<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form for Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Virtual Gaming Technologies, Inc.
(Name of Small Business Issuer in its charter)
Delaware 33-0716247
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12625 High Bluff Drive
Suite 205A
San Diego, California 92130-2053
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 619-259-5015
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.00001 par value
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(Title of class)
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Part 1
Item 1. Description of Business
Business Development
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Virtual Gaming Technologies, Inc. (the "Company") is engaged in the
business of offering over the Internet casino-style gaming operations, including
baccarat, blackjack and video poker, and a pari-mutuel sports betting service.
The Company intends to offer additional casino games in the future. The
Company's gaming operations are offered in certain international jurisdictions,
located in Europe, the Caribbean, Latin America, the Middle East, Australia,
Asia and Africa supported by a server site and hardware located in Antigua. The
Company commenced gaming operations in September 1997.
The Company was formed under the laws of the State of Delaware on October
24, 1995 under the name MBA Licensing Corp. The Company's initial operations
included the development of CD-ROM and video game cartridges that incorporated
certain patented virtual reality technology. In November 1995, the Company
conducted a private placement of its $.00001 par value common stock ("Common
Stock") at $0.25 per share pursuant to Rule 504 under the Securities Act of 1933
("1933 Act"). In that offering, the Company sold 1,160,000 shares of Common
Stock in consideration of cash proceeds of $60,000, net of $5,000 of offering
costs, and the cancellation of $225,000 of licensing and consulting fees due and
payable. In May 1996, the Company chose to suspend all operations relating to
the development of the virtual reality CD-ROMs and video game cartridges in
favor of pursuing the development of casino-style gaming operations over the
Internet. On June 20, 1996, the Company changed its corporate name to Internet
Gaming Technologies, Inc. On January 22, 1997, the Company changed its
corporate name to Virtual Gaming Technologies, Inc.
Pursuant to a Securities Purchase Agreement dated September 5, 1996, as
amended, Unistar Entertainment, Inc., a wholly-owned subsidiary of Executone
Information Systems, Inc., agreed to purchase 233,333 shares of Common Stock at
$3.00 per share. In addition, the Company granted Unistar a common stock
purchase warrant entitling Unistar to purchase 200,000 shares of Common Stock at
an exercise price of $3.45 per share. The warrant is immediately exercisable
and expires on March 6, 2002.
Between April 1997 and August 1997, the Company conducted a private
placement of shares of Common Stock, at a price of $2.00 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 1,018,250
shares of Common Stock for the gross proceeds of $2,036,500. Proceeds from the
sale of the shares were applied towards the development and implementation of
the Company's Internet gaming operations and working capital.
In January 1998, the Company commenced a private placement of 1,400,000
shares of Common Stock, at a price of $3.00 per share, pursuant to Rule 506
under the 1933 Act. As of July 20, 1998, the Company had sold 932,235 shares of
Common Stock for the gross proceeds of $2,796,705. Proceeds from the sale of
the shares were applied towards the development and implementation of the
Company's Internet gaming operations and working capital.
Unless the context otherwise requires, all references to the Company
includes its wholly-owned subsidiaries Internet Gaming Technologies, Inc., a
Nevada corporation, Emerald Riviera Ltd., an Irish corporation, and Virtual
Gaming Technologies (Antigua) Ltd., an Antiguan corporation. The Company's
executive offices are located at 12625 High Bluff Drive, Suite 205A, San Diego,
California 92130; telephone number (619) 259-5015.
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Business of the Issuer
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General
The Company currently offers over the Internet casino-style gaming
opportunities, including baccarat, blackjack and video poker, and a pari-mutuel
sports betting service. The Company has internally developed proprietary
software applications, based on the Java programming language, that allows for
interactive gaming, including simulated casino motion and sound, on a real-time
basis. The Company offers its gaming operations in certain international
jurisdictions located in Asia, the Caribbean, Latin America, the Middle East,
Australia, Europe and Africa. The Company's gaming operations are conducted by
its wholly-owned subsidiary, Virtual Gaming Technologies (Antigua) Ltd.,
pursuant to a non-exclusive license from the Company and supported by a server
site and hardware located in St. Johns, Antigua, West Indies.
The Company's policy is to accept subscriptions only from persons over the
age of 21 and believed to reside in jurisdictions that are not known to
expressly prohibit Internet gaming. Subscriptions will not be accepted from
persons believed to be citizens or residents of the United States.
To date, the Company's activities have included the market analysis and
development of its virtual casino technology and its on line operations.
Beginning in 1996 and continuing through the second quarter of 1997, the Company
established an Internet website at which it offered an interactive beta test
version of its gaming service and a virtual casino under the name
"virtcasino.com." Beginning in the third quarter of 1997 and continuing through
the date of this registration statement, the Company has conducted limited
operations of its Internet casino. On April 1, 1998, the Company commenced
offering a pari-mutuel sports betting service.
As of the date of this registration statement, the Company has conducted
limited marketing of its Internet gaming operations and, consequently, from the
inception of operations in September 1997 through March 31, 1998 the Company has
generated only $41,264 of gross revenue from gaming operations. As of July 20,
1998, the Company had accepted 9,251 subscriptions for its Internet gaming
operations and as of the same date cash deposits by customers, which are used by
customers for wagering, from inception of gaming operations totalled
approximately $205,919.
The Company's Services and Products
Platforms and Subscription. The Company has established a website, located
on the Internet at www.virtcasino.com, at which it offers an interactive gaming
service and a virtual casino under the service name "Constellation." The
Company has established a second website, located at www.virtsports.com, at
which it offers a pari-mutuel sports betting service under the service name
Internet Sports Market. The websites are accessible by the general public,
however, only established customers will be permitted to play the gaming
opportunities for money.
The Company's websites are accessible by a minimum hardware configuration
consisting of a 486 personal computer with Windows 95 or greater, with 16 MB
RAM, 20 MB free hard disk space, a 14,400 modem and a direct PPP Internet
connection. All games are provided in a Windows-based, menu driven format with
"point and click" interactivity. Persons who wish to conduct gaming operations
at Constellation or Internet Sports Market are able to subscribe over the
Internet by completing an application appearing at the website. Part of the
application process requires that the subscriber open an account and make a
minimum deposit with the Company of $50.
The websites are controlled by the Company and are designed to invite the
customer to sign up and apply for casino and sportsbook membership. After their
membership application is reviewed, it is either accepted or rejected based on
criteria including, but not limited to, age and geographic location of the
customer. The Company's policy is to accept subscriptions only from persons
over the age of 21 and believed to reside in jurisdictions that are not known to
expressly prohibit Internet gaming. Subscriptions will not be accepted from
persons believed to be citizens or residents of the United States. The Company
uses, among other techniques, Internet databases that publish the local
addresses of most Internet domain names in order to verify that the subscriber
resides in a jurisdiction that is not known to prohibit Internet gaming. Upon
acceptance, the approved customer is then allowed to download the gaming
software over the Internet for installation on their personal
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computer. The customer is then given a username and password and is thereby
able to access the Company's gaming servers over the Internet through their
Internet service provider.
The Company's websites allow the customers to review all terms, rules and
conditions applicable to gaming and other uses at the site. All gaming winnings
and losses are debited and credited to the customer's account on a real-time
basis. All games are conducted pursuant to house rules and advantages that are
published at the website and which are as favorable or more favorable than those
used by the major Las Vegas casinos.
Constellation Casino. The Company internally developed the Constellation
casino and tested it at beta test sites for three months prior to the
commencement of limited commercial operations in September 1997. The gaming
opportunities offered at the Constellation website have been designed to evoke
the sights and sounds similar to a Las Vegas style casino. Computer graphics
present the "lobby" of the Constellation, consisting of several menu items which
the customer can choose to enter. Included among those menu items are the
various gaming rooms, including baccarat, blackjack and video poker. In the
future, the Company intends to also offer slots, roulette and other casino
games. The customers use the Windows format of commands to carry out gaming
activities. The website offers audio features, including the sound of shuffling
cards, video poker machine payouts and general casino background sounds. The
Constellation website is presently written in English, Spanish, Japanese and
Chinese. The Company intends to adapt the website to as many languages and
ethnic identities as practicable in order to facilitate worldwide expansion of
the customer base.
International Sports Market. On April 1, 1998, the Company commenced
offering a pari-mutuel sports betting service at its International Sports Market
website. The Company offers at this website the opportunity to bet on a variety
of sporting events played in the United States, Central and South America,
Europe and Asia. The sports betting service is conducted by way of proprietary
software internally developed by the Company. Management of the Company
believes that its sports wagering service is currently unique on the Internet
and that it provides the Company certain advantages including limited exposure
to sports wagering risk.
Future Developments. The Company intends to conduct continuing development
and innovation of its products in accordance with changing consumer preferences,
demographics, and the evolution of new technologies. The Company's development
strategy is to leverage its technology and the technology of other software
developers, with the goal of providing applications that are competitive and
innovative in the Internet gaming industry.
Virtual Gaming Technologies (Antigua) Ltd.
Virtual Gaming Technologies (Antigua) Ltd. ("VGTA") was organized under the
laws of Antigua on June 19, 1997 as a wholly-owned subsidiary of the Company.
All of the Company's Internet gaming and related banking operations are carried
out by VGTA pursuant to a perpetual nonexclusive license from the Company. The
hardware and software platforms on which the Company's Internet gaming
operations are conducted, including all computer servers, are located and
operated by VGTA staff in Antigua. The Company maintains a redundant server in
San Diego, California in order that senior management may monitor gaming
operations on a real time basis from the Company's headquarters.
VGTA's operations are sanctioned by the government of Antigua pursuant to a
license from the Antiguan government permitting VGTA to conduct a virtual casino
and a sports betting service on the Internet. The government license also
exempts VGTA from the payment of taxes on the repatriation of profits earned in
Antigua. The Antiguan government license expires on July 15, 1999, subject to
VGTA's right to renew for three consecutive one year extensions subject to
VGTA's payment of an annual license renewal fee of $175,000.
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Marketing
As of the date of this registration statement, the Company markets its
gaming services through Internet advertising. The Company intends to develop a
network of regional sales people who will target potential customers based on
their historical gambling patterns. At that time, the Company intends to use a
multi-tiered marketing approach through a combination of Internet advertising,
telemarketing and direct marketing from regional offices.
Competition
As of the date of this registration statement, there are approximately 100
Internet gaming service providers and several other parties that have announced
their intention to develop Internet gaming operations. The Company believes
that many of the current competitors offer gaming products and services in
English only and focus their marketing efforts on residents of the United
States. The Company believes that it is one of a small number of Internet
gaming service providers that offer multi-lingual gaming sites and focus their
marketing efforts in jurisdictions outside of the United States.
The Company presently encounters significant competition from existing
providers of Internet gaming operations and expects to encounter increasing
competition as additional Internet gaming service providers come on-line. Many
of the Company's present and future competitors have or may have, as the case
may be, greater capital and other resources than the Company and may choose to
adopt an international marketing plan similar to the Company's. There can be no
assurance that the Company will be able to generate meaningful revenues or
earnings from its Internet gaming operations or otherwise successfully compete
in the future.
Regulation
Gaming activities are stringently regulated in the United States and most
developed countries. The gaming regulations and supervisory procedures in the
United States and most developed countries are based upon policies that are
concerned with, among other things, (i) the prevention of unsavory or unsuitable
persons from having a direct or indirect involvement with gaming; (ii) the
establishment and maintenance of responsible accounting practices and
procedures; (iii) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
governing jurisdictions; (iv) the prevention of cheating and fraudulent
practices; and (v) the provision of a source of government revenue through
taxation and licensing fees.
At the present time the Company believes that several developed countries,
including Australia and several countries in Europe, the Caribbean, Latin
America, the Middle East, Asia, and Africa have not prohibited Internet gaming
activities. However, gaming over the Internet is a new industry and some or all
of these foreign jurisdictions may take action to more severely regulate or even
prohibit Internet gaming operations in their jurisdictions. The Company intends
to adopt a proactive policy of lobbying international jurisdictions, where
appropriate, for purposes of seeking approval of Internet gambling and the
regulation of those activities on a basis that is favorable to the Company.
The Company believes that as of the date of this registration statement,
many federal and state prosecutorial agencies in the United States have taken
the position that the provision of Internet gaming services to residents of the
United States are subject to existing federal and state laws which generally
prohibit the provision of gaming opportunities, except where licensed or subject
to exemption. On the other hand, it is the Company's understanding that many
providers of Internet gaming services to citizens and residents of the United
States have taken the position that existing federal and state laws pertaining
to the provision of gaming opportunities do not apply to Internet gaming
services. In 1997, legislation was introduced to the United States Senate and
House of Representatives which, if enacted, would effectively amend the Federal
Wire Statute, codified at 18 U.S.C. (S)1084, to prohibit the provision of
Internet gaming operations to residents of the United States. (Internet
Gambling Prohibition Act of 1997; S. 474 and H.R. 2380). At the present time,
it is the Company's policy not to offer its Internet gaming services to citizens
or residents of the United States and to otherwise endeavor to comply with
federal and state laws in the United States pertaining to gaming.
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Employees
As of the date of this registration statement, the Company employs 30
people on a full-time basis.
Legal Proceedings
There are no pending legal proceedings to which the Company is a party or
to which the property interests of the Company are subject.
Item 2. Management's Discussion and Analysis or Plan of Operation
Plan of Operations
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The Company is engaged in the business of offering gaming opportunities
over the Internet. In September 1997, the Company commenced offering Casino
style gaming opportunities over the Internet, including baccarat, blackjack and
video poker, and in April 1998 commenced offering a pari-mutuel sports betting
service. As of the date of this registration statement, the Company has
conducted limited marketing of its Internet gaming operations and, consequently,
from the inception of gaming operations in September 1997 through March 31,
1998, the Company generated only $41,264 of gross revenue from gaming
operations. As of July 20, 1998, the Company had accepted 9,251 subscriptions
for its Internet gaming operations and as of the same date cash deposits made by
customers, which are used by customers for wagering, from inception of gaming
operations totalled approximately $205,919.
The Company has financed its activities to date through the sale of its
securities. See "Item 4, Part II - "Recent Sales of Unregistered Securities"
for a description of the Company's sale of shares of its securities since
inception. In January 1998, the Company commenced a private placement of
1,400,000 shares of Common Stock, at a price of $3.00 per share. The offering is
being conducted by management of the Company on a straight best efforts basis,
which means that there is no minimum offering amount or escrow of proceeds and
there is no commitments on the part of third parties to subscribe or arrange for
others to subscribe for the purchase of the offered shares. As of July 20, 1998,
the Company had sold 932,235 shares of Common Stock for the gross proceeds of
$2,796,705.
As of March 31, 1998, the Company had a working capital deficit of $103,307
and stockholders' equity of $198,336, however subsequent to March 31, 1998 the
Company sold 819,585 shares of Common Stock in the above-mentioned private
placement for the gross proceeds of $2,458,755. The Company's plan of
operations over the next 12 months includes the full scale roll-out of its
casino style gaming operations and sportsbook over the Internet through the
introduction of a multi-tiered marketing plan intended to target potential
customers based on their historical gambling patterns. See "Item 1. Description
of Business - Business of the Issuer - Marketing." In addition to its working
capital on hand as of the date of this registration statement, the Company
believes that it will require, at least, an additional $1,400,000 of capital
over the next 12 months in order to fund the full scale roll-out of its Internet
gaming operations and to finance the continuing losses from operations as the
Company endeavors to build revenue and reach profitable operations.
There can be no assurance that the Company will be able to obtain
sufficient additional capital, either through the present private placement or
otherwise, in order to fund the Company's working capital requirements in a
timely manner. The report of the Company's independent accountants for the
fiscal year ended December 31, 1997 states that due to recurring losses from
operations, the absence of significant operating revenues and the Company's
limited capital resources, there is substantial doubt about the Company's
ability to continue as a going concern.
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Year 2000 Compliance
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The Company utilizes computer software programs and operating systems,
including applications used in operating the gaming services, the Company's
proprietary software, network access, and various administrative and billing
functions. To the extent the Company's software applications contain source
codes that are unable to appropriately interpret the upcoming calendar year
2000, some level of modification, or even possibly replacement of such
applications, may be necessary. The Company has appointed a Year 2000 Committee
to perform an audit to assess the scope of the Company's risks and bring its
applications into compliance. The Committee is currently in the process of
completing its identification of applications that are not Year 2000 compliant,
if any. In addition, the Company has begun to ask its vendors about their
progress in identifying and addressing problems that their computer systems may
face in correctly processing date information related to the Year 2000.
The Company is in the early stages of conducting its Year 2000 audit and
therefore is unable to make a reasonable estimate of the costs associated with
Year 2000 compliance. Accordingly, no assurance can be given that any or all of
the Company's or third party systems are or will be Year 2000 compliant or that
the costs required to address the Year 2000 issue or that the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Forward Looking Statements
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This registration statement contains forward-looking statements that are
based on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this registration statement,
the words "believe," "endeavor," "expect," "anticipate," "estimate," "intends,"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, the Company's recent commencement of commercial
operations; the absence of commercial acceptance of the Company's services and
products by its potential customers; the absence of meaningful revenues as of
the date of this registration statement; the Company's present financial
condition and the risks and the availability of additional capital as and when
required; the going concern opinion included in the report of the Company's
independent accountants for the Company's fiscal 1997 financial statements; the
risks and uncertainties of regulation of Internet gaming by the international
community; the risks and uncertainties concerning technological changes;
increased competition; and general economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
or projected. The Company cautions potential investors not to place undue
reliance on any such forward-looking statements all of which speak only as of
the date made.
Item 3. Description of Property
The Company's executive offices are located in San Diego, California, and
consist of approximately 4,603 square feet which the Company rents on a month to
month basis for monthly rent of $8,333. The Company's gaming operations are
conducted from its facility in St. John's, Antigua, West Indies. The Antiguan
facility consists of approximately 532 square feet which the Company rents on a
month to month basis for monthly rent of $1,620.
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Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of July 20, 1998 by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the issued and outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percentage Owned
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<S> <C> <C>
Daniel B. Najor (1) 3,555,000 45.1%
Joseph R. Paravia (1)(2) 585,000 7.1%
John Van Rhyn (1)(4) 59,000 (3)
John Varley (1)(5) 40,000 (3)
Bruce Merati (1)(6) -- --
Michael Yacenda (1)(7) -- --
Charles R. McCarthy, Jr. (1)(8) 43,000 (3)
Dick L. Rottman (1)(9) 53,665 (3)
All officers and directors as a group 4,335,665 51.9%
</TABLE>
____________________
(1) Address is 12625 High Bluff Drive, Suite 205A, San Diego, California
92130.
(2) Includes options granted to Mr. Paravia to purchase 360,000 shares of
Common Stock. Does not include options to purchase 120,000 shares of
Common Stock that are subject to vesting.
(3) Less than one percent.
(4) Includes options granted to Mr. Van Rhyn to purchase 45,000 shares of
Common Stock.
(5) Includes options granted to Mr. Varley to purchase 40,000 shares of Common
Stock. Does not include options to purchase 40,000 shares of Common Stock
that are subject to vesting.
(6) Does not include options granted to Mr. Merati to purchase 40,000 shares of
Common Stock that are subject to vesting.
(7) Does not include securities of the Company held by Unistar Entertainment
Inc., of which Mr. Yacenda is President. See Item 1: "Description of
Business - Business Development."
(8) Includes options granted to Mr. McCarthy to purchase 10,000 shares of
Common Stock. Does not include options to purchase 10,000 shares of Common
Stock that are subject to vesting.
(9) Includes options granted to Mr. Rottman to purchase 10,000 shares of Common
Stock. Does not include options to purchase 10,000 shares of Common Stock
that are subject to vesting.
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Item 5. Directors, Executive Officers, Promoters and Control Persons.
Set forth below are the directors and officers of the Company.
Name Age Position
---- --- --------
Daniel B. Najor 44 Chairman of the Board and Secretary
Joseph R. Paravia 46 President, Chief Executive Officer and Director
John Van Rhyn 61 Vice President of Gaming Operations
John A. Varley 36 Vice President of Marketing
Bruce Merati 40 Chief Financial Officer
Michael W. Yacenda 46 Director
Charles R. McCarthy, Jr. 59 Director
Dick L. Rottman 60 Director
Mr. Najor founded the business of the Company in 1995 and has served as
Chairman of the Board and Secretary since June 1996. From June 1996 to July
1997, Mr. Najor served as Chief Executive Officer of the Company. Since 1997,
Mr. Najor has also served as President and a director of Contextual Trading
Company, Inc., a San Diego, California based independent retail grocery business
with over 160 employees.
Mr. Paravia has served as President and a director of the Company since
July 1996 and as Chief Executive Officer of the Company since July 1997. Mr.
Paravia has over 20 years of experience in the gaming industry. From October
1995 through May 1996, Mr. Paravia served as the Vice President of the Tropicana
Hotel in Las Vegas, Nevada, where he was responsible for all casino operations.
From 1991 to February 1995, Mr. Paravia served as a member of the Board of
Directors and as Senior Director of Casino Operations for Caesars Palace in Las
Vegas, Nevada, where he was responsible for all casino operations.
Mr. Van Rhyn has served as Vice President of Gaming Operations since June
1997. Mr. Van Rhyn has over 20 years of experience in the gaming industry,
including positions of primary responsibility in the areas of sports book and
racing, finance and accounting, and general casino operations. From 1993 to
1997, Mr. Van Rhyn was a self-employed consultant to the gaming industry. From
1989 to 1992, Mr. Van Rhyn was director of all race, sports book, poker and Keno
operations at the Desert Inn Hotel & Casino in Las Vegas, Nevada. From 1988 to
1989, Mr. Van Rhyn was director of all race, sports book, poker and Keno
operations at the Sands Hotel & Casino in Las Vegas.
Mr. Varley has served as the Vice President of Marketing of the Company
since July 27, 1998. From August 1997 until July 1998, Mr. Varley served as
Chief Financial Officer of the Company. From April 1996 to August 1997, Mr.
Varley served as Chief Financial Officer of CGM Group LLC, a management
consulting firm. From 1990 to April 1996, Mr. Varley served in various
accounting positions, including Director of Accounting, for American Hawaii
Cruises, a wholly-owned subsidiary of American Classic Voyages.
Mr. Merati has served as Chief Financial Officer of the Company since July
27, 1998. From July 1997 to July 1998, Mr. Merati served as the Controller of
The Weekend Exercise Company, Inc., an apparel manufacturer. From 1995 to 1997,
Mr. Merati served as the Controller of Airline Interiors, Inc., an airline seat
manufacturer. From 1993 to 1995, Mr. Merati served as the Controller of First
Affiliated Securities, a securities broker-dealer and investment banker. Mr.
Merati is a Certified Public Accountant and spent seven years as a staff
accountant and audit manager with the London office of PricewaterhouseCoopers.
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Mr. Yacenda has served as a director of the Company since March 1997. Mr.
Yacenda has served as President of Unistar Entertainment, Inc., a wholly-owned
subsidiary of Executone Information Systems, Inc., since 1996 and as Executive
Vice President of Executone Information Systems, Inc. since 1990.
Mr. McCarthy has served as director of the Company since April 1998. Since
1993, Mr. McCarthy has been a partner in O'Connor & Hannan, where he has
practices as a corporate attorney in the firm's Washington, D.C. office.
Mr. Rottman has served as director of the Company since April 1998. Since
1994, Mr. Rottman has served as Chairman of the Board and Chief Executive
Officer of Western Insurance Company. In addition, Mr. Rottman has served as
Chief Executive Officer of Bell United Insurance Company since 1986. Mr.
Rottman served as the Insurance Commissioner for the State of Nevada from 1971
to 1978.
Each director holds office until his successor is elected and qualified or
until his earlier resignation in the manner provided in the Bylaws of the
Company. The Board of Directors has established an Audit Committee consisting
of Messrs. Yacenda, Najor and Rottman and a Compensation Committee consisting of
Messrs. McCarthy, Najor and Paravia. The Audit Committee reviews the Company's
independent auditors, the scope and timing of their audit services and other
services they are asked to perform, the auditor's report on the Company's
financial statements following completion of the their audit, and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee makes annual recommendations to the
Board of Directors for the appointment of independent auditors for the ensuing
year. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
reviews general policy matters relating to compensation benefits of employees of
the Company.
Item 6. Executive Compensation
Cash Compensation of Executive Officers. The following table sets forth
the cash compensation paid by the Company to its Chief Executive Officer and to
all other executive officers for services rendered during the fiscal years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- --------------------------------------
Name and Position Year Salary Bonus Other Annual Restricted Common Shares All
Compensation Stock Underlying Other
Awards ($) Options Granted Compen-
(# Shares) sation
- - ------------------------------- ---- ---------- ----- ------------ ---------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel B. Najor, Chairman(1) 1997 $ 47,197 -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Joseph R. Paravia, President 1997 $111,076 -0- -0- $50,000 -0- -0-
and CEO(2) 1996 $ 39,036 -0- -0- $ 8,000 480,000 -0-
1995 -0- -0- -0- -0- -0- -0-
John Van Rhyn, 1997 $ 39,846 -0- -0- -0- 45,000 -0-
Vice President - Gaming 1996 -0- -0- -0- -0- -0- -0-
Operations(3) 1995 -0- -0- -0- -0- -0- -0-
John A. Varley, 1997 $ 26,250 -0- -0- -0- -0- -0-
Vice President - Marketing(4) 1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Bruce Merati, 1997 $ -0- -0- -0- -0- -0- -0-
Chief Financial Officer(5) 1996 -0- -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
</TABLE>
_________________
(1) The Company did not pay to or accrue for Mr. Najor any salary until July
1997, at which time Mr. Najor began to receive a salary at the rate of
$120,000 per annum. Mr. Najor's salary was reduced to $1,000 per month
effective as of November 11, 1997.
(2) Commencing June 1, 1996, the Company began paying Mr. Paravia a salary at
the rate of $100,000 per annum. Mr. Paravia's salary was reduced to $8,000
per month effective as of November 11, 1997.
(3) Commencing June 6, 1997, the Company began paying Mr. Van Rhyn a salary at
the rate of $70,000 per annum. Mr. Van Rhyn's salary was reduced to $3,000
per month effective as of February 9, 1998.
-9-
<PAGE>
(4) Commencing August 4, 1997, the Company began paying Mr. Varley a salary at
the rate of $65,000 per annum.
(5) Commencing July 27, 1998, the Company began paying Mr. Merati a salary at
the rate of $85,000 per annum.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
- - --------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Options/SARs Exercise or Expiration Date
Underlying Granted to Employees in Base
Options/SARs Granted Fiscal Year Price ($/Sh)
(#)
- - ------------------------ -------------------- ------------------------ -------------- ----------------
<S> <C> <C> <C> <C>
John Van Rhyn
Vice President - Gaming 45,000 28.1% $2.00 May 2, 2000
Operations
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------
Number of
Securities Value of
Shares Acquired Underlying Unexercised
Name on Exercise Value Received Unexercised In-the-Money
Options (SARs Options (SARs
at FY-End (#) at FY-End($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- - ------------------------ --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph R. Paravia, 360,000/120,000 $1,036,800/$345,600
President & CEO
John Van Rhyn
Vice President - Gaming 20,000/25,000 $ 22,600/$28,250
Operations
</TABLE>
Compensation of Directors. All non-officer directors of the Company
receive an attendance fee of $1,000 per meeting of the Board of Directors. All
directors receive reimbursement for out-of-pocket expenses in attending Board of
Directors meetings. From time to time the Company may engage certain members of
the Board of Directors to perform services on behalf of the Company and will
compensate such persons for the services which they perform.
Item 7. Certain Relationships and Related Transactions.
Between May 1996 and December 1996, Daniel B. Najor and a company
affiliated with Mr. Najor advanced approximately $128,000 to the Company's
operating subsidiary for general working capital. All advances accrued interest
at the rate of eight percent (8%) per annum. On April 11, 1997, Mr. Najor and
the affiliated company converted the principal amount of the indebtedness into
128,000 shares of Common Stock, at the conversion rate of $1.00 per share.
Accrued interest under the advances in the amount of approximately $11,279 was
repaid by the Company in July 1997.
Pursuant to a Securities Purchase Agreement dated September 5, 1996, as
amended, Unistar Entertainment, Inc., a wholly-owned subsidiary of Executone
Information Systems, Inc., agreed to purchase 233,333 shares of Common Stock at
$3.00 per share. In addition, the Company granted Unistar a common stock
purchase warrant
-10-
<PAGE>
entitling Unistar to purchase 200,000 shares of Common Stock at $3.45 per share
over a five year period. In 1997, the Company appointed Mr. Michael Yacenda to
its Board of Directors. Mr. Yacenda is the President of Unistar Entertainment,
Inc. and the Executive Vice President of Executone Information Systems, Inc.
Item 8. Description of Securities.
Common Stock
The Company is authorized to issue 15,000,000 shares of Common Stock,
$.00001 par value, of which, as of July 20, 1998, 7,874,526 shares were issued
and outstanding and held of record by 102 stockholders. Holders of shares of
Common Stock are entitled to one vote per share on all matters to be voted upon
by the stockholders generally. The approval of proposals submitted to
stockholders at a meeting other than for the election of directors requires the
favorable vote of a majority of the shares voting, except in the case of certain
fundamental matters (such as certain amendments to the Certificate of
Incorporation, and certain mergers and reorganizations), in which cases Delaware
law and the Company's Bylaws require the favorable vote of at least a majority
of all outstanding shares. Stockholders are entitled to receive such dividends
as may be declared from time to time by the Board of Directors out of funds
legally available therefor, and in the event of liquidation, dissolution or
winding up of the Company to share ratably in all assets remaining after payment
of liabilities. The holders of shares of Common Stock have no preemptive,
conversion, subscription or cumulative voting rights.
-11-
<PAGE>
Part II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Company's Common Stock has been listed on the OTC Bulletin Board under
the symbol "VGTI" since April 1997. From inception of trading through July 20,
1998, the high and low last sale prices were $11.25 per share and $1.75 per
share, respectively. The Company considers its Common stock to be thinly traded
and that any reported bid or sale prices may not be a true market-based
valuation of the Common Stock.
As of July 20, 1998, there were 102 record holders of the Company's Common
Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for the operation of the Company's
business.
Item 2. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party or
to which the property interests of the Company are subject.
Item 3. Changes in and Disagreements with Accountants
In October 1997, the Company dismissed Carter, Polito & Muscio, Inc. as
independent auditors for the Company and appointed McGladrey & Pullen, LLP as
independent auditors. Carter, Polito & Muscio, Inc. had previously audited the
Company's consolidated financial statements as of and for the fiscal year ended
December 31, 1996. The decision to change independent auditors was approved by
the Board of Directors of the Company. During the fiscal year ended December 31,
1996 and the subsequent interim period through October 1997 there were no
disagreements between the Company and Carter, Polito & Muscio, Inc. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures which disagreements if not resolved to the
satisfaction of Carter, Polito & Muscio, Inc. would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
Except for the explanatory paragraph included in the firm's report on the
financial statements for the 1996 fiscal year, relating to substantial doubt
existing about the Company's ability to continue as a going concern, the audit
report of Carter, Polito & Muscio, Inc. on the Company's financial statements as
of December 31, 1996 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
Item 4. Recent Sales of Unregistered Securities.
During the last three years the Company sold unregistered shares of its
Common Stock in the following transactions:
A. In October 1995, the Company issued 3,940,000 shares of Common Stock to
the founder of the Company. There was no underwriter involved in this issuance.
The issuance was conducted pursuant to Section 4(2) under the 1933 Act.
B. In November 1995, the Company conducted a private placement of
1,160,000 shares of Common Stock to five parties, at a price of $.25 per share,
for cash proceeds of $60,000, net of $5,000 of offering costs, and the
cancellation of $225,000 of licensing and consulting fees due payable. There was
no underwriter involved in the placement. The placement was conducted pursuant
to Rule 504 under the 1933 Act.
C. In December 1995, the Company issued 25,000 shares of Common Stock to
its corporate counsel in consideration of legal services rendered. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Rule 504 under the 1933 Act.
-12-
<PAGE>
D. In May and July 1996, the Company issued 558,334 shares of Common Stock
to one officer and three consultants in consideration of services rendered.
There was no underwriter involved in the issuances. The issuances were conducted
pursuant to Section 4(2) of the 1933 Act.
E. In September and October 1996, the Company conducted a private
placement of 46,669 shares of Common Stock to five investors at a price of $3.00
per share, for the gross proceeds of $140,000. There was no underwriter involved
in this placement. The placement was conducted pursuant to Rule 504 under the
1933 Act.
F. Pursuant to a Stock Purchase Agreement dated September 5, 1996, as
amended, the Company issued 233,333 shares of Common Stock to Unistar
Entertainment, Inc., at an offering price of $3.00 per share, for the gross
proceeds of $700,000. In addition, the Company granted Unistar a common stock
purchase warrant entitling Unistar to purchase 200,000 shares of Common Stock at
an exercise price of $3.45 per share. The warrant is immediately exercisable and
expires on March 6, 2002. The Company is presently obligated to issue Unistar an
additional 116,667 shares of Common Stock pursuant to certain anti-dilution
provisions. There was no underwriter involved in this issuance. The issuance was
conducted pursuant to Section 4(2) of the 1933 Act.
G. In December 1996, the Company granted to an officer options to purchase
480,000 shares of Common Stock at an exercise price of $.25 per share. Options
to purchase 240,000 shares of Common Stock vested and first became exercisable
on December 31, 1996, options to purchase an additional 120,000 shares of Common
Stock vested and first became exercisable on December 31, 1997 and the final
120,000 shares of Common Stock will vest and first become exercisable on
December 31, 1998. The options expire on December 31, 1999. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act.
H. From November 1996 to May 1998, the Company issued 20,858 shares of
Common Stock to two consulting firms in consideration of consulting services
rendered. There was no underwriter involved in the issuances. The issuances were
conducted pursuant to Rule 504 of the 1933 Act.
I. In April 1997, the Company issued 128,000 shares of Common Stock to an
officer of the Company and one of his affiliates, in consideration of the
cancellation of $128,000 of indebtedness. There was no underwriter involved in
this issuance. The issuance was conducted pursuant to Rule 504 under the 1933
Act.
J. In May 1997, the Company granted to an employee options to purchase
75,000 shares of Common Stock at an exercise price of $1.00 per share. The
options are immediately exercisable and expire on May 6, 2000. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act.
K. In May 1997, the Company issued to a consultant a common stock purchase
warrant to purchase 30,000 shares of Common Stock at an exercise price of $2.25
per share. In January 1998, the Company issued to the same consultant a common
stock purchase warrant to purchase an additional 70,000 shares of Common Stock
at an exercise price of $3.00 per share. All of the warrants are immediately
exercisable and expire five years from the date of issuance. There was no
underwriter involved in this issuance. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act.
L. During April through August 1997, the Company conducted a private
placement of Common Stock. In the private placement, the Company sold 1,018,250
shares of Common Stock to approximately 29 investors at an offering price of
$2.00 per share, for the gross proceeds of $2,036,500. The placement was
conducted pursuant to Rule 506 under the 1933 Act. The Company utilized finders
in the private placement and issued a total of 113,973 shares of Common Stock as
finder's fees. The finder's fee shares were issued pursuant to Section 4(2) of
the 1933 Act.
M. In August 1997, the Company granted to an officer options to purchase
45,000 shares of Common Stock at an exercise price of $2.00 per share. Options
to purchase 20,000 shares of Common Stock were immediately exercisable upon
grant and options to purchase 25,000 shares of Common Stock vested and first
became exercisable on June 8, 1998. The options expire on August 14, 2000. There
was no underwriter involved in this issuance. The issuance was conducted
pursuant to Section 4(2) of the 1933 Act.
-13-
<PAGE>
N. In August 1997, the Company issued a total of 27,500 shares of Common
Stock to an officer of the Company and a consultant in consideration for
services rendered on behalf of the Company. There was no underwriter involved in
this issuance. The issuance was conducted pursuant to Rule 504 under the 1933
Act.
O. In September 1997, the Company issued 43,174 shares of Common Stock to
three consultants and one employee in consideration of services rendered on
behalf of the Company. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
P. In September 1997, the Company issued 1,200 shares of Common Stock to a
consultant in consideration for services rendered on behalf of the Company.
There was no underwriter involved in this issuance. The issuance was conducted
pursuant to Rule 504 under the 1933 Act.
Q. In September 1997, the Company granted to an employee options to
purchase 30,000 shares of Common Stock at an exercise price of $2.25 per share.
Options to purchase 15,000 shares of Common Stock vest and first become
exercisable on September 1, 1998 and options to purchase 15,000 shares of Common
Stock vest and first become exercisable on September 1, 1999. The options expire
on September 1, 2000. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
R. In December 1997, the Company issued to two employees options to
purchase an aggregate of 10,000 shares of Common Stock at an exercise price of
$2.50 per share. The options were immediately exercisable upon grant and expire
on December 30, 2002. There was no underwriter involved in this issuance. The
issuance was conducted pursuant to Section 4(2) of the 1933 Act.
S. In January 1998, the Company issued to one of its officers and eleven
of its employees options to purchase an aggregate of 122,000 shares of Common
Stock at an exercise price of $2.87 per share. Options to purchase 80,000 shares
of Common Stock were issued to an officer of the Company, of which options to
purchase 40,000 shares of Common Stock were immediately exercisable upon grant,
options to purchase 20,000 shares of Common Stock vest and first become
exercisable on January 2, 1999 and options to purchase the remaining 20,000
shares of Common Stock vest and first become exercisable on January 2, 2000. All
options issued to the employees were immediately exercisable upon grant, except
for options to purchase 15,000 shares of Common Stock granted to one employee,
of which options to purchase 5,000 shares of Common Stock were immediately
exercisable upon grant and options to purchase 10,000 shares of Common Stock
vest and first become exercisable on January 2, 1999. All of the foregoing
options expire on January 2, 2001. There was no underwriter involved in the
issuances. The issuances were conducted pursuant to Section 4(2) of the 1933
Act.
T. In January 1998, the Company commenced a private placement of shares of
Common Stock, at a price of $3.00 per share. As of July 20, 1998, the Company
had sold 932,235 shares of Common Stock for the gross proceeds of $2,796,705.
The placement is being conducted pursuant to Rule 506 under the 1933 Act. The
Company utilized finders in the private placement and issued a total of 11,000
shares of Common Stock as finder's fees. The finder's fee shares were issued
pursuant to Section 4(2) of the 1933 Act.
U. In April 1998, the Company issued to two newly appointed directors
options to purchase an aggregate of 40,000 shares of Common Stock at an exercise
price of $4.50 per share, of which options to purchase 20,000 shares of Common
Stock were immediately exercisable upon grant and options to purchase 20,000
shares of Common Stock vest and first become exercisable on April 22, 1999. The
options expire on April 22, 2001. There was no underwriter involved in the
issuance. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
V. In July 1998, the Company issued to one of its officers options to
purchase 40,000 shares of Common Stock at an exercise price of $6.00 per share.
Options to purchase 10,000 shares of Common Stock vest and first become
exercisable on July 27, 1999. Options to purchase 15,000 shares of Common Stock
vest and first become exercisable on July 27, 2000. Options to purchase 15,000
shares of Common Stock vest and first become exercisable on July 27, 2001. The
options expire on July 27, 2003. There was no underwriter involved in this
issuance. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
-14-
<PAGE>
Item 5. Indemnification of Directors and Officers.
Delaware Statutes
- - -----------------
Section 145 of the Delaware General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors, employees and
agents under certain circumstances as follows:
"(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or 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, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit 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 and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested
-15-
<PAGE>
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
Certificate of Incorporation
- - ----------------------------
The Company's Certificate of Incorporation provides that the directors of
the Company shall be protected from personal liability to the fullest extent
permitted by law. The Company's Bylaws also contain a provision for the
indemnification of the Company's directors (see "Indemnification of Directors
and Officers - Bylaws" below).
Bylaws
- - ------
The Company's Bylaws provide for the indemnification of the Company's
directors, officers, employees, or agents under certain circumstances as
follows:
"7.1 Authorization For Indemnification. The Corporation may indemnify, in
---------------------------------
the manner and to the full extent permitted by law, any person (or the estate,
heirs, executors, or administrators of any person) who was or is a party to, or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines
-16-
<PAGE>
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or 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, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
7.2 Advance of Expenses. Costs and expenses (including attorneys' fees)
-------------------
incurred by or on behalf of a director or officer in defending or investigating
any action, suit, proceeding or investigation may be paid by the Corporation in
advance of the final disposition of such matter, if such director or officer
shall undertake in writing to repay any such advances in the event that it is
ultimately determined that he is not entitled to indemnification. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel in a written opinion, or by the stockholders, that, based upon the facts
known to the Board or counsel at the time such determination is made, (a) the
director, officer, employee or agent acted in bad faith or deliberately breached
his duty to the Corporation or its stockholders, and (b) as a result of such
actions by the director, officer, employee or agent, it is more likely than not
that it will ultimately be determined that such director, officer, employee or
agent is not entitled to indemnification.
7.3 Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or as a member of any committee or similar
body against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article or applicable law.
7.4 Non-exclusivity. The right of indemnity and advancement of expenses
---------------
provided herein shall not be deemed exclusive of any other rights to which any
person seeking indemnification or advancement of expenses from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. Any agreement for
indemnification of or advancement of expenses to any director, officer, employee
or other person may provide rights of indemnification or advancement of expenses
which are broader or otherwise different from those set forth herein."
Indemnity Agreements
- - --------------------
The Company's Bylaws provide that the Company may indemnify directors,
officers, employees or agents to the fullest extent permitted by law and the
Company has agreed to provide such indemnification to its directors, Joseph R.
Paravia, Daniel B. Najor, Michael W. Yacenda, Charles R. McCarthy, Jr. and Dick
L. Rottman pursuant to written indemnity agreements.
-17-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. 19
Consolidated Balance Sheets............................................... 20
Consolidated Statements of Operations..................................... 21
Consolidated Statements of Stockholders' Equity........................... 22
Consolidated Statements of Cash Flows..................................... 25
Notes to Consolidated Financial Statements................................ 27
</TABLE>
-18-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Virtual Gaming Technologies, Inc.
(A Development Stage Company)
San Diego, California
We have audited the accompanying consolidated balance sheets of Virtual Gaming
Technologies, Inc. (A Development Stage Company) and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Virtual Gaming
Technologies, Inc. (A Development Stage Company) and Subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations
since inception, has generated no significant operating revenue, and has limited
capital resources. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 8. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ McGLADREY & PULLEN, LLP
San Diego, California
February 24, 1998, except for Note 8,
as to which the date is July 16, 1998
-19-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31, 1998
ASSETS 1996 1997 (Unaudited)
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 468,301 $ 290,991 $ 184,444
Securities available for sale (Note 2) - 55,190 -
Prepaid expenses and other assets 17,513 34,112 24,790
Gaming license, net - 54,167 29,167
----------------------------------------------------
Total current assets 485,814 434,460 238,401
----------------------------------------------------
Equipment, net (Notes 3 and 4) 58,961 313,113 302,865
----------------------------------------------------
Deposits 5,773 13,745 14,643
----------------------------------------------------
$ 550,548 $ 761,318 $ 555,909
====================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 45,483 $ 85,658 $ 167,629
Funds held on deposit - 5,588 14,241
Current portion of capital lease obligation
(Note 4) - 9,334 9,838
Note payable (Note 5) - 150,000 150,000
Notes payable to stockholder and affiliate
(Note 5) 128,680 - -
----------------------------------------------------
Total current liabilities 174,163 250,580 341,708
----------------------------------------------------
Long-Term Portion of Capital Lease Obligation
(Note 4) - 19,447 15,865
-----------------------------------------------------
Commitments and Contingencies (Notes 4, 5 and 8)
Stockholders' Equity (Notes 5 and 6)
Common stock, $.00001 par value; authorized 15,000,000
shares; number issuable and number issued and
outstanding: 1996: 0 and 5,853,334 shares;
1997: 116,667 and 6,931,291 shares; March 31, 1998
(unaudited): 172,478 and 7,043,941 shares, respectively 59 70 72
Additional paid-in capital 1,469,456 6,651,558 7,336,906
Unrealized gain on securities available for sale (Note 2) - 120 -
Deficit accumulated during the development stage (1,093,130) (6,160,457) (7,138,642)
-----------------------------------------------------
376,385 491,291 198,336
-----------------------------------------------------
$ 550,548 $ 761,318 $ 555,909
=====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-20-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Three Months Ended March 31, October 24, 1995
Years Ended December 31, ---------------------------- (Inception) through
-------------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Casino Revenue $ - $ 3,681 $ - $ 37,583 $ 41,264
Less promotional discounts - 3,293 - 20,002 23,295
---------------------------------------------------------------------------
Net Gaming Revenue - 388 - 17,581 17,969
---------------------------------------------------------------------------
Operating Expenses:
Operating expenses (Note 6) 737,024 4,160,138 2,820,272 991,246 6,167,091
Settlement expense (Note 5) 75,000 906,203 - - 981,203
---------------------------------------------------------------------------
812,024 5,066,341 2,820,272 991,246 7,148,294
---------------------------------------------------------------------------
(Loss) from Operations (812,024) (5,065,953) (2,820,272) (973,665) (7,130,325)
Financial income (expense):
Interest income 6,383 17,631 2,818 1,497 25,511
Interest expense (Note 5) (7,206) (18,205) (3,420) (4,714) (30,125)
Loss on sale of securities - - - (1,103) (1,103)
---------------------------------------------------------------------------
(823) (574) (602) (4,320) (5,717)
---------------------------------------------------------------------------
(Loss) before
income taxes (812,847) (5,066,527) (2,820,874) (977,985) (7,136,042)
State income tax expense (Note 7) 800 800 200 200 2,600
---------------------------------------------------------------------------
Net (loss) $ (813,647) $ (5,067,327) $(2,821,074) $ (978,185) $(7,138,642)
===========================================================================
Basic and diluted loss per
share $ (0.15) $ (0.80) $ (0.49) $ (0.14) $ (1.22)
===========================================================================
Weighted average common
shares outstanding 5,430,997 6,325,317 5,703,409 7,107,782 5,873,893
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-21-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
------------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon incorporation 3,940,000 $ 39 $ - $ - $ - $ 39
Issuances of common stock for cash:
November 1995 260,000 3 59,997 - - 60,000
Issuances of common stock for services:
Licensing and consulting fees,
November 1995 925,000 9 224,991 - - 225,000
Net (loss) for the period from inception
to December 31, 1995 - - - - (279,483) (279,483)
--------------------------------------------------------------------------------
Balance, December 31, 1995 5,125,000 51 284,988 - (279,483) 5,556
--------------------------------------------------------------------------------
Issuances of common stock for cash:
September 1996 163,000 2 814,998 - - 815,000
October 1996 5,000 - 25,000 - - 25,000
Issuances of common stock:
Officer compensation, May 1996 200,000 2 8,463 - - 8,465
Services, July 1996 358,334 4 304,361 - - 304,365
Consulting services, November 1996 2,000 - 10,000 - - 10,000
Additional paid-in capital contributed:
Forgiven loan from stockholder, June 1996 - - 5,361 - - 5,361
Common stock transferred from
majority stockholder pursuant to
licensing agreement (Note 5) - - 16,285 - - 16,285
Net (loss) for the year ended
December 31, 1996 - - - - (813,647) (813,647)
------------------------------------------------------------------------------
Balance, December 31, 1996, as restated (Note 5) 5,853,334 $ 59 $ 1,469,456 $ - $(1,093,130) $ 376,385
------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-22-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
----------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance forwarded, December 31, 1996, as restated 5,853,334 $59 $1,469,456 $-- $(1,093,130) $ 376,385
Issuances of common stock for cash, net of
issuance costs: April 1997 through August 1997 1,132,223 11 2,002,989 -- -- 2,003,000
Issuances of common stock per
antidilution agreements 112,002 1 (1) -- -- --
Issuable common stock per antidilution
agreement (Note 5) 116,667 1 (1) -- -- --
Issuances of common stock:
Consulting services:
January 1997 3,858 -- 15,003 -- -- 15,003
May 1997 4,500 -- 13,725 -- -- 13,725
August 1997 34,500 -- 202,420 -- -- 202,420
September 1997 5,374 -- 26,834 -- -- 26,834
October 1997 4,500 -- 20,565 -- -- 20,565
November 1997 1,500 -- 5,925 -- -- 5,925
December 1997 1,500 -- 5,130 -- -- 5,130
Officer compensation, August 1997 35,000 1 205,799 -- -- 205,800
Conversion of note payable (Note 5) 128,000 1 240,639 -- -- 240,640
Issuance of stock purchase warrants (Note 5) -- -- 818,126 -- -- 818,126
Issuance of employee stock options (Note 6) -- -- 1,641,234 -- -- 1,641,234
Shares retired (Note 5) (385,000) (4) (16,285) -- -- (16,289)
Unrealized gain on securities available for sale -- -- -- 120 -- 120
Net (loss) for the year ended December 31, 1997 -- -- -- -- (5,067,327) (5,067,327)
---------------------------------------------------------------------------
Balance, December 31, 1997 7,047,958 $70 $6,651,558 $120 $(6,160,457) $ 491,291
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-23-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Unrealized Deficit
Gain on Accumulated
Common Stock Additional Securities During the
--------------------- Paid-In Available Development
Shares Amount Capital for Sale Stage Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance forwarded, December 31, 1997 7,047,958 $ 70 $6,651,558 $ 120 $(6,160,457) $ 491,291
Unaudited Information:
- - ---------------------
Issuances of common stock for cash, net of
issuance costs: January 1998 through March 1998 168,461 2 437,051 - - 437,053
Issuance of employee stock options (Note 6) - - 94,715 - - 94,715
Issuance of stock purchase warrants (Note 5) - - 153,582 - - 153,582
Elimination of unrealized gain due to
sale of securities - - - (120) - (120)
Net (loss) for the three month period ended
March 31, 1998 - - - - (978,185) (978,185)
----------------------------------------------------------------------------
Balance, March 31, 1998 (Unaudited) 7,216,419 $ 72 $7,336,906 $ - $(7,138,642) $ 198,336
============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-24-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Three Months Ended March 31, October 24, 1995
Years Ended December 31, --------------------------- (Inception) through
----------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(813,647) $(5,067,327) $(2,821,074) $(978,185) $(7,138,642)
Adjustment to reconcile net (loss) to operating
activities:
Settlement expense - 906,203 906,203 - 906,203
Depreciation and amortization 2,585 39,313 3,510 24,664 66,562
Loss on sale of securities available for sale - 1,103 1,103
Compensation related to the conversion of
stockholder note payable - 112,640 - - 112,640
Issuance of common stock options and warrants
for licensing and consulting fees and compensation 339,115 2,182,270 827,369 248,297 2,994,682
Changes in assets and working capital components:
(Increase) decrease in:
Prepaid expenses (17,513) (16,599) 10,000 9,322 (24,790)
Gaming license - (54,167) - 25,000 (29,167)
Increase (decrease) in:
Accounts payable and accrued expenses 39,233 39,495 (30,698) 81,971 166,949
Funds held on deposit - 5,588 - 8,653 14,241
-------------------------------------------------------------------------
Net cash (used in)
operating activities (450,227) (1,852,584) (1,104,690) (579,175) (2,930,219)
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Increase in deposits (5,773) (7,972) - (898) (14,643)
Purchase of equipment (61,546) (260,125) (22,003) (14,416) (336,087)
Purchase of investments available for sale - (55,070) - - (55,070)
Proceeds from the sale of investments - - - 53,967 53,967
-------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (67,319) (323,167) (22,003) 38,653 (351,833)
-------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-25-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Period From
Three Months Ended March 31, October 24, 1995
Years Ended December 31, --------------------------- (Inception) through
----------------------- 1997 1998 March 31, 1998
1996 1997 (Unaudited) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities
Net proceeds from sale of common stock 840,000 2,003,000 858,254 437,053 3,340,092
Proceeds from notes to stockholder 128,680 - - - 134,041
Principal payments under capital lease - (4,559) - (3,078) (7,637)
--------------------------------------------------------------------------
Net cash provided by
financing activities 968,680 1,998,441 858,254 433,975 3,466,496
--------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents 451,134 (177,310) (268,439) (106,547) 184,444
Cash and cash equivalents at beginning of year 17,167 468,301 468,301 290,991 -
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $468,301 $ 290,991 $ 199,862 $ 184,444 $ 184,444
==========================================================================
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest $ 7,206 $ 6,122 $ - $ 964 $ 14,292
Income taxes $ 800 $ 800 $ - $ - $ 2,400
Supplemental Schedule of Noncash
Investing and Financing Activities
Loan from stockholder converted to paid-in capital $ 5,361 $ 128,000 $ - $ - $ 133,361
Capital lease obligation incurred for equipment $ - $ 33,340 $ - $ - $ 33,340
Settlement and conversion of shares to note payable $ - $ 16,289 $ - $ - $ 16,289
Unrealized gain on securities available for sale $ - $ 120 $ - $ (120) $ -
</TABLE>
See Notes to Consolidated Financial Statements.
-26-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Virtual Gaming Technologies, Inc. (the "Company") was incorporated in the State
of Delaware on October 24, 1995 under the name MBA Licensing Corp. The Company's
initial operations were to include the manufacturing and marketing of CD-ROM and
video game cartridges. On June 20, 1996 the Board of Directors approved the
change of the Company's name to Internet Gaming Technologies, Inc. On January
22, 1997, the Company's name was changed to Virtual Gaming Technologies, Inc.
The Company is establishing casino-style operations over the Internet focused on
the international marketplace outside the United States. During its development
stage, the Company has been acquiring computer hardware, developing its gaming
software and operating systems, and raising capital. The Company has incurred
substantial losses to date, as no significant operating revenue has been
generated. Proceeds from the Company's private placements of shares of its
common stock have funded its operations to date.
A summary of the Company's significant accounting policies follows:
Interim financial statements
The accompanying balance sheet as of March 31, 1998 and the statements of
operations and cash flows for the three month periods ended March 31, 1997 and
1998, respectively, have not been audited. However, these financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, the accompanying interim
financial statements reflect all material adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results for the
interim periods presented. The results for the interim periods are not
necessarily indicative of the results which will be reported for the entire
year.
Use of estimates
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
-27-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Financial instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts payable and short-term debt approximate fair value
due to the immediate short-term maturity of these financial instruments.
The fair value of the Company's capital lease obligation approximates the
carrying amount based on the current rates offered to the Company for debt of
the same remaining maturities with similar collateral requirements.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Emerald Riviera Limited, an Irish Corporation,
Internet Gaming Technologies, Inc., a Nevada Corporation and Virtual Gaming
Technologies (Antigua) Ltd., an Antigua Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Foreign operations and concentrations
The U.S. dollar is considered the functional currency for Emerald Riviera
Limited and Virtual Gaming Technologies (Antigua) Ltd. Accordingly, the monetary
assets and liabilities of these entities have been remeasured using the current
rate of exchange and nonmonetary assets have been remeasured using the
appropriate historical rates of exchange. Adjustments resulting from the
translation of the financial statements of the entities are not significant.
The Company is licensed and authorized to establish and operate its gaming
operations in Antigua. The Company has a five year gaming license which requires
an annual fee of $100,000. Upon the Company offering its pari-mutuel sports
betting service, the annual fee will be increased to $175,000. All of the
Company's gaming activities are conducted in Antigua, and its server site and
certain gaming related hardware are located in Antigua. As such, all of the
Company's earned gaming revenues and loss of approximately $160,000 were
incurred in Antigua. As of December 31, 1997, the Company maintained
approximately $130,000 in total assets in Antigua which primarily consisted of
approximately $45,000 in net fixed assets and $54,000 in unamortized license
fee.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all cash accounts,
which are not subject to withdrawal restrictions or penalties, and certificates
of deposit and money market funds purchased with a maturity of three months or
less to be cash equivalents. The Company maintains its primary checking and
savings accounts at two financial institutions located in California. Accounts
at these banks are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At December 31, 1997 and March 31, 1998, the Company's uninsured
cash balances totaled $151,921 and $40,786, respectively. The Company has not
experienced any losses in such accounts.
-28-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Investment securities
Investment securities at December 31, 1997 are principally municipal bonds. The
Company classifies its debt securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities that the Company has the ability and intent to
hold until maturity. All other securities not included in trading or held-to-
maturity are classified as available-for-sale. The Company does not have any
securities classified as trading or held-to-maturity.
Securities available-for-sale are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
A decline in the market value of any marketable security below cost that is
deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Equipment
Equipment is recorded at cost and is depreciated on the straight-line method
over its estimated useful life of five years.
Depreciation of assets under capital lease is included in depreciation expense
of owned assets in the consolidated statements of operations.
Revenue recognition
Gaming revenue is the net win from gaming activities, which is the difference
between gaming wins and losses. As of December 31, 1997, the Company is offering
video blackjack and poker to its customers.
In September 1997, the Company commenced limited operations with live gaming
activity, initially offering video poker and blackjack to its customers. In the
first quarter of 1998, the Company introduced video baccarat, and in the second
quarter of 1998 introduced limited testing of an Internet based pari-mutuel
sports-betting service.
Funds held on deposit
The Company requires customers to advance cash or credit card deposits prior to
participating in gaming activities.
-29-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Advertising costs
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Loss per common share
Basic loss per common share has been computed on the basis of the weighted-
average number of common shares outstanding and issuable under antidilution
provisions during each period presented. Diluted per-share amounts assume the
conversion of potential common stock, such as options and warrants. The common
shares issuable upon exercise of employee stock options and stock warrants have
not been included in the computation of diluted loss per common share because
their inclusion would have had an antidilutive effect.
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Software development costs and recently issued accounting pronouncement
Software development costs for internal use software are expensed as incurred.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" in March 1998. SOP 98-1 is not expected to have a
material impact on the Company's financial statements.
Regulation risk
The Company intends to provide its services in jurisdictions that do not
prohibit gaming over the Internet. There can be no assurance that the Company
will be able to comply with future government regulations that will affect
gaming operations in a significant number of international jurisdictions. The
United States has laws prohibiting gaming operations except by licensed persons.
Currently, the effect of these laws on Internet gaming is uncertain. As a
result, the Company does not intend to accept subscribers from the United
States.
-30-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 2. Investment Securities
Investments at December 31, 1997 consist of municipal bonds that mature in April
2001 and are stated at fair value.
The amortized cost, gross unrealized holding gains and fair value of the
available-for-sale securities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Gains Fair Value
--------- ----------- ----------
<S> <C> <C> <C>
Municipal obligations $ 55,070 $ 120 $ 55,190
</TABLE>
Subsequent to December 31, 1997, the Company sold these securities for a
realized loss of $1,103.
Note 3. Equipment
Equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
December 31, December 31, 1998
1996 1997 (Unaudited)
------------ ------------ -----------
<S> <C> <C> <C>
Computers $ 22,032 $ 268,091 $ 276,938
Office furniture and equipment 39,514 53,580 59,149
Capital lease - automobile -- 33,340 33,340
--------------------------------------------------------------------
61,546 355,011 369,427
Less accumulated depreciation 2,585 41,898 66,562
--------------------------------------------------------------------
$ 58,961 $ 313,113 $ 302,865
====================================================================
</TABLE>
Note 4. Lease Commitments
Operating leases
The Company leases its office facility under three noncancelable operating lease
agreements expiring at various times through July 1999. The leases call for
aggregate monthly payments of approximately $13,000.
In addition, the Company leases certain office equipment under noncancelable
operating lease agreements expiring at various times through December 2002. The
leases call for aggregate monthly payments of approximately $500.
-31-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 4. Lease Commitments (Continued)
Capital lease
The Company leases an automobile under a capital lease agreement, with an
imputed interest rate of 21.22%, due in monthly installments of $1,214 through
July 2000. The automobile that collateralizes the lease has a net book value of
$28,710.
At December 31, 1997, the future annual minimum lease payments under operating
and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Years Ending December 31, Leases Lease
- - ------------------------- --------- -------
<S> <C> <C>
1998 $ 147,614 $ 14,568
1999 50,127 14,568
2000 1,445 8,499
2001 840 --
2002 630 --
---------- ---------
Total minimum lease payments $ 200,656 $ 37,635
===========
Less amount representing interest 8,854
---------
Present value of net minimum lease payments 28,781
Less current maturities 9,334
---------
Long-term lease obligations $ 19,447
=========
</TABLE>
Rental expense for the years ended December 31, 1997 and 1996 totaled $105,415
and $19,298, respectively. Rental expense for the three months ended March 31,
1998 and 1997 totaled $35,651 and $22,154, respectively, and totaled $160,364
for the period October 24, 1995 (inception) through March 31, 1998.
-32-
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC. (A DEVELOPMENT STAGE COMPANY)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
- - -------------------------------------------------------------------------------
Note 5. Related Party Transactions
Note payable to stockholder and affiliate
The Company received advances in the form of notes payable from its Chairman of
the Board of Directors and his affiliated company. The notes payable were
unsecured, due on demand and provided for interest at a fixed rate of 8%. Total
interest expense incurred by the Company on these related party notes payable
for the years ended December 31, 1997 and 1996 was approximately $3,400 and
$7,200, respectively.
During the year ended December 31, 1997, the Company's Board of Directors
approved the issuance of 128,000 shares of the Company's common stock to the
Chairman and his affiliated company in payment of the notes. The per share
quoted market price at the time of issuance was $1.88 per share. The excess of
the fair value of shares issued over the carrying amount of the notes payable of
$112,640 was recognized as compensation expense in the accompanying consolidated
statement of operations.
Note payable - licensing agreement
In May 1996, the Company entered into a non-exclusive licensing agreement with
CasinoWorld Holdings, Ltd. (CasinoWorld) for the use of certain computer
software and hardware (the CasinoWorld Agreement). Under the terms of the
CasinoWorld Agreement, the Company agreed to transfer 385,000 shares of its
common stock to CasinoWorld as a licensing fee. As additional consideration, the
Company agreed to pay a royalty in the amount of 33 1/3% of net gaming revenue
derived through Internet operations. The 385,000 shares of common stock had been
presented as additional shares of common stock issued in the consolidated
financial statements for the year ended December 31, 1996. The shares were
actually transferred to CasinoWorld through the Company's majority stockholder.
Stockholders' equity has been restated without any effect on the Company's
financial position, results of operations or cash flow for the year ended
December 31, 1996 to reflect this transaction. Net (loss) per common share and
the weighted average common shares outstanding were increased and decreased
$0.01 and 241,414 shares, respectively.
Effective February 1997, the Company and CasinoWorld agreed to terminate the
CasinoWorld Agreement. Under the termination agreement, CasinoWorld returned to
the Company 385,000 shares of the Company's common stock in exchange for a
$150,000 promissory note and all 385,000 shares were retired. The promissory
note is unsecured and bears interest at a fixed rate of 10%. Principal and
interest are due in quarterly installments equal to 10% of the Company's net
gaming revenue, as defined in the promissory note. At December 31, 1997, no
payments have been made on this promissory note. The Company recorded a charge
to operations of $133,711 to reflect the effect of the settlement during 1997.
-33-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 5. Related Party Transactions (Continued)
Stock agreements
In September 1996, the Company entered into an agreement with Unistar
Entertainment, Inc. (Unistar) whereby Unistar agreed to purchase up to 600,000
shares of the Company's stock at a price of $5.00 per share (the Securities
Purchase Agreement), subject to certain antidilution provisions. The Securities
Purchase Agreement was executed in contemplation of CasinoWorld providing or
developing an Internet gaming system. Concurrent with the execution of the
Securities Purchase Agreement, the Company issued 140,000 shares of its common
stock to Unistar for $700,000.
As a result of the termination of the Company's license agreement with
CasinoWorld, in March 1997 the Company and Unistar entered into a settlement
agreement (the Settlement Agreement). Under the terms of the Settlement
Agreement, the Company agreed to issue an additional 93,333 shares to Unistar
without consideration as required under the antidilution provisions.
Additionally, as a result of the private placement conducted by the Company in
1997 discussed below, the Company is obligated to issue an additional 116,667
shares to Unistar under the antidilution provisions. The Company also issued to
Unistar a common stock warrant valued at $772,492 entitling Unistar to purchase
up to 200,000 shares of common stock, pursuant to the settlement agreement. The
warrants are immediately exercisable at $3.45 per share, subject to certain
adjustments as provided for in the warrant, and expire five years from the date
of issuance.
The Company has also granted to Unistar, for no additional consideration, a non-
exclusive, nonassignable royalty-free license to the Company's software
applications relating to state or Indian bingo or lottery games for use by
Unistar, provided that Unistar shall not use such software technology to compete
with a preexisting gaming operation of the Company.
Stock and options issued for services
During the year ended December 31, 1997, the Company issued a total of 55,732
shares of its common stock to various unrelated third parties as consideration
for services provided. The Company has accounted for all stock and stock
equivalent transactions at the fair market value of the stock as of the grant
date or as services have been performed.
Pursuant to a consulting agreement, the Company also issued a stock warrant to
purchase 30,000 shares of its common stock as consideration for services
provided. The warrants carry an exercise price of $2.25 per share. The warrant
has been valued at $45,634. As part of an extension of the consulting agreement
effective January 1, 1998, the holder of the warrant is entitled to a warrant to
purchase an additional 35,000 shares of common stock at an exercise price of
$3.00 per share when the stock price reaches $6.00 per share and another 35,000
shares when the stock price reaches $7.50 per share. All of the warrants are
immediately exercisable and expire five years from the date of issuance.
-34-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 5. Related Party Transactions (Continued)
Stock and options issued for services (continued)
During the three months ended March 31, 1998, the Company granted warrants for
consulting services which entitled the holder to an additional 70,000 shares of
common stock pursuant to the above agreement. The Company recorded a charge
totaling $153,582 for the value of the warrants in the March 31, 1998
consolidated statement of operations.
Stock bonuses
In August 1997, the Company's Board of Directors approved the issuance of stock
bonuses to two key employees. The President/CEO and one of the technical
engineers were issued 25,000 and 10,000 shares of common stock, respectively.
The stock bonuses have been charged to operations based upon the fair market
value of $5.88 per share as of the Board approval date, totaling $205,800.
In May 1996, the Company's Board of Directors approved the issuance of 200,000
shares of the Company's common stock to the President/CEO. The stock bonus was
charged to operations based upon the fair market value of the stock as of the
Board approval date.
Stock issuance for cash
During the year ended December 31, 1997, the Company completed a private
placement of 1,132,223 shares of common stock including 113,973 shares issued as
related commissions under Rule 506 of Regulation D promulgated under the
Securities Act of 1933. Total net proceeds from the offering were $2,003,000.
The Company also issued 18,669 shares of its common stock without consideration
pursuant to a Board resolution on March 20, 1997 to modify the 1996 Rule 504
offering terms from $5.00 per share to $3.00 per share.
During the three months ended March 31, 1998, the Company issued 168,461 shares
of common stock relative to a 700,000 share private placement offering under
Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net
proceeds from the offering were $437,053. See Note 8 regarding a subsequent
modification of the offering.
-35-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans
In 1997, the Company adopted a stock option plan under which options to purchase
up to 500,000 shares of common stock may be granted to officers, employees or
directors of the Company, as well as consultants, independent contractors or
other service providers of the Company. Both "incentive" and "nonqualified"
options may be granted under the Plan. Incentive options may be granted at an
exercise price equal to the fair market value of the shares at the date of grant
while nonqualified options may be granted at an exercise price determined by the
Board of Directors. Individual option agreements will contain such additional
terms as may be determined by the Board of Directors at the time of grant. The
Plan provides for grants of options with a term of up to ten years. Incentive
options must be granted with exercise prices equal to the fair market value on
the date of grant, except that incentive options granted to persons owning stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company may not be granted at less than 110% of the fair market
value on the date of grant.
Stock options
On December 31, 1996, the Company granted an option whereby the President/CEO
can exercise an option to purchase 480,000 shares of common stock. On the
measurement date, February 15, 1997, 240,000 of the shares became immediately
exercisable with the remainder 240,000 shares exercisable in equal increments on
December 31, 1997 and 1998, respectively. All of the options have an exercise
price of $0.25 per share and expire three years from the grant date, in December
1999.
In addition, the Company granted options to several key employees of the Company
for the aggregate purchase of 160,000 shares of common stock. The exercise price
on these shares range from $1.00 to $2.50 per share. The options vest and expire
on various dates through December 2002.
The Company has elected to account for nonqualified grants and grants under its
Plan following APB No. 25 and related interpretations. Accordingly, compensation
cost of approximately $1,641,000 has been recognized for the nonqualified
options granted during the year ended December 31, 1997.
-36-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans (Continued)
The fair value of each option granted during the year ended December 31, 1997
was estimated on the measurement date utilizing the then current fair value of
the underlying shares less the exercise price discounted over the average
expected life of the options (3 to 5 years), with an average risk free interest
rate of 5.56% to 6.27%, price volatility of 1.0 and no dividends. Had
compensation cost for all awards been determined based on the fair value method
as prescribed by FASB Statement No. 123, Accounting for Stock-Compensation,
reported net (loss) and (loss) per common share would have been as follows:
<TABLE>
<CAPTION>
December 31, March 31, 1998
1997 (Unaudited)
------------ --------------
<S> <C> <C>
Net (loss):
As reported $(5,067,327) $ (978,185)
Proforma $(5,156,328) $(1,262,527)
Basic and diluted net (loss) per share:
As reported $ (0.80) $ (0.14)
Proforma $ (0.82) $ (0.18)
</TABLE>
A summary of the activity of the stock options for the three months ended March
31, 1998 and the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31, 1998
December 31, 1997 (Unaudited)
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period -- $ -- 640,000 $0.59
Granted 640,000 0.59 122,000 2.87
Forfeited -- -- -- --
Expired -- -- -- --
------- ----- ------- -----
Outstanding at end of period 640,000 $0.59 762,000 $0.95
======= ===== ======= =====
Exercisable at end of period 465,000 $0.50 502,000 $0.87
------- ----- ------- -----
Weighted-average fair value
of options granted during
the period $3.27 $2.21
</TABLE>
-37-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 6. Stock Option Plans (Continued)
A further summary of options outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
480,000 2 years $0.25 360,000 $0.25
75,000 3 years 1.00 75,000 1.00
45,000 2.63 years 2.00 20,000 2.00
30,000 2.67 years 2.25
10,000 5 years 2.50 10,000 2.50
------- -------
640,000 465,000
======= =======
</TABLE>
In January 1998, the Company's Board of Directors approved the issuance of stock
options to employees under the Plan. The options provide for an exercise price
equal to the fair market value of the shares on the date of the grant and expire
five years thereafter. No compensation cost has been recognized for grants under
the Plan for the three months ended March 31, 1998. During the three months
ended March 31, 1998, $94,715 of compensation cost was attributed to
nonqualified options granted during the year ended December 31, 1997. The fair
value of each option granted during the three months ended March 31, 1998 was
estimated on the measurement date utilizing the then current fair value of the
underlying shares less the exercise price discounted over the average expected
five year life of the options with an average risk free interest rate of 5.25%
price volatility of 1.0 and no dividends.
The options granted to employees during the three months ended March 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Average
Granted and Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
122,000 4.75 years $2.87 72,000 $2.87
======= ======
</TABLE>
Subsequent to March 31, 1998, the Company granted options to purchase shares of
the Company's common stock at the then fair market value to two directors and an
officer. The options are for a total of 80,000 shares and expire three to five
years from the grant date.
-38-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 7. Income Taxes
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The tax effect of temporary
differences consisted of the following as of March 31, and December 31:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- 1998
1996 1997 (Unaudited)
---------- ---------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 81,800 $ 346,000 $ 687,000
Compensation element of stock options issued -- 670,000 760,000
Startup costs capitalized for income tax purposes 330,500 975,000 923,000
-------- ---------- ----------
Gross deferred tax assets 412,300 1,991,000 2,370,000
Less valuation allowance 412,300 1,975,000 2,354,000
-------- ---------- ----------
-- 16,000 16,000
Deferred tax liabilities, equipment -- (16,000) (16,000)
-------- ---------- ----------
$ -- $ -- $ --
======== ========== ==========
</TABLE>
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. As the achievement of
required future taxable income is uncertain, the Company recorded a valuation
allowance.
As of December 31, 1997, the Company has net operating loss carryforwards for
both federal and state income tax purposes. Federal net operating loss
carryforwards totaling approximately $869,000 expire as follows: $194,000 in
2011, and $675,000 in 2012. State net operating carryforwards totaling
approximately $869,000 expire as follows: $194,000 in 2001, and $675,000 in
2002. Due to Internal Revenue Service regulations, the availability of the
operating loss carryforwards may be limited upon a substantial change in
ownership.
A reconciliation of the effective tax rates with the federal statutory rate is
as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Three months ended
------------------------ March 31, 1998
1996 1997 (Unaudited)
---------- ----------- ------------------
<S> <C> <C> <C>
Income tax benefit at 35% statutory rate $(284,000) $(1,772,000) $(342,000)
Change in valuation allowance 412,300 1,578,700 379,000
Nondeductible expenses -- 443,000 8,000
Loss of net operating loss carryforwards (51,000) -- --
State income taxes, net (76,500) (232,000) (55,000)
Other -- (16,900) 10,200
--------- ----------- ---------
$ 800 $ 800 $ 200
========= =========== =========
</TABLE>
-39-
<PAGE>
Virtual Gaming Technologies, Inc. (A Development Stage Company)
and Subsidiaries
Notes to Consolidated Financial Statements
(Information relating to the three months ended March 31, 1998 and 1997 is
unaudited)
________________________________________________________________________________
Note 8. Management's Plans for Future Operations and Financing
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, as discussed in Note
1, the Company has been in the development stage since its inception October 24,
1995, and has experienced cumulative losses since its inception of $7,138,642,
inclusive of noncash charges for capital stock, options, and warrant issuance-
related activity of approximately $3,789,000. The cumulative losses have reduced
net stockholders' equity to $198,336 and the Company has a working capital
deficit of $103,307 as of March 31, 1998. At present, the Company's working
capital plus limited revenue from gaming will not be sufficient to meet the
Company's objectives as structured. Although these conditions indicate that the
Company may be unable to continue as a going concern, management did anticipate
considerable losses would be incurred before the Company became self-sustaining.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
In September 1997, the Company commenced limited operations with live gaming
activity, initially offering video poker and blackjack to its customers. During
the first quarter of 1998, the Company introduced video baccarat, and in the
second quarter of 1998, introduced limited testing of an Internet based pari-
mutuel sports-betting service.
The Company estimates it needs substantial new capital to achieve meaningful
revenue producing operations. In January 1998, the Company initiated a private
placement of 700,000 shares of the Company's common stock at $3.00 per share. In
July 1998, the Board of Directors approved the modification of the private
placement memorandum to offer 1,400,000 shares at the $3.00 share price and to
extend the termination date of the offering to September 30, 1998. Management's
plans include consideration of joint venture arrangements with other companies
in strategic locations in order to target customers within these specified
foreign countries and licensing of the Company's software to other companies.
The Company is also considering an arrangement to offer credit card processing
services to other Internet based businesses, and in June 1998, deposited
$300,000 with a major bank relative to a contemplated arrangement.
-40-
<PAGE>
PART III
Item 1. Index To Exhibits Page
----
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Specimen of Common Stock Certificate
10.1 Securities Purchase Agreement dated September 5, 1996 between
the Company and Unistar Entertainment, Inc.
10.2 Settlement Agreement and Mutual General Release
Holdings, Ltd, dated February 2, 1997 between thd Company
and CasinoWorld
10.3 Settlement Agreement and Mutual General Release between the Company
and Unistar Entertainment, Inc. dated March 6, 1997
10.4 Employment Agreement dated September 1, 1997 between the Company and
Joseph R. Paravia
10.5 Virtual Gaming Technologies, Inc. 1997 Stock Option Plan
21.1 List of Subsidiaries
27.1 Financial Data Schedule
-41-
<PAGE>
Signatures
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIRTUAL GAMING TECHNOLOGIES, INC.,
a Delaware corporation
Date: July 31, 1998 By: /s/ JOSEPH R. PARAVIA
------------------------------------------
Joseph R. Paravia, Chief Executive Officer
-42-
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MBA LICENSING CORP
1. The name of the corporation is MBA LICENSING CORP.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is the
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to Issue is Fifteen million (15,000,000) shares and the par value of
each of such shares is One one-thousandth of a dollar ($.00001) amounting in the
aggregate to $150.00.
5. The name and mailing address of each incorporator is as follows:
Laura Vitalo Corporation Trust Center
11209 Orange Street
Wilmington, Delaware 19801
The name and mailing address of each person who is to serve as a director
until the first annual meeting of the stockholders or until a successor is
elected and qualified is as follows:
Grant Gee 936 The East Mall, Suite 300
Etobicoke, Ontario M9J 6J9
Barbara Kaye Lozer 936 The East Mall, Suite 300
Etobicoke, Ontario M9J 6J9
6. The corporation shall exist perpetually.
7. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to make, alter or repeal
the by-laws of the corporation.
8. Elections of directors need not be by written ballot unless the by-laws
of the corporation shall so provide. Meetings of stockholders may be held
within or without the State of Delaware, as the by-laws may provide. The books
of the corporation may be kept (subject to any provision contained in the
statutes) outside the State of Delaware at such place or pieces as may be
designated from time to time by the board of defectors or in the bylaws of the
<PAGE>
corporation.
9. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
10. A director of the corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except/or liability (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law,. or
(iv) for any transaction from which the director derived any improper personal
benefit.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is our act and deed and the facts herein stated are true, end
accordingly have hereunto set my hand this 24th day of October, 1995.
/s/ Laura Vitalo
--------------------------------------------
<PAGE>
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
MBA LICENSING CORP.
MBA Licensing Corp. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: By the unanimous consent of the Directors of MBA Licensing Corp.,
a resolution was duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of said Corporation, declaring said amendment to be
advisable and seeking the consent of the majority of the shareholders of said
Corporation to adopt such amendment to the Certificate of Incorporation,
pursuant to Sections 228 and 242 of the Delaware General Corporation Law. The
resolution setting forth the proposed amendments is as follows:
ARTICLE FIRST of the Certificate of Incorporation of the Corporation be
amended in its entirety to read as follows:
The name of the corporation is INTERNET GAMING TECHNOLOGIES, INC.
SECOND: that a majority of the Stockholders have given their written consent
to the above amendment in lieu of a meeting in accordance with the provisions of
Section 228 of the Delaware General Corporation Law;
THIRD: that the aforesaid amendment shall be duly adopted in accordance with
the applicable Section 242 and 228 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by its President and
Secretary, this 20th day of June, 1996.
MBA Licensing Corp.
By: /s/ Daniel B. Najor
---------------------------------------------------
Daniel B. Najor, President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNET GAMING TECHNOLOGIES, INC.
INTERNET GAMING TECHNOLOGIES, INC., a corporation duly organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
I. The amendment to the Corporation's Certificate of Incorporation set
forth below was duly adopted in accordance with the provisions of Section 242
and has been consented to in writing by the Joint Written Consent of the Board
of Directors and Majority Stockholder of the Corporation dated January 21, 1997,
in accordance with Section 228 of the General Corporation Law of the State of
Delaware.
II. Article 1. of the Corporation's Certificate of Incorporation is amended
to read in its entirety as follows:
"1. The name of the corporation is Virtual Gaming Technologies, Inc."
IN WITNESS WHEREOF, the undersigned hereby duly executes this Certificate of
Amendment hereby declaring and certifying under penalty of perjury that this is
the act and deed of the Corporation and the facts herein stated are true, this
21st day of January, 1997.
INTERNET GAMING TECHNOLOGIES, INC.
By:/s/ Daniel B. Najor
----------------------------------------------------
Daniel B. Najor, President
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
VIRTUAL GAMING TECHNOLOGIES, INC.
A Delaware Corporation
ARTICLE I
OFFICE
1.1 Registered Office. The registered office of Virtual Gaming
-----------------
Technologies, Inc., a Delaware corporation (hereinafter called the
"Corporation"), in the State of Delaware shall be at 1209 Orange Street, City of
Wilmington, County of New Castle, and the name of the registered agent in charge
thereof shall be The Corporation Trust Company.
1.2 Principal Office. The principal office for the transaction of the
----------------
business of the Corporation shall be 12625 High Bluff Drive, Suite 205A, San
Diego, California 92130. The Board of Directors (hereinafter called the
"Board") is hereby granted full power and authority to change the principal
office from one location to another.
1.3 Other Offices. The Corporation may also have an office or offices at
-------------
such other place or places, either within or without the State of Delaware, as
the Board may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Annual Meetings. Annual meetings of the stockholders of the
---------------
Corporation for the purpose of electing directors and for the transaction of
such other business as may properly come before such meetings in accordance with
Section 2.11 of these Bylaws may be held at such time, date and place as the
Board shall determine by resolution.
2.2 Special Meetings. A special meeting of the stockholders for the
----------------
transaction of any proper business may be called at any time by the Board, the
Chief Executive Officer (Chairman of the Board), the President or one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting.
2.3 Place of Meetings. All meetings of the stockholders shall be held at
-----------------
such places within or without the State of Delaware, as may from time to time be
designated by the person or persons calling the respective meeting and specified
in the respective notices or waivers of notice thereof.
<PAGE>
2.4 Notice of Meetings.
------------------
(a) Except as otherwise required by law, written notice of each
meeting of the stockholders, whether annual or special, shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, notice
is given when deposited in the United States mail, postage prepaid, directed to
the stockholder at his address as it appears on the records of the Corporation.
Except as otherwise expressly required by law, no publication of any notice of a
meeting of the stockholders shall be required. Every notice of a meeting of the
stockholders shall state the place, date and hour of the meeting, and in the
case of a special meeting, shall also state the purpose or purposes for which
the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall have waived such notice and
such notice shall be deemed waived by any stockholder who shall attend such
meeting in person or by proxy, except as a stockholder who shall attend such
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Except as otherwise expressly required by law, notice of any
adjourned meeting of the stockholders need not be given if the time and place
thereof are announced at the meeting at which the adjournment is taken.
(b) Whenever notice is required to be given to any stockholder to whom
(i) notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such person during
the period between such two consecutive annual meetings, or (ii) all, and at
least two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any person shall deliver to the Corporation a written notice setting
forth his then current address, the requirement that notice be given to such
person shall be reinstated. In the event that the action taken by the
Corporation is such as to require the filing of a certificate under any of the
other sections, the certificate need not state that notice was not given to
persons to whom notice was not required to be given pursuant to this section.
2.5 Quorum. Except as provided by law, the holders of record of a
------
majority in voting interest of the shares of stock of the Corporation entitled
to be voted thereat, present in person or by proxy, shall constitute a quorum
for the transaction of business at any meeting of the stockholders of the
Corporation or any adjournment thereof. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum, and by any greater number of shares otherwise required to
take such action by applicable law or the Certificate of Incorporation. In the
absence of a quorum at any meeting or any adjournment thereof, a majority in
voting interest of the stockholders present in person or by proxy and
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entitled to vote thereat or, in the absence therefrom of all the stockholders,
any officer entitled to preside at, or to act as secretary of, such meeting may
adjourn such meeting from time to time. At any such adjourned meeting at which
a quorum is present any business may be transacted which might have been
transacted at the meeting as originally called.
2.6 Voting.
------
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 2.10 of these Bylaws
as the record date for the determination of stockholders entitled to notice of
and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (A) at
the close of business on the day next preceding the day on which notice of the
meeting shall be given or (B) if notice of the meeting shall be waived, at the
close of business on the day next preceding the day on which the meeting shall
be held.
(b) Voting shall in all cases be subject to the provisions of the
Delaware General Corporation Law and to the following provisions:
(i) Subject to Section 2.6(b)(vii), shares held by an
administrator, executor, guardian, conservator, custodian or other fiduciary may
be voted by such holder either in person or by proxy, without a transfer of such
shares into the holder's name; and shares standing in the name of a trustee may
be voted by the trustee, either in person or by proxy, but no trustee shall be
entitled to vote shares held by such trustee without a transfer of such shares
into the trustee's name.
(ii) Shares standing in the name of a receiver may be voted by
such receiver; and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into the receiver's name if
authority to do so is contained in the order of the court by which such receiver
was appointed.
(iii) Subject to the provisions of the Delaware General
Corporation Law, and except where otherwise agreed in writing between the
parties, a stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(iv) Shares standing in the name of a minor may be voted and the
Corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the Corporation has notice, actual or
constructive, of the non-age,
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unless a guardian of the minor's property has been appointed and written notice
of such appointment given to the Corporation.
(v) Shares standing in the name of another corporation,
domestic or foreign, may be voted by such officer, agent or proxyholder as the
bylaws of such other corporation may prescribe or, in the absence of such
provision, as the Board of Directors of such other corporation may determine or,
in the absence of such determination, by the chairman of the board, president or
any vice president of such other corporation, or by any other person authorized
to do so by the board, president or any vice president of such other
corporation. Shares which are purported to be executed in the name of a
corporation (whether or not any title of the person signing is indicated) shall
be presumed to be voted or the proxy executed in accordance with the provisions
of this subdivision, unless the contrary is shown.
(vi) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes.
(vii) Shares held by the Corporation in a fiduciary capacity, and
shares of the Corporation held in a fiduciary capacity by any subsidiary, shall
not be entitled to vote on any matter, except to the extent that the settlor or
beneficial owner possesses and exercises a right to vote or to give the
Corporation binding instructions as to how to vote such shares.
(viii) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a stockholder voting agreement
or otherwise, or if two or more persons (including proxyholders) have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
Corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(A) If only one votes, such act binds all;
(B) If more than one vote, the act of the majority so
voting binds all;
(C) If more than one vote, but the vote is evenly split on
any particular matter, each fraction may vote the securities in question
proportionately. If the instrument so filed or the registration of the shares
shows that any such tenancy is held in unequal interests, a majority or even
split for the purpose of this section shall be a majority or even split in
interest.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by his proxy appointed by an instrument in
writing, subscribed by such
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stockholder or by his attorney thereunto authorized and delivered to the
secretary of the meeting. A validly executed proxy which does not state that it
is irrevocable shall continue in full force and effect unless revoked by the
person executing it, prior to the vote pursuant thereto, by a writing delivered
to the Corporation stating that the proxy is revoked or by a subsequent proxy
executed by, or attendance at the meeting and voting in person by the person
executing the proxy; provided, however, that no such proxy shall be valid after
the expiration of three (3) years from the date of such proxy, unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of the Delaware General
Corporation Law.
(d) At any meeting of the stockholders all matters, except as
otherwise provided in the Certificate of Incorporation, in these Bylaws or by
law, shall be decided by the vote of a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote thereat and
thereon, a quorum being present.
(e) The vote at any meeting of the stockholders on any question need
not be written ballot, unless so directed by the chairman of the meeting;
provided, however, that any election of directors at any meeting must be
conducted by written ballot upon demand made by any stockholder or stockholders
present at the meeting before the voting begins. On a vote by ballot each
ballot shall be signed by the stockholder voting, or by his proxy, if there be
such proxy, and it shall state the number of shares voted.
2.7 Action Without a Meeting. Any action which is required to be taken or
------------------------
which may be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
In the case of election of directors, such a consent shall be effective only if
signed by the holders of all outstanding shares entitled to vote for the
election of directors; provided, however, that a director may be elected at any
time to fill a vacancy on the Board that has not been filled by the directors,
by the written consent of the holders of a majority of the outstanding shares
entitled to vote for the election of directors. All such consents shall be
filed with the Secretary of the Corporation and shall be maintained in the
corporate records.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the
earliest dated consent delivered in the manner required by this section to the
Corporation, written consents signed by a sufficient number of holders or
members to take action are delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer
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or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to a Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. In the event that the action which is consented
to is such as would have required the filing of a certificate under any other
section of this title, if such action had been voted on by stockholders at a
meeting thereof, the certificate filed under such other section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written consent has been given in accordance with this
section, and that written notice has been given as provided in this section.
2.8 List of Stockholders. The Secretary of the Corporation shall prepare
--------------------
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.9 Judges. If at any meeting of the stockholders a vote by written
------
ballot shall be taken on any question, the chairman of such meeting may appoint
a judge or judges to act with respect to such vote. Each judge so appointed
shall first subscribe an oath faithfully to execute the duties of a judge at
such meeting with strict impartiality and according to the best of his ability.
Such judges shall: (i) decide upon the qualification of the voters; (ii) report
the number of shares represented at the meeting and entitled to vote on such
question; (iii) conduct the voting and accept the votes; and (iv) when the
voting is completed, ascertain and report the number of shares voted
respectively for and against the question. Reports of judges shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge on any question other than a vote for
or against a proposal in which he shall have a material interest.
2.10 Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board, and
which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of such meeting.
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<PAGE>
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board, and which date
shall not be more than ten days after the date upon which the resolution fixing
the record date is adopted by the Board. If no record date has been fixed by
the Board, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
is required, shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to the Corporation
by delivery to its registered office in the State of Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the Board and prior action by the Board is required, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on which
the Board adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action.
If no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
If no record is fixed by the Board, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board may
fix a new record date for the adjourned meeting.
2.11 Stockholder Proposals at Annual Meetings.
----------------------------------------
(a) Business may be properly brought before an annual meeting by a
stockholder only upon the stockholder's timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than thirty (30) days nor more than sixty (60) days prior
to the meeting as originally scheduled; provided, however, that in the event
that less than forty (40) days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth
(10th) day
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<PAGE>
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. For purposes of this Section 2.11,
any adjournment(s) or postponement(s) of the original meeting shall be deemed
for purposes of notice to be a continuation of the original meeting and no
business may be brought before any reconvened meeting unless such timely notice
of such business was given to the Secretary of the Corporation for the meeting
as originally scheduled. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting, (ii) the name and record address of the stockholder proposing
such business, (iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business. Notwithstanding the foregoing, nothing in this
Section 2.11 shall be interpreted or construed to require the inclusion of
information about any such proposal in any proxy statement distributed by, at
the direction of, or on behalf of the Board.
(b) The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.11, and
if the chairman should so determine, the chairman shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
2.12 Notice of Stockholder Nominees.
------------------------------
(a) Nominations of persons for election to the Board of the
Corporation shall be made only at a meeting of stockholders and only (i) by or
at the direction of the Board or (ii) by any stockholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 2.12. Such nominations, other
than those made by or at the direction of the Board, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than thirty (30) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event that less than forty (40) days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth (10th) day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. For purposes of this
Section 2.12, any adjournment(s) or postponement(s) of the original meeting
shall be deemed for purposes of notice to be a continuation of the original
meeting and no nominations by a stockholder of persons to be elected directors
of the Corporation may be made at any such reconvened meeting unless pursuant to
a notice which was timely for the meeting on the date originally scheduled.
Such stockholder's notice shall set forth: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to the Securities Exchange Act of 1934, as amended,
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (ii) as to the
stockholder
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giving the notice (A) the name and address, as they appear on the Corporation's
books, of such stockholder, and (B) the class and number of shares of the
Corporation which are beneficially owned by such stockholder. Notwithstanding
the foregoing, nothing in this Section 2.12 shall be interpreted or construed to
require the inclusion of information about any such nominee in any proxy
statement distributed by, at the discretion of, or on behalf of the Board.
(b) The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 2.12, and if the
chairman should so determine, the chairman shall so declare to the meeting and
the defective nomination shall be disregarded.
ARTICLE III
BOARD OF DIRECTORS
3.1 General Powers. The property, business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board.
3.2 Number and Term of Office. The authorized number of directors shall
-------------------------
be no less than three (3) and no more than nine (9). The exact number of
authorized directors shall be set by resolution of the board of directors,
within the limits specified above. Directors need not be stockholders. Each
director shall hold office until the next annual meeting and until a successor
has been elected and qualified, or he resigns, or he is removed in a manner
consistent with these Bylaws.
3.3 Election of Directors. The directors shall be elected annually by the
---------------------
stockholders of the Corporation and the persons receiving the greatest number of
votes in accordance with the system of voting established by these Bylaws shall
be the directors.
3.4 Resignation and Removal of Directors. Any director of the Corporation
------------------------------------
may resign at any time by giving written notice to the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time be
not specified, it shall take effect immediately upon its receipt; and unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. Any or all of the directors may be removed with
or without cause if such removal is approved by the affirmative vote of a
majority of the outstanding shares entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before his term of office expires.
3.5 Vacancies. Except as otherwise provided in the Certificate of
---------
Incorporation, any vacancy in the Board, whether because of death, resignation,
disqualification, an increase in the number of directors or any other cause, may
be filled by a majority of the remaining directors, though less than a quorum.
Each director so chosen to fill a vacancy shall hold office until his successor
shall have been elected and qualified or until he shall resign or shall have
been removed in the manner hereinafter provided.
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The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
3.6 Place of Meeting, Etc. The Board may hold any of its meetings at
---------------------
such place or places within or without the State of Delaware as the Board may
from time to time by resolution designate or as shall be designated by the
person or persons calling the meeting or in the notice or a waiver of notice of
any such meeting. Directors may participate in any regular or special meeting of
the Board by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board can hear
each other, and such participation shall constitute presence in person at such
meeting.
3.7 First Meeting. The Board shall meet as soon as practicable after
-------------
each annual election of directors and notice of such first meeting shall not be
required.
3.8 Regular Meetings. Regular meetings of the Board may be held at such
----------------
times as the Board shall from time to time by resolution determine. If any day
fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and place
on the next succeeding business day not a legal holiday. Except as may be
required by law or specified herein, notice of regular meetings need not be
given.
3.9 Special Meetings. Special meetings of the Board shall be held
----------------
whenever called by the Chairman of the Board, the President or any two or more
directors. Except as otherwise provided by law or by these Bylaws, notice of
the time and place of each such special meeting shall be mailed to each
director, addressed to him at his residence or usual place of business, at least
five (5) days before the day on which the meeting is to be held, or shall be
sent to him at such place by telegraph or cable or be delivered personally not
less than forty-eight (48) hours before the time at which the meeting is to be
held. Except where otherwise required by law or by these Bylaws, notice of the
purpose of a special meeting need not be given. Notice of any meeting of the
Board shall not be required to be given to any director who is present at such
meeting, except a director who shall attend such meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
3.10 Quorum and Manner of Acting. Except as otherwise provided in these
---------------------------
Bylaws, in the Certificate of Incorporation or by law, the presence of a
majority of the authorized number of directors shall be required to constitute a
quorum for the transaction of business, at any meeting of the Board, and all
matters shall be decided at any such meeting, a quorum being present, by the
affirmative votes of a majority of the directors present. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, provided any action taken is approved by at least a
majority of the required quorum for such meeting. In the absence of a quorum, a
majority of directors present at any meeting may adjourn the same from time to
time until a quorum shall be present. Notice of an adjourned meeting need not
be given. The
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directors shall act only as a Board, and the individual directors shall have no
power as such.
3.11 Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board or of any committee thereof may be taken without a
meeting if a written consent thereto is signed by all members of the Board or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee.
3.12 Compensation. The directors shall receive only such compensation for
------------
their services as directors as may be allowed by resolution of the Board. The
Board may also provide that the Corporation shall reimburse each such director
for any expense incurred by him on account of his attendance at any meetings of
the Board or Committees of the Board. Neither the payment of such compensation
nor the reimbursement of such expenses shall be construed to preclude any
director from serving the Corporation or its subsidiaries in any other capacity
and receiving compensation therefor.
3.13 Committees of Directors.
-----------------------
(a) The Board may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. Any such committee, to the extent
provided in the resolution of the Board and except as otherwise limited by law,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it;
provided, however, that no such committee shall have the power or authority to
act on behalf of the Board with regard to:
(i) the approval of any action which, under the Delaware
General Corporation Law, also requires stockholders' approval or approval of the
outstanding shares;
(ii) the filling of vacancies on the Board of Directors or in
any committees;
(iii) the fixing of compensation of the directors for serving on
the Board or on any committee;
(iv) the amendment or repeal of Bylaws or the adoption of new
Bylaws;
(v) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(vi) a distribution to the stockholders of the Corporation,
except at a rate or in a periodic amount or within a price range determined by
the Board of Directors; or
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<PAGE>
(vii) the appointment of any other committees of the Board of
Directors or the members thereof.
(b) Meetings and action of committees shall be governed by, and held
and taken in accordance with, the provisions of these Bylaws dealing with the
place of meetings, regular meetings, special meetings and notice, quorum, waiver
of notice, adjournment, notice of adjournment and action without meeting, with
such changes in the context of these Bylaws as are necessary to substitute the
committee and its members for the Board of Directors and its members, except
that the time or regular meetings of committees may be determined by resolutions
of the Board of Directors. Notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors or a committee may adopt
rules for the government of such committee not inconsistent with the provisions
of these Bylaws.
Any such committee shall keep written minutes of its meetings and report
the same to the Board at the next regular meeting of the Board. In the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in the place of any such absent or disqualified member.
3.14 Other Committees. The Board may, by resolution passed by a majority
----------------
of the whole Board, designate one or more committees, each committee to consist
of one or more non-employee directors and one or more other disinterested
persons, who need not be directors, for the purpose of providing advice to the
Board regarding any matter, including but not limited to the compensation of
officers and other key employees. For the purposes of this Section, a
"disinterested person" means any person having no significant interest in the
actions of the committee, as determined by the Board. Any such committee, to
the extent provided in the resolution of the Board and except as otherwise
limited by law, shall assist the Board in exercising its powers and authority in
the management of the business and affairs of the Corporation, but shall not
itself exercise such powers and authority. Any such committee shall keep
written minutes of its meetings and report the same to the Board at the next
regular meeting of the Board. In the absence or disqualification of a member of
any such committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint any disinterested person to act at the meeting in the place
of any such absent or disqualified member. The compensation and reimbursement
of expenses of the members of any such committee shall be determined by
resolution passed by a majority of the whole Board. Neither the payment of such
compensation nor the reimbursement of such expenses shall be construed to
preclude any such member from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
3.15 Certain Transactions. In the absence of fraud, no contract or other
--------------------
transaction between the Corporation and any other corporation, and no act of the
Corporation, shall in any way be affected or invalidated by the fact that any of
the directors of the Corporation
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are financially or otherwise interested in, or are directors or officers of,
such other corporations; and, in the absence of fraud, any director,
individually, or any firm of which any director may be a member, may be a party
to, or may be financially or otherwise interested in, any contract or
transaction of the Corporation; provided, in any case, that the fact that he or
such firm is so interested shall be disclosed or shall have been known to the
Board of Directors or committee. Any director of the Corporation who is also a
director or officer of any such other corporation or who is so interested may be
counted in determining the existence of a quorum at any meeting of the Board of
Directors of the Corporation that shall authorize any such contract, act or
transaction, and may vote thereat to authorize any such contract, act or
transaction, with full force and effect as if he were not such director or
officer of such other corporation or not so interested.
ARTICLE IV
OFFICERS
4.1 Corporate Officers.
------------------
(a) The officers of the Corporation shall be a Chief Executive Officer
(Chairman of the Board), a President, one or more Vice Presidents (the number
thereof and their respective titles to be determined by the Board), a Secretary,
Chief Financial Officer (Treasurer) and such other officers as may be appointed
at the discretion of the Board in accordance with the provisions of Section
4.1(b).
(b) In addition to the officers specified in Section 4.1(a), the Board
may appoint such other officers as the Board may deem necessary or advisable,
including one or more Assistant Secretaries and one or more Assistant
Treasurers, each of whom shall hold office for such period, have such authority
and perform such duties as the Board may from time to time determine. The Board
may delegate to any officer of the Corporation or any committee of the Board the
power to appoint, remove and prescribe the duties of any officer provided for in
this Section 4.1(b).
(c) Any number of offices may be held by the same person.
4.2 Election, Term of Office and Qualifications. The officers of the
-------------------------------------------
Corporation, except such officers as may be appointed in accordance with
Sections 4.1(b) or 4.5, shall be appointed annually by the Board at the first
meeting thereof held after the election of the Board. Each officer shall hold
office until such officer shall resign or shall be removed by the Board (either
with or without cause) or otherwise disqualified to serve, or the officer's
successor shall be appointed and qualified.
4.3 Removal. Any officer of the Corporation may be removed, with or
-------
without cause, at any time at any regular or special meeting of the Board by a
majority of the directors of the Board at the time in office or, except in the
case of an officer appointed by the Board, by any officer of the Corporation or
committee of the Board upon whom or which such power of removal may be conferred
by the Board.
-13-
<PAGE>
4.4 Resignations. Any officer may resign at any time by giving written
------------
notice of his resignation to the Board, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, upon receipt thereof by the Board,
President or Secretary, as the case may be; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
4.5 Vacancies. A vacancy in any office because of death, resignation,
---------
removal, disqualification or other cause may be filled for the unexpired portion
of the term thereof in the manner prescribed in these Bylaws for regular
appointments or elections to such office.
4.6 Chief Executive Officer (Chairman of the Board). The Chief Executive
-----------------------------------------------
Officer (Chairman of the Board) of the Corporation shall be the chief executive
officer of the Corporation, unless otherwise determined by the Board, and shall
have, subject to the control of the Board, general and active supervision and
management over the business of the Corporation and over its several subordinate
officers, assistants, agents and employees. The Chief Executive Officer shall
preside at all meetings of the stockholders and at all meetings of the Board.
4.7 President. The President shall have, subject to the control of the
---------
Board and/or the Chief Executive Officer (Chairman of the Board), general and
active supervision and management over the business of the Corporation and over
its several subordinate officers, assistants, agents and employees. The
President shall have such other powers and duties as may from time to time be
assigned to him by the Chief Executive Officer (Chairman of the Board), the
Board or as prescribed by the Bylaws. At the request of the Chief Executive
Officer (Chairman of the Board), or in the case of the absence or inability to
act of the Chief Executive Officer (Chairman of the Board) upon the request of
the Board, the President shall perform the duties of the Chief Executive Officer
(Chairman of the Board) and when so acting, shall have all the powers of, and be
subject to all the restrictions upon, the Chief Executive Officer (Chairman of
the Board).
4.8 Vice Presidents. Each Vice President shall have such power and
---------------
perform such duties as the Board may from time to time prescribe. At the
request of the President, or in the case of the President's absence or inability
to act upon the request of the Board, a Vice President shall perform the duties
of the President and when so acting, shall have all the powers of, and be
subject to all the restrictions upon, the President.
4.9 Chief Financial Officer (Treasurer). The Chief Financial Officer
-----------------------------------
(Treasurer) shall supervise, have custody of, and be responsible for all funds
and securities of the Corporation. The Chief Financial Officer (Treasurer)
shall deposit all such funds in the name of the Corporation in such banks, trust
companies or other depositories as shall be selected by the Board or in
accordance with authority delegated by the Board. The Chief Financial Officer
(Treasurer) shall receive, and give receipts for, moneys due and payable to the
Corporation from any source whatsoever. The Chief Financial Officer (Treasurer)
shall exercise general supervision over expenditures and disbursements made by
officers,
-14-
<PAGE>
agents and employees of the Corporation and the preparation of such records and
reports in connection therewith as may be necessary or desirable. The Chief
Financial Officer (Treasurer) shall, in general, perform all other duties
incident to the office of Chief Financial Officer (Treasurer) and such other
duties as from time to time may be assigned to the Chief Financial Officer
(Treasurer) by the Board.
4.10 Secretary. The Secretary shall have the duty to record the
---------
proceedings of all meetings of the Board, of the stockholders, and of all
committees of which a secretary shall not have been appointed in one or more
books provided for that purpose. The Secretary shall see that all notices are
duly given in accordance with these Bylaws and as required by law; shall be
custodian of the seal of the Corporation and shall affix and attest the seal to
all documents to be executed on behalf of the Corporation under its seal; and,
in general, he shall perform all the duties incident to the office of Secretary
and such other duties as may from time to time be assigned to him by the Board.
4.11 Compensation. The compensation of the officers of the Corporation
------------
shall be fixed from time to time by the Board. None of such officers shall be
prevented from receiving such compensation by reason of the fact that he is also
a director of the Corporation. Nothing contained herein shall preclude any
officer from serving the Corporation, or any subsidiary corporation, in any
other capacity and receiving proper compensation therefor.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS,
BANK ACCOUNTS, ETC.
5.1 Execution of Contracts. The Board, except as in these Bylaws
----------------------
otherwise provided, may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances; and unless so authorized by the Board or by these Bylaws, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any account.
5.2 Checks, Drafts, Etc. All checks, drafts or other orders for payment
--------------------
of money, notes or other evidence of indebtedness, issued in the name of or
payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person shall give such bond, if any, as the
Board may require.
5.3 Deposits. All funds of the Corporation not otherwise employed shall
--------
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may select, or as may be
selected by any officer or officers, assistant or assistants, agent or agents,
or attorney or attorneys of the Corporation to whom such power shall have been
delegated by the Board. For the purpose of deposit
-15-
<PAGE>
and for the purpose of collection for the account of the Corporation, the Chief
Executive Officer, President, any Vice President or the Chief Financial Officer,
(or any other officer or officers, assistant or assistants, agent or agents or
attorney or attorneys of the Corporation who shall from time to time be
determined by the Board), may endorse, assign and deliver checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation.
5.4 General and Special Bank Accounts. The Board may from time to time
---------------------------------
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
6.1 Certificates for Stock.
----------------------
(a) The shares of the Corporation shall be represented by
certificates, provided that the Board may provide by resolution or resolutions
that some or all of any or all classes or series of its stock shall be
uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate, in such form
as the Board shall prescribe, signed by, or in the name of, the Corporation by
the Chief Executive Officer (Chairman of the Board), or the President or Vice
President, and by the Chief Financial Officer (Treasurer) or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation
representing the number of shares registered in certificate form. Any of or all
of the signatures on the certificates may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any such certificates, shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may nevertheless be issued by the Corporation with the same effect as though the
person who signed such certificate, or whose facsimile signature shall have been
placed thereupon, were such officer, transfer agent or registrar at the date of
issue.
(b) A record shall be kept of the respective names of the persons,
firms or corporations owning the stock represented by such certificates, the
number and class of shares represented by such certificates, respectively, and
the respective dates thereof, and in case of cancellation, the respective dates
of cancellation. Every certificate surrendered to the Corporation for exchange
or transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 6.4.
-16-
<PAGE>
6.2 Transfers of Stock. Transfers of shares of stock of the Corporation
------------------
shall be made only on the books of the Corporation by the registered holder
thereof, or by such holder's attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 6.3, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, such fact shall be so expressed in the entry of
transfer if, when the certificate or certificates shall be presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
6.3 Regulations. The Board may make such rules and regulations as it may
-----------
deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for shares of the stock of the
Corporation. It may appoint, or authorize any officer or officers to appoint,
one or more transfer clerks or one or more transfer agents and one or more
registrars, and may require all certificates for stock to bear the signature or
signatures of any of them.
6.4 Lost, Stolen, Destroyed and Mutilated Certificates. In any case of
--------------------------------------------------
loss, theft, destruction or mutilation of any certificate of stock, another may
be issued in its place upon proof of such loss, theft, destruction or mutilation
and upon the giving of a bond of indemnity to the Corporation in such form and
in such sum as the Board may direct; provided, however, that a new certificate
may be issued without requiring any bond when, in the judgment of the Board, it
is proper to do so.
6.5 Payment for Shares. Certificates for shares may be issued prior to
------------------
full payment under such restrictions and for such purposes as the Board may
provide; provided, however, that on any certificate issued to represent any
partly paid shares, the total amount of the consideration to be paid therefor
and the amount paid thereon shall be stated.
ARTICLE VII
INDEMNIFICATION
7.1 Authorization For Indemnification. The Corporation may indemnify, in
---------------------------------
the manner and to the full extent permitted by law, any person (or the estate,
heirs, executors, or administrators of any person) who was or is a party to, or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably
-17-
<PAGE>
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, that he had reasonable cause to believe
that his conduct was unlawful.
7.2 Advance of Expenses. Costs and expenses (including attorneys' fees)
-------------------
incurred by or on behalf of a director or officer in defending or investigating
any action, suit, proceeding or investigation may be paid by the Corporation in
advance of the final disposition of such matter, if such director or officer
shall undertake in writing to repay any such advances in the event that it is
ultimately determined that he is not entitled to indemnification. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel in a written opinion, or by the stockholders, that, based upon the facts
known to the Board or counsel at the time such determination is made, (a) the
director, officer, employee or agent acted in bad faith or deliberately breached
his duty to the Corporation or its stockholders, and (b) as a result of such
actions by the director, officer, employee or agent, it is more likely than not
that it will ultimately be determined that such director, officer, employee or
agent is not entitled to indemnification.
7.3 Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or as a member of any committee or similar
body against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article or applicable law.
7.4 Non-exclusivity. The right of indemnity and advancement of expenses
---------------
provided herein shall not be deemed exclusive of any other rights to which any
person seeking indemnification or advancement of expenses from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. Any agreement for
indemnification of or advancement of expenses to any director, officer, employee
or other person may provide rights of indemnification or advancement of expenses
which are broader or otherwise different from those set forth herein.
-18-
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Seal. The Board shall provide a corporate seal, which shall be
----
in the form of a circle and shall bear the name of the Corporation and words and
figures showing that the Corporation was incorporated in the State of Delaware
and the year of incorporation.
8.2 Waiver of Notices. Whenever notice is required to be given by
-----------------
these Bylaws or the Certificate of Incorporation or by law, the person entitled
to said notice may waive such notice in writing, either before or after the time
stated therein, and such waiver shall be deemed equivalent to notice.
Attendance of a person at a meeting (whether in person or by proxy in the case
of a meeting of stockholders) shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of any regular or special meeting of the
stockholders, directors or members of a committee of directors need be specified
in any written waiver of notice.
8.3 Amendments. The original or other Bylaws of the Corporation may
----------
be adopted, amended or repealed by the incorporators, by the initial directors
if they were named in the Certificate of Incorporation, or, before the
Corporation has received any payment for any of its stock, by its Board. After
the Corporation has received any payment for any of its stock, the power to
adopt, amend or repeal Bylaws shall be in the stockholders entitled to vote;
provided, however, the Corporation may, in its Certificate of Incorporation,
confer the power to adopt, amend or repeal Bylaws upon the directors. The fact
that such power has been so conferred upon the directors shall not divest the
stockholders of the power, nor limit their power to adopt, amend or repeal
Bylaws.
8.4 Representation of Other Corporations. The Chief Executive
------------------------------------
Officer (Chairman of the Board), President, any Vice President or the Secretary
of this Corporation is authorized to vote, represent and exercise on behalf of
this Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this Corporation. The
authority herein granted to said officers to vote or represent on behalf of this
Corporation any and all shares held by this Corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
person authorized to do so by proxy or power of attorney duly executed by said
officers.
8.5 Stock Purchase Plans. The Corporation may adopt and carry out a
--------------------
stock purchase plan or agreement or stock option plan or agreement providing for
the issue and sale for such consideration as may be fixed of its unissued
shares, or of issued shares acquired or to be acquired, to one or more of the
employees or directors of the Corporation or of a subsidiary or to a trustee on
their behalf and for the payment for such shares in installments or at one time,
and may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes, or otherwise.
-19-
<PAGE>
Any stock purchase plan or agreement or stock option plan or agreement
may include, among other features, the fixing of eligibility for participation
therein, the class and price of shares to be issued or sold under the plan or
agreement, the number of shares which may be subscribed for, the method of
payment therefor, the reservation of title until full payment therefor, the
effect of the termination of employment and option or obligation on the part of
the Corporation to repurchase the shares, the time limits of and termination of
the plan and any other matters, not in violation of applicable law, as may be
included in the plan as approved or authorized by the Board or any committee of
the Board.
8.6 Construction and Definitions. Unless the context requires
----------------------------
otherwise, the general provisions, rules of construction and definitions in the
Delaware General Corporation Law shall govern the construction of these Bylaws.
Without limiting the generality of this provision, the singular number includes
the plural, the plural number includes the singular, and the term "person"
includes both a corporation and a natural person.
-20-
<PAGE>
C E R T I F I C A T E O F S E C R E T A R Y
- - - - - - - - - - - - - - - - - - - - - -
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Virtual Gaming
Technologies, Inc., a Delaware corporation; and
2. That the foregoing Amended and Restated Bylaws, comprising twenty
(20) pages, constitute the Bylaws of said Corporation as duly adopted by the
board of directors of said Corporation by unanimous written consent effective as
of March 20, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said Corporation effective as of March 20, 1997.
/s/ Daniel B. Najor
-----------------------------------------------
Daniel B. Najor, Secretary
-21-
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
[________] [________]
PAR VALUE $.00001
VIRTUAL GAMING TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP 92824S 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF VIRTUAL
GAMING TECHNOLOGIES, INC. (hereinafter called the "Corporation"), transferable
only on the books of the Corporation by the holder hereof in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are issued and shall be held
subject to all of the provisions of the Certificate of Incorporation of the
Corporation to all of which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Date
[SEAL OF VIRTUAL GAMING TECHNOLOGIES, INC.]
/s/ DANIEL B. NAJOR /s/ JOSEPH R. PARAVIA
- - ----------------------- ---------------------
Chief Executive Officer Secretary
Countersigned: ^^Illegible Signature^^
Florida Atlantic Stock Transfer, Inc.
5701 North Pine Island Road,
Tamarac, Florida 33321 Transfer agent
<PAGE>
The following abbreviation, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______Custodian_______
(Cust) (Minor)
under Uniform Gifts to Minors
TEN ENT - as tenants by the entireties Act ________________________
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
Additional abbreviation may also be used though not in above list.
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - --------------------------------------
- - --------------------------------------
_______________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
---------------------------------
----------------------------------------
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
EXHIBIT 10.1
INTERNET GAMING TECHNOLOGIES, INC.
SECURITIES PURCHASE AGREEMENT
--------------------------------------------
September 5, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Purchase and Sale of Securities.............. 1
Section 2. Closing...................................... 2
Section 3. Conditions to Close.......................... 3
Section 4. Representations and Warranties of the Company 4
Section 5. Representations, Warranties and Covenants
of the Purchaser............................ 10
Section 6. Registration Rights.......................... 12
Section 7. Miscellaneous................................ 22
</TABLE>
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
This Securities Purchase Agreement ("Agreement") is entered into this 5th
day of September 1996 between INTERNET GAMING TECHNOLOGIES, INC., a Delaware
corporation (the "Company"), and UNISTAR ENTERTAINMENT, INC., a Colorado
corporation ("Purchaser").
R E C I T A L S
- - - - - - - -
A. The Company desires to obtain funds from the Purchaser in order to
further the operations of the Company.
B. In order to obtain such funds, the Company desires to sell and issue
to the Purchaser up to 600,000 shares (the "Shares") of the Company's $.00001
per value common stock ("Common Stock") at a price of $5.00 per Share.
C. Purchaser desires to purchase the Shares subject to the Company's
ability to provide or arrange for the development and delivery of a turn-key
Internet gaming system ("System"), on the terms and subject to the conditions
set forth herein.
D. Concurrent with the execution of this Agreement, Purchaser and
CasinoWorld Holdings, Ltd., a Delaware corporation ("CWH"), have entered into
that certain Nonexclusive License Agreement ("License Agreement") providing for
the development and delivery of the System.
E. In addition to the foregoing transactions, the Company is currently
conducting a private placement ("Private Placement") of 1,000,000 shares of its
Common Stock, at $5.00 per share, pursuant to a Private Placement Memorandum
dated July 24, 1996 ("Memorandum").
A G R E E M E N T
- - - - - - - - -
It is agreed as follows:
1. Purchase and Sale of Securities.
-------------------------------
1.1 Purchase and Sale of Securities. Subject to the terms and
-------------------------------
conditions herein stated, the Company agrees to sell and issue to Purchaser, and
Purchaser agrees to purchase from the Company, up to 600,000 Shares at a
purchase price of $5.00 per Share. Concurrent with the execution of this
Agreement, the Company shall sell and deliver to Purchaser a certificate for
140,000 Shares, and Purchaser shall purchase said Shares and deliver to the
Company by cashier's check or wire transfer $700,000. Purchaser shall purchase,
and the Company shall sell and issue to Purchaser, the balance of the Shares
subject to the following incremental development of the System:
-1-
<PAGE>
1.1.1 Milestone Phase I - Purchaser shall purchase 20,000 Shares,
and deliver to the Company $100,000, upon the installation of the hardware and
software necessary to launch the National Indian Lottery ("NIL") homepage
("Homepage") for the website and virtual CasinoWorld/TM/ site pursuant to
Section 2.2.2 of the License Agreement.
1.1.2 Milestone Phase II - Purchaser shall purchase 30,000 Shares,
and deliver to the Company $150,000, upon the installation of all gaming
software necessary to launch the NIL Homepage pursuant to Section 2.2.3 of the
License Agreement.
1.1.3 Milestone Phase III - Purchaser shall purchase 50,000
Shares, and deliver to the Company $250,000, upon the installation of all
business systems necessary to launch the NIL Homepage pursuant to Section 2.2.4
of the License Agreement.
1.1.4 Milestone Phase IV - Purchaser shall purchase 50,000 Shares,
and deliver to the Company $250,000, upon the installation of all hardware and
software necessary to launch the commercial/public release version of the NIL
Homepage pursuant to Section 2.2.5 of the License Agreement.
1.1.5 Milestone Phase V - Purchaser shall purchase 70,000 Shares,
and deliver to the Company $350,000, upon the installation of all carrier
equipment and related hardware necessary to launch the NIL telephone system
pursuant to Section 2.2.6 of the License Agreement.
1.1.6 Milestone Phase VI - Purchaser shall purchase 90,000 Shares,
and deliver to the Company $450,000, upon the completion of all IVR software
necessary to launch the NIL IVR system pursuant to Section 2.2.7 of the License
Agreement.
1.1.7 Milestone Phase VII - Purchaser shall purchase 150,000
Shares, and deliver to the Company $750,000, upon the installation of all IVR
hardware necessary to launch the NIL IVR system pursuant to Section 2.2.8 of the
License Agreement.
2. Closing. The initial close of the transactions contemplated by this
-------
Agreement ("Close") shall take place at 10:00 a.m., Pacific Daylight Time
("PDT"), at the offices of the Company, 8989 Rio San Diego Drive, Suite 320, San
Diego, California 92108 on September 6, 1996, or at such other time or place as
the parties hereto shall by written instrument designate. At the initial Close,
the Company shall deliver to Purchaser certificates representing 140,000 Shares
to be purchased by the Purchaser under this Agreement in definitive form and
registered in the name of Purchaser, against delivery to the Company by the
Purchaser of a check or wire transfer in the amount of $700,000. Additional
Closes, upon substantially identical terms and conditions to those contained
herein, shall be held in accordance with the increments and timetable set forth
in Section 1 until all 600,000 Shares have been sold. Unless otherwise stated,
the initial Close and any additional Closes shall be referred to herein as the
"Close."
-2-
<PAGE>
3. Conditions to Close.
-------------------
3.1 Purchaser Conditions to Close. The obligations of each of the
-----------------------------
Purchaser to purchase the Shares hereunder shall be subject to the satisfaction
of the following conditions precedent at or before each Close.
(a) Performance of Covenants. The Company shall have performed
------------------------
all of its covenants and obligations under this Agreement to be performed by the
Company on or prior to the Close.
(b) Representations and Warranties Correct. The representations
--------------------------------------
and warranties of the Company contained in this Agreement shall be true and
correct in all material respects when made and shall be true and correct in all
material respects at and as of the Close with the same force and effect as if
they had been made on and as of said date.
(c) Approvals and Consents. The Company shall have received all
----------------------
necessary approvals required by any state or province for the offer and sale of
the Shares pursuant to this Agreement and all necessary approvals and consents
shall have been obtained from any and all government departments and agencies
and from all other commissions, boards, agencies and from any other person or
persons whose approval or consent is necessary to consummate the transactions
contemplated under this Agreement.
(d) Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to the Purchaser and the
Purchaser's counsel, and the Purchaser or the Purchaser's counsel shall have
received all such counterpart originals or certified or other copies of such
documents as the Purchaser or they may reasonably request.
(e) Opinion of Company Counsel. Purchaser shall have received
--------------------------
from Bruck & Perry, counsel for the Company, an opinion, dated as of the date of
the initial Close, in the form attached hereto as Exhibit A.
(f) Shareholders Agreement. The Company, Purchaser and Daniel
----------------------
Najor shall have executed a shareholder's agreement substantially in the form
attached hereto as Exhibit B relating to the election of a member of the Board
of Directors.
(g) License Agreement. Purchaser and CWH shall have executed the
-----------------
License Agreement as of the date hereof.
3.2 Company Conditions to Close. The obligations of the Company to
---------------------------
sell the Shares hereunder shall be subject to the satisfaction of the following
conditions precedent at or before the Close.
-3-
<PAGE>
(a) Performance of Covenants. The Purchaser shall have performed
------------------------
all of its covenants and obligations under this Agreement to be performed by the
Purchaser on or prior to the Close.
(b) Representations and Warranties Correct. The representations
--------------------------------------
and warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects when made and shall be true and correct in all
material respects at and as of the Close with the same force and effect as if
they had been made on and as of said date.
(c) Approvals and Consents. The Company shall have received all
----------------------
necessary approvals required by any state or province for the offer and sale of
the Shares pursuant to this Agreement and all necessary approvals and consents
shall have been obtained from any and all government departments and agencies
and from all other commissions, boards, agencies and from any other person or
persons whose approval or consent is necessary to consummate the transactions
contemplated under this Agreement.
3.3 Access to Information. The Company has given and shall continue
---------------------
to give to the Purchaser and its counsel, accountants and other advisors,
agents, consultants and representatives (collectively, "Representatives"), full
access, during normal business hours throughout the period prior to Close, to
all of the properties, books, contracts, commitments and records of the Company,
and has furnished and will continue to furnish during such period all such
information concerning it (including its operations, financial condition and
business plan) as the Purchaser may reasonably request. Provided, that any
furnishing of such access or information to the Purchaser or its Representatives
or any investigation by the Purchaser or its Representatives shall not affect
the right of the Purchaser to rely on the representations and warranties of the
Company made in this Agreement. The Purchaser agrees to hold in strict
confidence all documents and information concerning the Company so furnished
which is of a trade secret or confidential nature ("Confidential Information")
unless the same shall have become public knowledge other than through disclosure
by the Purchaser or its Representatives and, if the transactions contemplated by
this Agreement are not consummated, such confidence shall be maintained and all
such Confidential Information (in written form) shall be immediately returned by
the Purchaser to the Company. The Company agrees to clearly identify such
Confidential Information.
4. Representation and Warranties of the Company.
--------------------------------------------
As a material inducement to the Purchaser to enter into this Agreement
and to purchase the Shares, the Company represents and warrants that the
following statements are true and correct in all material respects as of the
date hereof and will be true and correct in all material respects at Close,
except as expressly qualified or modified herein.
4.1 Organization and Good Standing. The Company is a corporation
------------------------------
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power and authority to enter into and
perform its obligations under this Agreement, and to own its properties and to
carry on its business as presently
-4-
<PAGE>
conducted and as proposed to be conducted. The Company is duly qualified to do
business as a foreign corporation in every jurisdiction in which the failure to
so qualify would have a material adverse effect upon the Company.
4.2 Capitalization. The authorized capital stock of the Company
--------------
consists of 15,000,000 shares of Common Stock of which 5,675,000 shares of
Common Stock are issued and outstanding as of the date of this Agreement (and
prior to the issuance of the 1,000,000 shares ("Private Placement Shares") of
Common Stock pursuant to the Private Placement). All outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid,
nonassessable, and free of any preemptive rights. Except for subscriptions or
sales of the Private Placement Shares, at Close there will not be outstanding,
nor will the Company be subject to any agreement under which there may become
outstanding, any right to purchase, or security convertible into or exchangeable
for, any capital stock of the Company, including, but not limited to, options,
warrants, or rights. Except as set forth herein, the Company is under no
obligation (contingent or otherwise) to purchase or otherwise acquire or retire
any of its securities.
4.3 Subsidiaries. The Company does not own, directly or indirectly,
------------
any equity or debt securities of any corporation, partnership, or other entity,
other than its equity interest in Internet Gaming Technologies, Inc., a Nevada
corporation, and Emerald Riviera Ltd., an Irish corporation (the
"Subsidiaries"), both of which are wholly-owned subsidiaries of the Company.
4.4 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by the Company in connection with the transactions
contemplated by this Agreement, have been duly authorized, executed and
delivered by the Company and is each the valid and legally binding obligation of
the Company, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency reorganization and moratorium laws and other
laws affecting enforcement of creditor's rights generally and by general
principles of equity. The Shares issuable hereunder, when issued and paid for
by Purchaser in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
4.5 No Violation. The execution, delivery and performance of this
------------
Agreement has been duly authorized by the Company's Board of Directors and, to
the extent necessary, the shareholders of the Company, will not violate any law
or any order of any court or government agency applicable to the Company, or the
Certificate of Incorporation or Bylaws of the Company, as amended, and will not
result in any breach of or default under, or, except as expressly provided
herein, result in the creation of any encumbrance upon any of the assets of the
Company pursuant to the terms of any agreement or instrument by which the
Company or any of its assets may be bound. No approval of or filing with any
governmental authority is required for the Company to enter into, execute or
perform this Agreement.
4.6 Litigation. Except as set forth on the Company Disclosure
----------
Schedule attached hereto as Exhibit C ("Company Disclosure Schedule"), there are
no suits or proceedings (including without limitation, proceedings by or before
any arbitrator,
-5-
<PAGE>
government commission, board, bureau or other administrative agency) pending or,
to the knowledge of the Company, threatened against or affecting the Company
which, if adversely determined, would have a material adverse effect on the
consolidated financial condition, results of operations, prospects or business
of the Company, and the Company is subject to or in default with respect to any
order, writ, injunction or decree of any federal, state, local or other
governmental department.
4.7 Use of Proceeds. The Company represents and warrants that up to
---------------
$1,000,000 of the proceeds from the sale of the shares will be applied towards
the payment of equipment pursuant to the terms of that certain Hardware, Mutual
Use and Emergency Backup Agreement of even date herewith by and among Purchaser,
CWH and the Company. The Company intends to use, and will use its best efforts
to see that it does use, the balance of the proceeds from the sale of the Shares
solely for the purpose of furthering the operations of the Company.
4.8 Taxes. Federal income tax returns and state and local income tax
-----
returns for the Company have been filed as required by law; all taxes as shown
on such returns or on any assessment received subsequent to the filing of such
returns have been paid, and there are no pending assessments or adjustments or
any income tax payable for which reserves, which are reasonably believed by the
Company to be adequate for the payment of any additional taxes that may come
due, have not been established. All other taxes imposed on the Company have
been paid and any reports or returns due in connection herewith have been filed.
4.9 No Defaults. Except as set forth on the Company Disclosure
-----------
Schedule, no material default (or event which, with the passage of time or the
giving of notice, or both, would become a material default) exists or is alleged
to exist with respect to the performance of any obligation of the Company under
the terms of any indenture, license, mortgage, deed of trust, lease, note,
guaranty, joint venture agreement, operating agreement, partnership agreement,
or other contract or instrument to which the Company is a party or any of their
assets are subject, or by which they are otherwise bound, and, to the best
knowledge of the Company, no such default or event exists or is alleged to exist
with respect to the performance of any obligation of any party thereto.
4.10 Securities Law Compliance. Assuming the accuracy of the
-------------------------
representations and warranties of Purchaser set forth in Section 5 of this
Agreement, the offer, issue, sale and delivery of the Shares under the
circumstances contemplated by this Agreement constitutes or will constitute an
exempt transaction under the Securities Act of 1933 (the "1933 Act"), as now in
effect, and registration of the Shares under the Securities Act, is not
required, and no notice, filing, registration, or qualification under any U.S.
state securities or "Blue Sky" law is required in connection therewith except
for such filings as may be necessary to comply with the Blue Sky laws of any
state, which filings will be made in a timely manner.
4.11 Corporate Documents. The Company has furnished to Purchaser, or
-------------------
will furnish upon request, true and complete copies of the Certificate of
Incorporation and Bylaws of the Company certified by its secretary and copies of
the resolutions adopted by
-6-
<PAGE>
the Company's Board of Directors authorizing and approving this Agreement and
the transactions contemplated hereby.
4.12 Compliance with Laws. The Company has complied in all material
--------------------
respects with all laws, regulations and orders affecting its business and
operations and is not in default under or in violation of any provision of any
federal, state or local rule, regulation or law.
4.13 Anti-Dilution Adjustment. In the event that the Company shall at
------------------------
any time or from time to time during the twelve (12) month period immediately
following the date of this Agreement issue, sell or otherwise dispose of shares
of Common Stock without consideration, or for a consideration per share less
than $5.00 (in each case, a "Disposition"), then simultaneously with such
Disposition the Company shall issue to the Purchaser, for no additional
consideration, an additional number of shares of Common Stock equal to the
amount obtained by subtracting (x) from (y), where (y) equals the number of
shares of Common Stock issued to the Purchaser under this Agreement (including
this Section 4.14) prior to the Disposition and (x) equals the total amount of
cash consideration paid by the Purchaser to the Company divided by the cash
consideration per share received by the Company in the Disposition.
4.14 Co-Signature Arrangement. Until such time as the Company has
------------------------
received equity or debt capital in an amount of not less than $2,000,000, in
addition to the payments received from Purchaser hereunder, the Company shall
not disburse any portion of the $700,000 in cash proceeds delivered by the
Purchaser at the initial Close without the Purchaser's prior written consent
which shall not be unreasonably withheld. At the Purchaser's request, the
Company shall deposit the $700,000 in a special operating account that requires
two signatures, one from the Company and one of the Purchaser, for any
withdrawals, transfers or check drafts.
4.15 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement.
4.16 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted as described in the
Memorandum without any conflict with or infringement of the rights of others.
Except as disclosed in the Memorandum, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. Except as set forth on the Company Disclosure Schedule,
the Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The
-7-
<PAGE>
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of the Company or that would conflict with the Company's business
as proposed to be conducted. Neither the execution nor delivery of this
Agreement, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct of the Company's business as proposed in the
Memorandum, will, to the Company's knowledge, conflict with or result in a
material breach of the terms, conditions, or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of such
employees is now obligated. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.
4.17 Compliance with Other Instruments.
---------------------------------
(a) The Company is not in material violation or material default
of any provisions of its Certificate of Incorporation or Bylaws or of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or, to its knowledge, of any provision of federal or state
statute, rule or regulation applicable to the Company. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any such violation or be in conflict with
or constitute, with or without the passage of time and giving of notice, either
a default under any such provision, instrument, judgment, order, writ, decree or
contract or an event which results in the creation of any lien, charge or
encumbrance upon any material portion of the assets of the Company.
(b) The Company has avoided every condition, and has not
performed any act, the occurrence of which would result in the Company's loss of
any right granted under any license, distribution or other agreement which loss
would have a material adverse effect on the Company.
4.18 Agreements; Action.
------------------
(a) Except for agreements disclosed in the Memorandum or
explicitly contemplated hereby, there are no agreements, understandings or
proposed transactions between the Company and any of its officers, directors,
affiliates, or any affiliate thereof which are material to the business,
affairs, prospects, operations, properties, assets or financial condition of the
Company.
(b) Except for agreements disclosed in the Memorandum or
explicitly contemplated hereby, there are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to the Company
in excess of, $25,000 except as entered into or made in connection with the
business of the Company as contemplated proposed in the Memorandum, or (ii) the
license of any patent, copyright, trade secret or other proprietary
-8-
<PAGE>
right to or from the Company, or (iii) provisions restricting or affecting the
development, manufacture or distribution of the Company's products or services,
or (iv) indemnification by the Company with respect to infringements of
proprietary rights.
(c) Except as disclosed in the Memorandum, the Company has not
(i) declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock, (ii) except for
legal fees incurred in connection with this transaction and loans received from
Daniel Najor, incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $5,000 or, in the case of indebtedness
and/or liabilities individually less than $5,000, in excess of $25,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than the sale of its inventory in the
ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) Except for agreements disclosed in the Memorandum, the
Company is not a party to and is not bound by any contract, agreement or
instrument, or subject to any restriction under its Certificate of Incorporation
or Bylaws, which materially adversely affects its business as now conducted or
as proposed to be conducted, its properties or its financial condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
4.19 Disclosure. The Company believes it has fully provided the
----------
Purchaser with all the information which the Purchaser has requested for
deciding whether to purchase the Common Stock and all information which the
Company believes is reasonably necessary to enable the Purchaser to make such
decision. Neither this Agreement nor any other statements or certificates made
or delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
4.20 Memorandum. The Company has presented to the Purchaser a copy of
----------
the Memorandum. The Memorandum has been prepared in good faith by the Company
and does not contain any untrue statement of a material fact nor does it omit to
state a material fact necessary to make the statements made therein not
misleading, except that
-9-
<PAGE>
with respect to projections contained in the Memorandum, the Company represents
only that such projections were prepared in good faith and that the Company
reasonably believes there is a reasonable basis for such projections.
4.21 Registration Rights. Except as provided in Section 6 of this
-------------------
Agreement and the Registration Rights Agreement attached as Exhibit II to the
Memorandum, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
4.22 Corporate Documents. The Certificate of Incorporation and Bylaws
-------------------
of the Company are in the form attached hereto as Exhibit D and Exhibit E,
respectively.
4.23 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
4.24 Minute Books. The minute books of the Company and its
------------
subsidiaries provided to the Purchaser contain a complete summary of all
meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
5. Representations, Warranties and Covenants of the Purchaser.
----------------------------------------------------------
As a material inducement to the Company to enter into this Agreement
and to sell and issue the Shares, the Purchaser represents, warrants and
covenants that the following statements are true and correct as of the date
hereof and will be materially true and correct at Close.
5.1 Domicile and Accredited Purchaser. The Purchaser is domiciled in
---------------------------------
the State of Connecticut, is a wholly-owned subsidiary of Executone Information
Systems, Inc., a Virginia corporation, and is an accredited investor as that
term is defined by Rule 501 under the 1933 Act.
5.2 Power and Authority. The Purchaser is duly organized, validly
-------------------
existing and in good standing under the laws of the State of Colorado, and has
taken all corporate and other action on the part of the Purchaser, as
applicable, necessary for the execution, delivery and consummation of the
transactions contemplated by this Agreement. Purchaser has full and absolute
right, power and authority and legal capacity to execute, deliver and perform
this Agreement and all other agreements contemplated hereby to be executed by
such Purchaser and, upon such execution, this Agreement and all such other
agreements will be the valid and binding obligation of Purchaser, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting enforcement of creditors rights generally.
-10-
<PAGE>
5.3 No Violation. The execution, delivery and performance of this
------------
Agreement and all other agreements contemplated hereby to be executed and
delivered by Purchaser, and the consummation of the transactions contemplated
hereby and thereby will not materially violate, with or without the giving of
notice or the lapse of time, or both, any provision of law applicable to
Purchaser and will not conflict with or result in the breach or termination of
any provision of, or constitute a default under, or give any person the right to
accelerate any material obligation under, or result in the creation of any lien,
security interest, charge or encumbrance upon any material properties, assets or
business of Purchaser, pursuant to the organizational or charter documents of
Purchaser, if any, or any indenture, mortgage, deed of trust, lien, lease or
other instrument or agreement or any order, judgment, arbitration award or
decree to which Purchaser is a party or by which Purchaser or any of its assets
and properties is or may be bound.
5.4 Acquisition for Investment. Purchaser is acquiring the Shares
--------------------------
for its or its own account, for investment purposes only and not with a view to,
or for sale in connection with, a distribution, as that term is used in Section
2(11) of the 1933 Act thereof in a manner which would require registration under
the 1933 Act or any state securities laws.
5.5 Restrictive Legend. Purchaser understands that the Shares have
------------------
not been registered under the 1933 Act, or the securities laws of any state, in
reliance upon exemption from registration for nonpublic offers and sales of
securities. Consequently, the right to transfer, sell, pledge or otherwise
dispose of the Shares will be limited by the 1933 Act and the rules thereunder.
Purchaser understands and acknowledges that the certificates evidencing the
Shares issued pursuant to this Agreement shall bear the following restrictive
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THE SHARES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF A CURRENT AND
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT WITH RESPECT
TO SUCH SHARES, OR AN OPINION OF THE ISSUER'S COUNSEL TO
THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT
or such other restrictive legend as counsel to the Company may reasonably deem
appropriate at the time of such issuance.
5.6 Confidentiality of Information. Purchaser agrees that any
------------------------------
information obtained by Purchaser pursuant to Section 3.1, 3.2 or 3.3 which is
proprietary to the Company or otherwise confidential, and clearly identified by
the Company as such, will not be disclosed without the prior written consent of
the Company. Provided, that Purchaser may disclose such information without the
prior written consent of the Company to its
-11-
<PAGE>
partners, associates, representatives or employees for purposes of evaluating,
or otherwise taking action, in respect of its investment.
5.7 Speculative Nature and Risk. Purchaser understands and
---------------------------
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Shares. Purchaser represents and warrants that the
Shares constitute an investment which is suitable and consistent with
Purchaser's financial condition and that Purchaser is able to bear the risks of
this investment for an indefinite period of time, which may include the total
loss of Purchaser's investment in the Company. Purchaser further represents
that Purchaser has adequate means of providing for Purchaser's current financial
needs and corporate contingencies and that there is no need for liquidity in
Purchaser's investment in the Shares and that Purchaser has sufficient financial
and business experience to evaluate the merits and risks of an investment in the
Company.
5.8 Independent Investigation and Advisors. Purchaser confirms that
--------------------------------------
(i) Purchaser has received, reviewed, understands and has fully considered for
purposes of Purchaser's acquisition of the Shares the Company's Memorandum and
organizational documents, (ii) Purchaser has been expressly offered the
opportunity to be provided a copy of and to review all reports, documents and
exhibits referenced therein and such other agreements, documents and information
as Purchaser deems necessary or appropriate in determining to make an investment
in the Company; (iii) the Company has limited financial resources and will need
sources of capital, in addition to the proceeds from the sale of the Shares
under this Agreement, to implement its current business plan, the availability
of which is uncertain and cannot be assured, and (iv) the Shares are highly
speculative investments with a high degree of risk of loss by Purchaser of his
investment therein. Purchaser represents and warrants that in making the
decision to acquire the Shares, it has relied upon its own independent
investigation of the Company and the independent investigations of the Company
by its representatives, including his own professional legal, tax, and business
advisors, and that Purchaser and its representatives have been given the
opportunity to examine all relevant documents and to ask questions of and to
receive answers from the Company, or person(s) acting on its behalf, concerning
the terms and conditions of acquisition by Purchaser of the Shares and any other
matters concerning an investment in the Company, and to obtain any additional
information Purchaser deems necessary or appropriate to verify the accuracy of
the information provided.
6. Registration Rights. To induce the Purchaser to purchase the Shares,
-------------------
the Company has agreed to provide registration rights with respect to the
Registrable Securities (as defined below) as set forth in this Section 6. The
Company hereby covenants and agrees as follows:
6.1 Definitions. As used in this Section 6, the following terms have
-----------
the meanings indicated:
"Demand Registration" has the meaning assigned such term in Section
6.3(a).
"Designated Holder" means each of the Holders and any transferee of
any of them to whom Registrable Securities have been transferred, other than a
transferee to whom
-12-
<PAGE>
such securities have been transferred pursuant to a registration statement under
the 1933 Act or Rule 144 under the 1933 Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Inspector" has the meaning assigned such term in Section
6.6(a)(viii).
"Holders" means the Purchaser and any Person to whom Registrable
Securities are transferred by any of them.
"NASD" has the meaning assigned such term in Section 6.6(a)(xiv).
"Person" shall mean any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company, government (or an agency or political
subdivision thereof) or other entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.
"Registrable Securities" mean each of the following: (a) the Shares,
(b) any shares of Common Stock issued pursuant to Section 4.14, and (c) any
shares of Common Stock issued or issuable to the Holders of the Shares by way of
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise and
shares of Common Stock issuable upon conversion, exercise or exchange thereof.
"Registration Expenses" has the meaning assigned to such term in
Section 6.5(d).
"SEC" means the Securities and Exchange Commission.
"Underwriter" has the meaning assigned such term in Section 6.3(e).
6.2 Securities Subject to this Agreement.
------------------------------------
(a) Registrable Securities. For the purposes of this Agreement,
----------------------
Registrable Securities will cease to be Registrable Securities when a
registration statement covering such Registrable Securities has been declared
effective under the 1933 Act by the SEC and such Registrable Securities have
been disposed of pursuant to such effective registration statement.
(b) Holders of Registrable Securities. A Person is deemed to be a
---------------------------------
holder of Registrable Securities whenever such Person owns of record Registrable
Securities, or holds an option to purchase, or a security convertible into or
exercisable or exchangeable for, Registrable Securities whether or not such
acquisition or conversion has actually been effected and disregarding any legal
restrictions upon the exercise of such rights. If the Company receives
conflicting instructions, notices or elections from two or more persons with
respect to the same Registrable Securities, the Company may act upon the basis
of the instructions, notice or election received from the registered owner of
such Registrable
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<PAGE>
Securities. Registrable Securities issuable upon exercise of an option or upon
conversion of another security shall be deemed outstanding for the purposes of
this Agreement.
6.3 Demand Registration.
-------------------
(a) Request for Demand Registration. At any time during the eighteen
-------------------------------
(18) month period commencing six (6) months from the initial Close, subject to
extension as provided in Section 6.5 hereof, the Holders holding more than 50%
of the Registrable Securities then held by all of the Holders may make a written
request for registration (such Designated Holders making such request being
deemed to be "Initiating Holders") of Registrable Securities under the 1933 Act,
and under the securities or blue sky laws of any jurisdiction reasonably
designated by such holder or holders (a "Demand Registration"); provided, the
Company will not be required to effect more than two (2) Demand Registrations at
the request of the Holders pursuant to this Section 6.3. Such request for a
Demand Registration shall specify the amount of the Registrable Securities
proposed to be sold, the intended method of disposition thereof and the
jurisdictions in which registration is desired. Upon a request for a Demand
Registration, the Company shall promptly take such steps as are necessary or
appropriate to prepare for the registration of the Registrable Securities to be
registered. Within 15 days after the receipt of such request, the Company shall
give written notice thereof to all other Designated Holders holding Registrable
Securities (the "Non-Initiating Holders") and include in such registration all
Registrable Securities held by a Designated Holder with respect to which the
Company has received written requests for inclusion therein within 15 days of
the receipt by such Designated Holder of such written notice. Each such request
shall specify the number of Registrable Securities to be registered, the
intended method of disposition thereof and the jurisdictions in which
registration is desired. Unless Designated Holders holding the majority of the
Registrable Securities to be included in the Demand Registration consent in
writing, no other party, including the Company (but not including any other
Designated Holder), shall be permitted to offer securities under any such Demand
Registration.
(b) Effective Demand Registration. A registration shall not constitute
-----------------------------
a Demand Registration until it has become effective and remains continuously
effective until the earlier of (i) the date of sale of all Registrable
Securities registered thereunder or (ii) 90 days from the effective date. The
Company shall use its best efforts to cause any such Demand Registration to
become effective not later than 90 days after it receives a request under
Section 3(a) hereof.
(c) Expenses. The Company shall pay all Registration Expenses (other
--------
than underwriting discounts and commissions) in connection therewith, whether or
not such Demand Registration becomes effective; provided, however, that each
Designated Holder participating in such Demand Registration shall bear the costs
of its own legal counsel.
(d) Underwriting Procedures. If Initiating Holders holding a majority
-----------------------
of the Registrable Securities held by all such Initiating Holders so elect, the
offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of a firm commitment underwritten offering and the managing
underwriter or underwriters selected for such offering shall be the Underwriter
selected in accordance with Section 6.3(e). In
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<PAGE>
such event, if the Underwriter advises the Company in writing that in its
opinion the aggregate amount of such Registrable Securities requested to be
included in such offering is sufficiently large to have a material adverse
affect on the success of such offering, the Company shall include in such
registration only the aggregate amount of Registrable Securities that in the
opinion of the Underwriter may be sold without any such material adverse affect
and shall reduce, first as to any stockholders who are the Non-Initiating
Holders as a group and then as to the Initiating Holders as a group, pro rata
within each group based on the number of Registrable Securities included in the
request for Demand Registration, the amount of Registrable Securities to be
included by each Designated Holder in such registration.
(e) Selection of Underwriters. If any Demand Registration of
-------------------------
Registrable Securities is in the form of an underwritten offering, the
Initiating Holders holding a majority of the Registrable Securities held by all
such Initiating Holders shall, in their discretion, select and obtain an
investment banking firm to act as the managing underwriter of the offering (the
"Underwriter"), subject to approval by the Company which shall not be
unreasonably withheld.
6.4 Piggy-Back Registration.
-----------------------
(a) Piggy-Back Rights. If the Company proposes to file a registration
-----------------
statement under the Act, other than pursuant to Section 6.3 hereof, with respect
to an offering by the Company for its own account of any class of security
(other than a registration statement on Form S-4 or S-8 or any successor or
other forms not available for registering capital stock for sale to the public),
then the Company shall give written notice of such proposed filing to each of
the Designated Holders of Registrable Securities at least 30 days before the
anticipated filing date, and such notice shall describe in detail the proposed
registration and distribution (including those jurisdictions where registration
under the securities or blue sky laws is intended) and offer such Designated
Holders the opportunity to register the number of Registrable Securities as each
such holder may request. The Company shall use its best efforts (within ten
days of the notice provided for in the preceding sentence) to cause the managing
underwriter or underwriters of a proposed underwritten offering (the "Company
Underwriter") to permit the Designated Holders of Registrable Securities who
have requested to participate in the registration for such offering to include
such Registrable Securities in such offering on the same terms and conditions as
the securities of the Company included therein. Notwithstanding the foregoing,
if the Company Underwriter delivers a written opinion to the Designated Holders
of Registrable Securities that the total amount or kind of securities which
they, the Company and any other persons or entities intend to include in such
offering (the "Total Securities") is sufficiently large so as to have a material
adverse effect on the distribution of the Total Securities, then the amount or
kind of securities to be offered for the account of such Designated Holders and
such other persons or entities (other than the Company) shall be reduced pro
rata to the extent necessary to reduce the Total Securities to the amount
recommended by the Company Underwriter. Unless waived by a Designated Holder in
writing, each Designated Holder shall have the right to participate pro rata
based upon the proportion of the Registrable Securities held by them bears to
all Registrable Securities.
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<PAGE>
6.5 Holdback Agreements and Termination.
-----------------------------------
(a) Delay of Rights Under Special Circumstances. Upon receipt by the
-------------------------------------------
Company of a request for Demand Registration pursuant to Section 6.3(a) hereof,
the Company shall have the right, in the event that the Company is then engaged
in business negotiations which would be materially adversely affected by a
Demand Registration, or any other material business development or event has
occurred which the Company believes in its reasonable judgment would be
adversely affected by a Demand Registration, to delay the effectiveness of such
request by the Initiating Holders for a period of up to 120 days; provided,
however, that this right may only be exercised by the Company on one occasion.
The Company shall exercise the foregoing delay right by delivering to the
Initiating Holders, within 15 days after the receipt of such request, a written
notice attesting to the necessity of such a delay.
(b) Restrictions on Demands by Designated Holders and Termination of
----------------------------------------------------------------
Demand Rights. Each Designated Holder of Registrable Securities agrees that the
- - -------------
right to request a Demand Registration shall be suspended for a period of up to
180 days commencing upon the date the Company executes a letter of intent with
an underwriter for a firm commitment underwritten public offering of its
securities having an aggregate offering price of not less than $5,000,000,
provided that a registration statement with respect to such offering is filed by
the Company with the SEC within 45 days from the date of execution of such
letter of intent. The foregoing suspension of the rights of the Holders will
cease if such registration statement is not declared effective by the SEC within
60 days of the filing thereof.
6.6 Registration Procedures.
-----------------------
(a) Obligations of the Company. Whenever registration of Registrable
--------------------------
Securities has been requested pursuant to Sections 6.3 or 6.4 of this Agreement,
the Company shall use its best efforts to effect the registration and sale of
such Registrable Securities in accordance with the intended method of
distribution thereof as quickly as practicable, and in connection with any such
request, the Company shall, as expeditiously as possible:
(i) diligently use its best efforts to prepare and file with the
SEC a registration statement on any form for which the Company then qualifies of
which counsel for the Company shall deem appropriate and which form shall be
available for the sale of such Registrable Securities in accordance with the
intended method of distribution thereof, and use its best efforts to cause such
registration statement to become effective; provided, however, that before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company shall (A) provide counsel selected by the Designated
Holders holding a majority of the Registrable Securities being registered in
such registration ("Holders' Counsel") and any other Inspector (as hereinafter
defined) with an adequate and appropriate opportunity to participate in the
preparation of such registration statement and each prospectus included therein
(and each amendment or supplement thereto) to be filed with the SEC, which
documents shall be subject to the review of Holders' Counsel, and (B)
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<PAGE>
notify the Holders' Counsel and each seller of Registrable Securities of any
stop order issued or threatened by the SEC and take all reasonable action
required to prevent the entry of such stop order or to remove it if entered;
(ii) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for a period
of not less than 90 days, or such shorter period which will terminate when all
Registrable Securities covered by such registration statement have been sold,
and comply with the provisions of the 1933 Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller of
Registrable Securities, prior to filing a registration statement, copies of such
registration statement as is proposed to be filed, and thereafter such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such other
documents as each such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller of Registrable Securities reasonably requests, and to continue such
qualification in effect in such jurisdiction for as long as is permissible
pursuant to the laws of such jurisdiction, or for as long as any such seller
requests or until all of such Registrable Securities are sold, whichever is
shortest, and do any and all other acts and things which may be reasonably
necessary or advisable to enable any such seller to consummate the disposition
in such jurisdictions of the Registrable Securities owned by such seller;
provided, however, that the Company shall not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 6.6(a)(iv), (B) subject itself to
taxation in any such jurisdiction or (C) consent to general service of process
in any such jurisdiction;
(v) use its best efforts to cause the Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the seller or sellers of
Registrable Securities to consummate the disposition of such Registrable
Securities;
(vi) notify each seller of Registrable Securities at any time when
a prospectus relating thereto is required to be delivered under the 1933 Act,
upon discovery that, or upon the happening of any event as a result of which,
the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, and the
-17-
<PAGE>
Company shall promptly prepare a supplement or amendment to such prospectus and
furnish to each seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, after delivery to the
purchasers of such Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made;
(vii) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Underwriter, if any, selected
as provided in Sections 6.3 or 6.4) and take such other actions as are prudent
and reasonably required in order to expedite or facilitate the disposition of
such Registrable Securities;
(viii) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition pursuant
to such registration statement, Holders' Counsel and any attorney, accountant or
other agent retained by any such seller or any managing underwriter (each, an
"Inspector" and collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause the
Company's and its subsidiaries, officers, directors and employees, and the
independent public accountants of the Company, to supply all information
reasonably requested by any such Inspector in connection with such registration
statement. Records that the Company determines, in good faith, to be
confidential and which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (A) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in the registration
statement, (B) the release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction, or (C) the information in
such records has been made generally available to the public other than through
a breach of the confidentiality requirement set forth above. Each Seller of
Registrable Securities agrees that it shall, upon learning that disclosure of
such Records is required by any court of competent jurisdiction, give notice to
the Company and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Records deemed confidential;
(ix) if such sale is pursuant to an underwritten offering, use its
best efforts to obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as Holders' Counsel or the
managing underwriter reasonably request;
(x) use its best efforts to furnish, at the request of any seller
of Registrable Securities on the date such securities are delivered to the
underwriters for sale pursuant to such registration or, if such securities are
not being sold through underwriters, on the date the registration statement with
respect to such securities becomes effective, an opinion, dated such date, of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such request,
covering such legal matters with respect to the registration in respect of which
such opinion
-18-
<PAGE>
is being given as such seller may reasonably request and are customarily
included in such opinions;
(xi) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable but no later than 15 months after the
effective date of the registration statement, an earnings statement covering a
period of 12 months beginning after the effective date of the registration
statement, in a manner which satisfies the provisions of Section 6.11(a) of the
1933 Act;
(xii) cause all such Registrable Securities to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, provided, that the applicable listing requirements are satisfied;
(xiii) keep each seller of Registrable Securities advised in
writing as to the initiation and progress of any registration under Sections 6.3
or 6.4 hereunder;
(xiv) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable Securities
and their respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc. (the "NASD"); and
(xv) use best efforts to take all other steps necessary to
effect the registration of the Registrable Securities contemplated hereby.
(b) Seller Information The Company may require each seller of
------------------
Registrable Securities as to which any registration is being effected to furnish
to the Company such information regarding the seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
(c) Notice to Discontinue. Each Designated Holder of Registrable
---------------------
Securities agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 6.6(a)(vi), such
Designated Holder shall forthwith discontinue disposition of Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such Designated Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 6.6(a)(vi) and, if so
directed by the Company, such Designated Holder shall deliver to the Company (at
the Company's expense) all copies, other than permanent file copies then in such
Designated Holder's possession, of the prospectus covering such Registrable
Securities which is current at the time of receipt of such notice. If the
Company shall give any such notice, the Company shall extend the period during
which such registration statement shall be maintained effective pursuant to this
Agreement (including without limitation the period referred to in Section
6.6(a)(ii)) by the number of days during the period from and including the date
of the giving of such notice pursuant to Section 6.6(a)(vi) to and including the
date when the Designated Holder shall have received the copies of the
supplemented or amended prospectus contemplated by and meeting the requirements
of Section 6.6(a)(vi).
-19-
<PAGE>
(d) Registration Expenses. The Company shall pay all expenses (other
---------------------
than as set forth in Section 6.3(c)) arising from or incident to the performance
of, or compliance with, this Agreement, including without limitation, (i) SEC,
stock exchange and NASD registration and filing fees, (ii) all fees and expenses
incurred in complying with securities or blue sky laws (including reasonable
fees, charges and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) all printing, messenger and
delivery expenses, (iv) the fees, charges and disbursements of counsel to the
Company and of its independent public accountants and any other accounting and
legal fees, charges and expenses incurred by the Company (including without
limitation any expenses arising from any special audits incident to or required
by any registration or qualification), and (v) any liability insurance or other
premiums for insurance obtained (which insurance the Company agrees to use its
best efforts to obtain upon the reasonable request of any seller of Registrable
Securities) retained in connection with any Demand Registration or piggy-back
registration pursuant to the terms of this Agreement, regardless of whether such
registration statement is declared effective. All of the expenses described in
this Section 6.5 are referred to herein as "Registration Expenses."
6.7 Indemnification; Contribution
-----------------------------
(a) Indemnification by the Company. The Company agrees to indemnify,
------------------------------
to the fullest extent permitted by law, each Designated Holder, its officers,
directors, partners, employees, advisors and agents and each Person who controls
(within the meaning of the 1933 Act or the Exchange Act) such Designated Holder
from and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation) arising out of or based upon any
untrue, or allegedly untrue, statement of a material fact contained in any
registration statement, prospectus or preliminary prospectus or notification or
offering circular (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or arising out of or based upon
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such Designated Holder expressly for use
therein. The Company shall also indemnify any underwriters of the Registrable
Securities, their officers, directors and employees and each Person who controls
such underwriters (within the meaning of the 1933 Act and the Exchange Act) to
the same extent as provided above with respect to the indemnification of the
Designated Holders of Registrable Securities.
(b) Indemnification by Designated Holders. In connection with any
-------------------------------------
registration statement in which a Designated Holder is participating pursuant to
Sections 6.3 or 6.4 hereof, each such Designated Holder shall furnish to the
Company in writing such information with respect to such Designated Holder as
the Company may reasonably request or as may be required by law for use in
connection with any such registration statement or prospectus and each
Designated Holder agrees to indemnify, to the fullest extent permitted by law,
the Company, any underwriter retained by the Company and their respective
directors, officers, employees and each Person who controls the Company or such
underwriter (within the meaning of the 1933 Act and the Exchange Act) to the
same extent as the foregoing indemnity from the Company to the Designated
Holders, but only
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<PAGE>
with respect to any such information furnished in writing by such Designated
Holder; provided, however, that the total amount to be indemnified by such
Designated Holder pursuant to this Section 6.7(b) shall be limited to the net
proceeds received by such Designated Holder in the offering to which the
registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification hereunder (the "Indemnification Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified Party of any written notice of the commencement of
any action, suit, proceeding or investigation or threat thereof made in writing
for which the Indemnified Party intends to claim indemnification or contribution
pursuant to this Agreement; provided, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party of any liability
that it may have to the Indemnified Party hereunder. If notice of commencement
of any such action is given to the Indemnifying Party as above provided, the
Indemnifying Party shall be entitled to participate in and, to the extent it may
wish, jointly with any other Indemnifying Party similarly notified, to assume
the defense of such action at its own expense, with counsel chosen by it and
satisfactory to such Indemnified Party. The Indemnified Party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel (other than
reasonable costs of investigation) shall be paid by the Indemnified Party unless
(i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party
fails to assume the defense of such action with counsel satisfactory to the
Indemnified Party in its reasonable judgment, (iii) the named parties to any
such action (including any impleaded parties) have been advised by such counsel
that either (A) representation of such Indemnified Party and the Indemnifying
Party by the same counsel would be inappropriate under applicable standards of
professional conduct or (B) there may be one or more legal defenses available to
it which are different from or additional to those available to the Indemnifying
Party. In either of such cases the Indemnifying Party shall not have the right
to assume the defense of such action on behalf of such Indemnified Party. No
Indemnifying Party shall be liable for any settlement entered into without its
written consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this Section
------------
6.7 from the Indemnifying Party is unavailable to an Indemnified Party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative faults of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
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<PAGE>
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in Sections 6.7(a), 6.7(b) and 6.7(c), any legal or
other fees, charges or expenses reasonably incurred by such party in connection
with any investigation or proceeding. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 6.7(d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person.
6.8 Rule 144. The Company covenants that, from and after the date that
--------
the Company has a class of equity securities registered under the Exchange Act,
it shall (i) file any reports required to be filed by it under the Exchange Act
and the rules and regulations adopted by the SEC thereunder; and (ii) take such
further action as each Designated Holder of Registrable Securities may
reasonably request (including providing any information necessary to comply with
Rules 144 and 144A under the 1933 Act), all to the extent required from time to
time to enable such Designated Holder to sell Registrable Securities without
registration under the 1933 Act within the limitation of the exemptions provided
by (a) Rule 144 or Rule 144A under the 1933 Act, as such rules may be amended
from time to time, or (b) any similar rules or regulations hereafter adopted by
the SEC. The Company shall, upon the request of any Designated Holder of
Registrable Securities, deliver to such Designated Holder a written statement as
to whether it has complied with such requirements.
7. Miscellaneous.
-------------
7.1 Survival of Representations. All representations, warranties and
---------------------------
agreements contained herein or made in writing by the Company and the Purchaser
in connection with the transactions contemplated hereby except any
representation, warranty or agreement as to which compliance may have been
appropriately waived, shall survive the execution and delivery of this Agreement
and continue for a period of two years from the date of the Close, at which time
all representations, warranties and agreements hereunder shall expire.
7.2 Waiver of Conditions. At any time or times during the term
--------------------
hereof, the Company may waive fulfillment of any one or more of the conditions
to its obligations in whole or in part, and the Purchaser may waive fulfillment
of any one or more of the foregoing conditions to their obligation, in whole or
in part, by delivering to the other party a written waiver or waivers of
fulfillment thereof to the extent specified in such written waiver or waivers.
7.3 Partial Invalidity. If any term, covenant or condition of this
------------------
Agreement or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Agreement shall be
valid and be enforced to the fullest extent permitted by law.
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<PAGE>
7.4 Notices. Any notices relating to this Agreement shall be deemed
-------
sufficiently given and served for all purposes if given by a telegram filed,
charges prepaid, or a writing deposited in the United States mail, postage
prepaid and registered or certified within the United States, addressed as
follows:
If to the Company:
Internet Gaming Technologies, Inc.
8989 Rio San Diego Drive, Suite 320
San Diego, California 92108
Attention: Daniel B. Najor, Chief Executive Officer
If to the Purchaser:
Unistar Entertainment, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Michael W. Yacenda, Executive Vice President
7.5 Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of the parties hereto
and no right or liability or obligation arising hereunder may be assigned by any
party hereto.
7.6 Law Governing. This Agreement shall be construed and interpreted
-------------
in accordance with and governed and enforced in all respects by the laws of the
State of California.
7.7 Headings. The section, subsection and paragraph headings
--------
throughout this Agreement are for convenience and reference only, and the words
contained therein shall not be held to expand, modify, amplify or aid in the
interpretation, construction or meaning of this Agreement.
7.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each signed by different persons and all of said counterparts
together shall constitute one and the same instrument, and such instrument shall
be deemed to have been made, executed and delivered on the date first
hereinabove written, irrespective of the time or times when the same or any
counterparts thereof actually may have been executed and delivered a counterpart
thereof to the Company and the Purchaser.
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<PAGE>
7.9 Entire Agreement. This Agreement and the exhibits contain the
----------------
entire agreement of the parties hereto and may not be modified, altered or
changed in any manner whatsoever, except by a written agreement signed by the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
INTERNET GAMING TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Daniel B. Najor
--------------------
Daniel B. Najor, Chief Executive Officer
UNISTAR ENTERTAINMENT, INC.,
a Colorado corporation
By: /s/ Michael W. Yacenda
------------------------
Michael W. Yacenda, Executive Vice President
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<PAGE>
EXHIBIT C
---------
Company Disclosure Schedule
---------------------------
Sections 4.6 and 4.17
- - ---------------------
Pursuant to its letter to the Company dated August 8, 1996, International
Game Technology, a Nevada corporation, claims that the Company's use of the name
"Internet Gaming Technologies" and the initials "IGT" infringes on certain
trademarks held by International Game Technology.
Section 4.10
- - ------------
The Company's wholly-owned subsidiary, Emerald Riviera, Ltd., an Irish
corporation, has entered into two (2) agreements with CWH, namely a Nonexclusive
License Agreement effective as of May 1, 1996 ("License Agreement") and an
Amended and Restated Operating, Revenue Sharing, and Management Services
Agreement effective as of May 16, 1996 ("Operating Agreement"). Article III of
the License Agreement and Article II.2 of the Operating Agreement contains
certain conditions precedent to the enforcement of the duties of CWH thereunder
which as of the date of this Agreement have not been satisfied by the Licensee,
including:
A. Licensee's obligation to obtain a gaming license as provided in
Section 3.1.5 of the License Agreement and Section II.2.4 of the
Operating Agreement.
B. Licensee's deposit of U.S. $1,000,000 in a financial institution to
serve as the gaming bankroll as provided in Section 3.1.3 of the
License Agreement and Section II.2.5 of the Operating Agreement.
C. Licensee's commitment of U.S. $2,000,000 to a marketing plan as
required by Section 3.1.4 of the License Agreement and Section II. 2.6
of the Operating Agreement.
<PAGE>
EXHIBIT 10.2
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is entered into
as of this 26th day of February, 1997 by and between VIRTUAL GAMING
TECHNOLOGIES, INC., a Delaware corporation ("VGTB"), EMERALD RIVIERA LIMITED, an
Irish corporation ("ERL"), DANIEL B. NAJOR, an individual ("Najor"), and JOSEPH
R. PARAVIA, an individual ("Paravia"), on the one hand, and CASINOWORLD
HOLDINGS, LTD., a Delaware corporation ("CWH"), and KENDELL R. LANG, an
individual ("Lang"), on the other hand. VGTB, ERL, Najor and Paravia are
sometimes collectively referred to herein as the "VGTB Parties." CWH and Lang
are sometimes collectively referred to herein as the "CWH Parties."
R E C I T A L S
- - - - - - - -
A. ERL and CWH have entered into that certain Amended and Restated
Nonexclusive License Agreement dated July 24, 1996 ("License Agreement") and
that certain Amended and Restated Operating, Revenue Sharing and Management
Services Agreement dated as of July 24, 1996 ("Management Services Agreement").
B. Pursuant to the terms of the License Agreement, VGTB has issued to
CWH 385,000 shares of VGTB's $.00001 par value common stock (the "License Fee
Shares").
C. Certain disputes and differences have arisen by and between the
VGTB Parties, on the one hand, and the CWH Parties, on the other hand,
concerning, inter alia, the License Agreement and Management Services Agreement.
D. The parties now desire and intend by this Agreement - solely to
buy their peace and avoid litigation costs and without in any way admitting or
acknowledging any liability or potential liability or the validity of any claims
asserted by any party - to resolve the disputes and differences, to discharge
each other from any and all liability with reference thereto and to terminate
all agreements or claims between them that exist as of the date hereof.
It is agreed as follows:
1. Incorporation of Recitals. The parties hereby acknowledge the above
-------------------------
recitals and hereby agree to incorporate those recitals by this reference into
the terms of the Agreement.
2. Termination of Agreements.
-------------------------
A. Except as specifically stated otherwise herein, the VGTB Parties
and the CWH Parties hereby mutually agree to the termination of, and hereby
mutually terminate the License Agreement and the Management Services Agreement,
including the termination and nonsurvival of all representations, warranties and
covenants thereunder; and
<PAGE>
B. All of the parties further agree to the termination of all other
agreements, understandings or arrangements between the VGTB Parties, or any one
of them, on the one hand, and the CWH Parties, or any one of them, on the other
hand, including all such agreements regarding noncompetition, disclosure or use
of trade secrets or confidential information.
3. Release.
-------
A. Each of the VGTB Parties and their Privies do hereby release,
acquit and forever discharge each of the CWH Parties and their Privies from any
and all claims, demands, actions, causes of action, damages, costs, or other
claims whatsoever in law or equity, which any of the VGTB Parties or their
Privies may have against any of the CWH Parties or their Privies pertaining to,
relating to, connected with, or arising out of any matter or thing whatsoever
whether or not relating to or arising out of the License Agreement or Management
Services Agreement. In so doing, each of the VGTB Parties and their Privies
releases, relinquishes, remises, waives forever, discharges, absolves, and quits
each of the CWH Parties and their Privies from each, every and all things,
including by way of example, but not limitation, each, every and all manner of
actions, causes of action, liabilities, debts, sums of money, controversies,
indebtedness, breaches of contract, breaches of duty or any relationships, acts,
omissions, promises, agreements, representations, damages and any demand of any
type, nature, kind or description, whether in law or in equity, or otherwise, by
reason of any matters, causes or things, whatsoever, whether known or unknown,
suspected or unsuspected, heretofore or now existing which could, might or may
be claimed to exist from the beginning of time unto the date of these presents.
B. Each of the CWH Parties and their Privies do hereby release,
acquit and forever discharge each of the VGTB Parties and their Privies from any
and all claims, demands, actions, causes of action, damages, costs, or other
claims whatsoever in law or equity, which any of the CWH Parties or their
Privies may have against any of the VGTB Parties or their Privies pertaining to,
relating to, connected with, or arising out of any matter or thing whatsoever
whether or not relating to or arising out of the License Agreement or Management
Services Agreement. In so doing, each of the CWH Parties and their Privies
releases, relinquishes, remises, waives forever, discharges, absolves, and quits
each of the VGTB Parties and their Privies from each, every and all things,
including by way of example, but not limitation, each, every and all manner of
actions, causes of action, liabilities, debts, sums of money, controversies,
indebtedness, breaches of contract, breaches of duty or any relationships, acts,
omissions, promises, agreements, representations, damages and any demand of any
type, nature, kind or description, whether in law or in equity, or otherwise, by
reason of any matters, causes or things, whatsoever, whether known or unknown,
suspected or unsuspected, heretofore or now existing which could, might or may
be claimed to exist from the beginning of time unto the date of these presents.
C. Privies. As used in this Agreement, the term "Privies" refers to:
-------
administrators, affiliates, agents, assigns, attorneys, consultants, directors,
employees, executors, heirs, insurers, officers, predecessors, principals,
representatives, reinsurers, servants, shareholders, subsidiaries, successors,
sureties and trustees.
<PAGE>
D. Limitation of Releases. The releases herein are intended to be
----------------------
general, except that:
(a) the release by the CWH Parties does not extend to or include
Tom Jackson;
(b) they do not operate to release any rights or obligations
arising out of this Agreement.
E. Waiver of Code Provisions. Each of the parties hereto does hereby
-------------------------
acknowledge and agree that it is their intention that this Agreement shall be
effective as a full and final accord and satisfaction and settlement of and as a
bar to each and every claim, demand, debt, account, reckoning, liability,
obligation, cost, expense, lien, action and cause of action, heretofore referred
to and released, which any of the parties had, or has had against the other. In
connection with such waiver and relinquishment, each of the parties hereto
acknowledges that they are aware that they or their attorney may hereafter
discover facts different from or in addition to the facts which they or their
attorney now know or believe to be true with respect to the subject matter of
this Agreement, but that it is their intention to fully, finally, absolutely and
forever settle any and all claims, disputes and differences which to now exist
or heretofore have existed between the parties, and that in furtherance of such
intention the mutual releases herein given shall be and remain in effect as full
and complete general mutual releases notwithstanding the discovery of any such
different or additional facts. Therefore, each of the parties hereto
acknowledges that they have been informed by their respective attorneys and/or
advisors of, and that they are familiar with Section 1542 of the Civil Code of
the State of California which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Each of the parties hereto does hereby abandon, release, waive and relinquish
all rights and benefits which they may acquire under Section 1542 of the Civil
Code of the State of California pertaining to the subject matter of this
Agreement.
F. No Admission of Liability. It is expressly understood,
-------------------------
acknowledged and agreed to that by reason of entering into this Agreement, none
of the parties admit, expressly or impliedly, any fact or liability of any type
or nature with respect to any matter, whether or not referred to herein, and
none of the parties have made any such admission and this Agreement is entered
into solely by way of compromise and settlement only.
G. Ownership of Claims. The parties represent and warrant that
-------------------
there has been no assignment or other transfer of any interest in any claim
which they might have and therefore each of the undersigned agree to defend,
indemnify and hold the other harmless from any liabilities, claims, demands,
damages, costs, expenses and attorneys' fees
-3-
<PAGE>
incurred, as a result of any person asserting any such assignment or transfer of
any rights or claims under such assignment or transfer.
H. Indemnity. The VGTB Parties agree to defend, indemnify and hold
---------
the CWH Parties harmless from any liabilities, claims, demands, costs, expenses
and attorneys' fees incurred in connection with any later assertion by the VGTB
Parties or their Privies (except Tom Jackson, ASDAR Group, Nicholas Coscia,
Executone Information Systems, Inc., Unistar Entertainment, Inc. or James Egide)
of any right or claim which is the subject of the release contained in Section
3.A. The CWH Parties agree to defend, indemnify and hold the VGTB Parties
harmless from any liabilities, claims, demands, costs, expenses and attorneys'
fees incurred in connection with any later assertion by the CWH Parties or their
Privies (except Tom Jackson, ASDAR Group, Executone Information Systems, Inc.,
Unistar Entertainment, Inc., James Egide or Nicholas Coscia) of any right or
claim which is the subject of the release contained in Section 3.B.
4. Consideration.
-------------
A. By the CWH Parties. In consideration of the releases provided by
------------------
the VGTB Parties herein:
(i) CWH agrees to return to VGTB for cancellation, and for no
additional consideration, all of the License Fee Shares. Concurrent with the
execution of this Agreement, CWH shall deliver to VGTB certificates representing
the License Fee Shares along with appropriately prepared stock powers, which
shall be acceptable to VGTB in its sole discretion, for purposes of returning
the License Fee Shares to VGTB for cancellation. CWH and Lang hereby represent
and warrant, jointly and severally, that CWH and Grabin Corporation are the sole
beneficial owners of the License Fee Shares, and have good and valid title to
such securities, and CWH and Grabin Corporation will transfer to VGTB good and
marketable title to the License Fee Shares free and clear of all pledges,
security interests, mortgages, liens, claims, charges, restrictions or
encumbrances, except for any restriction under applicable federal or state
securities laws.
(ii) CWH hereby releases Monacall S.A.M. L'Universe Telematique
("Monacall"), Virtual Casinos Gaming and Wagering Corporation, Ltd. ("VCG
Ireland") and their affiliates of any covenants of exclusivity or other
restrictions that would have the purpose of or effect of inhibiting or
preventing Monacall or VCG Ireland from participating with the VGTB Parties in
the establishment or operation of an internet gaming service in the world. CWH
shall provide written notice of the release in this subpart (ii) to Monacall and
VCG Ireland in a manner that is positive and without prejudice to the VGTB
Parties' ability to pursue a strategic relationship with either Monacall or VCG
Ireland independent of CWH.
(iii) The CWH Parties hereby agree not to solicit the services of
any persons who are as of the date of this Agreement or who within two years of
the date of this Agreement become employees, subcontractors, vendors,
representatives or marketing agents of the VGTB Parties, for a period of two
years. The CWH Parties acknowledge that the VGTB Parties' actual damages in the
event of a default by any of the CWH Parties under
-4-
<PAGE>
this subsection would be extremely difficult or impracticable to determine.
Therefore, the parties acknowledge that they have agreed, after negotiation,
that their reasonable estimate of the VGTB Parties' damages in the event of a
default by any of the CWH Parties under this subsection is three (3) times the
average annual payments made by the VGTB Parties to the person solicited over
the two years prior to the default.
(iv) CWH shall return to the VGTB Parties all graphics and
website material developed by CWH for ERI.
B. By the VGTB Parties. In consideration of the releases provided
-------------------
by the CWH Parties herein:
(i) VGTB agrees to execute and perform its obligations under
the Promissory Note annexed hereto as Exhibit A.
(ii) The VGTB Parties hereby agree not to solicit the services
of any persons who are as of the date of this Agreement or who within two years
of the date of this Agreement become employees, subcontractors, vendors,
representatives or marketing agents of the CWH Parties, for a period of two
years. The VGTB Parties acknowledge that the CWH Parties' actual damages in the
event of a default by any of the VGTB Parties under this subsection would be
extremely difficult or impracticable to determine. Therefore, the parties
acknowledge that they have agreed, after negotiation, that their reasonable
estimate of the CWH Parties' damages in the event of a default by any of the
VGTB Parties under this subsection is three (3) times the average annual
payments made by the CWH Parties to the person solicited over the two years
prior to the default.
(iii) The VGTB Parties shall use their best efforts to facilitate
and obtain a reinstatement of the Joint Venture Agreement between CWH and VCG
Ireland and the related obligations of Monacall and Monacard International Ltd.
or a renegotiation of that agreement on substantially similar terms.
(iv) Confidential Information.
------------------------
(a) The VGTB Parties agree that for a period of two years
following the date of this Agreement, the VGTB Parties will keep confidential
and will not directly or indirectly divulge to anyone nor use or otherwise
appropriate for their own benefit, or on behalf of any other person, firm,
partnership or corporation by whom such parties might be employed or otherwise
associated or affiliated with, any of The CWH Parties' Confidential Information.
The term "CWH Parties' Confidential Information" shall mean:
(1) All information developed by, for or on behalf of
the CWH Parties, or any of them, and previously disclosed to any of the VGTB
Parties concerning or relating to CWH marketing and business plans, client and
customer lists, technology and/or product licensing strategy or other marketing
information and strategies;
-5-
<PAGE>
(2) The source codes for gaming opportunities and
related work product or work for hire (including, without limitation,
programming code, graphic product, images, and text), developed by or on behalf
of the CWH and previously disclosed to any of the VGTB Parties, including,
without limitation, that developed by Random Games, Durand Communications
Network, Stellcom Technologies, Inc. or other employees or contractors of any of
the CWH Parties (collectively, the "Source Codes");
(b) The VGTB Parties agree to immediately return to the
other all of the documents, computer printouts and disks, computer software,
computer hardware, memoranda, notebooks, correspondence, files, lists and other
records in any form and the like and all photocopies or other reproductions
thereof that include or reflect the CWH Parties' Confidential Information.
(c) In the event that the VGTB Parties or a person
controlled by any VGTB Party is using the Source Code, then the royalty payable
under 4.B(i) shall be 33% instead of 10% during the period that such Source
Codes are used, and shall continue to be payable at that rate for so long as any
of the VGTB Parties or any person controlled by any of the VGTB Parties use the
Source Codes.
(d) The VGTB Parties recognize the unique and irreplaceable
nature of the CWH Parties' Confidential Information and agree that the
unauthorized use or disclosure of the same shall cause irreparable injury not
adequately compensable by money damages. Accordingly, upon any actual or
threatened breach of this Section 4.B(iv), the aggrieved party or parties shall
be entitled to a temporary restraining order, preliminary injunction, and
permanent injunction enjoining the unauthorized use or disclosure of the
confidential information or other breach of this Section 4.C. This provision
shall not limit the right of the aggrieved party to seek money damages or other
relief at law or equity.
5. Interpretation and Enforcement.
------------------------------
A. Effect of Headings. The subject heading of the paragraphs and
------------------
subparagraphs of this agreement are included for purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions.
B. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties pertaining to the subject matter contained in this
Agreement and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification
or amendment to this Agreement shall be binding unless executed in writing by
all parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provisions, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall
be binding unless executed in writing by the party making the waiver.
C. Counterparts. This Agreement may be executed simultaneously in
------------
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
-6-
<PAGE>
D. Recovery of Litigation Expenses. If any legal action is brought
-------------------------------
for declaratory relief for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover their costs, including reasonable attorneys' fees,
and other expenses incurred in that action or proceeding, in addition to any
other relief to which they may be entitled.
E. Agreement Understood. The parties acknowledge that they and
--------------------
those authorized to sign this Agreement are over the age of 18 and legally
competent and authorized to execute this Agreement which is intended to be a
legally binding contract dealing with the release and/or conveyance of certain
valuable and important rights. Before signing this document, each of said
parties has read the same from beginning to end and fully understands the
Agreement from its beginning. Each party has had the opportunity to consult
with counsel regarding this document and has received a copy of the same for
their own records.
F. Further Documents. Each party agrees it will execute or cause to
-----------------
be executed such further and other documents as are needed to carry out the
expressed intents and purposes of this Agreement. It is understood that should
it develop that there are any mistakes in this Agreement which would cause the
release and discharge of the parties to be defective or less than complete, or
if it or any provision is declared unenforceable by a court or arbitrator for
any reason, then the parties shall execute any and all other instruments and do
any and all other things necessary to effectuate a full, final and complete
release of claims or possible claims in connection with the matters set forth in
this Agreement.
G. Modification. This Agreement shall not be modified by either
------------
party by oral representation made before or after the execution of this
Agreement. All modifications must be in writing and signed by the parties.
H. Disclosure. None of the Parties shall make or cause to be made
----------
any announcement, public or private, through any media whatsoever concerning the
contents of this Agreement.
I. Binding on Successors. This Agreement and the covenants and
---------------------
conditions contained herein shall apply to, be binding upon, and inure to the
administrators, executors, legal representatives, assignees, successors, agents
and assigns of the parties hereto.
J. Construction. This Agreement shall not be construed against the
------------
party preparing it, but shall be construed as if all parties jointly prepared
this Agreement and any uncertainty and ambiguity shall not be interpreted
against a party. This Agreement is to be interpreted, enforced and governed by
and under the laws of the State of California.
K. Advise of Own Counsel. Each of the VGTB Parties acknowledge that
---------------------
Daniel K. Donahue, of Bruck & Perry, a Professional Corporation, has acted as
counsel to the VGTB Parties in connection with the negotiation and execution of
this Agreement. The
-7-
<PAGE>
CWH Parties represent and acknowledge that they have been represented by Craig
Celnicker of Baker & McKenzie, in connection with the negotiation and execution
of this Agreement and each party represents that they have read and have had
this Agreement explained to them by their own counsel.
L. Governing Law. This agreement will be deemed to have been made
-------------
under, and will, in all respects, be interpreted , enforced and governed by and
under the laws of the State of California without giving effect to that State's
conflicts of laws principles.
M. Arbitration. The parties agree that all disputes, controversies
-----------
or claims arising out of, relating to or in connection with this Agreement,
including the formation, breach, default, termination or invalidity thereof
("Disputes") shall first be submitted to mediation under the then current CPR
Model Mediation Procedure for Business Disputes. If within 60 days after such
mediation has been initiated, the Dispute has not been resolved to the
satisfaction of both parties, such Dispute will be finally settled under the
Commercial Arbitration Rules of the American Arbitration Association by a single
arbitrator appointed by the American Arbitration Association in accordance with
its rules. The proceedings will be conducted in San Diego, California in the
English language. The arbitrator will have the power to award costs and
attorneys' fees and will award attorneys' fees to the prevailing party in any
arbitration. The parties waive obligation to venue and submit to the
jurisdiction of the United States District Court for the Southern District of
California, for the resolution of any dispute arising out of or relating to this
agreement to arbitrate or the enforcement thereof, or, in the event that such
court does not have subject matter jurisdiction of any such dispute, the parties
waive objection to venue and submit to the jurisdiction of the Superior Court of
the State of California, County of San Diego. Prior to the selection of the
arbitral panel, nothing in this agreement to arbitrate will prevent the parties
from applying to a court that would otherwise have jurisdiction for provisional
or interim measures. After the arbitral panel is selected, it will have sole
jurisdiction to hear such applications, except that the parties agree that any
measure ordered by the arbitrator may be immediately and specifically enforced
by a court otherwise having jurisdiction over the parties. Each party hereto
hereby agrees that the arbitration procedure provided herein will be the sole
and exclusive method of resolving any of the aforesaid Disputes.
N. Fees and Expenses. Each party shall bear all of its own costs,
-----------------
expenses and attorneys' fees in connection with the matter released and the
entering into this Agreement.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
[Agreement continues on the next page]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Settlement Agreement and
Mutual Release on the date first above written.
"VGTB Parties"
VIRTUAL GAMING TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Daniel B. Najor
-----------------------------------------------
Daniel B. Najor, Chief Executive Officer
/s/ Daniel B. Najor
--------------------------------------------------
Daniel B. Najor, an individual
/s/ Joseph R. Paravia
--------------------------------------------------
Joseph R. Paravia, an individual
"CWH Parties"
CASINOWORLD HOLDINGS, LTD.,
a Delaware corporation
By: /s/ Kendell Lang
-----------------------------------------------
Kendell Lang, Chief Executive Officer
/s/ Kendell Lang
--------------------------------------------------
Kendell Lang, an individual
-9-
<PAGE>
PROMISSORY NOTE EXHIBIT A
$150,000 DEL MAR, CALIFORNIA
One Hundred Fifty Thousand and no/100 Dollars March 10, 1997
For value received, the undersigned (the "Maker") hereby promises to pay to
CasinoWorld Holdings, Ltd., or order (the "Holder"), at Del Mar, California, or
such other place as Holder may designate, the sum of One Hundred Fifty Thousand
Dollars ($150,000). This Promissory Note shall bear interest on the unpaid
principal balance from time to time outstanding, computed on the basis of a
three hundred sixty (360) day year, actual days elapsed, at a rate (the
"Interest Rate") equal to Ten Percent (10%) per annum. Principal and interest
due under this Note shall be paid by the Maker in quarterly payments equal to
10% of its Net Win from gaming revenue (defined as gross revenue received by the
Maker or any affiliate of the Maker or any other persona controlled by the Maker
or its affiliate from any Internet gaming activity, less payouts to customers).
Payments shall commence (the "Repayment Start Date") on the last day of the
first calendar quarter in which the Maker or any affiliate of the Maker or any
other person controlled by the Maker or its affiliate commences commercial
Internet gaming operations; provided, however, that in no event shall the
Repayment Start Date be later than September 30, 1997. Payments shall continue
on the last day of each successive quarter for a total of eight quarters.
Payments hereunder shall be applied first to accrued and unpaid interest and
then to the outstanding principal balance. All remaining principal and interest
accrued under this Note, if any, shall be due and payable in a lump sum two
years from the Repayment Start Date.
Upon the happening of any of the following events, Holder may, at its option
declare immediately due and payable the entire unpaid balance, without allowance
for principal reduction, of this Note, plus any other amounts payable at the
time of such declaration pursuant to this Note. Such events are the following:
(1) the failure to make any payment as it falls due under this Note if such
payment is not made within five days of Maker's receipt of written notice of
non-payment from Holder; (2) the Maker admits in writing its inability to pay
debts as they become due, makes a general assignment for the benefit of
creditors, transfers all or substantially all of its assets, or files a petition
or action for relief under any bankruptcy, reorganization, insolvency or
moratorium law, or any other law or laws for the relief of, or relating to,
debtors; or (3) an involuntary petition is filed against the Maker under any
bankruptcy, reorganization, insolvency or moratorium law, or any other law or
laws for the relief of, or relating to, debtors, unless such petition is
dismissed or vacated within sixty (60) days of the date thereof.
The acceptance by the Holder of any payment hereunder which is less than payment
in full of all amounts due and payable at the time of such payment shall not
constitute a waiver of the right to accelerate at that time or any subsequent
time or nullify any prior acceleration without the express written consent of
the Holder except as and to the extent otherwise provided by law.
A-1
<PAGE>
The Maker of this Note waives diligence, presentment, protest and demand and
also notice of protest, demand, dishonor and nonpayment of this Note.
If Holder should institute collection efforts of any nature whatsoever, to
attempt to collect any and all amounts due hereunder upon default of the Maker,
Maker shall be liable to pay Holder immediately and without demand all
reasonable costs and expenses of collection incurred by the Holder, including
without limitation reasonable attorneys' fees, whether or not suit or other
action or proceeding be instituted and specifically including, but not limited
to, collection efforts that may be made through any bankruptcy court.
Notwithstanding anything to the contrary contained in this Note, total liability
for payments hereunder in the nature of interest, additional interest, and other
charges will not exceed the limits imposed by applicable interest rate
limitation laws. All agreements between Maker and Holder, whether now existing
or hereafter arising and whether written or oral, are limited so that in no
event, whether by reason of demand or acceleration of the maturity of this Note
or otherwise, shall the interest contracted for, charged, received, paid, or
agreed to be paid to Holder exceed interest computed at the highest lawful rate
of interest applicable to this Note (the "Maximum Rate"). If from any
circumstances whatsoever, interest would otherwise be payable to Holder hereof
in excess of interest computed at the Maximum Rate, the interest payable to
Holder shall be reduced to interested computed at the Maximum Rate, and, if from
any circumstance Holder shall ever receive anything of value deemed interest by
applicable law in excess of interest computed at the Maximum Rate, an amount
equal to any excessive shall be applied to the reduction of the principal hereof
and not to the payment of interest, or if such excessive interest exceeds the
unpaid balance of principal hereof, such excess shall be refunded to the Maker.
All interest paid or agreed to be paid to Holder shall, to the extent permitted
by applicable law, be amortized, prorated, allocated, and spread throughout the
full period until payment in full of the principal (including the period of any
renewal or extension hereof) so that the interest for such full period shall not
exceed interest computed at the Maximum Rate.
Any notices required to be given hereunder shall be deemed delivered five (5)
days after such notice in writing is placed in the United States Mail, postage
prepaid.
The provisions of this Note are intended to be severable and divisible and the
validity or unenforceability of a provision or term herein shall not invalidate
or render unenforceable the remainder of this Note or any part thereof.
This Note shall be governed by and construed and interpreted in accordance with
the internal laws of the State of California.
Dated: March 10, 1997
Del Mar, California
Virtual Gaming Technologies, Inc. ("VGTB")
By: /s/ Daniel B. Najor
----------------------------------------
Daniel B. Najor, Chief Executive Officer
A-2
<PAGE>
EXHIBIT 10.3
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is entered
into as of this 6th day of March 1997 by and between VIRTUAL GAMING
TECHNOLOGIES, INC., a Delaware corporation formerly known as "Internet Gaming
Technologies, Inc." ("VGT"), EMERALD RIVIERA LIMITED, an Irish corporation
("ERL"), DANIEL B. NAJOR, an individual ("Najor"), and JOSEPH R. PARAVIA, an
individual ("Paravia"), on the one hand, and EXECUTONE INFORMATION SYSTEMS,
INC., a Virginia corporation ("Executone"), and UNISTAR ENTERTAINMENT, INC., a
Colorado corporation ("Unistar"), on the other hand. VGT, ERL, Najor and
Paravia are sometimes collectively referred to herein as the "VGT Parties."
Executone and Unistar are sometimes collectively referred to herein as the
"Executone Parties."
R E C I T A L S
- - - - - - - -
A. VGT and Unistar have entered into that certain Securities Purchase
Agreement dated September 5, 1996 ("Purchase Agreement") pursuant to which
Unistar agreed to purchase, and VGT agreed to sell to Unistar, up to 600,000
shares (the "Shares") of VGT's $.00001 par value common stock ("Common Stock"),
at a price of $5.00 per Share, subject to the satisfaction of certain conditions
set forth in the Purchase Agreement. As of the date of this Agreement, Unistar
has purchased 140,000 Shares and, in consideration thereof, has delivered to VGT
$700,000.
B. Concurrent with the parties' execution of the Purchase Agreement:
VGT, Executone and Najor executed that certain Shareholders Agreement
("Shareholders Agreement") dated September 5, 1996; VGT, Executone, Unistar and
CasinoWorld Holdings, Ltd., a Delaware corporation ("CWH"), entered into that
certain Mutual Cooperation Agreement ("Cooperation Agreement") dated September
5, 1996; and VGT, Executone, Unistar and CWH entered into that certain Hardware,
Mutual Use and Emergency Backup Agreement ("Backup Agreement") dated September
5, 1996.
C. Certain disputes and differences have arisen by and between the
VGT Parties, on the one hand, and the Executone Parties, on the other hand, with
regard to transactions contemplated by the aforementioned agreements, and the
parties now desire and intend by this Agreement, to resolve the disputes and
differences, to discharge each other from any and all liability with reference
thereto and to terminate all agreements or claims between them that exist as of
the date hereof.
D. The VGT Parties and the Executone Parties each intend to
separately enter into agreements with CWH for purposes of restructuring the
agreements each has previously entered into with CWH.
<PAGE>
It is agreed as follows:
1. Incorporation of Recitals. The parties hereby acknowledge the above
-------------------------
recitals and hereby agree to incorporate those recitals by this reference into
the terms of the Agreement.
2. Termination of Agreements. Except for those agreements,
-------------------------
representations and warranties provided for herein:
A. The VGT Parties and Executone Parties hereby mutually agree to the
termination of the Purchase Agreement and the Shareholders Agreement, including
the termination and nonsurvival of all representations, warranties and covenants
thereunder; and
B. The VGT Parties and the Executone Parties hereby mutually agree to
release the other from all obligations, covenants and claims, both past, present
and in the future, under the Cooperation Agreement and Backup Agreement and, for
all practical purposes, to terminate such agreements vis-a-vis each other.
C. All of the parties further agree to the termination of all other
agreements, understandings or arrangements between the VGT Parties, or any one
of them, on the one hand, and the Executone Parties, or any one of them, on the
other hand, including all such agreements regarding noncompetition, disclosure
or use of trade secrets or confidential information.
3. Release.
-------
A. Each of the VGT Parties do hereby release, acquit and forever
discharge each of the Executone Parties and their heirs, executors,
administrators, predecessors, successors and assigns, subsidiaries, insurers,
representatives, officers, directors, employees, consultants, agents, attorneys
and affiliates from any and all claims, demands, actions, causes of action,
damages, costs, or other claims whatsoever in law or equity, which any of the
VGT Parties may have against any of the Executone Parties pertaining to,
relating to, connected with, or arising out of any matter or thing whatsoever
whether or not relating to or arising out of the Purchase Agreement,
Shareholders Agreement, Cooperation Agreement or Backup Agreement. In so doing,
each of the VGT Parties releases, relinquishes, remises, waives forever,
discharges, absolves, and quits each of the Executone Parties from each, every
and all things, including by way of example, but not limitation, each, every and
all manner of actions, causes of action, liabilities, debts, sums of money,
controversies, indebtedness, breaches of contract, breaches of duty or any
relationships, acts, omissions, promises, agreements, representations, damages
and any demand of any type, nature, kind or description, whether in law or in
equity, or otherwise, by reason of any matters, causes or things, whatsoever,
whether known or unknown, suspected or unsuspected, heretofore or now existing
which could, might or may be claimed to exist from the beginning of time unto
the date of these presents.
-2-
<PAGE>
B. Each of the Executone Parties do hereby release, acquit and
forever discharge each of the VGT Parties and each of their heirs, executors,
administrators, predecessors, successors and assigns, subsidiaries, insurers,
representatives, officers, directors, employees, consultants, agents, attorneys
and affiliates from any and all claims, demands, actions, causes of action,
damages, costs, or other claims whatsoever in law or equity, which any of the
Executone Parties may have against any of the VGT Parties pertaining to,
relating to, connected with, or arising out of any matter or thing whatsoever
whether or not relating to or arising out of the Purchase Agreement,
Shareholders Agreement, Cooperation Agreement or Backup Agreement. In so doing,
each of the Executone Parties releases, relinquishes, remises, waives forever,
discharges, absolves, and quits each of the VGT Parties from each, every and all
things, including by way of example, but not limitation, each, every and all
manner of actions, causes of action, liabilities, debts, sums of money,
controversies, indebtedness, breaches of contract, breaches of duty or any
relationships, acts, omissions, promises, agreements, representations, damages
and any demand of any type, nature, kind or description, whether in law or in
equity, or otherwise, by reason of any matters, causes or things, whatsoever,
whether known or unknown, suspected or unsuspected, heretofore or now existing
which could, might or may be claimed to exist from the beginning of time unto
the date of these presents.
C. Waiver of Code Provisions. Each of the parties hereto does hereby
-------------------------
acknowledge and agree that it is their intention that this Agreement shall be
effective as a full and final accord and satisfaction and settlement of and as a
bar to each and every claim, demand, debt, account, reckoning, liability,
obligation, cost, expense, lien, action and cause of action, heretofore referred
to and released, which any of the parties had, or has had against the other. In
connection with such waiver and relinquishment, each of the parties hereto
acknowledges that they are aware that they or their attorney may hereafter
discover facts different from or in addition to the facts which they or their
attorney now know or believe to be true with respect to the subject matter of
this Agreement, but that it is their intention to fully, finally, absolutely and
forever settle any and all claims, disputes and differences which to now exist
or heretofore have existed between the parties, and that in furtherance of such
intention the mutual releases herein given shall be and remain in effect as full
and complete general mutual releases notwithstanding the discovery of any such
different or additional facts. Therefore, each of the parties hereto
acknowledges that they have been informed by their respective attorneys and/or
advisors of, and that they are familiar with Section 1542 of the Civil Code of
the State of California which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Each of the parties hereto does hereby abandon, release, waive and relinquish
all rights and benefits which they may acquire under Section 1542 of the Civil
Code of the State of California pertaining to the subject matter of this
Agreement.
-3-
<PAGE>
D. No Admission of Liability. It is expressly understood,
-------------------------
acknowledged and agreed to that by reason of entering into this Agreement, none
of the parties admit, expressly or impliedly, any fact or liability of any type
or nature with respect to any matter, whether or not referred to herein, and
none of the parties have made any such admission and this Agreement is entered
into solely by way of compromise and settlement only.
E. Ownership of Claims. The parties represent and warrant that there
-------------------
has been no assignment or other transfer of any interest in any claim which they
might have and therefore each of the undersigned agree to defend, indemnify and
hold the other harmless from any liabilities, claims, demands, damages, costs,
expenses and attorneys' fees incurred, as a result of any person asserting any
such assignment or transfer of any rights or claims under such assignment or
transfer.
4. Consideration.
-------------
A. By the VGT Parties. In consideration of the releases provided by
------------------
the Executone Parties herein, VGT agrees:
(i) To readjust the Share purchase price to $3.00 per Share,
subject to further adjustment as provided for in Section 5.6 below, and to sell
to Unistar an aggregate of 233,333 Shares for the total consideration of
$700,000, of which VGT acknowledges its prior receipt of $700,000 from Unistar,
subject to Section 5.13 of this Agreement, and Unistar acknowledges its prior
receipt of 140,000 Shares from VGT;
(ii) To issue to Unistar a common stock purchase warrant
("Warrant"), in the form attached hereto as Exhibit A, entitling Unistar to
purchase up to 200,000 shares of Common Stock over a five year period at $3.45
per share, subject to certain adjustments as provided for in the Warrant.
(iii) To grant Unistar, for no additional consideration, a non-
exclusive, non-assignable royalty-free license ("Limited License") to VGT's
software applications ("Software Technology") relating to gaming for use by
Unistar in operating State or Indian bingo or lottery games; provided, however,
that Unistar shall not use such Software Technology to compete with a pre-
existing gaming operation of VGT. VGT further agrees to assist Unistar, at
Unistar's request, in the further development of the Software Technology for
Unistar's use under the Limited License subject to the terms, including the fees
payable to VGT for such services, to be mutually agreed on by the parties at a
later date.
(iv) The VGT Parties further agree that for a period of five
years following the date of this Agreement, the VGT Parties, and each of them,
will keep confidential and will not directly or indirectly divulge to anyone nor
use or otherwise appropriate for their own benefit, or on behalf of any other
person, firm, partnership or corporation by whom such party might be employed or
otherwise associated or affiliated with, any of the marketing and business
plans, client and customer lists and other marketing information and strategies
developed by or on behalf of any of the VGT Parties and previously disclosed to
any of the VGT Parties ("Executone Confidential Information"). The
-4-
<PAGE>
VGT Parties hereby agree to immediately return to Executone all of the
documents, computer printouts and disks, computer software, computer hardware,
memoranda, notebooks, correspondence, files, lists and other records and the
like and all photocopies or other reproductions thereof that include or reflect
the Executone's Confidential Information.
A. By the Executone Parties. In consideration of the releases
------------------------
provided by the VGT Parties herein:
(i) Unistar agrees to purchase an additional 93,333 Shares,
subject to Section 5.13 of this Agreement, against the $700,000 previously
delivered to the Company; and
(ii) The Executone Parties further agree that for a period of
five years following the date of this Agreement, the Executone Parties, and each
of them, will keep confidential and will not directly or indirectly divulge to
anyone nor use or otherwise appropriate for their own benefit (except as
expressly provided for herein), or on behalf of any other person, firm,
partnership or corporation by whom such party might be employed or otherwise
associated or affiliated with, any of the Software Technology, marketing and
business plans, client and customer lists and other marketing information and
strategies developed by or on behalf of any of the VGT Parties and previously
disclosed to any of the Executone Parties ("VGT Confidential Information"). The
Executone Parties hereby agree to immediately return to VGT all of the
documents, computer printouts and disks, computer software, computer hardware,
memoranda, notebooks, correspondence, files, lists and other records and the
like and all photocopies or other reproductions thereof that include or reflect
the VGT Confidential Information.
C. Deliveries. VGT and Unistar shall each deliver to the other
----------
concurrent with the execution of this Agreement all deliveries to be made under
this Section 4.
5. Representation and Warranties of VGT.
------------------------------------
As a material inducement to Unistar to enter into this Agreement and
to purchase the Shares, VGT represents and warrants that the following
statements are true and correct in all material respects as of the date hereof,
except as expressly qualified or modified herein.
5.1 Organization and Good Standing. VGT is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full corporate power and authority to enter into and perform
its obligations under this Agreement, and to own its properties and to carry on
its business as presently conducted and as proposed to be conducted. VGT is
duly qualified to do business as a foreign corporation in every jurisdiction in
which the failure to so qualify would have a material adverse effect upon VGT.
5.2 Capitalization. The authorized capital stock of VGT consists of
--------------
15,000,000 shares of Common Stock of which 5,845,192 shares of Common Stock are
issued and outstanding as of the date of this Agreement. All outstanding shares
of Common
-5-
<PAGE>
Stock have been duly authorized and validly issued, and are fully paid,
nonassessable, and free of any preemptive rights. Except for options held by
management to purchase 480,000 shares of Common Stock, there are no outstanding
rights to purchase or securities convertible or exchangeable for any capital
stock of VGT or any agreement requiring VGT to issue such rights or securities.
Except as set forth herein, VGT is under no obligation (contingent or otherwise)
to purchase or otherwise acquire or retire any of its securities.
5.3 Subsidiaries. VGT does not own, directly or indirectly, any
------------
equity or debt securities of any corporation, partnership, or other entity,
other than its equity interest in Internet Gaming Technologies, Inc., a Nevada
corporation, and Emerald Riviera Ltd., an Irish corporation (the
"Subsidiaries"), both of which are wholly-owned subsidiaries of VGT.
5.4 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by VGT in connection with the transactions contemplated
by this Agreement, have been duly authorized, executed and delivered by VGT and
is each the valid and legally binding obligation of VGT, enforceable in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency reorganization and moratorium laws and other laws affecting
enforcement of creditor's rights generally and by general principles of equity.
The Shares issuable hereunder, when issued and paid for by Unistar in accordance
with the terms of this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable.
5.5 No Violation. The execution, delivery and performance of this
------------
Agreement has been duly authorized by VGT's Board of Directors and, to the
extent necessary, the shareholders of VGT, will not violate any law or any order
of any court or government agency applicable to VGT, or the Certificate of
Incorporation or Bylaws of VGT, as amended, and will not result in any breach of
or default under, or, except as expressly provided herein, result in the
creation of any encumbrance upon any of the assets of VGT pursuant to the terms
of any agreement or instrument by which VGT or any of its assets may be bound.
No approval of or filing with any governmental authority is required for VGT to
enter into, execute or perform this Agreement.
5.6 Litigation. Except as set forth on VGT Disclosure Schedule
----------
attached hereto as Exhibit B ("VGT Disclosure Schedule"), there are no suits or
proceedings (including without limitation, proceedings by or before any
arbitrator, government commission, board, bureau or other administrative agency)
pending or, to the knowledge of VGT, threatened against or affecting VGT which,
if adversely determined, would have a material adverse effect on the
consolidated financial condition, results of operations, prospects or business
of VGT, and VGT is subject to or in default with respect to any order, writ,
injunction or decree of any federal, state, local or other governmental
department.
5.7 Taxes. Federal income tax returns and state and local income tax
-----
returns for VGT have been filed as required by law; all taxes as shown on such
returns or on any assessment received subsequent to the filing of such returns
have been paid, and there are no pending assessments or adjustments or any
income tax payable for which reserves, which are reasonably believed by VGT to
be adequate for the payment of any additional taxes that may come due, have not
been established. All other taxes imposed
-6-
<PAGE>
on VGT have been paid and any reports or returns due in connection herewith have
been filed.
5.8 No Defaults. Except as set forth on VGT Disclosure Schedule, no
-----------
material default (or event which, with the passage of time or the giving of
notice, or both, would become a material default) exists or is alleged to exist
with respect to the performance of any obligation of VGT under the terms of any
indenture, license, mortgage, deed of trust, lease, note, guaranty, joint
venture agreement, operating agreement, partnership agreement, or other contract
or instrument to which VGT is a party or any of their assets are subject, or by
which they are otherwise bound, and, to the best knowledge of VGT, no such
default or event exists or is alleged to exist with respect to the performance
of any obligation of any party thereto.
5.9 Corporate Documents. VGT has furnished to Unistar, or will
-------------------
furnish upon request, true and complete copies of the Certificate of
Incorporation and Bylaws of VGT certified by its secretary and copies of the
resolutions adopted by VGT's Board of Directors authorizing and approving this
Agreement and the transactions contemplated hereby.
5.10 Compliance with Laws. VGT has complied in all material respects
--------------------
with all laws, regulations and orders affecting its business and operations and
is not in default under or in violation of any provision of any federal, state
or local rule, regulation or law.
5.11 Securities Law Compliance. Assuming the accuracy of the
-------------------------
representations and warranties of Unistar set forth in Section 6 of this
Agreement, the offer, issue, sale and delivery of the Shares under the
circumstances contemplated by this Agreement constitutes or will constitute an
exempt transaction under the Securities Act of 1933 (the "1933 Act"), as now in
effect, and registration of the Shares under the Securities Act, is not
required, and no notice, filing, registration, or qualification under any U.S.
state securities or "Blue Sky" law is required in connection therewith except
for such filings as may be necessary to comply with the Blue Sky laws of any
state, which filings will be made in a timely manner.
5.12 Anti-Dilution Adjustment. In the event that VGT shall at any
------------------------
time or from time to time during the twelve (12) month period immediately
following the date of this Agreement issue, sell or otherwise dispose of shares
of Common Stock (other than compensatory shares issued to management or
employees of VGT) without consideration, or for a consideration per share less
than $3.00 (in each case, a "Disposition"), then simultaneously with such
Disposition VGT shall issue to Unistar, for no additional consideration, an
additional number of shares of Common Stock equal to the amount obtained by
subtracting (x) from (y), where (y) equals the number of shares of Common Stock
issued to Unistar under this Agreement (including this Section 5.6) prior to the
Disposition and (x) equals the total amount of consideration paid by Unistar to
VGT divided by the consideration per share received by VGT in the Disposition.
5.13 Co-Signature Arrangement. Until such time as VGT has received
------------------------
equity or debt capital in an amount of not less than $2,000,000, in addition to
the payments
-7-
<PAGE>
received from Unistar hereunder, VGT shall not disburse any portion of the
$700,000 in cash proceeds delivered by Unistar at the initial Close without
Unistar's prior written consent which shall not be unreasonably withheld. At
Unistar's request, VGT shall deposit the $700,000 in a special operating account
that requires two signatures, one from VGT and one of Unistar, for any
withdrawals, transfers or check drafts.
5.14 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of VGT is required in connection with the consummation of the
transactions contemplated by this Agreement.
5.15 Patents and Trademarks. VGT has sufficient title and ownership
----------------------
of all patents, trademarks, service marks, trade names, copyrights, trade
secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted by VGT without any
conflict with or infringement of the rights of others. Except as disclosed in
VGT Disclosure Schedule, there are no outstanding options, licenses, or
agreements of any kind relating to the foregoing, nor is VGT bound by or a party
to any options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, proprietary rights and processes of any other person or entity.
Except as set forth on VGT Disclosure Schedule, VGT has not received any
communications alleging that VGT has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. VGT is not aware that any of its employees is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of VGT or that would conflict with VGT's
business as proposed to be conducted. Neither the execution nor delivery of
this Agreement, nor the carrying on of VGT's business by the employees of VGT,
nor the conduct of VGT's business as proposed, will, to VGT's knowledge,
conflict with or result in a material breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. VGT does not
believe it is or will be necessary to utilize any inventions of any of its
employees (or people it currently intends to hire) made prior to their
employment by VGT.
5.16 Compliance with Other Instruments.
---------------------------------
(a) VGT is not in material violation or material default of any
provisions of its Certificate of Incorporation or Bylaws or of any instrument,
judgment, order, writ, decree or contract to which it is a party or by which it
is bound or, to its knowledge, of any provision of federal or state statute,
rule or regulation applicable to VGT. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event
-8-
<PAGE>
which results in the creation of any lien, charge or encumbrance upon any
material portion of the assets of VGT.
(b) VGT has avoided every condition, and has not performed any
act, the occurrence of which would result in VGT's loss of any right granted
under any license, distribution or other agreement which loss would have a
material adverse effect on VGT.
5.17 Agreements; Action.
------------------
(a) Except for agreements disclosed in VGT Disclosure schedule or
explicitly contemplated hereby, there are no agreements, understandings or
proposed transactions between VGT and any of its officers, directors,
affiliates, or any affiliate thereof which are material to the business,
affairs, prospects, operations, properties, assets or financial condition of
VGT.
(b) Except for agreements disclosed in VGT Disclosure Schedule or
explicitly contemplated hereby, there are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which VGT is a party or by which it is bound which may involve (i)
obligations (contingent or otherwise) of, or payments to VGT in excess of,
$25,000 except as entered into or made in connection with the business of VGT as
proposed, or (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from VGT, or (iii) provisions restricting or affecting
the development, manufacture or distribution of VGT's products or services, or
(iv) indemnification by VGT with respect to infringements of proprietary rights.
(c) Except as disclosed in VGT Disclosure Schedule, VGT has not
(i) declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock, (ii) except for
legal fees incurred in connection with this transaction and loans received from
Daniel Najor, incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $50,000, (iii) made any loans or advances
to any person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than the
sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities VGT has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) Except for agreements disclosed in VGT Disclosure Schedule,
VGT is not a party to and is not bound by any contract, agreement or instrument,
or subject to any restriction under its Certificate of Incorporation or Bylaws,
which materially adversely affects its business as now conducted or as proposed
to be conducted, its properties or its financial condition.
-9-
<PAGE>
(f) VGT has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of VGT with or into any such corporation
or corporations, (ii) with any corporation, partnership, association or other
business entity or any individual regarding the sale, conveyance or disposition
of all or substantially all of the assets of VGT or a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of VGT is disposed of, or (iii) regarding any other form of acquisition,
liquidation, dissolution or winding up of VGT.
5.18 Disclosure. VGT believes it has fully provided Unistar with all
----------
the information which Unistar has requested for deciding whether to purchase the
Common Stock and all information which VGT believes is reasonably necessary to
enable Unistar to make such decision. Neither this Agreement nor any other
statements or certificates made or delivered in connection herewith contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements herein or therein not misleading.
5.19 Corporate Documents. The Certificate of Incorporation and Bylaws
-------------------
of VGT are in the form attached hereto as Exhibit D and Exhibit E, respectively.
5.20 Title to Property and Assets. VGT owns its property and assets
----------------------------
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens which arise in the ordinary course of business and do not
materially impair VGT's ownership or use of such property or assets. With
respect to the property and assets it leases, VGT is in compliance with such
leases and, to the best of its knowledge, holds a valid leasehold interest free
of any liens, claims or encumbrances.
5.21 Minute Books. The minute books of the Company and its
------------
subsidiaries provided to Unistar contain a complete summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
6. Representations, Warranties and Covenants of Unistar.
----------------------------------------------------
As a material inducement to VGT to enter into this Agreement and to
sell and issue the Shares, Unistar represents, warrants and covenants that the
following statements are true and correct as of the date hereof.
6.1 Domicile and Accredited Unistar. Unistar is domiciled in the
-------------------------------
State of Connecticut, is a wholly-owned subsidiary of Executone Information
Systems, Inc., a Virginia corporation, and is an accredited investor as that
term is defined by Rule 501 under the 1933 Act.
6.2 Power and Authority. Unistar is duly organized, validly existing
-------------------
and in good standing under the laws of the State of Colorado, and has taken all
corporate and other action on the part of Unistar, as applicable, necessary for
the execution, delivery and consummation of the transactions contemplated by
this Agreement. Unistar has full and
-10-
<PAGE>
absolute right, power and authority and legal capacity to execute, deliver and
perform this Agreement and all other agreements contemplated hereby to be
executed by Unistar and, upon such execution, this Agreement and all such other
agreements will be the valid and binding obligation of Unistar, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting enforcement of creditors rights generally.
6.3 No Violation. The execution, delivery and performance of this
------------
Agreement and all other agreements contemplated hereby to be executed and
delivered by Unistar, and the consummation of the transactions contemplated
hereby and thereby will not materially violate, with or without the giving of
notice or the lapse of time, or both, any provision of law applicable to Unistar
and will not conflict with or result in the breach or termination of any
provision of, or constitute a default under, or give any person the right to
accelerate any material obligation under, or result in the creation of any lien,
security interest, charge or encumbrance upon any material properties, assets or
business of Unistar, pursuant to the organizational or charter documents of
Unistar, if any, or any indenture, mortgage, deed of trust, lien, lease or other
instrument or agreement or any order, judgment, arbitration award or decree to
which Unistar is a party or by which Unistar or any of its assets and properties
is or may be bound.
6.4 Acquisition for Investment. Unistar is acquiring the Shares for
--------------------------
its own account, for investment purposes only and not with a view to, or for
sale in connection with, a distribution, as that term is used in Section 2(11)
of the 1933 Act thereof in a manner which would require registration under the
1933 Act or any state securities laws.
6.5 Restrictive Legend. Unistar understands that the Shares have not
------------------
been registered under the 1933 Act, or the securities laws of any state, in
reliance upon exemption from registration for nonpublic offers and sales of
securities. Consequently, the right to transfer, sell, pledge or otherwise
dispose of the Shares will be limited by the 1933 Act and the rules thereunder.
Unistar understands and acknowledges that the certificates evidencing the Shares
issued pursuant to this Agreement shall bear the following restrictive legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF A
CURRENT AND EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT WITH
RESPECT TO SUCH SHARES, OR AN OPINION OF THE ISSUER'S COUNSEL TO THE
EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT
or such other restrictive legend as counsel to VGT may reasonably deem
appropriate at the time of such issuance.
-11-
<PAGE>
6.6 Speculative Nature and Risk. Unistar understands and
---------------------------
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Shares. Unistar represents and warrants that the
Shares constitute an investment which is suitable and consistent with Unistar's
financial condition and that Unistar is able to bear the risks of this
investment for an indefinite period of time, which may include the total loss of
Unistar's investment in VGT. Unistar further represents that Unistar has
adequate means of providing for Unistar's current financial needs and corporate
contingencies and that there is no need for liquidity in Unistar's investment in
the Shares and that Unistar has sufficient financial and business experience to
evaluate the merits and risks of an investment in VGT.
6.7 Independent Investigation and Advisors. Unistar confirms that
--------------------------------------
(i) Unistar has received, reviewed, understands and has fully considered for
purposes of Unistar's acquisition of the Shares VGT's financial statements,
business plans and organizational documents, (ii) Unistar has been expressly
offered the opportunity to be provided a copy of and to review all reports,
documents and exhibits referenced therein and such other agreements, documents
and information as Unistar deems necessary or appropriate in determining to make
an investment in VGT; (iii) VGT has limited financial resources and will need
sources of capital, in addition to the proceeds from the sale of the Shares
under this Agreement, to implement its current business plan, the availability
of which is uncertain and cannot be assured, and (iv) the Shares are highly
speculative investments with a high degree of risk of loss by Unistar of his
investment therein. In this regard, Unistar acknowledges that VGT's Private
Placement Memorandum dated July 24, 1996 ("PPM") is no longer current and that
it is not relying on the PPM in connection with its investment decision under
this Agreement. Unistar represents and warrants that in making the decision to
acquire the Shares, it has relied upon its own independent investigation of VGT
and the independent investigations of VGT by its representatives, including his
own professional legal, tax, and business advisors, and that Unistar and its
representatives have been given the opportunity to examine all relevant
documents and to ask questions of and to receive answers from VGT, or person(s)
acting on its behalf, concerning the terms and conditions of acquisition by
Unistar of the Shares and any other matters concerning an investment in VGT, and
to obtain any additional information Unistar deems necessary or appropriate to
verify the accuracy of the information provided.
7. Registration Rights. To induce Unistar to purchase the Shares, VGT
-------------------
has agreed to provide registration rights with respect to the Registrable
Securities (as defined below) as set forth in this Section 7. VGT hereby
covenants and agrees as follows:
7.1 Definitions. As used in this Section 7, the following terms have
-----------
the meanings indicated:
"Demand Registration" has the meaning assigned such term in Section
7.3(a).
"Designated Holder" means each of the Holders and any transferee of
any of them to whom Registrable Securities have been transferred, other than a
transferee to whom such securities have been transferred pursuant to a
registration statement under the 1933 Act or Rule 144 under the 1933 Act.
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<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Inspector" has the meaning assigned such term in Section
7.6(a)(viii).
"Holders" means Unistar and any Person to whom Registrable Securities
are transferred by any of them.
"NASD" has the meaning assigned such term in Section 7.6(a)(xiv).
"Person" shall mean any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company, government (or an agency or political
subdivision thereof) or other entity of any kind, and shall include any
successor (by merger or otherwise) of such entity.
"Registrable Securities" mean each of the following: (a) the Shares,
(b) any shares of Common Stock issued pursuant to Section 5.6, (c) any shares
("Warrant Shares") of Common Stock issued or issuable upon exercise of the
Warrant attached hereto as Exhibit I, and (d) any shares of Common Stock issued
or issuable to the Holders of the Shares or the Warrant Shares by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise and
shares of Common Stock issuable upon conversion, exercise or exchange thereof.
"Registration Expenses" has the meaning assigned to such term in
Section 7.5(d).
"SEC" means the Securities and Exchange Commission.
"Underwriter" has the meaning assigned such term in Section 7.3(e).
7.2 Securities Subject to this Agreement.
------------------------------------
(a) Registrable Securities. For the purposes of this Agreement,
----------------------
Registrable Securities will cease to be Registrable Securities when a
registration statement covering such Registrable Securities has been declared
effective under the 1933 Act by the SEC and such Registrable Securities have
been disposed of pursuant to such effective registration statement.
(b) Holders of Registrable Securities. A Person is deemed to be a
---------------------------------
holder of Registrable Securities whenever such Person owns of record Registrable
Securities, or holds an option to purchase, or a security convertible into or
exercisable or exchangeable for, Registrable Securities whether or not such
acquisition or conversion has actually been effected and disregarding any legal
restrictions upon the exercise of such rights. If VGT receives conflicting
instructions, notices or elections from two or more persons with respect to the
same Registrable Securities, VGT may act upon the basis of the instructions,
notice or election received from the registered owner of such Registrable
Securities. Registrable
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<PAGE>
Securities issuable upon exercise of an option or upon conversion of another
security shall be deemed outstanding for the purposes of this Agreement.
7.3 Demand Registration.
-------------------
(a) Request for Demand Registration. At any time during the eighteen
-------------------------------
(18) month period commencing six (6) months from the initial Close, subject to
extension as provided in Section 7.5 hereof, the Holders holding more than 50%
of the Registrable Securities then held by all of the Holders may make a written
request for registration (such Designated Holders making such request being
deemed to be "Initiating Holders") of Registrable Securities under the 1933 Act,
and under the securities or blue sky laws of any jurisdiction reasonably
designated by such holder or holders (a "Demand Registration"); provided, VGT
will not be required to effect more than two (2) Demand Registrations at the
request of the Holders pursuant to this Section 7.3. Such request for a Demand
Registration shall specify the amount of the Registrable Securities proposed to
be sold, the intended method of disposition thereof and the jurisdictions in
which registration is desired. Upon a request for a Demand Registration, VGT
shall promptly take such steps as are necessary or appropriate to prepare for
the registration of the Registrable Securities to be registered. Within 15 days
after the receipt of such request, VGT shall give written notice thereof to all
other Designated Holders holding Registrable Securities (the "Non-Initiating
Holders") and include in such registration all Registrable Securities held by a
Designated Holder with respect to which VGT has received written requests for
inclusion therein within 15 days of the receipt by such Designated Holder of
such written notice. Each such request shall specify the number of Registrable
Securities to be registered, the intended method of disposition thereof and the
jurisdictions in which registration is desired. Unless Designated Holders
holding the majority of the Registrable Securities to be included in the Demand
Registration consent in writing, no other party, including VGT (but not
including any other Designated Holder), shall be permitted to offer securities
under any such Demand Registration.
(b) Effective Demand Registration. A registration shall not constitute
-----------------------------
a Demand Registration until it has become effective and remains continuously
effective until the earlier of (i) the date of sale of all Registrable
Securities registered thereunder or (ii) 90 days from the effective date. VGT
shall use its best efforts to cause any such Demand Registration to become
effective not later than 90 days after it receives a request under Section
7.3(a) hereof.
(c) Expenses. VGT shall pay all Registration Expenses (other than
--------
underwriting discounts and commissions) in connection therewith, whether or not
such Demand Registration becomes effective; provided, however, that each
Designated Holder participating in such Demand Registration shall bear the costs
of its own legal counsel.
(d) Underwriting Procedures. If Initiating Holders holding a majority
-----------------------
of the Registrable Securities held by all such Initiating Holders so elect, the
offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of a firm commitment underwritten offering and the managing
underwriter or underwriters selected for such offering shall be the Underwriter
selected in accordance with Section 7.3(e). In
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<PAGE>
such event, if the Underwriter advises VGT in writing that in its opinion the
aggregate amount of such Registrable Securities requested to be included in such
offering is sufficiently large to have a material adverse affect on the success
of such offering, VGT shall include in such registration only the aggregate
amount of Registrable Securities that in the opinion of the Underwriter may be
sold without any such material adverse affect and shall reduce, first as to any
stockholders who are the Non-Initiating Holders as a group and then as to the
Initiating Holders as a group, pro rata within each group based on the number of
Registrable Securities included in the request for Demand Registration, the
amount of Registrable Securities to be included by each Designated Holder in
such registration.
(e) Selection of Underwriters. If any Demand Registration of
-------------------------
Registrable Securities is in the form of an underwritten offering, the
Initiating Holders holding a majority of the Registrable Securities held by all
such Initiating Holders shall, in their discretion, select and obtain an
investment banking firm to act as the managing underwriter of the offering (the
"Underwriter"), subject to approval by VGT which shall not be unreasonably
withheld.
7.4 Piggy-Back Registration.
-----------------------
(a) Piggy-Back Rights. If during the eighteen (18) month period
-----------------
following the date of this Agreement, VGT proposes to file a registration
statement under the Act, other than pursuant to Section 7.3 hereof, with respect
to an offering by VGT for its own account of any class of security (other than a
registration statement on Form S-4 or S-8 or any successor or other forms not
available for registering capital stock for sale to the public), then VGT shall
give written notice of such proposed filing to each of the Designated Holders of
Registrable Securities at least 30 days before the anticipated filing date, and
such notice shall describe in detail the proposed registration and distribution
(including those jurisdictions where registration under the securities or blue
sky laws is intended) and offer such Designated Holders the opportunity to
register the number of Registrable Securities as each such holder may request.
VGT shall use its best efforts (within ten days of the notice provided for in
the preceding sentence) to cause the managing underwriter or underwriters of a
proposed underwritten offering (the "Company Underwriter") to permit the
Designated Holders of Registrable Securities who have requested to participate
in the registration for such offering to include such Registrable Securities in
such offering on the same terms and conditions as the securities of VGT included
therein. Notwithstanding the foregoing, if VGT Underwriter delivers a written
opinion to the Designated Holders of Registrable Securities that the total
amount or kind of securities which they, VGT and any other persons or entities
intend to include in such offering (the "Total Securities") is sufficiently
large so as to have a material adverse effect on the distribution of the Total
Securities, then the amount or kind of securities to be offered for the account
of such Designated Holders and such other persons or entities (other than VGT)
shall be reduced pro rata to the extent necessary to reduce the Total Securities
to the amount recommended by VGT Underwriter. Unless waived by a Designated
Holder in writing, each Designated Holder shall have the right to participate
pro rata based upon the proportion of the Registrable Securities held by them
bears to all Registrable Securities.
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<PAGE>
7.5 Holdback Agreements and Termination.
-----------------------------------
(a) Delay of Rights Under Special Circumstances. Upon receipt by VGT
-------------------------------------------
of a request for Demand Registration pursuant to Section 7.3(a) hereof, VGT
shall have the right, in the event that VGT is then engaged in business
negotiations which would be materially adversely affected by a Demand
Registration, or any other material business development or event has occurred
which VGT believes in its reasonable judgment would be adversely affected by a
Demand Registration, to delay the effectiveness of such request by the
Initiating Holders for a period of up to 120 days; provided, however, that this
right may only be exercised by VGT on one occasion. VGT shall exercise the
foregoing delay right by delivering to the Initiating Holders, within 15 days
after the receipt of such request, a written notice attesting to the necessity
of such a delay.
(b) Restrictions on Demands by Designated Holders and Termination of
----------------------------------------------------------------
Demand Rights. Each Designated Holder of Registrable Securities agrees that the
- - -------------
right to request a Demand Registration shall be suspended for a period of up to
180 days commencing upon the date VGT executes a letter of intent with an
underwriter for a firm commitment underwritten public offering of its securities
having an aggregate offering price of not less than $5,000,000, provided that a
registration statement with respect to such offering is filed by VGT with the
SEC within 45 days from the date of execution of such letter of intent. The
foregoing suspension of the rights of the Holders will cease if such
registration statement is not declared effective by the SEC within 60 days of
the filing thereof.
7.6 Registration Procedures.
-----------------------
(a) Obligations of VGT. Whenever registration of Registrable
------------------
Securities has been requested pursuant to Sections 7.3 or 7.4 of this Agreement,
VGT shall use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended method of distribution
thereof as quickly as practicable, and in connection with any such request, VGT
shall, as expeditiously as possible:
(i) diligently use its best efforts to prepare and file with
the SEC a registration statement on any form for which VGT then qualifies of
which counsel for VGT shall deem appropriate and which form shall be available
for the sale of such Registrable Securities in accordance with the intended
method of distribution thereof, and use its best efforts to cause such
registration statement to become effective; provided, however, that before
filing a registration statement or prospectus or any amendments or supplements
thereto, VGT shall (A) provide counsel selected by the Designated Holders
holding a majority of the Registrable Securities being registered in such
registration ("Holders' Counsel") and any other Inspector (as hereinafter
defined) with an adequate and appropriate opportunity to participate in the
preparation of such registration statement and each prospectus included therein
(and each amendment or supplement thereto) to be filed with the SEC, which
documents shall be subject to the review of Holders' Counsel, and (B) notify the
Holders' Counsel and each seller of Registrable Securities of any stop order
issued or threatened by the SEC and take all reasonable action required to
prevent the entry of such stop order or to remove it if entered;
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<PAGE>
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than 90 days, or such shorter period which will terminate
when all Registrable Securities covered by such registration statement have been
sold, and comply with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller of
Registrable Securities, prior to filing a registration statement, copies of such
registration statement as is proposed to be filed, and thereafter such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus) and such other
documents as each such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(iv) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Securities reasonably requests, and
to continue such qualification in effect in such jurisdiction for as long as is
permissible pursuant to the laws of such jurisdiction, or for as long as any
such seller requests or until all of such Registrable Securities are sold,
whichever is shortest, and do any and all other acts and things which may be
reasonably necessary or advisable to enable any such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller; provided, however, that VGT shall not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 7.6(a)(iv), (B) subject itself to
taxation in any such jurisdiction or (C) consent to general service of process
in any such jurisdiction;
(v) use its best efforts to cause the Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary by virtue of the
business and operations of VGT to enable the seller or sellers of Registrable
Securities to consummate the disposition of such Registrable Securities;
(vi) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the 1933
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, and VGT shall promptly
prepare a supplement or amendment to such prospectus and furnish to each seller
a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, after delivery to the purchasers of such
Registrable Securities, such prospectus shall not contain an untrue statement of
a material fact or omit to state any
-17-
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
(vii) enter into and perform customary agreements (including an
underwriting agreement in customary form with the Underwriter, if any, selected
as provided in Sections 7.3 or 7.4) and take such other actions as are prudent
and reasonably required in order to expedite or facilitate the disposition of
such Registrable Securities;
(viii) make available for inspection by any seller of Registrable
Securities, any managing underwriter participating in any disposition pursuant
to such registration statement, Holders' Counsel and any attorney, accountant or
other agent retained by any such seller or any managing underwriter (each, an
"Inspector" and collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of VGT and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause VGT's and
its subsidiaries, officers, directors and employees, and the independent public
accountants of VGT, to supply all information reasonably requested by any such
Inspector in connection with such registration statement. Records that VGT
determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (A)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in the registration statement, (B) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, or (C) the information in such records has been made generally
available to the public other than through a breach of the confidentiality
requirement set forth above. Each Seller of Registrable Securities agrees that
it shall, upon learning that disclosure of such Records is required by any court
of competent jurisdiction, give notice to VGT and allow VGT, at VGT's expense,
to undertake appropriate action to prevent disclosure of the Records deemed
confidential;
(ix) if such sale is pursuant to an underwritten offering, use
its best efforts to obtain a "cold comfort" letter from VGT's independent public
accountants in customary form and covering such matters of the type customarily
covered by "cold comfort" letters as Holders' Counsel or the managing
underwriter reasonably request;
(x) use its best efforts to furnish, at the request of any
seller of Registrable Securities on the date such securities are delivered to
the underwriters for sale pursuant to such registration or, if such securities
are not being sold through underwriters, on the date the registration statement
with respect to such securities becomes effective, an opinion, dated such date,
of counsel representing VGT for the purposes of such registration, addressed to
the underwriters, if any, and to the seller making such request, covering such
legal matters with respect to the registration in respect of which such opinion
is being given as such seller may reasonably request and are customarily
included in such opinions;
(xi) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable but no later than 15 months after the
effective date of the registration statement, an earnings statement covering a
period of 12 months beginning after the effective date of
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<PAGE>
the registration statement, in a manner which satisfies the provisions of
Section 11(a) of the 1933 Act;
(xii) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by VGT are then listed,
provided, that the applicable listing requirements are satisfied;
(xiii) keep each seller of Registrable Securities advised in
writing as to the initiation and progress of any registration under Sections 7.3
or 7.4 hereunder;
(xiv) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable Securities
and their respective counsel in connection with any filings required to be made
with the National Association of Securities Dealers, Inc. (the "NASD"); and
(xv) use best efforts to take all other steps necessary to
effect the registration of the Registrable Securities contemplated hereby.
(b) Seller Information VGT may require each seller of Registrable
------------------
Securities as to which any registration is being effected to furnish to VGT such
information regarding the seller and the distribution of such securities as VGT
may from time to time reasonably request in writing.
(c) Notice to Discontinue. Each Designated Holder of Registrable
---------------------
Securities agrees that, upon receipt of any notice from VGT of the happening of
any event of the kind described in Section 7.6(a)(vi), such Designated Holder
shall forthwith discontinue disposition of Registrable Securities pursuant to
the registration statement covering such Registrable Securities until such
Designated Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 7.6(a)(vi) and, if so directed by VGT, such
Designated Holder shall deliver to VGT (at VGT's expense) all copies, other than
permanent file copies then in such Designated Holder's possession, of the
prospectus covering such Registrable Securities which is current at the time of
receipt of such notice. If VGT shall give any such notice, VGT shall extend the
period during which such registration statement shall be maintained effective
pursuant to this Agreement (including without limitation the period referred to
in Section 7.6(a)(ii)) by the number of days during the period from and
including the date of the giving of such notice pursuant to Section 7.6(a)(vi)
to and including the date when the Designated Holder shall have received the
copies of the supplemented or amended prospectus contemplated by and meeting the
requirements of Section 7.6(a)(vi).
(d) Registration Expenses. VGT shall pay all expenses (other than as
---------------------
set forth in Section 7.3(c)) arising from or incident to the performance of, or
compliance with, this Agreement, including without limitation, (i) SEC, stock
exchange and NASD registration and filing fees, (ii) all fees and expenses
incurred in complying with securities or blue sky laws (including reasonable
fees, charges and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) all printing, messenger and
delivery expenses, (iv) the fees, charges and disbursements of counsel to VGT
and of its independent
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<PAGE>
public accountants and any other accounting and legal fees, charges and expenses
incurred by VGT (including without limitation any expenses arising from any
special audits incident to or required by any registration or qualification),
and (v) any liability insurance or other premiums for insurance obtained (which
insurance VGT agrees to use its best efforts to obtain upon the reasonable
request of any seller of Registrable Securities) retained in connection with any
Demand Registration or piggy-back registration pursuant to the terms of this
Agreement, regardless of whether such registration statement is declared
effective. All of the expenses described in this Section 7.5 are referred to
herein as "Registration Expenses."
7.7 Indemnification; Contribution
-----------------------------
(a) Indemnification by VGT. VGT agrees to indemnify, to the fullest
----------------------
extent permitted by law, each Designated Holder, its officers, directors,
partners, employees, advisors and agents and each Person who controls (within
the meaning of the 1933 Act or the Exchange Act) such Designated Holder from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any untrue, or
allegedly untrue, statement of a material fact contained in any registration
statement, prospectus or preliminary prospectus or notification or offering
circular (as amended or supplemented if VGT shall have furnished any amendments
or supplements thereto) or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing to VGT
by such Designated Holder expressly for use therein. VGT shall also indemnify
any underwriters of the Registrable Securities, their officers, directors and
employees and each Person who controls such underwriters (within the meaning of
the 1933 Act and the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Designated Holders of Registrable
Securities.
(b) Indemnification by Designated Holders. In connection with any
-------------------------------------
registration statement in which a Designated Holder is participating pursuant to
Sections 7.3 or 7.4 hereof, each such Designated Holder shall furnish to VGT in
writing such information with respect to such Designated Holder as VGT may
reasonably request or as may be required by law for use in connection with any
such registration statement or prospectus and each Designated Holder agrees to
indemnify, to the fullest extent permitted by law, VGT, any underwriter retained
by VGT and their respective directors, officers, employees and each Person who
controls VGT or such underwriter (within the meaning of the 1933 Act and the
Exchange Act) to the same extent as the foregoing indemnity from VGT to the
Designated Holders, but only with respect to any such information furnished in
writing by such Designated Holder; provided, however, that the total amount to
be indemnified by such Designated Holder pursuant to this Section 7.7(b) shall
be limited to the net proceeds received by such Designated Holder in the
offering to which the registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification hereunder (the "Indemnification Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified
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<PAGE>
Party of any written notice of the commencement of any action, suit, proceeding
or investigation or threat thereof made in writing for which the Indemnified
Party intends to claim indemnification or contribution pursuant to this
Agreement; provided, that the failure to notify the Indemnifying Party shall not
relieve the Indemnifying Party of any liability that it may have to the
Indemnified Party hereunder. If notice of commencement of any such action is
given to the Indemnifying Party as above provided, the Indemnifying Party shall
be entitled to participate in and, to the extent it may wish, jointly with any
other Indemnifying Party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
Indemnified Party. The Indemnified Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees
to pay the same, (ii) the Indemnifying Party fails to assume the defense of such
action with counsel satisfactory to the Indemnified Party in its reasonable
judgment, (iii) the named parties to any such action (including any impleaded
parties) have been advised by such counsel that either (A) representation of
such Indemnified Party and the Indemnifying Party by the same counsel would be
inappropriate under applicable standards of professional conduct or (B) there
may be one or more legal defenses available to it which are different from or
additional to those available to the Indemnifying Party. In either of such cases
the Indemnifying Party shall not have the right to assume the defense of such
action on behalf of such Indemnified Party. No Indemnifying Party shall be
liable for any settlement entered into without its written consent, which
consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this Section
------------
7.7 from the Indemnifying Party is unavailable to an Indemnified Party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative faults of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such Indemnifying
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in Sections 7.7(a), 7.7(b) and 7.7(c), any legal or
other fees, charges or expenses reasonably incurred by such party in connection
with any investigation or proceeding. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 7.7(d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. No person guilty of fraudulent
misrepresentation
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<PAGE>
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person.
7.8 Rule 144. VGT covenants that, from and after the date that VGT
--------
has a class of equity securities registered under the Exchange Act, it shall (i)
file any reports required to be filed by it under the Exchange Act and the rules
and regulations adopted by the SEC thereunder; and (ii) take such further action
as each Designated Holder of Registrable Securities may reasonably request
(including providing any information necessary to comply with Rules 144 and 144A
under the 1933 Act), all to the extent required from time to time to enable such
Designated Holder to sell Registrable Securities without registration under the
1933 Act within the limitation of the exemptions provided by (a) Rule 144 or
Rule 144A under the 1933 Act, as such rules may be amended from time to time, or
(b) any similar rules or regulations hereafter adopted by the SEC. VGT shall,
upon the request of any Designated Holder of Registrable Securities, deliver to
such Designated Holder a written statement as to whether it has complied with
such requirements.
8. Interpretation and Enforcement.
------------------------------
8.1 Survival of Representations. All representations, warranties and
---------------------------
agreements contained herein or made in writing by VGT and Unistar in connection
with the transactions contemplated hereby except any representation, warranty or
agreement as to which compliance may have been appropriately waived, shall
survive the execution and delivery of this Agreement and continue for a period
of two years from the date of the Close, at which time all representations,
warranties and agreements hereunder shall expire.
8.2 Partial Invalidity. If any term, covenant or condition of this
------------------
Agreement or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Agreement shall be
valid and be enforced to the fullest extent permitted by law.
8.3 Notices. Any notices relating to this Agreement shall be deemed
-------
sufficiently given and served for all purposes if given by a telegram filed,
charges prepaid, or a writing deposited in the United States mail, postage
prepaid and registered or certified within the United States, addressed as
follows:
If to VGT:
Virtual Gaming Technologies, Inc.
12625 High Bluff Drive, Suite 205A
San Diego, California 92130
Attention: Daniel B. Najor, Chief Executive Officer
-22-
<PAGE>
If to Unistar:
Unistar Entertainment, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Michael W. Yacenda, Executive Vice President
8.4 Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of the parties hereto
and no right or liability or obligation arising hereunder may be assigned by any
party hereto.
8.5 Effect of Headings. The subject heading of the paragraphs and
------------------
subparagraphs of this agreement are included for purposes of convenience only,
and shall not affect the construction or interpretation of any of its
provisions.
8.6 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties pertaining to the subject matter contained in this
Agreement and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification
or amendment to this Agreement shall be binding unless executed in writing by
all parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provisions, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall
be binding unless executed in writing by the party making the waiver.
8.7 Counterparts. This Agreement may be executed simultaneously in
------------
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.8 Recovery of Litigation Expenses. If any legal action is brought
-------------------------------
for declaratory relief for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover their costs, including reasonable attorneys' fees,
and other expenses incurred in that action or proceeding, in addition to any
other relief to which they may be entitled.
8.9 Agreement Understood. The parties acknowledge that they and
--------------------
those authorized to sign this Agreement are over the age of 18 and legally
competent and authorized to execute this Agreement which is intended to be a
legally binding contract dealing with the release and/or conveyance of certain
valuable and important rights. Before signing this document, each of said
parties has read the same from beginning to end and fully understands the
Agreement from its beginning. Each party has had the opportunity to consult
with counsel regarding this document and has received a copy of the same for
their own records.
8.10 Further Documents. Each party agrees it will execute or cause to
-----------------
be executed such further and other documents as are needed to carry out the
expressed intents
-23-
<PAGE>
and purposes of this Agreement. It is understood that should it develop that
there are any mistakes in this Agreement which would cause the release and
discharge of the parties to be defective or less than complete, or if it or any
provision is declared unenforceable by a court or arbitrator for any reason,
then the parties shall execute any and all other instruments and do any and all
other things necessary to effectuate a full, final and complete release of
claims or possible claims in connection with the matters set forth in this
Agreement.
8.11 Modification. This Agreement shall not be modified by either
------------
party by oral representation made before or after the execution of this
Agreement. All modifications must be in writing and signed by the parties.
8.12 Disclosure. None of the Parties shall make or cause to be made
----------
any announcement, public or private, through any media whatsoever concerning the
contents of this Agreement.
8.13 Binding on Successors. This Agreement and the covenants and
---------------------
conditions contained herein shall apply to, be binding upon, and inure to the
administrators, executors, legal representatives, assignees, successors, agents
and assigns of the parties hereto.
8.14 Construction. This Agreement shall not be construed against the
------------
party preparing it, but shall be construed as if all parties jointly prepared
this Agreement and any uncertainty and ambiguity shall not be interpreted
against a party. This Agreement is to be interpreted, enforced and governed by
and under the laws of the State of California.
8.15 Advise of Own Counsel. Each of the VGT Parties acknowledge that
---------------------
Daniel K. Donahue, of Bruck & Perry, a Professional Corporation, has acted as
counsel to the VGT Parties in connection with the negotiation and execution of
this Agreement. The Executone Parties represent and acknowledge that they have
been represented by Barbara C. Anderson, Esq., General Counsel and Secretary of
Executone, in connection with the negotiation and execution of this Agreement
and each party represents that they have read and have had this Agreement
explained to them by their own counsel.
[Signatures continue on the next page]
-24-
<PAGE>
8.16 Fees and Expenses. Each party shall bear all of its own costs,
-----------------
expenses and attorneys' fees in connection with the matters released and the
entering into of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Settlement
Agreement and Mutual Release on the date first above written.
"VGT Parties"
VIRTUAL GAMING TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Daniel B. Najor
-----------------------------------------------
Daniel B. Najor, Chief Executive Officer
/s/ Daniel B. Najor
--------------------------------------------------
Daniel B. Najor, an individual
/s/ Joseph R. Paravia
-------------------------------------------------
Joseph R. Paravia, an individual
"Executone Parties"
EXECUTONE INFORMATION SYSTEMS, INC.
a Virginia corporation
By: /s/ Michael W. Yacenda
-----------------------------------------------
Michael W. Yacenda, Executive Vice President
UNISTAR ENTERTAINMENT, INC.,
a Colorado corporation
By: /s/ Michael W. Yacenda
-----------------------------------------------
Michael W. Yacenda, President
-25-
<PAGE>
EXHIBIT B
---------
VGT DISCLOSURE STATEMENT
Sections 5.6 and 5.8
- - --------------------
VGT and ERL have previously entered into certain written agreements ("CWH
Agreement") with CasinoWorld Holdings, Ltd. ("CWH"), copies of which have
previously been provided to the Executone Parties. VGT believes that CWH has
materially breached those agreements and is presently seeking to resolve the
issues presented by such breaches. Although CWH has not asserted in writing any
claim that the VGT Parties, or any of them, are in breach of the CWH Agreements,
VGT presumes that if it is forced to bring litigation against CWH that CWH will
counterclaim based on the alleged breach by the VGT Parties.
Section 5.7
- - -----------
VGT's 1996 corporate income tax return has not been filed as of this date.
Section 5.17
- - ------------
The Company has obligations in excess of $25,000 under the CWH Agreements
and its Agreement dated September 24, 1996 between Virtual Casino Gaming and
Wagering Company and ERL, a copy of which has been presented to the Executone
Parties.
-26-
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into on September 1,
1997, to be effective as of July 31, 1996, between VIRTUAL GAMING TECHNOLOGIES,
INC., a Delaware corporation ("Employer"), and JOSEPH R. PARAVIA ("Employee").
R E C I T A L
- - - - - - -
Employer wishes to employ Employee, and Employee agrees to serve, as Chief
Executive Officer of Employer, subject to the terms and conditions set forth
below.
A G R E E M E N T
- - - - - - - - -
It is agreed as follows:
1. TERM OF EMPLOYMENT. Employer hereby employs Employee, and Employee
------------------
hereby accepts employment with Employer, for a period of three (3) years
terminating July 31, 1999 ("Employment Period"); provided that this Agreement
shall be automatically renewed for successive one (1) year terms unless either
party elects not to renew this Agreement by delivering written notice of its
election to the other party no later than thirty (30) days prior to the end of
the current term. Notwithstanding anything in this Section 1 to the contrary,
this Agreement may be terminated at any time in accordance with Section 6.
2. DUTIES OF EMPLOYEE. Employee shall serve in the capacity as Chief
------------------
Executive Officer of Employer at Employer's office in San Diego, California, or
at such other place as Employer may direct provided that Employer shall not
direct or cause Employee to perform his services from an office outside of San
Diego County, California. Employee's principal duties and responsibilities
shall consist of primary responsibility for all (i) sales and marketing and
activities; (ii) administrative matters; and (iii) employee management and
supervision. Employee shall perform such other services and duties as may from
time to time be assigned to Employee by Employer's board of directors provided
that such other services and duties are not inconsistent with any other term of
this Agreement. Except during vacation periods or in accordance with Employer's
personnel policies covering executive leaves and reasonable periods of illness
or other incapacitation, Employee shall devote his services to Employer's
business and interests in a manner consistent with Employee's title and office
and Employer's needs for his services. Employee shall perform the duties of
Employee's office and those assigned to Employee by the Employer's board of
directors with fidelity, to the best of Employee's ability, and in the best
interest of Employer.
<PAGE>
3. COMPENSATION OF EMPLOYEE.
------------------------
3.1 Base Compensation. As compensation for Employee's services
-----------------
hereunder, Employee shall receive a base salary of One Hundred Thousand Dollars
($100,000) per year, payable in equal bi-monthly installments, or a ratable
portion thereof for periods of less than one-half month. Subject to and
concurrent with Employer's receipt of an additional $1,000,000 of equity capital
subsequent to July 15, 1997, Employer shall enter into good faith negotiations
with Employee to increase Employee's base salary to an amount commensurate with
Employee's office and experience and with due regard to the financial conditions
and prospects of Employer.
3.2 Bonus Compensation. As additional compensation for Employee's
------------------
services hereunder, Employee shall be entitled to a one-time cash bonus (the
"Bonus"), as provided for in this Section 3.2. If Employer earns a Net Profit
(as defined below) of $1,500,000 within a 12 month period beginning August 1,
1997 and ending July 31, 1998, Employee shall be entitled to a bonus of
$100,000.00. As used herein, the term "Net Profit" shall mean the gross revenue
of all gaming revenue generated by customers, less all related costs and
overhead, such costs to include all costs including, but not limited to, payouts
to subscribers, insurance, labor (including wages and salaries of officers,
directors, employees, independent contractors), equipment costs, technical fees
and training costs.
3.3 Housing Allowance. In addition, Employee shall be entitled to
-----------------
a monthly housing allowance of One Thousand Dollars ($1,000), which shall be
paid to Employee concurrently with the second (2nd) installment of Employee's
monthly base compensation.
4. EXPENSE REIMBURSEMENTS. Employee shall be reimbursed for reasonable
----------------------
and actual out-of-pocket expenses incurred by Employee in performance of
Employee's duties and responsibilities hereunder in accordance with Employer's
established personnel policy covering executive officer expense reimbursements,
as such policy may be amended, revised or otherwise changed from time to time.
Employee shall furnish proper vouchers and expense reports and shall be
reimbursed only for those expenses which shall be reimbursable.
5. VACATION, SICK LEAVE AND OTHER FRINGE BENEFITS. Employee shall be
----------------------------------------------
entitled to two (2) weeks vacation per every twelve (12) month period of
employment hereunder. Employee shall also be entitled to leaves for illness or
other incapacitation as is consistent with Employee's title and Employer's needs
for Employee's services, except as otherwise provided for in Section 6.2.
Employee shall be entitled during Employee's employment hereunder to share or
participate in such medical insurance programs or other "fringe" benefit plans
or programs as shall be made available to executive officers employed by
Employer generally, in accordance with Employer's established personnel
policies, if any, or as established, amended, revised or otherwise changed from
time to time, covering executive officer employee benefits.
-2-
<PAGE>
6. TERMINATION.
-----------
6.1 Termination by Employer for Cause. Employer may terminate this
---------------------------------
Agreement and Employee's employment hereunder for Cause (as defined herein) any
time effective upon written notice to Employee. As used herein, the term "Cause"
shall mean:
6.1.1 Habitual neglect in the performance of Employee's material
duties as set forth in Section 2 which continues uncorrected for a period of
thirty (30) days after written notice thereof by Employer to Employee; or
6.1.2 Gross negligence involving misfeasance or nonfeasance by
Employee in the performance of Employee's material duties as set forth in
Section 2 which continues uncorrected for a period of thirty (30) days after
written notice thereof by Employer to Employee.
6.1.3 A material breach of that certain Employee NonDisclosure
and Invention Assignment Agreement dated February 15, 1997 entered into by
Employee.
6.2 Termination Upon Death or Disability. This Agreement and
------------------------------------
Employee's employment hereunder shall terminate upon Employee's death or
Disability (as defined herein). For this purpose, "Disability" means incapacity,
whether by reason of physical or mental illness or disability, which prevents
Employee from substantially performing Employee's material duties as set forth
in Section 2 for six (6) months, or for shorter periods aggregating six (6)
months in any twelve (12) successive calendar months. Upon termination for
death, and unless Employer shall have in force a disability insurance policy
providing for benefits in an amount at least equal thereto, upon termination for
Disability, Employer shall continue to pay the base compensation payments
pursuant to Section 3.1 to the surviving spouse of Employee (or if there is none
to Employee's estate) in the case of death and to Employee or Employee's court
appointed conservator in the case of Disability until the date three (3) months
thereafter. Termination for death shall become effective upon the occurrence of
such event and termination for Disability shall become effective upon written
notice by Employer to Employee.
6.3 Events Upon Termination. The termination of this Agreement
-----------------------
pursuant to Section 6 shall also result in the termination of all rights and
benefits of Employee under this Agreement except for any rights to compensation
accrued under Section 3 prior to the date of termination or rights to expense
reimbursement under Section 4.
7. EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that
--------------------------
Employee is free to enter into this Agreement and to perform each of the
provisions contained herein. Employee represents and warrants that Employee is
not restricted or prohibited, contractually or otherwise, from entering into and
performing this Agreement, and that Employee's execution and performance of this
Agreement is not a violation or breach of any agreement between Employee and any
other person or entity.
-3-
<PAGE>
8. GENERAL PROVISIONS.
------------------
8.1 Severable Provisions. The provisions of this Agreement are
--------------------
severable, and if any one or more provisions may be determined to be judicially
unenforceable, in whole or in part, the remaining provisions shall nevertheless
be binding and enforceable.
8.2 Assignment. Neither this Agreement nor any of the rights or
----------
obligations of Employee or the Company hereunder shall be assignable.
8.3 Attorneys' Fees. If any legal action arises under this Agreement
---------------
or by reason of any asserted breach of it, the prevailing party shall be
entitled to recover all costs and expenses, including reasonable attorneys'
fees, incurred in enforcing or attempting to enforce any of the terms, covenants
or conditions, including costs incurred prior to commencement of legal action,
and all costs and expenses, including reasonable attorneys' fees, incurred in
any appeal from an action brought to enforce any of the terms, covenants or
conditions.
8.4 Notices. Any notice to be given to Employer under the terms of
-------
this Agreement shall be addressed to Employer at the address of Employer's
principal place of business, and any notice to be given to Employee shall be
addressed to Employee at his home address last shown on the records of Employer,
or at such other address as either party may hereafter designate in writing to
the other. Any notice required or permitted under this Agreement shall be in
writing and shall be deemed effective: (i) upon receipt in the event of delivery
by hand, including delivery made by private delivery or overnight mail service
where either the recipient or delivery agent executes a written receipt or
confirmation of delivery; or (ii) 48 hours after deposited in the United States
mail, registered or certified mail, return receipt requested, postage prepaid.
8.5 Waiver. Either party's failure to enforce any provision or
------
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, or prevent that party thereafter from
enforcing each and every other provision of this Agreement.
8.6 Entire Agreement; Amendments. This Agreement supersedes any and
----------------------------
all other agreements, either oral or in writing, between the parties hereto with
respect to the employment of Employee by Employer and contains all of the
covenants and Agreements between the parties with respect to the employment of
Employee by Employer. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement or promise not contained
in this Agreement will be effective only if it is in writing signed by the party
to be charged.
-4-
<PAGE>
8.7 Titles and Headings. Titles and headings to sections of this
-------------------
Agreement are for the purpose of reference only and shall in no way limit,
define or otherwise affect the interpretation or construction of such
provisions.
8.8 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
"EMPLOYER"
VIRTUAL GAMING TECHNOLOGIES, INC.,
a Delaware corporation
By:/s/ Daniel B. Najor
------------------------------------------------
Daniel B. Najor, Chief Executive Officer
"EMPLOYEE"
/s/ Joseph R. Paravia
---------------------------------------------------
Joseph R. Paravia
-5-
<PAGE>
EXHIBIT 10.5
VIRTUAL GAMING TECHNOLOGIES, INC.
1997 STOCK OPTION PLAN
1. PURPOSE. The purpose of the Virtual Gaming Technologies, Inc. 1997
-------
Stock Option Plan (the "Plan") is to strengthen Virtual Gaming Technologies,
Inc., a Delaware corporation ("Corporation"), by providing to employees,
officers, directors, consultants and independent contractors of the Corporation
or any of its subsidiaries added incentive for high levels of performance and
unusual efforts to increase the earnings of the Corporation. The Plan seeks to
accomplish this purpose by enabling specified persons to purchase shares of the
common stock of the Corporation, $.00001 par value, thereby increasing their
proprietary interest in the Corporation's success and encouraging them to remain
in the employ or service of the Corporation.
2. CERTAIN DEFINITIONS. As used in this Plan, the following words and
-------------------
phrases shall have the respective meanings set forth below, unless the context
clearly indicates a contrary meaning:
2.1 "Board of Directors": The Board of Directors of the Corporation.
------------------
2.2 "Committee": The Committee which shall administer the Plan shall
---------
consist of the entire Board of Directors.
2.3 "Fair Market Value Per Share": The fair market value per share
---------------------------
of the Shares as determined by the Committee in good faith. The Committee is
authorized to make its determination as to the fair market value per share of
the Shares on the following basis: (i) if the Shares are traded only otherwise
than on a securities exchange and are not quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ"), but are quoted on the
bulletin board or in the "pink sheets" published by the National Daily Quotation
Bureau, either (a) the average of the mean between the average daily bid and
average daily asked prices of the Shares during the thirty (30) day period
preceding the date of grant of an Option, as quoted on the bulletin board or in
the "pink sheets" published by the National Daily Quotation Bureau, or (b) the
daily closing price of the Shares on the date of grant of an Option, as
published on the bulletin board or in such "pink sheets;" (ii) if the Shares are
traded on a securities exchange or on the NASDAQ, either (a) the average of the
daily closing prices of the Shares during the ten (10) trading days preceding
the date of grant of an Option, as quoted in the Wall Street Journal, or (b)
the daily closing price of the Shares on the date of grant of an Option, as
quoted in the Wall Street Journal; or (iii) if the Shares are traded only
otherwise than as described in (i) or (ii) above, or if the Shares are not
publicly traded, the value determined by the Committee in good faith based upon
the fair market value as determined by completely independent and well qualified
experts.
2.4 "Option": A stock option granted under the Plan.
------
<PAGE>
2.5 "Incentive Stock Option": An Option intended to qualify for
----------------------
treatment as an incentive stock option under Code Sections 421 and 422, and
designated as an Incentive Stock Option.
2.6 "Nonqualified Option": An Option not qualifying as an Incentive
-------------------
Stock Option.
2.7 "Optionee": The holder of an Option.
--------
2.8 "Option Agreement": The document setting forth the terms and
----------------
conditions of each Option.
2.9 "Shares": The shares of common stock $.00001 par value of the
------
Corporation.
2.10 "Code": The Internal Revenue Code of 1986, as amended.
----
2.11 "Subsidiary": Any corporation of which fifty percent (50%) or
----------
more of total combined voting power of all classes of stock of such corporation
is owned by the Corporation or another Subsidiary (as so defined).
3. ADMINISTRATION OF PLAN.
----------------------
3.1 In General. This Plan shall be administered by the Committee.
----------
Any action of the Committee with respect to administration of the Plan shall be
taken pursuant to (i) a majority vote at a meeting of the Committee (to be
documented by minutes), or (ii) the unanimous written consent of its members.
3.2 Authority. Subject to the express provisions of this Plan, the
---------
Committee shall have the authority to: (i) construe and interpret the Plan,
decide all questions and settle all controversies and disputes which may arise
in connection with the Plan and to define the terms used therein; (ii)
prescribe, amend and rescind rules and regulations relating to administration of
the Plan; (iii) determine the purchase price of the Shares covered by each
Option and the method of payment of such price, individuals to whom, and the
time or times at which, Options shall be granted and exercisable and the number
of Shares covered by each Option; (iv) determine the terms and provisions of
the respective Option Agreements (which need not be identical); (v) determine
the duration and purposes of leaves of absence which may be granted to
participants without constituting a termination of their employment for purposes
of the Plan; and (vi) make all other determinations necessary or advisable to
the administration of the Plan. Determinations of the Committee on matters
referred to in this Section 3 shall be conclusive and binding on all parties
howsoever concerned. With respect to Incentive Stock Options, the Committee
shall administer the Plan in compliance with the provisions of Code Section 422
as the same may hereafter be amended from time to time. No member of the
Committee shall be
-2-
<PAGE>
liable for any action or determination made in good faith with respect to the
Plan or any Option.
4. ELIGIBILITY AND PARTICIPATION.
-----------------------------
4.1 In General. Only officers, employees and directors who are also
----------
employees of the Corporation or any Subsidiary shall be eligible to receive
grants of Incentive Stock Options. Officers, employees and directors (whether
or not they are also employees) of the Corporation or any Subsidiary, as well as
consultants, independent contractors or other service providers of the
Corporation or any Subsidiary shall be eligible to receive grants of
Nonqualified Options. Within the foregoing limits, the Committee, from time to
time, shall determine and designate persons to whom Options may be granted.
All such designations shall be made in the absolute discretion of the Committee
and shall not require the approval of the stockholders. In determining (i) the
number of Shares to be covered by each Option, (ii) the purchase price for such
Shares and the method of payment of such price (subject to the other sections
hereof), (iii) the individuals of the eligible class to whom Options shall be
granted, (iv) the terms and provisions of the respective Option Agreements, and
(v) the times at which such Options shall be granted, the Committee shall take
into account such factors as it shall deem relevant in connection with
accomplishing the purpose of the Plan as set forth in Section 1. An individual
who has been granted an Option may be granted an additional Option or Options if
the Committee shall so determine. No Option shall be granted under the Plan
after May 2, 2007, but Options granted before such date may be exercisable after
such date.
4.2 Certain Limitations. In no event shall Incentive Stock Options
-------------------
be granted to an Optionee such that the sum of (i) aggregate fair market value
(determined at the time the Incentive Stock Options are granted) of the Shares
subject to all Options granted under the Plan which are exercisable for the
first time during the same calendar year, plus (ii) the aggregate fair market
value (determined at the time the options are granted) of all stock subject to
all other incentive stock options granted to such Optionee by the Corporation,
its parent and Subsidiaries which are exercisable for the first time during
such calendar year, exceeds One Hundred Thousand Dollars ($100,000). For
purposes of the immediately preceding sentence, fair market value shall be
determined as of the date of grant based on the Fair Market Value Per Share as
determined pursuant to Section 2.3.
5. AVAILABLE SHARES AND ADJUSTMENTS UPON CHANGES
---------------------------------------------
IN CAPITALIZATION.
-----------------
5.1 Shares. Subject to adjustment as provided in Section 5.2 below,
------
the total number of Shares to be subject to Options granted pursuant to this
Plan shall not exceed 500,000 Shares. Shares subject to the Plan may be either
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Corporation; the Committee shall be empowered to take any
appropriate action required to make Shares available for Options granted under
this Plan. If any Option is surrendered before exercise
-3-
<PAGE>
or lapses without exercise in full or for any other reason ceases to be
exercisable, the Shares reserved therefore shall continue to be available under
the Plan.
5.2 Adjustments. As used herein, the term "Adjustment Event" means
-----------
an event pursuant to which the outstanding Shares of the Corporation are
increased, decreased or changed into, or exchanged for a different number or
kind of shares or securities, without receipt of consideration by the
Corporation, through reorganization, merger, recapitalization, reclassification,
stock split, reverse stock split, stock dividend, stock consolidation or
otherwise. Upon the occurrence of an Adjustment Event, (i) appropriate and
proportionate adjustments shall be made to the number and kind of shares and
exercise price for the shares subject to the Options which may thereafter be
granted under this Plan, (ii) appropriate and proportionate adjustments shall be
made to the number and kind of and exercise price for the shares subject to the
then outstanding Options granted under this Plan, and (iii) appropriate
amendments to the Option Agreements shall be executed by the Corporation and the
Optionees if the Committee determines that such an amendment is necessary or
desirable to reflect such adjustments. If determined by the Committee to be
appropriate, in the event of an Adjustment Event which involves the substitution
of securities of a corporation other than the Corporation, the Committee shall
make arrangements for the assumptions by such other corporation of any Options
then or thereafter outstanding under the Plan. Notwithstanding the foregoing,
such adjustment in an outstanding Option shall be made without change in the
total exercise price applicable to the unexercised portion of the Option, but
with an appropriate adjustment to the number of shares, kind of shares and
exercise price for each share subject to the Option. The determination by the
Committee as to what adjustments, amendments or arrangements shall be made
pursuant to this Section 5.2, and the extent thereof, shall be final and
conclusive. No fractional Shares shall be issued under the Plan on account of
any such adjustment or arrangement.
6. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
6.1 Intended Treatment as Incentive Stock Options. Incentive Stock
---------------------------------------------
Options granted pursuant to this Plan are intended to be "incentive stock
options" to which Code Sections 421 and 422 apply, and the Plan shall be
construed and administered to implement that intent. If all or any part of an
Incentive Stock Option shall not be an "incentive stock option" subject to
Sections 421 or 422 of the Code, such Option shall nevertheless be valid and
carried into effect. All Options granted under this Plan shall be subject to
the terms and conditions set forth in this Section 6 (except as provided in
Section 5.2) and to such other terms and conditions as the Committee shall
determine to be appropriate to accomplish the purpose of the Plan as set forth
in Section 1.
6.2 Amount and Payment of Exercise Price.
------------------------------------
6.2.1 Exercise Price. The exercise price per
--------------
Share for each Share which the Optionee is entitled to purchase under a
Nonqualified Option shall be determined by the Committee. The exercise price
per Share for each Share which the
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<PAGE>
Optionee is entitled to purchase under an Incentive Stock Option shall be
determined by the Committee but shall not be less than the Fair Market Value
Per Share on the date of the grant of the Incentive Stock Option; provided,
however, that the exercise price shall not be less than one hundred ten percent
(110%) of the Fair Market Value Per Share on the date of the grant of the
Incentive Stock Option in the case of an individual then owning (within the
meaning of Code Section 425(d)) more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation or of its
parent or Subsidiaries.
6.2.2 Payment of Exercise Price. The consideration
-------------------------
to be paid for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Committee and may consist of
promissory notes, shares of the common stock of the Corporation or such other
consideration and method of payment for the Shares as may be permitted under
applicable state and federal laws.
6.3 Exercise of Options.
-------------------
6.3.1 Each Option granted under this Plan shall be
exercisable at such times and under such conditions as may be determined by the
Committee at the time of the grant of the Option and as shall be permissible
under the terms of the Plan; provided, however, in no event shall an Option be
exercisable after the expiration of ten (10) years from the date it is granted,
and in the case of an Optionee owning (within the meaning of Code Section
425(d)), at the time an Incentive Stock Option is granted, more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Corporation or of its parent or Subsidiaries, such Incentive Stock Option shall
not be exercisable later than five (5) years after the date of grant.
6.3.2 An Optionee may purchase less than the total number of
Shares for which the Option is exercisable, provided that a partial exercise of
an Option may not be for less than One Hundred (100) Shares and shall not
include any fractional shares.
6.4 Nontransferability of Options. All Options granted under this
-----------------------------
Plan shall be nontransferable, either voluntarily or by operation of law,
otherwise than by will or the laws of descent and distribution, and shall be
exercisable during the Optionee's lifetime only by such Optionee.
6.5 Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
Except as otherwise determined by the Committee in connection with the grant of
Nonqualified Options, the effect of termination of an Optionee's employment or
other relationship with the Corporation on such Optionee's rights to acquire
Shares pursuant to the Plan shall be as follows:
6.5.1 Termination for Other than Disability or Cause. If an
-----------------------------------------------
Optionee ceases to be employed by, or ceases to have a relationship with, the
Corporation for any reason other than for disability or cause, such Optionee's
Options shall expire not later than three (3) months thereafter. During such
three (3) month period and prior to the
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<PAGE>
expiration of the Option by its terms, the Optionee may exercise any Option
granted to him, but only to the extent such Options were exercisable on the date
of termination of his employment or relationship and except as so exercised,
such Options shall expire at the end of such three (3) month period unless such
Options by their terms expire before such date. The decision as to whether a
termination for a reason other than disability, cause or death has occurred
shall be made by the Committee, whose decision shall be final and conclusive,
except that employment shall not be considered terminated in the case of sick
leave or other bona fide leave of absence approved by the Corporation.
6.5.2 Disability. If an Optionee ceases to be employed by,
----------
or ceases to have a relationship with, the Corporation by reason of disability
(within the meaning of Code Section 22(e)(3)), such Optionee's Options shall
expire not later than one (1) year thereafter. During such one (1) year period
and prior to the expiration of the Option by its terms, the Optionee may
exercise any Option granted to him, but only to the extent such Options were
exercisable on the date the Optionee ceased to be employed by, or ceased to have
a relationship with, the Corporation by reason of disability and except as so
exercised, such Options shall expire at the end of such one (1) year period
unless such Options by their terms expire before such date. The decision as to
whether a termination by reason of disability has occurred shall be made by the
Committee, whose decision shall be final and conclusive.
6.5.3 Termination for Cause. If an Optionee's employment
---------------------
by, or relationship with, the Corporation is terminated for cause, such
Optionee's Option shall expire immediately; provided, however, the Committee
may, in its sole discretion, within thirty (30) days of such termination, waive
the expiration of the Option by giving written notice of such waiver to the
Optionee at such Optionee's last known address. In the event of such waiver, the
Optionee may exercise the Option only to such extent, for such time, and upon
such terms and conditions as if such Optionee had ceased to be employed by, or
ceased to have a relationship with, the Corporation upon the date of such
termination for a reason other than disability, cause, or death. Termination for
cause shall include termination for malfeasance or gross misfeasance in the
performance of duties or conviction of illegal activity in connection therewith
or any conduct detrimental to the interests of the Corporation. The
determination of the Committee with respect to whether a termination for cause
has occurred shall be final and conclusive.
6.6 Withholding of Taxes. As a condition to the exercise, in whole
--------------------
or in part, of any Options the Board of Directors may in its sole discretion
require the Optionee to pay, in addition to the purchase price of the Shares
covered by the Option an amount equal to any Federal, state or local taxes that
may be required to be withheld in connection with the exercise of such Option.
6.7 No Rights to Continued Employment or Relationship.
-------------------------------------------------
Nothing contained in this Plan or in any Option Agreement shall obligate the
Corporation to employ or have another relationship with any Optionee for any
period or interfere in any
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<PAGE>
way with the right of the Corporation to reduce such Optionee's compensation or
to terminate the employment of or relationship with any Optionee at any time.
6.8 Time of Granting Options. The time an Option is granted,
------------------------
sometimes referred to herein as the date of grant, shall be the day the
Corporation executes the Option Agreement; provided, however, that if
appropriate resolutions of the Committee indicate that an Option is to be
granted as of and on some prior or future date, the time such Option is granted
shall be such prior or future date.
6.9 Privileges of Stock Ownership. No Optionee shall be entitled to
-----------------------------
the privileges of stock ownership as to any Shares not actually issued and
delivered to such Optionee. No Shares shall be purchased upon the exercise of
any Option unless and until, in the opinion of the Corporation's counsel, any
then applicable requirements of any laws or governmental or regulatory agencies
having jurisdiction and of any exchanges upon which the stock of the Corporation
may be listed shall have been fully complied with.
6.10 Securities Laws Compliance. The Corporation will diligently
--------------------------
endeavor to comply with all applicable securities laws before any Options are
granted under the Plan and before any Shares are issued pursuant to Options.
Without limiting the generality of the foregoing, the Corporation may require
from the Optionee such investment representation or such agreement, if any, as
counsel for the Corporation may consider necessary or advisable in order to
comply with the Securities Act of 1933 as then in effect, and may require that
the Optionee agree that any sale of the Shares will be made only in such manner
as is permitted by the Committee. The Committee in its discretion may cause the
Shares underlying the Options to be registered under the Securities Act of 1933,
as amended, by the filing of a Form S-8 Registration Statement covering the
Options and Shares underlying such Options. Optionee shall take any action
reasonably requested by the Corporation in connection with registration or
qualification of the Shares under federal or state securities laws.
6.11 Option Agreement. Each Incentive Stock Option and Nonqualified
----------------
Option granted under this Plan shall be evidenced by the appropriate written
Stock Option Agreement ("Option Agreement") executed by the Corporation and the
Optionee in a form substantially the same as the appropriate form of Option
Agreement attached as Exhibit I or II hereto (and made a part hereof by this
reference) and shall contain each of the provisions and agreements specifically
required to be contained therein pursuant to this Section 6, and such other
terms and conditions as are deemed desirable by the Committee and are not
inconsistent with the purpose of the Plan as set forth in Section 1.
-7-
<PAGE>
7. PLAN AMENDMENT AND TERMINATION.
------------------------------
7.1 Authority of Committee. The Committee may at any time
----------------------
discontinue granting Options under the Plan or otherwise suspend, amend or
terminate the Plan and may, with the consent of an Optionee, make such
modification of the terms and conditions of such Optionee's Option as it shall
deem advisable; provided that, except as permitted under the provisions of
Section 5.2, the Committee shall have no authority to make any amendment or
modification to this Plan or any outstanding Option thereunder which would: (i)
increase the maximum number of shares which may be purchased pursuant to Options
granted under the Plan, either in the aggregate or by an Optionee (except
pursuant to Section 5.2); (ii) change the designation of the class of the
employees eligible to receive Incentive Stock Options; (iii) extend the term of
the Plan or the maximum Option period thereunder; (iv) decrease the minimum
Incentive Stock Option price or permit reductions of the price at which shares
may be purchased for Incentive Stock Options granted under the Plan; or (v)
cause Incentive Stock Options issued under the Plan to fail to meet the
requirements of incentive stock options under Code Section 422. An amendment or
modification made pursuant to the provisions of this Section 7 shall be deemed
adopted as of the date of the action of the Committee effecting such amendment
or modification and shall be effective immediately, unless otherwise provided
therein, subject to approval thereof (1) within twelve (12) months before or
after the effective date by stockholders of the Corporation holding not less
than a majority vote of the voting power of the Corporation voting in person or
by proxy at a duly held stockholders meeting when required to maintain or
satisfy the requirements of Code Section 422 with respect to Incentive Stock
Options, and (2) by any appropriate governmental agency. No Option may be
granted during any suspension or after termination of the Plan.
7.2 Ten (10) Year Maximum Term. Unless previously terminated by the
--------------------------
Committee, this Plan shall terminate on May 2, 2007, and no Options shall be
granted under the Plan thereafter.
7.3 Effect on Outstanding Options. Amendment, suspension or
-----------------------------
termination of this Plan shall not, without the consent of the Optionee, alter
or impair any rights or obligations under any Option theretofore granted.
8. EFFECTIVE DATE OF PLAN. This Plan shall be effective as of May 2,
----------------------
1997, the date the Plan was adopted by the Board of Directors, subject to the
approval of the Plan by the affirmative vote of a majority of the issued and
outstanding Shares of common stock of the Corporation represented and voting at
a duly held meeting at which a quorum is present within twelve (12) months
thereafter. The Committee shall be authorized and empowered to make grants of
Options pursuant to this Plan prior to such approval of this Plan by the
stockholders; provided, however, in such event the Option grants shall be made
subject to the approval of both this Plan and such Option grants by the
stockholders in accordance with the provisions of this Section 8.
-8-
<PAGE>
9. MISCELLANEOUS PROVISIONS.
------------------------
9.1 Exculpation and Indemnification. The Corporation shall indemnify
-------------------------------
and hold harmless the Committee from and against any and all liabilities, costs
and expenses incurred by such persons as a result of any act, or omission to
act, in connection with the performance of such persons' duties,
responsibilities and obligations under the Plan, other than such liabilities,
costs and expenses as may result from the gross negligence, bad faith, willful
conduct and/or criminal acts of such persons.
9.2 Governing Law. The Plan shall be governed and construed in
-------------
accordance with the laws of the State of California and the Code.
9.3 Compliance with Applicable Laws. The inability of the
-------------------------------
Corporation to obtain from any regulatory body having jurisdiction authority
deemed by the Corporation's counsel to be necessary to the lawful issuance and
sale of any Shares upon the exercise of an Option shall relieve the Corporation
of any liability in respect of the non-issuance or sale of such Shares as to
which such requisite authority shall not have been obtained.
-9-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------
The Registrant has the following subsidiaries: Emerald Riviera Ltd., an
Irish corporation, Virtual Gaming Technologies (Antigua), Ltd., an Antiguan
corporation, and Internet Gaming Technologies, Inc., a Nevada Corporation.
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