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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999.
[_] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _____________ to ______________
COMMISSION FILE NUMBER 000-29800
Virtgame.com Corp.
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(Exact name of registrant as specified 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)
Registrant's telephone number, including area code 858-259-5015
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Securities registered pursuant to section 12(g) of the Act:
(Title of Class)
Common Shares
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
Virtual Gaming Technologies, Inc.'s revenues for the most recent fiscal year
were $ 465,327.
The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant, based upon the closing price of the Common Stock
on the OTC Bulletin Board on March 24, 2000 was approximately $ 18,812,500. The
number of shares outstanding of the registrant's Common Stock, as of March 24,
2000 was 10,750,293.
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant Form 10-KSB Reference Location
None N/A
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Virtgam.com Corp.
Table of contents for Form 10K-SB
Year Ended December 31, 1999
<TABLE>
<CAPTION>
PART I
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<S> <C>
Item 1. Business
Business Developments 3
Business of Company 4
Products and Services 5
Customers 6
New Industry and Competition 6
Regulation 7
Employees 7
Research and Development 7
Proprietary Technology 7
Marketing and Sales 8
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
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Item 5. Market for Common Equity and Related Stockholders Matters 8
Item 6. Management's Discussion and Analysis or Plan of Operation 9
Item 7. Audited Financial Statements 11
Item 8. Changes In and Disagreement With Accountants on Accounting and Financial Disclosure 12
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons 12
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 17
</TABLE>
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PART I
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This Report contains forms of 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 Report, the words "believe,"
"expect," "anticipate," "estimate" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions, including without limitations, material
risk factors such as inadequate working capital, auditors qualification as to
going concern, recent commencement of operations, lack of market acceptance to
date for the Company's products and services, nominal revenues to date,
continuing losses from operations, future growth of revenue and threat of
regulation of company's business. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results will vary materially from those anticipated, estimated, or
projected and the variations may be material. 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 1. Business
Business Developments
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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 wagering service. 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 its
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. In August 1999, the Company changed
its name to Virtgame.com Corp.
Pursuant to a Securities Purchase Agreement dated September 5, 1996, as
amended, eLOT, Inc. ("eLOT") agreed to purchase 233,333 shares of Common Stock
at $3.00 per share. In addition, the Company granted eLOT a common stock
purchase warrant entitling eLOT 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. eLOT was formerly known as eLottery and prior to that
as Unistar Entertainment, Inc.
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.
Between January 1998 and December 1998, the Company conducted a private
placement of 1,400,000 shares of
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Common Stock, at a price of $3.00 per share, pursuant to Rule 506 under the 1933
Act. In that offering, the Company sold 1,387,238 shares of Common Stock for the
gross proceeds of $4,161,703. Proceeds from the sale of the shares were applied
towards the development and implementation of the Company's Internet gaming
operations and working capital.
Between February 1999 and June 1999, the Company conducted a private
placement of 700,000 shares of Common Stock at an offering price of $3.00 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 181,358 shares of Common Stock for the gross proceeds of
$544,074. Proceeds from the sale of the shares were applied towards the
development and implementation of the Company's Internet gaming operations and
working capital.
Between August 1999 and January 2000, the Company conducted a private
placement of 2,100,000 shares of Common Stock at an offering price of $1.50 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 1,301,600 shares of Common Stock for the gross proceeds of
$1,952,400. 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 February 2000, the Company started a private placement of 1,000,000
shares of common Stock, at a price of $1.50 per share. At the time of this 10-
KSB report, 213,333 shares have been sold for the gross proceeds of $320,000.
The placement is being conducted pursuant to rule 506 under the 1933 Act.
On December 21, 1999, the Company acquired all of the issued and
outstanding common shares of Primeline Technologies, Inc. in consideration of
Virtgame's issuance of 447,208 shares of its common stock to Primeline
stockholders.
In February 2000 the company signed a letter of intent to merge into eLOT,
Inc. The merger will be conducted as a tax-free reorganization in pursuant to
section 368 of the Internal Revenue Code. The letter of intent calls for the
close, sale or spin off of the Company's existing gaming operations in Antigua.
The merger will be effected by eLOT issuing one share of its common stock in
exchange for every three shares of common stock of VGTI issued and outstanding
on the closing date. Micahel Yacenda, a director of Virtgame.com is president of
eLottery, Inc. a subsidiary of eLOT, Inc.
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, Virtual Gaming
Technologies Argentina, S.A., an Argentinean 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.
Business of Company
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The Company has established an Internet web site at which it offers
interactive gaming service and a virtual casino under the service name
"Constellation." The web site is located on the Internet at www.virtcasino.com
and is accessible by the general public, however; only established subscribers
will be permitted to play the gaming opportunities for money. The web site is
accessible by a minimum hardware configuration consisting of a 486 personal
computer with Windows 95 or greater, with 16 MB RAM, 32 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 are able to subscribe
over the Internet by completing an application appearing at the web site. Part
of the application process requires that the subscriber opens an account, and
make a minimum deposit with the Company. The Company accepts subscriptions only
from persons over the age of 21 known or believed to reside in jurisdictions
that do not prohibit Internet gaming. Subscriptions will not be accepted from
persons believed to be citizens or residents of the United States.
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The Company has internally developed proprietary software applications,
based on the Java programming language, which 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, hardware and
banking relations located in St. Johns, Antigua, West Indies.
From the inception of operations in September 1997 through December 31,
1999 the Company has generated $731,607 of gross revenue from gaming operations.
At the time of this 10K-SB Report, the Company had accepted 42,871 subscriptions
for its Internet gaming operations and has had 1,381 active players. As of the
same date, customer cash deposits which are used by customers for wagering, from
inception of gaming operations totaled approximately $1,307,000.
The Company has signed a letter of intent with the province of Chaco,
Argentina to provide technology for internet lotteries in that province, and the
Company intends to pursue similar arrangements with other provinces in South
America under its web site www.OfficialGames.com or www.juegosoficiales.com.
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Products and Services
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The Company has established a web-site, 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 web-site, located at www.virtsports.com, at which it offers
a pari-mutuel sports wagering service under the service name International
Sports Market. The web-sites are accessible by the general public, however, only
established customers will be permitted to play the gaming opportunities for
money.
The Company's web-sites 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 web-site. Part of the
application process requires that the subscriber open an account and make a
minimum deposit with the Company of $20.
The web-sites are controlled by the Company and are designed to invite the
customer to sign up and apply for casino and sports-wagering 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 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 web-sites 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 web-site and which have similar odds and house rules as to
those offered by the major Las Vegas casinos.
Customer's conduct deposits to their gaming accounts by way of credit card
or wire payment. In August 1998, the Company began accepting Visa and MasterCard
transactions over a secure platform through Barclays Bank PLC. The
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Company's agreement with Barclays enables the Company to process credit cards
for the customers of its Constellation casino service.
The Company internally developed the Constellation casino and tested it at
beta test sites for three months prior to the commencement of commercial
operations in September 1997. The gaming opportunities offered at the
Constellation web-site 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. The customers use the Windows format of
commands to carry out gaming activities. The web-site offers audio features,
including the sound of shuffling cards, video poker machine payouts and general
casino background sounds. The Constellation web-site is presently written in
English, Spanish, Japanese, Chinese, Korean and Portuguese.
On April 1, 1998, the Company commenced offering a pari-mutuel sports
wagering service at its International Sports Market web-site. The Company offers
at this web-site the opportunity to bet on a variety of sporting events played
in the United States, Central and South America, Europe and Asia. The sports
wagering 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.
On December 16, 1999, the Company announced the creation of a state
Internet lottery site for Argentina. OfficialGames.com (JuegosOficiales.com)
will serve as the official gaming portal for state of Chaco in Argentina. The
soft launch of the site was conducted in January 2000 with instant lottery and
instant bingo games. The Company intends to expand its Internet lottery sites to
additional states in Argentina. Non-Internet lotteries are currently a $2.8
billion industry in Argentina.
On December 21, 1999, the Company acquired Primeline Technologies, Inc., a
producer of sports wagering software that already has been approved by the
Nevada Gaming Control Board. The Company bought Primeline Technologies in order
to improve Primeline's over-the-counter software work on the Internet and to
create a seamless system for online and on-site sportsbetting. The Company
intends to make its on-line betting service available both as an Internet
version as well as an Intranet version (i.e. via a closed loop system within a
state).
On January 25, 2000 the Company completed an agreement to provide Coast
Resorts with a Nevada Intranet Sports Book System. The system will be presented
to the Nevada Gaming Control Board in March 2000 for formal review and it is
expected to be approved and operational by Coast Resort in second quarter of
year 2000.
Customers
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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
New Industry and Competition
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The Company offers an interactive gaming service and virtual casino on the
Internet. Although the gaming industry is well established and has recently
experienced significant growth and profitability, gaming on the Internet is a
recent development and an unproven segment of the gaming industry and the
Company expects that there will be intense competition in Internet gaming. The
barrier to entry in Internet markets is generally low. In addition, several
providers are offering wagering on sporting events and lottery tickets from
international lotteries.
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Regulation
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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 10-KSB Report, 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 and 1999, legislation was introduced to the United States
Senate and House of Representatives which, if enacted, would have effectively
amended 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.
No action was taken on the bills prior to the end of the legislative session,
however there can be no assurance that similar legislation will not be
introduced in future legislative sessions. (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.
Employees
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As of the date of this 10-KSB Report, the Company employs 24 people on a
full and part time basis, 3 of which are based in Antigua.
Research and Development
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The Company spent approximately $706,000 in research and development in
1999 all of which were written off during the year. 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.
Proprietary Technology
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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
has also developed a web-site called Virtpartners, at the site address
www.virtpartners.com. The site enables the Company to establish strategic
- --------------------
alliances and joint ventures with agents around the world. The agent or the
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marketing partner can track, on the Internet and on a real time basis, the share
of his or her customer's gaming activity and the corresponding commission earned
in the win of the casino and the sports wagering system. The Virtpartners
software assigns agent codes automatically, identifies the site or e-mail
campaign the customer is associated with, provides full reporting capability for
the agent and has multi-level functionality to permit regional agents or joint
venture partners to receive an override commission on other agents they recruit.
The Company has also developed a Web based String Translator technology
that allows any language to be added to the casino game, sports-wagering, web-
sites, and administrative tools and customer service system in a fast and
seamless manner. This translation technology can be applied to any HTML web-
site.
Marketing and Sales
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The Company's primarily marketing strategy is to sign up agents as part of
a marketing partnership program under Virtpartners. Recently several such
partnership agreements were signed and some of the programs have started
producing revenues in 1999. These alliances include a variety of sources ranging
from individuals to established international companies in different businesses
such as web sites, search engines, for fun casinos as well as Internet service
providers, hotel room pay per view and interactive service providers.
Virtpartners, with site address www.virtpartners.com, enables the Company
--------------------
to leverage its marketing influence worldwide through a network of partner Web-
sites, individual agents and strategic alliances and joint ventures. The agent
tracking system enables joint venture partners, referring web-sites,
professional gaming agents, individual full time and part time agents to bring
in customers; identifies which site or e-mail campaign refers a prospect. The
system then assigns the agents code to the customer indefinitely; tracks the
customer net win and allows the agent to see real time reports of the customer's
gaming activity and their corresponding commission earned. The system also
provides full reporting capability for the web-site agents including usernames
of customers, net win by game, net commission per customer, time period,
language and country.
Item 2. Description of Property
The Company's executive offices are located in San Diego, California and
consist of approximately 4,000 square feet for a monthly rent of approximately
$10,600. The Company's Antigua subsidiary is located in Antigua where the
Company's servers and games are operated and managed.
Item 3. Legal Proceedings
The Company is not a party in any litigation and has no knowledge of any
pending legal proceedings in any court or agency of government, or government
authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1999 to a
vote of security holders, through the solicitation of proxies, or otherwise.
PART II
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Item 5. Market for Common Equity and Related Stockholders Matters
The Company's Common Stock is listed on the Over the Counter Bulletin Board
under the symbol "VGTI." The following table sets forth the high and low closing
prices of the Company's Common Stock for each calendar
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quarter since commencement of trading. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
High Low
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Mar 31, 1998 5.63 2.81
June 30, 1998 11.25 3.75
September 30, 1998 11.25 2.88
December 31, 1998 5.00 3.38
March 31, 1998 4.43 3.38
June 30, 1999 4.87 2.70
September 30, 1999 3.72 1.75
December 31, 1999 4.12 1.50
On December 31, 1999, the closing price for the Company's Common Stock was
$ 1.56 per share. As of that date, the Company had 168 stockholders of record
and approximately 797 beneficial holders of stock.
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business; therefore, the
Company does not anticipate paying cash dividends in the foreseeable future
During the year the Company sold unregistered shares of its Common Stock in
the following transactions:
A. In April 1999, the Company issued to one of its officers and one of its
employees options to purchase an aggregate of 185,000 shares of Common Stock
at an exercise price of $3.25 per share. Options to purchase 85,000 shares of
Common Stock were issued to an officer of the Company, of which options to
purchase 45,000 shares of Common Stock were immediately exercisable upon
grant, options to purchase 40,000 shares of Common Stock vest and first
become exercisable on April 29, 2000. All options issued to the employees
were immediately exercisable upon grant. All of the foregoing options expire
on April 29, 2002. There was no underwriter involved in the issuances. The
issuances were conducted pursuant to Section 4(2) of the 1933 Act.
B. In July 1999, the Company issued to two of its officers and one of its
employees options to purchase an aggregate of 1,100,000 shares of Common
Stock at exercise price ranging between $2.16 and $1.62 per share. Options to
purchase 800,000 shares of Common Stock were issued to two officers of the
Company, of which options to purchase 650,000 shares of Common Stock were
immediately exercisable upon grant, options to purchase 150,000 shares of
Common Stock vest and first become exercisable on July 26, 2000. Option to
purchase 100,000 Common Stock issued to the employee were immediately
exercisable upon grant, and options to purchase 100,000 shares vests and
first becomes exercisable on July 26, 2000 and the remainder 100,000 options
first become exercisable on July 26, 2001. Options to purchase 900,000 Common
Stock expire on July 25, 2004, options to purchase 100,000 Common Stock will
expire on July 25, 2005 and the remainder 100,000 expires on July 25, 2006.
There was no underwriter involved in the issuances. The issuances were
conducted pursuant to Section 4(2) of the 1933 Act.
C. In September 1999, the Company issued to two of its officers options to
purchase an aggregate of 690,000 shares of Common Stock at exercise price
ranging between $0.10 and $3.00 per share. All of these options were
immediately exercisable upon grant. There was no underwriter involved in the
issuances. Options to purchase 600,000 Common Stock expire on September 1,
2002; options to purchase 90,000 Common Stock will expire on September 1,
2004. The issuances were conducted pursuant to Section 4(2) of the 1933 Act.
D. In December 1999, the Company issued to sixteen of its employees options to
purchase an aggregate of 116,500, shares of Common Stock at exercise price of
$2.00 per share. Options to purchase 65,000 Common Stock were immediately
exercisable upon grant and 45,5000 vest and first become exercisable on
December 16, 2000, options for 3,000 first becomes exercisable on December
16, 2001 and 3,000 on December 16, 2002. Options to purchase 110,5000 Common
stock expire on December 14, 2003, options to purchase 3,000 Common Stock
expire on December 14, 2004 and options to purchase 3,000 Common Stock
expires on December 14,2005. There was no underwriter involved in the
issuances. The issuances were conducted pursuant to Section 4(2) of the 1933
Act.
E. In February 1999, the Company issued to four investment bankers warrants to
purchase an aggregate of 100,000 shares of Common Stock at exercise price of
$5.00 per share. All the foregoing options are immediate exercisable and
expire on February
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20, 2004. There was no underwriter involved in the issuances. The issuances
were conducted pursuant to Section 4(2) of the 1933 Act.
F. Between January 1999 and June 1999, the Company conducted a private
placement of 700,000 shares of Common Stock at an offering price of $3.00
per share, pursuant to Rule 506 under the 1933 Act. In that offering, the
Company sold a total of 181,359 shares of Common Stock for the gross
proceeds of $544,080. Proceeds from the sale of the shares were applied
towards the development and implementation of the Company's Internet gaming
operations and working capital.
G. Between August 1999 and December 1999, the Company conducted a private
placement of 2,100,000 shares of Common Stock at an offering price of $1.50
per share, pursuant to Rule 506 under the 1933 Act. In that offering, the
Company sold a total of 1,271,600 shares of Common Stock for the gross
proceeds of $1,907,400. Proceeds from the sale of the shares were applied
towards the development and implementation of the Company's Internet gaming
operations and working capital.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company has derived all its revenues from Internet casino-style
gaming, including baccarat, blackjack and video poker, and a pari-mutuel sports
wagering service. The Company's internally developed proprietary software
applications allow for interactive gaming, including simulated casino motion and
sound, on a real-time basis. The Company offers its gaming operations in several
languages 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.
Between January 1999 and June 1999, the Company conducted a private
placement of 700,000 shares of Common Stock at an offering price of $3.00 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 181,359 shares of Common Stock for the gross proceeds of
$544,080. Proceeds from the sale of the shares were applied towards the
development and implementation of the Company's Internet gaming operations and
working capital.
Between August 1999 and January 2000, the Company conducted a private
placement of 2,100,000 shares of Common Stock at an offering price of $1.50 per
share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company
sold a total of 1,301,600 shares of Common Stock for the gross proceeds of
$1,952,400. 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 February 2000, the Company started a private placement of 1,000,000
shares of common Stock, at a price of $1.50 per share. At the time of this
10-KSB report, 213,333 shares have been sold for the gross proceeds of $320,000.
The placement is being conducted pursuant to rule 506 under the 1933 Act.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
The Company's net revenues increased from $221,192 to $384,673 for the year
ended December 31, 1999 compared to the prior year period. The growth in
revenues was caused by increase in the Company's higher marketing and
advertising campaigns causing higher number of active players and gaming
operations. Operating expenses decreased by 19.3% for the year ended December
31, 1999 to $3,402,652 compared to $4,214,722 in the prior year period.
Interest income decreased to $11,454 for the year ended December 31,
1999 compared to $26,217 for the prior year period. The decrease was due to the
Company's lower cash position in 1999. Interest expense increased to
10
<PAGE>
$35,635 for the year ended December 31, 1999 compared to $20,360 for the prior
year period, due to higher note payable balances.
Liquidity and Capital Resources
The Company had working capital of $206,003 at December 31, 1999,
however since that date, the Company's working capital position has been further
depleted through losses from operations. In order to obtain the necessary
working capital to fund continued operations; the Company has undertaken a new
private placement offering. The private placement is for 1,000,000 shares at
$1.50 per share with sales commission of approximately 10% to fund the full
scale roll out of its Internet gambling operations and to fund the continuing
losses from operations as the Company endeavors to build revenues and reach
profitable operations. The Shares are being offered on a straight best effort
basis by the Company, which means that there is no minimum offering amount and
no escrow of proceeds. The Company believes it needs at least the net proceeds
of $1,350,000 from the sale of the 1,000,000 Shares of the Private Placement
before it starts generating cash flow from its operations. If the Company is
unable to raise this capital, it will endeavor to raise the additional required
funds through alternative sources, of which there can be no assurance. Failure
to obtain the required funds from any source would severely impact the Company's
financial condition and would jeopardize the Company's ability to continue as a
going concern. The Company's Independent Auditor's report includes an emphasis
of matter as to the Company's ability to continue as a going concern.
Inflation
The Company believes that inflation does not have a material effect on
its business.
Impact of Year 2000
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.
As of the date of this memorandum, nothing has come to the Company's
attention that would indicate that any of its computer software applications, or
those of its information suppliers and software licensers, are unable to operate
accurately after January 1, 2000. However, the Company has been advised that
the consequences of a Year 2000 failure may not become apparent for several
weeks following January 1, 2000. The Company previously has appointed a Year
2000 Committee to assess the scope of our risks in this regard and adopt
appropriate measures to bring its applications into compliance. To date, the
costs associated with this project have been insignificant. However, no
definitive assurance can be given that all of the Company's systems are Year
2000 compliant or that the impact of the Company's failure to achieve
substantial Year 2000 compliance will not have a material adverse effect on its
business, financial condition or results of operations.
Item 7. Financial Statements
The Independent Auditors' Reports for the years ended December 31,
1999 and 1998 are included in this report commencing on page F-1.
11
<PAGE>
Item 8. Changes In and Disagreement With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons
<TABLE>
<CAPTION>
Name Age Position
- ----- --- --------
<S> <C> <C>
Leo I. George 63 Chairman of the Board
Joseph R. Paravia 48 President, Chief Executive Officer and Director
John Van Rhyn 63 Vice President of Gaming Operations
Bruce Merati 42 Chief Financial Officer
Michael W. Yacenda 48 Director
Dick L. Rottman 62 Director
Kim A. Nathanson 43 Director
Scott A. Walker 41 Director
</TABLE>
Mr. George has served as Chairman of the Board of the Company since
September 1999. Since 1995, Mr. George has served as Vice-President for
Regulatory Affairs of WinStar Communications, a provider of wireless
communications services. From 1992 to 1995, Mr. George served as Chairman of
Avant-Garde Telecommunications Corp., a provider of nationwide wireless bypass
services to long distance carriers. From 1989 to 1992, Mr. George served as the
general counsel to the Goeken Group, the founder of MCI. During that time, Mr.
George and John Goeken collaborated to launch Airfone, the first commercial
telephone service with U.S. airline carriers.
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. 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 a Chartered Accountant in
England & Wales and spent seven years as auditor with the London office of
PricewaterhouseCoopers.
Mr. Yacenda has served as a director of the Company since March 1997.
Mr. Yacenda has served as President of eLottery, a subsidiary of eLOT since 1996
and as Executive Vice President of eLOT, Inc. since 1990.
12
<PAGE>
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.
Ms. Nathanson has served as a director of the Company since October
1998. Ms. Nathanson currently serves as the Senior Vice President of Product
Management at ENTEX Information Services. From 1996 to 1998, Ms. Nathanson
served as the Vice President of Paragon Initiatives at ENTEX, a provider of PC
networks and support services. From 1990 to 1996, she served as the Chairman and
Chief Operating Officer of FCP Technologies, Inc., a systems integrator and
reseller of computers, software and networking products.
Mr. Walker has served as a director of the Company since October 1998.
From January 1996 to the present, Mr. Walker has served as a partner and as
General Counsel of MCOM Management Corp. From June 1995 to the present, Mr.
Walker served as a principal of Walker Worldwide Ltd., an international trading
company. From 1986 to 1995, Mr. Walker practiced law with the firm of Walker &
Corsa.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires each director and executive officer of the Company, and
each person who owns more than ten percent (10%) of a registered class of the
Company's equity securities to file by specific dates with the Securities and
Exchange Commission (the "SEC") reports of ownership and reports of change of
ownership of equity securities of the Company. Officers, directors, and
10%stockholders are required by the SEC to furnish the Company with copies of
all Section 16(a) forms they file. The Company is required to state in this
report any failure of its directors and executive officers to file by the
relevant due date any of these reports during the Company's fiscal year. To the
Company's knowledge, all Section 16(a) filing requirements were complied with
during the fiscal year ended December 31, 1999.
13
<PAGE>
Item 10. 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------- -------------------------------
Restricted Common Shares
Stock Underlying
Other Annual Awards Options Granted All Other
Name and Position Year Salary Bonus Compensation ($) (# Shares) Compensation
- ---------------------------- ---- -------- ------ -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph R. Paravia, President 1999 $130,577 -0- -0- -0- 500,000 -0-
and CEO(1) 1998 $133,213 -0- -0- -0- -0- -0-
1997 $111,076 -0- -0- $50,000 -0- -0-
John Van Rhyn, 1999 $ 43,750 -0- -0- -0- -0- -0-
Vice President - Gaming 1998 $ 46,331 -0- -0- -0- 45,000 -0-
Operations(2) 1997 $ 39,846 -0- -0- -0- 45,000 -0-
Bruce Merati, 1999 $ 90,000 -0- -0- -0- 385,000 -0-
Chief Financial Officer(3) 1998 $ 31,875 -0- -0- -0- 40,000 -0-
1997 -0- -0- -0- -0- -0- -0-
</TABLE>
_______________
(1) 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. Mr. Paravia's salary was
reinstated to $120,000 per annum effective April 25, 1998 and was increased
to $150,000 per annum effective August 1, 1999.
(2) 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, and was reinstated to $70,000
per annum effective October 9, 1998. Effective February 15, 2000, Mr. Van
Rhyn's salary was reduced to $5,200 per year.
(3) Commencing July 27, 1998, the Company began paying Mr. Merati a salary at
the rate of $85,000 per annum Effective August 1, 1999, Mr. Merati's
salary was increased to $100,000 per annum.
14
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs
Underlying Options/SARs Granted to Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
- -------------------------- -------------------------- --------------------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Joseph Paravia, President 500,000 25.3% $1.625 July 25, 2004
Bruce Merati - Chief 85,000 4.3% $ 3.25 April 29, 2002
Financial Officer 300,000 15.2% $1.625 July 25, 2004
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options (SARs Options (SARs
at FY-End (#) at FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Received Unexercisable Unexercisable(1)
- ------------------- ----------------- ---------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Joseph R. Paravia, 980,000/0 $628,800/$0
President & CEO
John Van Rhyn
Vice President - Gaming
Operations 90,000/0 $ 0/$0
Bruce Merati - Chief
Financial Officer 235,000/190,000 $ 0/$0
</TABLE>
(1) Calculated based upon a last reported sale price of $1.56 per share of
Common Stock, as reported on the OTC Bulletin Board on December 31, 1999.
Employment Agreements:
(a) In September 1999, the Company entered into an employment
agreement with its Chairman, Leo I. George, pursuant to which Mr. George
received three-year options to purchase up to 100,000 shares of Common Stock at
an exercise price of $0.10 per share. These options contain a buy-back provision
in favor of the Company which enables the Company to buy-back these options and
the shares underlying the options at a price of $3.50 per share. In addition,
Mr. George received three-year options to purchase up to 700,000 shares of
Common Stock, of which options to purchase 500,000 shares are fully vested and
immediately exercisable and options to purchase 200,000 shares vest and first
become exercisable on September 2, 2000. The exercise price for the 500,000
fully vested options is $2.44 per share. The exercise price for the 200,000
options that vest on September 2, 2000 shall be equal to the fair market value
of the Common Stock on that date. Finally, in the event the Company obtains debt
or equity financing in excess of $10,000,000, Mr. George shall be entitled to
three-year options to purchase up to 200,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant.
(b) In November 1999, the Company entered into a two year employment
agreement with the Chief Executive Officer of the Company, Joseph R. Paravia.
The agreement provided for a base salary of $150,000, and an annual cash bonus
equal to 2% of the Company's annual gross revenues in excess of $1 million. The
agreement also provides for a cash bonus of $100,000 upon the anticipated public
offering of the Company and a payment of $250,000 upon the sale or merger of the
Company.
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.
15
<PAGE>
Item 11. 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 the date of March 24,
1999 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
- ------------------------------------------------------- --------------------------------------------- -----------------
<S> <C> <C>
Leo I. George(2)(3)(4) 2,982,000 26.3%
Daniel B. Najor (2)(4) 3,462,500 32.2%
Joseph R. Paravia (2)(5) 1,180,000 9.9%
John Van Rhyn (2)(6) 104,000 (7)
Bruce Merati (2)(8) 235,000 2.1%
Michael Yacenda (1)(9) 90,000 --
Dick L. Rottman (2)(10) 73,665 (7)
Kim A. Nathanson (2)(11) 36,667 (7)
Scott A. Walker (2)(12) 160,429 1.4%
All officers and directors 4,861,761 38.0%
as a group
</TABLE>
(1) President of eLottery, Inc. a subsidiary of eLOT, Inc.
(2) Address is 12625 High Bluff Drive, Suite 205A, San Diego, California
92130.
(3) Includes options granted to Mr. George to purchase 500,000 shares of
Common Stock at an exercise price of $2.46 per share and options to
purchase 100,000 shares of Common Stock at an exercise price of $0.10
per share.
(4) Includes 2,382,000 shares of Common Stock owned by Daniel Najor for
which Mr. Najor has granted Mr. George a limited irrevocable proxy to
vote these shares in connection with certain matters. See "Certain
Relationships and Related Transactions."
(5) Includes options granted to Mr. Paravia to purchase 480,000 shares of
Common Stock at an exercise price of $.25 per share and options to
purchase 500,000 shares of Common Stock at an exercise price of $1.625
per share.
(6) Includes options granted to Mr. Van Rhyn to purchase 45,000 shares at
$2.00 per share and options to purchase 45,000 shares at $2.875 per
share.
(7) Less than one percent.
(8) Represents options granted to Mr. Merati to purchase 40,000 shares of
Common Stock at an exercise price of $2.875 per share, options to
purchase 45,000 shares of Common Stock at an exercise price of $3.25
per share and options to purchase 150,000 shares of Common Stock at an
exercise price of $1.625 per share. Does not include options to
purchase 40,000 shares of Common Stock at an exercise price of $3.25
per share and options to purchase 150,000 shares of Common Stock at an
exercise price of $1.625 per share.
(9) Includes options to purchase 90,000 shares of Common Stock at an
exercise price of $3.00 per share. Does not include securities of the
Company held by eLOTtery Inc., of which Mr. Yacenda is President. See
Item 1: "Description of Business - Business Development."
(10) Includes options granted to Mr. Rottman to purchase 20,000 shares of
Common Stock at an exercise price of $4.50 per share.
(11) Includes options granted to Ms. Nathanson to purchase 20,000 shares of
common stock at an exercise price of $4.50 per share.
(12) Includes 121,196 shares of common stock owned by MCOM Management
Corp., with which Mr. Walker is affiliated. Also includes options
granted to Mr. Walker to purchase 20,000 shares of common stock at an
exercise price of $4.50 per share.
Item 12. Certain Relationships and Related Transactions
In September 1999, the Company, Leo I. George and Daniel B. Najor
entered into a Stock Restriction Agreement pursuant to which Mr. Najor agreed to
a restriction on 2,382,000 of his shares ("Restricted Shares") of Common Stock.
Pursuant to that agreement, Mr. Najor is prohibited from selling, pledging or
otherwise transferring or disposing the
16
<PAGE>
Restricted Shares without the consent of the Company. In addition, Mr. Najor
granted Mr. George a limited irrevocable proxy that enables Mr. George to vote
the Restricted Shares on any matter submitted to the stockholders for their
approval either at a meeting duly convened or by a written consent. However,
Mr. Najor retains the right to vote the Restricted Shares in connection with a
request for stockholder approval on any matter concerning the merger or
dissolution of the Company or the sale of substantially all of its assets. The
Stock Restriction Agreement and the proxy terminate on the earlier of: (i) the
termination of George's position as Chairman of the Company, (ii) the sale by
Mr. George of any of shares of Common Stock beneficially owned by him, (iii) the
sale of the Common Stock in a registered public offering, or (iv) September 2,
2001.
Item 13. Exhibits and Reports on Form 8-K
a) Exhibits - The following exhibits were filed on December 10, 1998 as
exhibits to the Company's 10-SB/A.
3.1 Certificate of Incorporation of the Company; filed as exhibit to the
Company's 10-SB/A dated December 21, 1998
3.2 Bylaws of the Company; filed as exhibit to the Company's 10-SB/A dated
December 21, 1998
3.3 Certificate of amendment to Certificate of incorporation of the
Company; filed on Definitive Information Statement dated July 7, 1999
4.1 Specimen of Common Stock Certificate; filed as exhibit to the
Company's 10-SB/A dated December 21, 1998
10.1 Securities Purchase Agreement dated September 5, 1996 between the
Company and Unistar Entertainment, Inc.; filed as exhibit to the
Company's 10-SB/A dated December 21, 1998
10.2 Settlement Agreement and Mutual General Release between the Company
and CasinoWorld Holdings, Ltd, dated February 26, 1997; filed as
exhibit to the Company's 10-SB/A dated December 21, 1998
10.3 Settlement Agreement and Mutual General Release between the Company
and Unistar Entertainment, Inc. dated March 6, 1997; filed as exhibit
to the Company's 10-SB/A dated December 21, 1998
10.4 Employment Agreement dated September 1, 1997 between the Company and
Joseph R. Paravia; filed as exhibit to the Company's 10-SB/A dated
December 21, 1998
10.5 Virtual Gaming Technologies, Inc. 1997 Stock Option Plan; filed as
exhibit to the Company's 10-SB/A dated December 21, 1998
10.6 Employment agreement dated September 2 1999, between the Company and
Leo I. George; filed with this report
10.7 Employment agreement dated November 2 1999, between the Company and
Joseph R. Paravia; filed with this report
10.8 Securities Acquisition Agreement dated December 20, 1999 between the
Company and Primeline Technologies, Inc.; filed with this report
10.9 Software development agreement dated January 20, 2000 between the
Company and Coast Resort; filed with this report
21.1 List of Subsidiaries; filed as exhibit to the Company's 10-SB/A dated
December 21, 1998
b) Reports on Form 8-K. The Company filed a report of Form 8-K on January
19, 1999 relating to the change of the Registrant's independent
auditors for the fiscal year ended December 31, 1998. Reports on From
8-K. The Company filed a report of From 8-K on March 29,2000 relating
to acquisition of Primeline Gaming Technologies, Inc.
27.1 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Virtual Gaming Technologies, Inc.
- --------------------------------
(Registrant)
Date: March 29, 2000 By: /s/ Joseph R. Paravia
-----------------------------------------
17
<PAGE>
President, Chief Executive Officer and
Director
Date: March 29, 2000 By: /s/ Bruce Merati
---------------------------------------
Chief Financial Officer
In accordance the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 29, 2000 By: /s/ Leo I. George
---------------------------------------
Chairman of the Board
Date: March 29, 2000 By: /s/ Michael W. Yacenda
---------------------------------------
Director
Date: March 29, 2000 By: /s/ Dick L. Rottman
---------------------------------------
Director
Date: March 29, 2000 By: /s/ Kim A. Nathanson
---------------------------------------
Director
Date: March 29, 2000 By: /s/ Scott A. Walker
---------------------------------------
Director
18
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND INDEPENDENT AUDITOR'S REPORT
For the years ended December 31, 1999 and 1998
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITOR'S REPORT........................ F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets...................... F-2 to F-3
Consolidated Statements of Operations............ F-4
Consolidated Statements of Shareholders' Equity.. F-5 to F-6
Consolidated Statements of Cash Flows............ F-7 to F-8
Notes to Consolidated Financial Statements....... F-9 to F-22
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Shareholders
Virtgame.com Corp.
San Diego, California
We have audited the consolidated balance sheets of Virtgame.com Corp. (formerly
Virtual Gaming Technologies, Inc.) and Subsidiaries (the "Company") as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, shareholders' 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 audits 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 consolidated financial position of
Virtgame.com Corp. and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated 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 7 to the
financial statements, the Company has suffered recurring losses from operations
since inception, has limited operating revenue and 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 7. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
San Diego, California PANNELL KERR FORSTER
January 27, 2000, except Note 9, as to which Certified Public Accountants
the date is February 27, 2000 A Professional Corporation
F-1
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
------
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 498,923 $ 523,512
Restricted cash 150,000
300,000
Gaming license 53,699 53,151
Prepaid expenses and other current assets 32,315 32,740
---------- ----------
Total current assets 734,937 909,403
---------- ----------
Noncurrent assets
Deposits 18,930 94,820
Property and equipment, net 1,298,231 449,059
---------- ----------
Total noncurrent assets 1,317,161 543,879
---------- ----------
Total assets $2,052,098 $1,453,282
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 126,287 209,895
Accrued expenses 143,081 120,947
Funds held on deposit 52,762 25,968
Current portion of capital lease obligation 7,928 11,519
Notes payable 198,876 150,000
------------ ------------
Total current liabilities 528,934 518,329
Long-term portion of capital lease obligation - 7,928
------------ ------------
Total liabilities 528,934 526,257
------------ ------------
Commitments and contingencies (Notes 3, 4, 5 and 7)
Shareholders' equity:
Preferred stock, $ .00001 par value, 10,000,000 shares
authorized, none issued or outstanding - -
Common stock, $ .00001 par value, 30,000,000 shares
authorized, 10,369,292 and 8,331,196 shares issued
and outstanding in 1999 and 1998, respectively;
144,334 and 180,763 shares issuable in 1999 and 1998,
respectively 105 85
Additional paid-in capital 14,726,388 11,079,550
Accumulated deficit (13,203,329) (10,152,610)
------------ ------------
Total shareholders' equity 1,523,164 927,025
------------ ------------
Total liabilities and shareholders' equity $ 2,052,098 $ 1,453,282
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ------------
<S> <C> <C>
Revenue:
Gaming revenue $ 465,327 $ 262,599
Less promotional discounts (80,654) (41,407)
----------- -----------
Net gaming revenue 384,673 221,192
----------- -----------
Operating expenses:
Salaries and payroll expenses 1,651,571 1,682,674
Other operating expenses 1,751,081 2,532,048
----------- -----------
Total operating expenses 3,402,652 4,214,722
----------- -----------
Loss from operations (3,017,979) (3,993,530)
Financial income (expense):
Interest income 11,454 26,217
Interest expense (35,635) (20,360)
Loss on sale of securities available for sale - (1,103)
Foreign exchange loss (5,672) (2,157)
----------- -----------
Total financial income (expense) (29,853) 2,597
----------- -----------
Loss before income taxes (3,047,832) (3,990,933)
Income tax expense 2,887 1,220
----------- -----------
Net Loss $(3,050,719) $(3,992,153)
=========== ===========
Basic and diluted net loss per share $ (0.34) $ (0.58)
=========== ===========
Shares used to compute basic and diluted net
loss per share 9,024,792 6,880,834
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Unrealized
Gain on
Common Stock Securities
--------------------- Additional Paid-In Available Accumulated
Shares Amount Capital for Sale Deficit Total
------------ ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,047,958 $70 $ 6,651,558 $ 120 $ (6,160,457) $ 491,291
Issuances of common stock for
cash, net of issuance costs:
January 1998 through
December 1998 1,399,905 14 3,967,011 - - 3,967,025
Issuable common stock per
commission agreement 64,096 1 (1) - - -
Issuance of employee stock
options (Note 5) - - 307,399 - - 307,399
Issuance of stock purchase
warrants (Note 5) - - 153,583 - - 153,583
Elimination of unrealized gain due
to sale of securities - - - (120) - (120)
Net (loss) for the year ended
December 31, 1998 - - - - (3,992,153) (3,992,153)
------------ ------- ----------- -------- ------------ -----------
Balance, December 31, 1998 8,511,959 $85 $11,079,550 $ - $(10,152,610) $ 927,025
------------ ------- ----------- ----------- ------------ -----------
</TABLE>
F-5
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(continued)
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance forwarded,
December 31, 1998 8,511,959 $ 85 $11,079,550 $(10,152,610) $ 927,025
Issuance of common stock
on exercise of employee
stock option 1,500 - 4,305 - 4,305
Issuances of common stock for
cash, net of issuance costs:
January 1999 through
June 1999 181,359 2 435,548 - 435,550
Issuance of common stock on
conversion of notes payable
(Note 4) 100,000 1 299,999 - 300,000
Issuances of common stock for
cash, net of issuance costs:
August 1999 through
December 1999 1,271,600 13 1,752,890 - 1,752,903
Issuance of common stock on
acquisition of subsidiary 447,208 4 899,996 - 900,000
Issuance of employee stock
options (Note 5) - - 254,100 - 254,100
Net (loss) for the year ended
December 31, 1999 - - - (3,050,719) (3,050,719)
------------ ------- ----------- ------------ -----------
Balance, December 31, 1999 10,513,626 $105 $14,726,388 $(13,203,329) $ 1,523,164
============ ======= =========== ============ ===========
</TABLE>
F-6
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,050,719) $(3,992,153)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 125,116 99,140
Loss on sale of securities available for sale - 1,103
Issuance of common stock options and warrants for
licensing and consulting fees and compensation 254,100 460,982
Changes in operating assets and liabilities:
Decrease (increase) in:
Restricted cash 150,000 (300,000)
Prepaid expenses and other current assets 425 1,372
Gaming license (548) 1,016
(Decrease) increase in:
Accounts payable and accrued expenses (61,474) 245,184
Funds held on deposit 26,794 20,380
----------- -----------
Net cash flows used in operating activities (2,556,306) (3,462,976)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in deposits 75,890 (81,075)
Purchase of equipment (74,288) (235,086)
Proceeds from sale of investments - 53,967
----------- -----------
Net cash flows provided by (used in) investing activities 1,602 (262,194)
----------- -----------
Cash flows from financing activities:
Net proceeds from the issuance of common stock 2,192,758 3,967,025
Borrowings on notes payable 475,000 -
Payments on notes payable (126,124) -
Principal payments under capital lease (11,519) (9,334)
----------- -----------
Net cash flows provided by financing activities 2,530,115 3,957,691
----------- -----------
Net (decrease) increase in cash and cash equivalents (24,589) 232,521
Cash and cash equivalents at beginning of year 523,512 290,991
----------- -----------
Cash and cash equivalents at end of year $ 498,923 $ 523,512
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated finanacial
statements.
F-7
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1999 and 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Cash paid during the year for:
Interest $ 38,532 $25,647
======== =======
Income taxes $ 2,887 $ 1,220
======== =======
Supplemental disclosure of noncash investing and financing activities:
Foreign exchange loss $ (5,672) $(2,157)
======== =======
Notes payable converted into shares of common stock $300,000 $ -
======== =======
</TABLE>
On December 21, 1999, the Company acquired 100% of the outstanding capital
stock of Primeline Gaming Technologies, Inc. in return for the issuance of
447,208 shares of its common stock. The value of the assets and liabilities
acquired was approximately $912,000 and $12,000, respectively.
The accompanying notes are an integral part of the consolidated finanacial
statements.
F-8
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
Organization and Business
Virtgame.com Corp. (the "Company") was incorporated in the State of
Delaware on October 24, 1995, under the name MBA Licensing Corp. 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, to Virtual
Gaming Technologies, Inc., and on May 20, 1999, to Virtgame.com Corp.
The Company is establishing casino-style operations over the Internet
focused on the international marketplace outside the United States. If the
demand for this service decreased or if the Company's ability to continue
to provide this service was impaired, the Company's revenue source would be
impacted. The Company has suffered recurring losses from operations since
inception and has generated limited operating revenue. Proceeds from the
Company's private placements of shares of its common stock are used to fund
its operations.
On December 21, 1999, the Company entered into a securities acquisition
agreement and plan of reorganization (the "Primeline Acquisition") with
Primeline Gaming Technologies, Inc. ("Primeline"). The Primeline
Acquisition resulted in the Company acquiring 100% of the outstanding
capital stock of Primeline in return for the issuance of 447,208 shares of
its common stock. The Primeline Acquisition has been accounted for as a
purchase at historical cost.
Had the Primeline Acquisition occurred on January 1, 1999, the proforma net
property and equipment at December 31, 1999 would have been $1,118,231, a
decrease of $180,000, and the proforma net loss and basic and diluted net
loss per share for the year ended December 31, 1999 would have been
$(3,230,719) and $(0.34), respectively, an increase of $180,000 and no
change, respectively. As Primeline was incorporated on October 6, 1999,
with limited activity for the period from October 6, 1999 (inception) to
December 31, 1999, depreciation of the acquired assets is the only proforma
adjustment.
Principles of Consolidation
The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries, Emerald Riviera Limited, an
Irish Corporation, Internet Gaming Technologies, Inc., a Nevada
Corporation, Virtual Gaming Technologies Argentina S.A., an Argentinian
Corporation, Virtual Gaming Technologies (Antigua) Ltd., an Antiguan
Corporation, and Primeline Gaming Technologies, Inc., a California
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, Virtual Gaming Technologies Argentina S.A. and Virtual Gaming
Technologies (Antigua) Ltd. Accordingly, the monetary assets and
liabilities of these entities have been remeasured using the current rates
of exchange and nonmonetary assets have been remeasured using the
appropriate historical rates of exchange.
F-9
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Foreign Operations and Concentrations (Continued)
Foreign exchange loss arises on the transfer of customers' foreign currency
credit card deposits into the Company's U.S. Dollar-denominated bank
accounts during the year and on the translation of the Company's cash held
in foreign banks to U.S. Dollars at year end.
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 net gaming revenue of $384,673 and $221,192 for
the years ended December 31, 1999 and 1998, respectively, was incurred in
Antigua. As of December 31, 1999 and 1998, approximately 75% and 73%,
respectively, of the Company's customers are located in Asia.
As of December 31, 1999 and 1998, the Company maintained approximately
$420,000 and $780,000, respectively, in total assets in Antigua, net of
inter-company receivables of $840,000 and $90,000, respectively. Included
in total assets in Antigua as of December 31, 1999 and 1998,was
approximately $230,000 and $420,000, respectively, in cash held in foreign
banks.
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.
Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, prepaid expenses and other current assets, deposits,
accounts payable, accrued expenses, and funds held on deposit approximate
fair value due to the immediate short-term maturity of these financial
instruments.
The fair value of the Company's capital lease obligation and notes payable
approximates the carrying amount based on the current rates offered to the
Company for debt of the same remaining maturities with similar collateral
requirements.
F-10
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Cash and Cash Equivalents
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 an original maturity of three months or less to
be cash equivalents.
The Company maintains its cash accounts at financial institutions located
in California and abroad. Accounts at the financial institutions located in
California are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At December 31, 1999 and 1998, the Company's uninsured cash
balances, including cash held in foreign banks and restricted cash, totaled
$454,011 and $651,169, respectively. The Company has not experienced any
losses in such accounts and management believes it places its cash on
deposit with financial institutions which are financially stable.
Restricted Cash
The Company was considering an arrangement to offer credit card processing
services to other Internet based businesses, and in June 1998, deposited
$300,000 with a major foreign bank relative to a contemplated arrangement.
The Company decided not to proceed with the above arrangement and during
the year ended December 31, 1999, $150,000 of this amount was returned to
the Company. The remaining $150,000 is classified as a current asset in the
accompanying consolidated balance sheet.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is calculated on
the straight-line basis over the estimated useful life of five years, or
related lease life, if shorter.
Funds Held on Deposit
The Company requires customers to advance cash or credit card deposits
prior to participating in gaming activities.
Revenue Recognition
Gaming revenue is the net win from gaming activities, which is the
difference between gaming wins and losses, and is recognized when the
result of each game is known.
F-11
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Stock Based Compensation
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require, companies
to recognize compensation expense for grants of stock, stock options, and
other equity instruments based on a fair-value method of accounting.
Companies that do not choose to adopt the expense recognition rules of SFAS
No. 123 will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion (APB) No. 25, but will be required to
provide proforma disclosures of the compensation expense determined under
the fair-value provisions of SFAS No. 123, if material. APB No. 25 requires
no recognition of compensation expense for most of the stock-based
compensation arrangements provided by the Company, namely, broad-based
employee stock purchase plans and option grants where the exercise price is
equal to the market price at the date of the grant.
The Company has adopted the disclosure provisions of SFAS No. 123 effective
January 1, 1996. The Company has opted to follow the accounting provisions
of APB No. 25 for stock-based compensation and to furnish the pro forma
disclosures required under SFAS No. 123 (see Note 5).
Advertising Costs
The Company charges the cost of advertising to expense as incurred.
Advertising costs for the year ended December 31, 1999 and 1998, were
approximately $161,000 and $611,000, respectively.
Software Development Costs
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" in March 1998. The SOP provides
guidance with respect to accounting for the various types of costs incurred
for computer software developed or obtained for the Company's use. The
Company adopted SOP 98-1 effective January 1, 1999. Software development
costs incurred in the research and development of new software products and
enhancements to existing software products for internal use are expensed as
incurred. Software development costs for the years ended December 31, 1999
and 1998, were approximately $706,000 and $859,000, respectively.
F-12
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities. 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.
Net Loss Per Share
Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential
dilution that could occur if stock options and other commitments to issue
common stock were exercised. During the years ended December 31, 1999 and
1998, options and warrants to purchase 3,575,300 and 1,122,000 common
shares, respectively, were anti-dilutive and have been excluded from the
weighted average share computation.
Comprehensive Income
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted this statement
effective January 1, 1998. For the years ended December 31, 1999 and 1998,
the Company had no items that were required to be recognized as components
of comprehensive income.
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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-13
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Computer hardware $ 405,148 $366,901
Computer software 1,051,707 119,795
Office furniture and equipment 72,715 70,061
Capital lease - automobile 34,815 33,340
---------- --------
1,564,385 590,097
Less: accumulated depreciation 266,154 141,038
---------- --------
$1,298,231 $449,059
========== ========
</TABLE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Operating Leases
The Company leases its office facilities under three noncancellable
operating lease agreements expiring at various times through June 2001. The
leases call for aggregate monthly payments of approximately $10,600.
In addition, the Company leases certain office equipment under
noncancellable operating lease agreements expiring at various times through
December 2002. The leases call for aggregate monthly payments of
approximately $2,800.
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 had a net
book value of $6,770 and $18,375 at December 31, 1999 and 1998,
respectively.
F-14
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------
At December 31, 1999, the annual future minimum lease payments under
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Lease
--------- -------
<S> <C> <C>
2000 $144,467 $ 8,499
2001 42,064 -
2002 12,693 -
-------- -------
Total minimum lease payments $199,224 8,499
========
Less amount representing interest 571
-------
Present value of net minimum lease payments 7,928
Less current maturities 7,928
-------
Long-term lease obligations $ -
=======
</TABLE>
Rental expense for office facilities for the years ended December 31, 1999
and 1998 totaled $146,918 and $122,010, respectively.
Employment Agreements
During September 1999, the Company entered into a two year employment
agreement with the Chairman of the Board of Directors. The agreement
provides for the grant of options to purchase: 100,000 shares of common
stock at $.10 per share; 500,000 shares of common stock at an exercise
price equal to the fair market value on the date of the agreement, 200,000
shares of common stock at an exercise price equal to the fair market value
on the one-year anniversary date of the agreement; and 300,000 shares at an
exercise price equal to the fair market value on the date of grant if,
prior to termination of the agreement, the Company has secured debt or
equity financing, or a combination thereof, in the aggregate amount of $10
million, after deducting for all associated costs. Compensation cost in the
amount of $236,000 has been recognized on the grant of options to purchase
100,000 shares of common stock at $.10 per share (see Note 5).
During November 1999, the Company entered into a two year and nine month
employment agreement with the Chief Executive Officer (the "CEO"). The
agreement provides for a base salary of $150,000, and an annual cash bonus
equal to 2% of the Company's annual gross revenues in excess of $1 million.
In conjunction with this agreement the CEO has agreed not to solicit any
person employed full-time by the Company during the term of his employment
and for one year after termination. The agreement also provides for a cash
bonus of $100,000 upon the anticipated public offering of the Company and a
payment of $250,000 upon the sale or merger of the Company.
F-15
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Note Payable to Stockholder and Affiliate
During the year ended December 31, 1999, the Company received advances of
$475,000 in the form of notes payable from its then Chairman of the Board of
Directors and his affiliated company. During the year ended December 31,
1999, $300,000 of this amount was converted into 100,000 shares of common
stock. The notes payable are unsecured, due on demand and provide for
interest at a fixed rate of 12% per annum. The principal balance outstanding
at December 31, 1999 was $75,000 and total interest expense incurred by the
Company on these related party notes payable for the year ended December 31,
1999 was approximately $17,000.
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 agree 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.
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. The Company
recorded a charge to operations of $133,711 to reflect the effect of the
settlement during 1997. All remaining principal and accrued interest was due
in September 1999. The note was not repaid on maturity and at December 31,
1999, had a balance of $123,876 which is due on demand.
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.
F-16
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
- -----------------------------------
Stock Agreements (Continued)
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 a private placement of shares of its common
stock conducted by the Company in 1997, the Company is required 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.
NOTE 5 - SHAREHOLDERS' EQUITY
- -----------------------------
Stock and Warrants Issued for Services
During the year ended December 31, 1997, pursuant to a consulting agreement,
the Company 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. During the year
ended December 31, 1998, the Company recorded a charge totaling $153,583 for
the value of these warrants.
During the year ended December 31, 1999, the Company issued warrants to
purchase 223,300 shares of its common stock as consideration for services
provided in connection with the Company's stock issuances for cash. All of
the warrants are immediately exercisable and expire five years from the date
of issuance. The warrants have been valued at $509,635 and have been
recorded as an increase and a decrease to additional paid-in capital, with
no net effect on shareholders' equity.
F-17
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5 - SHAREHOLDERS' EQUITY (Continued)
- -----------------------------
Stock and Warrants Issued for Cash
During the year ended December 31, 1998, the Company issued shares of common
stock relative to a 1,400,000 share private placement offering under Rule
506 of Regulation D promulgated under the Securities Act of 1933. Total net
proceeds from the offering at December 31, 1998 were $3,967,025, net of
issuance costs of $194,676.
During the year ended December 31, 1999, the Company issued 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 at December 31, 1999 were $435,550, net of
issuance costs of $108,530.
During the year ended December 31, 1999, the Company also issued shares of
common stock relative to a 1,400,000 share private placement offering under
Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total
net proceeds from the offering at December 31, 1999 were $1,752,903, net of
issuance costs of $154,500. In conjunction with this offering, the Company
issued warrants to purchase 30,000 shares of its common stock in August
1999. The warrants are immediately exercisable and expire five years from
the date of issuance.
Stock Options
In 1997, the Company adopted a stock option plan (the "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 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 the grant. The Plan
provides for grants of options with a term of up to 10 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.
The Company has elected to account for nonqualified grants and grants under
its Plan following APB No. 25 and related interpretations. Accordingly,
compensation costs of approximately $254,000 and $307,000 have been
recognized for nonqualified options for the years ended December 31, 1999
and 1998, respectively. In November 1999, the Company extended the
expiration date on options previously granted to the CEO to purchase 480,000
shares of common stock. The expiration date was extended by five years to
December 31, 2005. No additional compensation cost has been recognized on
F-18
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
the extension of the expiration date as there was no change in the intrinsic
value of the options.
F-19
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5 - SHAREHOLDER'S EQUITY (Continued)
- -----------------------------
Stock Options (Continued)
Under SFAS No.123, the fair value of each option granted during the years
ended December 31, 1999 and 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 life of the options of
three to five years, with an average risk free interest rate of 4.4% 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, reported net (loss) and (loss) per common share would
have been as follows:
December 31, December 31,
1999 1998
----------- ------------
Net (loss):
As reported $(3,050,719) $(3,992,153)
Proforma $(5,636,127) $(4,608,688)
Basic and diluted net (loss) per share:
As reported (0.34) $ (0.58)
Proforma (0.63) $ (0.67)
A summary of the activity of the stock options for the years ended December
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 932,000 1.45 640,000 $0.59
Granted 2,091,500 2.06 292,000 3.33
Exercised (1,500) 2.87 - -
Expired - - - -
----------------------------------------------------------
Outstanding at end of period 3,022,000 1.88 932,000 $1.45
==========================================================
</TABLE>
F-20
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C>
Exercisable at end of period 2,495,500 1.82 822,000 $1.19
======================================================
Weighted-average fair value of options
granted during the period $ 1.54 $2.28
====== =====
Weighted-average remaining contractual
life of options outstanding at end of period 3.9 years 4 years
====== =====
</TABLE>
F-21
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 - 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 December
31:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,819,000 $1,631,000
Compensation element of stock options issued 948,000 848,000
Startup costs capitalized for income tax purposes 312,000 683,000
Other 83,000 86,000
----------- ----------
Gross deferred tax assets 4,162,000 3,248,000
Less valuation allowance (4,105,000) 3,223,000
----------- ----------
57,000 25,000
Deferred tax liabilities, equipment (57,000) (25,000)
----------- ----------
$ - -
=========== ==========
</TABLE>
Realization of deferred tax assets is dependant upon sufficient future
taxable income during the period that deductible temporary differences and
carryforward 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. The valuation allowance increased by
$882,000 from 1998.
As of December 31, 1999, the Company has net operating loss carryforwards
for both federal and state income tax purposes. Federal net operating loss
carryforwards totaling approximately $7,078,000 expire as follows: $194,000
in 2011, $322,000 in 2012, $3,609,000 in 2018 and $2,953,000 in 2109. State
net operating loss carryforwards totaling approximately $7,075,000 expire as
follows: $4,123,000 in 2003 and $2,952,000 in 2004. Due to Internal Revenue
Service regulations, the availability of the operating loss carryforwards
may be limited upon a substantial change in ownership.
F-22
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6 - INCOME TAXES (Continued)
---------------------
A reconciliation of the effective tax rates with the federal statutory rate
is as follows as of December 31:
1999 1998
---- ----
Income tax benefit at 35% statutory rate $(1,068,000) $(1,397,000)
Change in valuation allowance 882,000 1,248,000
Nondeductible expenses 214,000 79,000
Adjustment to net operating loss carryforwards - 140,000
State income taxes, net (175,113) (217,780)
Other 150,000 149,000
----------- -----------
$ 2,887 $ 1,220
=========== ===========
NOTE 7 - 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, the
Company has experienced cumulative losses since its inception of
approximately $13,203,300, inclusive of noncash charges for capital stock,
options and warrant issuance-related activity of approximately $4,256,000.
The cumulative losses have reduced net stockholders' equity to approximately
$1,523,200 as of December 31, 1999. 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 that 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.
The Company estimates it needs substantial new capital to achieve meaningful
revenue producing operations and plans to seek up to $3 million in equity
financing via a Form SB-2 offering pursuant to the Securities Act of 1933.
In the event financing is not obtained, 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 has signed a letter of intent with the Province of Chaco,
Argentina, to provide technology for internet lotteries in that province,
and the Company intends to pursue similar arrangements with other provinces
and countries in South America.
F-23
<PAGE>
VIRTGAME.COM CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7 - MANAGEMENT'S PLANS FOR FUTURE OPERATIONS AND FINANCING (Continued)
- ---------------------------------------------------------------
As discussed in Note 1, the Company acquired 100% of the outstanding capital
stock of Primeline. Primeline has developed software that will provide an
online closed-loop sportsbook system. The Company has finalized an
installation and maintenance agreement with a land-based gaming corporation
in Nevada and intends to market this software to other land-based casinos in
the United States.
NOTE 8 - RECLASSIFICATION
- -------------------------
Gaming license has been reclassified in the financial statements at December
31, 1998 from noncurrent assets to current assets in order to more fairly
present the financial position of the Company. The result of this
reclassification increased total current assets at December 31, 1998 from
$856,252 to $909,403, an increase of $53,151.
NOTE 9 - SUBSEQUENT EVENT
- -------------------------
In February 2000, the Company signed a letter of intent to merge into eLOT,
Inc. The merger will be conducted as a tax free reorganization pursuant to
Section 368 of the Internal Revenue Code. The letter of intent calls for the
close, sale or spin-off of the Company's existing gaming operations in
Antigua.
F-24
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into on September 2,
1999 between VIRTGAME.COM CORP., a Delaware corporation ("Employer"), and LEO I.
GEORGE ("Executive").
R E C I T A L
-------------
Employer wishes to employ Executive, and Executive agrees to serve, as
Chairman of the Board 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 Executive, and Executive
------------------
hereby accepts employment with Employer, for a period of two (2) years
terminating September ___, 2001 ("Employment Period"); provided that this
Agreement shall be automatically renewed for a successive two (2) year term
unless either party elects not to renew this Agreement by delivering written
notice of its election to the other party no later than sixty (60) 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 EXECUTIVE. Executive shall serve in the capacity as
-------------------
Chairman of the Board of Employer. Executive shall be allowed to conduct his
operations from Washington, D.C., provided that Executive shall attend in person
meetings at Employer's office in San Diego, California, when so requested by
Employer. Executive's principal duties and responsibilities shall consist
primarily of (i) public relations, (ii) international marketing; and (iii)
capital raising activities. Executive shall perform such other services and
duties as may from time to time be assigned to Executive 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, Executive shall devote
his services to Employer's business and interests in a manner consistent with
Executive's title and office and Employer's needs for his services. Executive
shall perform the duties of Executive's office and those assigned to Executive
by the Employer's board of directors with fidelity, to the best of Executive's
ability, and in the best interest of Employer.
3. COMPENSATION OF EXECUTIVE.
-------------------------
3.1 Compensation Options Upon the commencement of Executive's
--------------------
employment term, Executive shall be granted a three-year nonqualified option
("Compensation Options") to purchase an aggregate of 100,000 shares of
Employer's $.00001 par value common stock ("Common Stock") at an exercise price
of $0.10 per share. The Compensation Options shall be subject to a right of
first refusal in favor of Employer which shall prevent Executive from selling
the shares of Common Stock underlying the Compensation Options without first
<PAGE>
offering them to Employer. Employer shall be entitled to purchase the shares of
Common Stock underlying the Compensation Options at a price equal to $3.50 per
share, subject to adjustment for recapitalizations, stock splits and the like.
The terms of the right of first refusal for the Compensation Options, as well as
all other terms of the Compensation Options, shall be set forth in an option
agreement to be executed between the Company and Executive in the form attached
hereto as Exhibit A.
3.2 Additional Options. Upon the commencement of Executive's
------------------
employment term, Executive shall also be granted a three-year nonqualified
option to purchase an aggregate of 500,000 shares of Common Stock at an exercise
price equal to the Fair Market Value (as defined in Section 3.4 herein) of the
Common Stock on the date of grant. In addition, on the one year anniversary of
this Agreement, Executive shall be granted a three-year nonqualified option to
purchase an aggregate of 300,000 shares of Common Stock at an exercise price
equal to the Fair Market Value of the Common Stock on such one year anniversary
date. The options set forth in this Section 3.2 shall have such additional terms
and conditions as set forth in an option agreement to be executed between the
Company and Executive in the form attached hereto as Exhibit B.
3.3 Bonus Options. As a one time bonus, Executive shall be granted a
-------------
three-year non-qualified option to purchase up to 200,000 shares of Common Stock
("Bonus Options") at an exercise price equal to the Fair Market Value of the
Common Stock on the date of grant. Executive shall be entitled to the Bonus
Options if, prior to the termination of this Agreement, Employer has secured
debt or equity financing, or a combination thereof, in the aggregate amount of
$10,000,000, after deducting for all finders' fees, commissions and other
expenses incurred by Employer in connection with the debt or equity financings.
The Bonus Options shall have such additional terms and conditions as set forth
in an option agreement to be executed between the Company and Executive in the
form attached hereto as Exhibit B.
3.4 Fair Market Value. For purposes of this Section 3, the term
-----------------
"Fair Market Value" shall mean the closing sale price of the Common Stock as
quoted on any U.S. securities exchange or on the OTC Bulletin Board.
4. EXPENSE REIMBURSEMENTS; EXECUTIVE ASSISTANT.
-------------------------------------------
4.1 Expense Reimbursement. Executive shall be reimbursed for
---------------------
reasonable and actual out-of-pocket expenses incurred by Executive in
performance of Executive'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. Executive shall furnish proper vouchers and expense reports and
shall be reimbursed only for those expenses which shall be reimbursable.
4.2 Executive Assistant. Employer agrees to employ an executive
-------------------
assistant ("Executive Assistant") for Executive. The Executive Assistant shall
be selected by Executive, subject to the approval of Employer, and shall work
with the Executive in Washington, D.C. The total compensation payable to the
Executive Assistant shall be determined upon the mutual
-2-
<PAGE>
agreement of Employer and Executive but in no event shall be less than $60,000
per year and no more than $75,000 per year.
5. VACATION, SICK LEAVE AND OTHER FRINGE BENEFITS. Executive shall be
----------------------------------------------
entitled to two (2) weeks vacation per every twelve (12) month period of
employment hereunder. Executive shall also be entitled to leaves for illness or
other incapacitation as is consistent with Executive's title and Employer's
needs for Executive's services, except as otherwise provided for in Section 6.3.
Executive shall be entitled during Executive'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.
6. TERMINATION.
-----------
6.1 Termination by Employer for Cause. Employer may terminate this
---------------------------------
Agreement and Executive's employment hereunder for Cause (as defined herein) any
time effective upon written notice from the Board of Directors of Employer to
Executive. As used herein, the term "Cause" shall mean:
6.1.1 Habitual neglect in the performance of Executive's
material duties as set forth in Section 2;
6.1.2 Negligence involving misfeasance or nonfeasance by
Executive in the performance of Executive's material duties as set forth in
Section 2; or
6.1.3 A material breach of that certain Executive Non Disclosure
and Invention Assignment Agreement dated September ___, 1999 entered into by
Executive.
6.2 Events Upon Termination. The termination of this Agreement
-----------------------
pursuant to Section 6 shall also result in the termination of all rights and
benefits of Executive 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. EXECUTIVE'S REPRESENTATIONS. Executive represents and warrants that
---------------------------
Executive is free to enter into this Agreement and to perform each of the
provisions contained herein. Executive represents and warrants that Executive is
not restricted or prohibited, contractually or otherwise, from entering into and
performing this Agreement, and that Executive's execution and performance of
this Agreement is not a violation or breach of any agreement between Executive
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 Executive or Employer 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 Executive shall be
addressed to Executive 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 Executive by Employer and contains all of the
covenants and Agreements between the parties with respect to the employment of
Executive 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.
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.
-4-
<PAGE>
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"
VIRTGAME.COM CORP.
a Delaware corporation
By:_________________________________
Joseph R. Paravia, President
"EXECUTIVE"
LEO I. GEORGE
-5-
<PAGE>
EXHIBIT 10.7
VIRTGAME.COM CORP.
Employment Agreement
This Employment Agreement ("Agreement") is made and entered into this 2nd
day of November, 1999 by and between Virtgame.com, Corp., a Delaware corporation
(the "Company"), and Joseph R. Paravia ("Executive").
A. Executive has the experience to provide services to the Company of an
extraordinary character which gives such services a unique value.
B. The Company desires to retain the services of Executive, and Executive
desires to be employed by the Company for the term of this Agreement.
The Company and Executive, intending to be legally bound, hereby agree as
follows:
1. Employment. The Company hereby employs Executive as the Chief
----------
Executive Officer of the Company. For the term of Executive's employment, and
upon the other conditions set forth in this Agreement, Executive accepts such
employment and agrees to perform services for the Company, subject always to
such resolutions as are established from time to time by the Board of Directors
of the Company.
2. Term. The term of Executive's employment hereunder shall commence
----
on the execution date of this Agreement and continue through July 31, 2002
subject to the termination provisions contained herein. The Agreement may be
terminated by the Company only for cause as set forth below, and shall not
constitute "at will" employment.
3. Position and Duties.
-------------------
3.1. Services with the Company. During the term of this Agreement,
-------------------------
Executive agrees to perform such duties and exercise such powers related thereto
as may from time to time be assigned to him by the Company's Board of Directors
(the "Board"). Executive shall duly and diligently perform all duties assigned
to him while in the employ of the Company. He shall be bound by and faithfully
observe and abide by all rules and regulations of the Company which are
1
<PAGE>
brought to his notice or of which he should be reasonably aware.
3.2. No Conflicting Duties. Executive shall devote sufficient
---------------------
productive time, ability, and attention to the business of the Company during
the term of this Agreement in a manner that will serve the best interests of the
Company. During the term hereof, Executive shall not serve as an officer,
director, employee, consultant or advisor to any other business without the
prior written consent of the Company's Board, which shall not be unreasonably
withheld. Executive hereby confirms he is under no contractual commitments
inconsistent with his obligations set forth in this Agreement. This Agreement
shall not be interpreted to prohibit Executive from making passive personal
investments or conduct private business affairs if those activities do not
materially interfere with the services required under this Agreement.
3.3. Uniqueness of Executive's Services. Executive hereby represents
----------------------------------
and agrees that the services to be performed under the terms of this Agreement
are of a special, unique, unusual, extraordinary, and intellectual character
that gives them a unique value. Executive recognizes the uniqueness of the
services he provides to the Company and realizes the Company may elect to
purchase a life insurance policy to protect against Executive's death for the
benefit of the Company. In such event, Executive shall reasonably cooperate and
take all steps necessary to assist Company in acquiring such policy or policies.
4. Compensation.
------------
4.1. Base Salary. As compensation for all services to be rendered
-----------
by Executive under this Agreement, the Company shall pay to Executive a base
annual salary of One Hundred Fifty Thousand Dollars ($150,000.00) (the "Base
Salary") effective as of August 1, 1999. Executive's base salary shall be paid
on a regular basis in accordance with the Company's normal payroll procedures
and policies. Upon execution of this Agreement, Company shall pay Executive any
and all accrued salary.
2
<PAGE>
4.2 Options. Company and Executive have entered into an Option
-------
Agreement which is incorporated herein by reference.
4.3. Extension of Time to Exercise Presently Held Options. Executive
----------------------------------------------------
presently possesses certain options to purchase stock in the Company, as
provided in the "Non-Qualified Stock Option Agreement" ("Internet Gaming
Agreement") which is attached hereto as Exhibit "A" and incorporated by
reference. The Company shall extend by five years all periods set forth in the
Non-Qualified Stock Option Agreement during which Executive may exercise the
options referred to in the Non-Qualified Stock Option Agreement. Provided
however, that in lieu of extending said options, the Company may at its sole and
absolute discretion, deliver to Executive four hundred and eighty thousand
(480,000) shares of the Company no later than December 15, 1999.
4.4. Public Offering Bonus. Company represents that it intends to
---------------------
pursue a public offering of its stock, and that it intends to exercise its best
efforts to engage an Investment Banking firm to underwrite its public offering.
Upon the execution of a Letter of Intent between the Company and an Investment
Banking firm relating to a public offering, Executive shall be paid fifty-
thousand ($50,000). Further, upon execution of an Investment Banking Agreement
to raise capital ("Investment Banking Agreement"), Executive shall be paid an
additional fifty-thousand dollars ($50,000).
In the event the Company does not sign a Letter of Intent prior to
entering into an Investment Banking Agreement, the Company shall pay Executive
One-Hundred Thousand ($100,000) dollars upon the Company's execution of an
Investment Banking Agreement. In the event the Company conducts a public
offering without the engaging an Investment Banking firm and/or signing an
Investment Banking Agreement, the Company shall pay Executive One-Hundred
Thousand ($100,000) dollars upon the filing with the Securities and Exchange
Commission of any Registration Statement for the sale of Company stock.
3
<PAGE>
4.5. Stock and Option Registration Rights. In the event the Company
------------------------------------
with the assistance of an Investment Banking firm, conducts a public offering of
the Company's shares, the Company shall provide Executive with registration
rights to all shares warrants and options which Executive then holds or
otherwise directly or constructively owns.
4.6 Payment Upon Sale or Merger of Company. In the event the
--------------------------------------
Company shall merge, sell a controlling interest, or sell a majority of its
assets, the Company shall pay Executive two-hundred and fifty thousand
($250,000) dollars. Further, as to any vested but unexercised options to
purchases shares in the Company which are held by Executive at the earlier of
(1) the Company's execution of a Letter of Intent to (a) merge, (b) sell a
controlling interest, or (c) sell a majority of its assets, or (2) the date of
any such merger or sale is consummated, the Company shall pay Executive cash in
the amount equal to the number of vested options which Executive holds
multiplied by the difference between the consideration paid to the Company upon
a sale or merger of the Company on a per share basis less the exercise price of
the option.
4.7. Cash Incentive Bonus. The Company shall pay Executive an annual
--------------------
cash bonus ("Cash Bonus"). Said Cash Bonus shall equal two percent (2%) of the
Company's annual gross revenues in excess of one-million dollars, calculated
using Generally Accepted Accounting Principles. Said Cash Bonus shall be
payable annually no later than the fifteenth day of the third month following
the end of the Company's fiscal year.
4.8. Stock Bonus. The Company shall grant Executive options to
-----------
purchase up to Two hundred thousand (200,000) shares of the Company's stock on
August 1st of each year of this Agreement at the stock's then fair market value.
Ownership of said options shall vest with Executive on the same date. Fair
market value is defined as the closing price of those shares as they are then
being traded on any stock exchange (including any "over the counter" trades).
The options shall be exercisable for a period of ten (10) years commencing on
the date of their grant.
4
<PAGE>
Executive may exercise the options, at his sole and absolute
discretion, by providing the Company with written notice accompanied by cash or
a cashier's check an amount equal to the product of the option exercise price
and the number of shares Executive desires to purchase pursuant to this
provision. Further, in electing to exercise the options, Executive shall not be
bound to exercise any particular or minimum number of options. Rather, Executive
may elect to exercise all or a portion of the Options on such dates as Executive
may choose.
4.9 Incentive Stock Options. The Company shall issue incentive stock
-----------------------
options to Executive pursuant to the Company's qualified Incentive Stock Option
Plan. Upon the execution of this Agreement Executive will receive incentive
stock options equal to $100,000 at the date of grant which shall vest
immediately and shall terminate ten years from the date of grant. Executive may
exercise the incentive stock options, at his sole and absolute discretion, by
providing the Company with written notice accompanied by cash or a cashier's
check an amount equal to the product of the incentive stock option exercise
price and the number of shares Executive desires to purchase pursuant to this
provision. Further, in electing to exercise the incentive stock options,
Executive shall not be bound to exercise any particular or minimum number of
options. Rather, Executive may elect to exercise all or a portion of the
incentive stock options on such dates as Executive may choose.
4.10 Expenses. The Company shall reimburse Executive for all
--------
reasonable business or travel expenses and office related expenses incurred by
Executive in the performance of his duties; including but not limited to:
airfare, motor vehicle rental, lodging, meals, telephone, copy costs, and
supplies.
4.11 Housing Allowance. The Company shall pay Executive a housing
-----------------
allowance of $1,500 per month. Said amount shall be payable to Executive no
later than the tenth day of each month. Beginning on the first anniversary of
the Agreement's commencement, said housing
5
<PAGE>
allowance shall be adjusted for annual changes in the Consumer Price Index
("CPI"). Said adjustment shall occur on each subsequent anniversary of the
Agreement's commencement based on the prior year's CPI rate change. Further,
adjustments shall be cumulative.
4.12 Automobile Allowance. The Company shall pay Executive an
--------------------
automobile allowance of $500 per month. Said amount shall be payable to
Executive no later than the tenth day of each month.
4.13 Mobile Telephone. The Company will provide Executive with the
----------------
exclusive use of a mobile (cellular and/or digital) telephone. Such use shall
be reasonable in nature and will be predominately for business purposes.
4.14 Business Travel. The Company and Executive recognize that it may
---------------
periodically be necessary for Executive to travel on behalf of the Company. The
Company agrees that whenever Executive is required to travel a distance in
excess of that which may be reached within three hours or more by regularly
scheduled commercial air carriers, the Company will pay for Executive to travel
in business class or better. Further, regardless of whether the destination may
be reached in three hours or more, the Company shall pay for Executive to travel
business class or better if he would otherwise be required to take connecting,
stopover, or layover flights which would cumulatively result in a total travel
time of more than five hours.
5. Vacation, Sick Leave and Insurance
5.1 Annual Vacation. Executive shall be entitled to fifteen (15)
---------------
days vacation time each year without loss of compensation. In the event that
Executive is unable for any reason to take the total amount of vacation time
authorized herein during any year, any unused vacation time shall carry over
from year to year. Vacation days will accrue at the rate of 1.25 days per each
month of service rendered. Any earned but unused vacation time will be paid to
Executive based upon his annual rate of all compensation paid in the previous
twelve months upon termination or expiration
6
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of this Agreement.
5.2. Sick Leave. Executive shall be entitled to twelve (12) days
----------
sick leave each year without loss of compensation. In the event that Executive
is unable for any reason to take the total amount of vacation time authorized
herein during any year, any unused vacation time shall carry over from year to
year. Sick leave days will accrue at the rate of 1 day per each month of service
rendered. Any earned but unused sick leave will be paid to Executive based upon
his annual rate of all compensation paid in the previous twelve months upon
termination or expiration of this Agreement.
5.3. Health Insurance. The Company shall provide Executive and his
----------------
immediate family members with comprehensive PPO or POS health insurance which
shall cover, medical, dental and vision.
5.4 Long Term Disability Insurance. The Company shall provide
------------------------------
Executive with "long term disability" insurance coverage. Coverage shall be for
the maximum amount for which Executive is eligible under the insurance
guidelines; however, coverage will never be below an amount equal to sixty
percent (60%) of Executive's monthly base salary. Executives' Base Salary as set
forth in section 4.1 will be increased by an amount equal to the premium for the
long term disability insurance, but the premium will be paid by Executive to the
issuer of the policy or their agent.
5.4 Life Insurance. The Company shall provide Executive a "whole
--------------
life" Life Insurance policy in the amount of $500,000, naming such beneficiary
or beneficiaries as Executive may designate.
7
<PAGE>
6. Compensation Upon the Termination of Executive's Employment.
-----------------------------------------------------------
6.1 In the event this Agreement is terminated prior to its expiration
for any reason except for Cause, as defined below, Executive shall be entitled
to receive Executive's then current Base Salary, Housing and Automobile
allowance through the date he is terminated. Further, Executive shall retain all
rights to vested shares and stock options, and all other rights under
sections 4.2, 4.3, 4.5, 4.6, 4.7, 4.8, and 4.9 of this Agreement.
The benefits provided for in this provision are exclusive of any other
rights or remedies which Executive would possess in the event the Company
terminates the Agreement without cause. The Company agrees that in the event it
terminates Executive's employment without cause, Executive retains all rights
and remedies available under the law, and the Company will not urge or otherwise
argue or assert in any legal, including judicial or arbitration, proceeding that
any provision of this Agreement as constitutes a waiver of rights by Executive.
6.2 In the event that Executive's employment is terminated pursuant
to section 10.2, Executive's beneficiary or beneficiary designated by Executive
in writing to the Company, or in the absence of such beneficiary, Executive's
estate, shall be entitled to receive Executive's then current Base Salary
through sixty (60) days after the date of his death.
7. Proprietary Matter. Except as permitted or directed by the Company,
------------------
Executive shall not during the term of his employment or at any time thereafter
divulge, furnish, disclose, or make accessible (other than in the ordinary
course of the business of the Company) to anyone for use in any way any
confidential, secret, or proprietary knowledge or information of the Company
("Proprietary Matter") which Executive has acquired or become acquainted with or
will acquire or become acquainted with, whether developed by himself or by
others, including, but not limited to, any trade secrets, confidential or secret
designs, processes, formulae, software or computer programs, plans, devices or
material (whether or not patented or patentable, copyrighted or
8
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copyrightable) directly or indirectly useful in any aspect of the business of
the Company, any confidential customer, distributor or supplier lists of the
Company, any confidential or secret development or research work of the Company,
or any other confidential, secret or non-public aspects of the business of the
Company. Executive acknowledges that the Proprietary Matter constitutes a unique
and valuable asset of the Company acquired at great time and expense by the
Company, and that any disclosure or other use of the Proprietary Matter other
than for the sole benefit of the Company would be wrongful and would cause
irreparable harm to the Company. Both during and after the term of this
Agreement, Executive will refrain from any acts or omissions that would reduce
the value of Proprietary Matter to the Company. The foregoing obligations of
confidentiality, however, shall not apply to any knowledge or information which
is now published or which subsequently becomes generally publicly known, other
than as a direct or indirect result of the breach of this Agreement by
Executive.
8. Ventures. If, during the term of this Agreement, Executive is engaged
--------
in or associated with the planning or implementing of any project, program, or
venture involving the Company and a third party or parties, all rights in the
project, program, or venture shall belong to the Company and shall constitute a
corporate opportunity belonging exclusively to the Company. Except as expressly
approved in writing by the Company, Executive shall not be entitled to any
interest in such project, program, or venture or to any commission, finder's fee
or other compensation in connection therewith, other than the compensation to be
paid to Executive as provided in this Agreement.
9. Solicitation of Employees.
--------------------------
9.1. Agreement Not to Solicit Employees. During his employment by the
----------------------------------
Company hereunder and for the one (1) year period following the termination of
such employment for any reason, Executive shall not, either directly or
indirectly, on his own behalf or in the service or on
9
<PAGE>
behalf of others solicit, divert or hire away, or attempt to solicit, divert or
hire away any person then employed full time by the Company.
10. Termination Prior to Expiration of the Term.
-------------------------------------------
10.1 Disability. Executive's employment shall terminate upon
----------
Executive becoming totally or permanently disabled for a period of six (6)
months or more. For purposes of this Agreement, the term "totally or permanently
disabled" or "total or permanent disability" means Executive's inability on
account of sickness or accident, whether or not job related, to engage in
regularly or to perform adequately his assigned duties under this Agreement.
Prior to terminating the Agreement pursuant to this provision, the Company shall
engage and consult one or more physicians as may be reasonable.
10.2 Death of Executive. Executive's employment shall terminate
-----------------------
immediately upon the death of Executive.
10.3 Termination for Cause. The Company may only terminate
---------------------
Executive's employment for "Cause" (as hereinafter defined). Further, no
termination for "Cause" may be invoked by Company without first providing
Executive with at least thirty (30) days written notice to correct any breach,
default or causation. Such written notice shall set forth with reasonable
specificity the Company's basis for such notice of termination and Executive
shall have thirty (30) days to correct the condition set forth in the notice.
10.3.1. Cause Defined. For the purpose of this section, the
-------------
termination of this Agreement by Company for any of the following reasons shall
be considered termination for Cause:
(i) Commission of a criminal act involving fraud, embezzlement
or breach of trust or other act which would prohibit
Executive from holding his position under the rules of the
Securities and Exchange Commission.
(ii) Willful, knowing and malicious violation of written
corporate policy or rules of the Company.
10
<PAGE>
(iii) Willful, knowing and malicious misuse, misappropriation,
or disclosure of any of the Proprietary Matters..
(iv) Misappropriation, concealment, or conversion of any money
or property of the Company.
(v) Being under the habitual influence of intoxicating liquors
or controlled substances while in the course of
employment.
(vi) Intentional and non-trivial damage or destruction of
property of the Company. For purposes of this provision
non-trivial is defined to mean damage occurring in the
course of a single act or occurrence in an amount
exceeding four hundred dollars.
(vii) Reckless and wanton conduct which endangers the safety of
other persons or property during the course of employment
or while on premises leased or owned by the Company.
(viii) The performance of duties in a habitually unsatisfactory
manner after being repeatedly advised in writing by the
Company of such unsatisfactory performance.
(ix) Continued incapacity on the part of Executive to perform
his duties, unless waived by the Company.
10.5. Surrender of Records and Property. Upon termination of his
---------------------------------
employment with the Company, Executive shall deliver promptly to the Company all
records, electronic media, manuals, books, blank forms, documents, letters,
memoranda, notes, notebooks, reports, data, tables, and calculations or copies
thereof, which are the property of the Company and which relate in any way to
the business, products, practices or techniques of the Company, and all other
property (keys, office equipment, computers, mobile phones, credit cards, etc.)
of the Company and Proprietary Matter, including but not limited to, all
documents which in whole or in part contain any trade secrets or confidential
information of the Company, which in any of these cases are in his possession or
under his control.
11. Assignment. This Agreement shall not be assignable, in whole or in
----------
part, by either party without the written consent of the other party, except
that the Company may, without the
11
<PAGE>
consent of Executive, assign its rights and obligations under this Agreement to
any corporation, firm or other business entity (i) with or into which the
Company may merge or consolidate, or (ii) to which the Company may sell or
transfer all or substantially all of its assets or of which fifty percent (50%)
or more of the equity investment and of the voting control is owned, directly or
indirectly, by, or is under common ownership with, the Company. Upon such
assignment by the Company, the Company shall obtain the assignees' written
agreement enforceable by Executive to assume and perform, and after the date of
such assignment, the terms, conditions, and provisions imposed by this Agreement
upon the Company. After any such assignment by the Company and such written
agreement by the assignee, the Company shall be discharged from all further
liability hereunder and such assignee shall thereafter be deemed to be the
Company for the purposes of all provisions of this Agreement including this
section.
12. Indemnification. The company shall indemnify Executive as provided in
---------------
the California Corporations Code, Company Articles or Company's Bylaws in effect
at the commencement of this Agreement. The scope of indemnification to which
Executive is entitled shall not be diminished, but may be expanded by the
Company, by amendment of the Company's Bylaws, Articles of Incorporation or
otherwise. Executive shall indemnify and hold the Company harmless from all
liability for loss, damages or injury resulting from the negligence or
misconduct of Executive.
13. Miscellaneous.
-------------
13.1 Governing Law. This Agreement is made under and shall be
-------------
government by and construed in accordance with the laws of the State of
California.
13.2 Entire Agreement. This Agreement contains the entire agreement
----------------
of the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings with respect to such subject matter, and the
parties hereto have made no agreements, representations or
12
<PAGE>
warranties relating to the subject matter of this Agreement which are not set
forth herein. Any dispute(s) or differences(s) which arise during the course of
this Agreement and which either involve its interpretation or meaning, or relate
to performance required hereunder shall be submitted to and resolved by binding
arbitration; provided, however, that the parties are not waiving and are
expressly reserving their right to seek injunctive relief by judicial process.
Nevertheless, the parties may, by subsequent consent, agree to submit requests
for injunctive relief to an arbitrator or arbitration panel. If either party
shall, in the opinion of the other party, be in breach of or default in the
performance or observance of any term or condition of this Agreement, the non-
defaulting party shall notify the defaulting party in writing of such fact, and
the defaulting party shall have ten (10) days from the receipt of such notice to
remedy or correct such breach or default. If the non-defaulting party asserts
that the breach or default has not been timely and properly cured, it may
commence arbitration as described herein and ask the arbitrator to deem this
Agreement terminated and/or grant such relief as is shown appropriate. In the
event the parties are unable to agree upon an arbitrator to hear and resolve
their differences (hereinafter the "Dispute"), each party shall designate one
person licensed as an attorney in California. Said two attorneys shall select
the neutral arbitrator. Unless agreed upon by the parties to the contrary,
arbitration shall be by a single, neutral arbitrator (hereinafter, the
"Arbitrator"). If the two designated attorneys cannot agree on the selection of
the Arbitrator, the attorneys shall each select one arbitrator. The two
arbitrators so selected shall then confer and jointly select a third arbitrator
who shall preside over the parties' dispute as Arbitrator. The Arbitrator shall
have the full and absolute authority to interpret this Agreement, to deem
conduct by the parties as either in compliance with or in breach of this
Agreement, to terminate this Agreement, and (if a breach is found) to award
appropriate damages or relief. The Dispute shall be settled in accordance with
then existing substantive law and, to the fullest extent possible, with
California substantive law. While evidence may be
13
<PAGE>
accepted, omitted, considered or excluded in the discretion of the Arbitrator,
the Arbitrator shall be bound by the California rules of evidence and by the
California Arbitration Act (CCP 1280 et seq.). The final decision of the
Arbitrator shall be served on the parties, in writing, within twenty (20) days
after conclusion of the arbitration hearing. The Arbitrator's decision shall be
binding and conclusive. Neither party shall pursue, prosecute or otherwise file
any legal action or proceeding (other than to seek injunctive relief as
described above). Except as provided in CCP 1286.2, no appeal shall be taken
from the Arbitrator's decision or from any subsequent court order confirming
said decision. The parties shall equally advance the costs incurred by
arbitration. The Arbitrator, however, shall have the discretion to award such
costs as well as attorneys' fees to the party prevailing in the arbitration
proceedings.
13.3 Withholding Taxes. The Company may withhold from any benefits
-----------------
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
13.4 Amendments. No amendment or modification of this Agreement
----------
shall be deemed effective unless made in writing signed by the parties hereto.
13.5 No Wavier. No term or condition of this Agreement shall be
---------
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
13.6 Severability. To the extent any provision of this Agreement
------------
shall be invalid or unenforceable, it shall be considered deleted here from and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
14
<PAGE>
13.7 Survival. Sections 4.2, 4.3, 4.4, 4.5, 4.6, 6, 7, 8, and 9
--------
shall survive termination of this Agreement.
13.8 Notices. Any and all notices, requests or other communications
-------
required or permitted in or by any provision of this Agreement shall be in
writing and may be delivered personally or by certified mail directed to the
addressee at such person's or entity's last known post office address, and if
given by certified mail, shall be deemed to have been delivered when deposited
in such, mail postage prepaid.
13.9 Legal Proceedings. In the event of legal proceedings, including
------------------
arbitration as set forth in Section 14.2 above, the prevailing party shall be
entitled, in addition to such relief as is deemed to be appropriate, to recover
such costs and reasonable attorneys' fees as are incurred therein.
This Agreement is executed on ________________, 1999 at ________________,
California.
Company: Executive:
Virtgame.com Corp. Joseph R. Paravia
By: __________________________ ___________________________
Title:________________________ Joseph R. Paravia
15
<PAGE>
EXHIBIT 10.8
SECURITIES ACQUISITION AGREEMENT
AND PLAN OF REORGANIZATION
THIS SECURITIES ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION
("Agreement") is entered into on December 20, 1999 by and among VIRTGAME.COM
CORP., a Delaware corporation ("Virtgame"), PRIMELINE GAMING TECHNOLOGIES, INC.,
a California corporation ("PrimeLine"), and the stockholders of PRIMELINE listed
on the list of stockholders ("List of Stockholders") attached as Exhibit "A"
hereto and who have executed this Agreement ("Stockholders").
R E C I T A L S
---------------
A. The Stockholders are the sole stockholders of PrimeLine. PrimeLine has an
authorized capitalization consisting of 1,000,000 shares of no par value common
stock ("PrimeLine Common Stock"), of which 100,000 common shares ("PrimeLine
Shares") are issued, outstanding and held by the Stockholders.
B. The Stockholders wish to transfer, and Virtgame wishes to acquire, all of
the PrimeLine Shares on the Closing Date (as defined below), in exchange for
Virtgame's transfer to the Stockholders of an aggregate of 300,000 shares
("Virtgame Shares") of the $.00001 par value common stock ("Virtgame Common
Stock") of Virtgame, provided however, if the average closing sale price of
Virtgame Common Stock for the 5 trading days immediately preceding the date this
Agreement is executed is less than $3 per share, the Stockholders shall be
entitled to the number of Virtgame Common Shares equal to $900,000 divided by
such five day average closing sale price so determined. For example, if the
average closing sale price was $2.50 per share, the number of shares of Virtgame
Common Stock would be 360,000 (900,000 / 2.5 = 360,000). The exchange of the
PrimeLine Shares for the Virtgame shares shall be subject to and upon the terms
and conditions hereinafter set forth.
A G R E E M E N T
-----------------
It is agreed as follows:
1. SECURITIES ACQUISITION AND REORGANIZATION.
-----------------------------------------
1.1 Agreement to Exchange Securities. A plan of reorganization of
--------------------------------
Virtgame and PrimeLine pursuant to the provisions of Section 368(a)(1)(B) of the
Internal Revenue Code of 1986, is adopted as follows:
1.1.1 Subject to the terms and upon the conditions set forth
herein, each Stockholder agrees to assign, transfer and deliver to Virtgame, and
Virtgame agrees to acquire from each Stockholder, at the Closing, the PrimeLine
Shares owned by the respective Stockholder as set forth on the List of
Stockholders, in exchange for the transfer, at the Closing, by Virtgame to each
Stockholder of a pro rata share of the Virtgame Shares. A Stockholder's pro rata
share of the Virtgame Shares shall be determined by multiplying the total number
of the Virtgame Shares (e.g., 300,000 shares of Virtgame Common Stock) by a
fraction, the numerator of which is the total number of PrimeLine Shares owned
by the Stockholder at the Closing and the denominator of which is 100,000.
1
<PAGE>
1.1.2 It is the intent of the parties that the transactions
contemplated under this Agreement qualify as a tax free reorganization under (S)
368(a)(1)(B). As such, the Stockholders intend to be entitled to exchange the
PrimeLine Common Stock on a tax free basis.
1.2 Instruments of Transfer.
-----------------------
1.2.1 PrimeLine Shares. Each Stockholder shall deliver to
----------------
Virtgame at the Closing certificates representing his PrimeLine Shares, along
with duly executed stock powers, in form and substance satisfactory to Virtgame
in order to vest in Virtgame all of his right, title and interest in and to the
PrimeLine Shares. From time to time after the Closing Date, and without further
consideration, the Stockholders will execute and deliver such other instruments
of transfer and take such other actions as Virtgame may reasonably request in
order to more effectively transfer to Virtgame the securities intended to be
transferred hereunder.
1.2.2 Virtgame Shares. Virtgame shall deliver to the
---------------
Stockholders at the Closing Date certificates representing the Virtgame Shares,
in form and substance satisfactory to the Stockholders, in order to effectively
vest in the Stockholders all right, title and interest in and to the Virtgame
Shares. From time to time after the Closing Date, and without further
consideration, Virtgame will execute and deliver such other instruments and take
such other actions as the Stockholders may reasonably request in order to more
effectively issue to them the Virtgame Shares.
1.3 Closing. The closing ("Closing") of the exchange of the
-------
PrimeLine Shares and the Virtgame Shares shall take place at the offices of
Virtgame, at 12625 High Bluff Drive, Suite 205A, San Diego, California 92130, at
10:00 a.m., local time, on December 21, 1999, or such other date as agreed to
by the parties to this Agreement.
2. INVESTMENT REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each
-------------------------------------------------------------
Stockholder severally represents, warrants and covenants to and with Virtgame
with respect to himself, as follows:
2.1 Power and Authority. The Stockholder has all requisite
-------------------
individual power and authority to enter into and to carry out all of the terms
of this Agreement and all other documents executed and delivered in connection
herewith. All individual action on the part of the Stockholder necessary for
the authorization, execution, delivery and performance of the Agreement by the
Stockholder has been taken and no further authorization on the part of the
Stockholder is required to consummate the transactions provided for under this
Agreement. When executed and delivered by the Stockholder, this Agreement shall
constitute the valid and legally binding obligation of the Stockholder
enforceable in accordance with their respective terms.
2.2 Ownership of and Title to Securities. The Stockholders represent
------------------------------------
that the Stockholders are the sole owners of all of the issued and outstanding
shares of capital stock of PrimeLine and that there are no warrants, options,
subscriptions, calls, or other similar rights of any kind for the purchase of
any securities of PrimeLine held by the Stockholders or any other persons. The
Stockholder represents that the Stockholders has and will transfer to Virtgame
2
<PAGE>
good and marketable title to the PrimeLine Shares which he owns, free and clear
of all pledges, security interests, mortgages, liens, claims, charges,
restrictions or encumbrances.
2.3 Investment and Related Representations.
--------------------------------------
2.3.1 Virtgame Shares as "Restricted" Securities. The
------------------------------------------
Stockholder is aware that neither the Virtgame Shares nor the offer or sale
thereof to the Stockholder has been registered under the Securities Act of 1933,
as amended ("Securities Act"), or under any state securities law. The
Stockholder further understands that no registration statement has been filed
with the Securities and Exchange Commission ("SEC"), nor with any other state
regulatory authority and that, as a result, any benefit which might normally
accrue to an investor such as the Stockholder by an impartial review of such a
registration statement by the SEC or other regulatory commission will not be
forthcoming. The Stockholder acknowledges that the Virtgame Shares will be
characterized as "restricted" securities under federal securities laws inasmuch
as they are being acquired in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act only in certain limited
circumstances. The Stockholder represents that the Stockholder is familiar in
general with Rule 144 under the Securities Act (which provides generally for a
one year holding period and limitations on the amount of "restricted" securities
that can be publicly resold in compliance with the rule upon completion of the
holding period), and understands the resale limitations imposed thereby and by
the Securities Act. The Stockholder agrees that the Stockholder will not sell
any portion of Virtgame Shares except in accordance with an available exemption
from registration under the Securities Act. The Stockholder understands that
each certificate for the Virtgame Shares issued to the Stockholder or to any
subsequent transferee shall be stamped or otherwise imprinted with an
appropriate legend summarizing the restrictions described in this Section 2.3.1
and that Virtgame shall refuse to transfer the Virtgame Shares except in
accordance with such restrictions, such legend to be substantially as follows:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SUCH SECURITY MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION, IN EACH
CASE AS CONFIRMED IN AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY AND IN EACH CASE IN ACCORDANCE WITH ANY OTHER
APPLICABLE LAW.
2.3.2 Investment Representation. This Agreement is made with the
-------------------------
Stockholder in reliance upon the Stockholder's representation, which by the
Stockholder's execution of this Agreement the Stockholder hereby confirms, that
the Virtgame Shares to be received by the Stockholder are being acquired
pursuant to this Agreement for investment and
3
<PAGE>
not with a view to the public resale or distribution thereof unless pursuant to
an effective registration statement or exemption under the Securities Act.
2.3.3 No Public Solicitation. The Stockholder is acquiring the
----------------------
Virtgame Shares after private negotiation and has not been attracted to the
acquisition of the Virtgame Shares by any press release, advertising or
publication.
2.3.4 Access to Information. The Stockholder believes he has
---------------------
received all of the information it considers necessary or appropriate for
deciding whether to acquire the Virtgame Shares, including, but not limited to
the copies of the Virtgame Disclosure Reports (as defined in Section 4.6). The
Stockholder further represents that it has had an opportunity to ask questions
of, and to receive answers from, Virtgame regarding Virtgame, its business and
prospects, and the Virtgame Shares.
2.3.5 Investor Sophistication and Ability to Bear Risk of Loss.
--------------------------------------------------------
The Stockholder acknowledges that he is able to protect his interests in
connection with the acquisition of the Virtgame Shares and can bear the economic
risk of investment in such securities without producing a material adverse
change in the Stockholder's financial condition. The Stockholder otherwise has
such knowledge and experience in financial or business matters that the
Stockholder is capable of evaluating the merits and risks of the investment in
the Virtgame Shares.
3. REPRESENTATIONS AND WARRANTIES OF PRIMELINE AND THE STOCKHOLDERS.
----------------------------------------------------------------
PrimeLine and each of the Stockholders severally represents, warrants and
covenants to and with Virtgame with respect to itself or himself as follows:
3.1 Organization and Good Standing. PrimeLine is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of the State of
California and is a duly qualified to do business and is in good standing as a
foreign corporation under the laws of each jurisdiction in which the character
or location of the assets owned or leased by it require qualification, except
where the failure to so qualify would not materially adversely affect the
business or condition, financial or otherwise, of PrimeLine. PrimeLine has
delivered or prior to the Closing Date will deliver to Virtgame complete and
correct copies of its articles of incorporation and bylaws, as amended,
certified by the Secretary of PrimeLine to be complete and correct. PrimeLine
has no subsidiaries or equity ownership in any other entities.
3.2 Capitalization. The authorized capital stock of PrimeLine
--------------
consists of 1,000,000 shares of PrimeLine Common Stock, no par value, of which
100,000 shares are issued and outstanding. The PrimeLine Shares are duly
authorized and have been validly issued, fully paid and are nonassessable.
There are no agreements, options, warrants or other rights to purchase any
authorized and unissued shares of PrimeLine Common Stock, and there are no
voting, pooling or voting trust agreements, arrangements or contracts by and
among PrimeLine, its shareholders, or any of them with regard to PrimeLine
Common Stock.
3.3 No Governmental or Other Proceeding or Litigation. There are no
-------------------------------------------------
orders of any court or administrative agency is in effect which restrains or
prohibits PrimeLine or the Stockholder from consummating the transactions
contemplated hereby, and no suit, action,
4
<PAGE>
investigation, inquiry or proceeding by any governmental body or other person or
legal or administrative proceeding has been instituted or threatened which
questions the validity or legality of PrimeLine's or the Stockholder's
consummation of the transactions contemplated hereby.
3.4 Approvals and Consents. There are no permits, consents, mandates
----------------------
or approvals of public authorities, either federal, state or local, or of any
third party necessary for the Stockholder's consummation of the transactions
contemplated hereby.
3.5 Power and Authority. PrimeLine has all requisite corporate power
-------------------
and authority to enter into and to carry out all of the terms of this Agreement
and all other documents executed and delivered in connection herewith. All
corporate action on the part of PrimeLine necessary for the authorization,
execution, delivery and performance of this Agreement by PrimeLine has been
taken and no further authorization on the part of PrimeLine is required to
consummate the transactions provided for under this Agreement. When executed
and delivered by PrimeLine, this Agreement shall constitute the valid and
legally binding obligation of PrimeLine enforceable in accordance with its
terms.
3.6 Contracts and Agreements. The PrimeLine Disclosure Schedule
------------------------
attached hereto as Appendix 1 ("PrimeLine Disclosure Schedule") sets forth all
contracts and agreements to which PrimeLine is a party or by which it is bound.
Except as set forth in the PrimeLine Disclosure Schedule, none of the contracts
or agreements will expire or be terminated or be subject to any modification of
terms or conditions upon the consummation of the transactions contemplated by
this Agreement. PrimeLine is not in default in any material respect under the
terms of any such contract or agreement nor in default in the payment of any
principal of or interest on any indebtedness for borrowed money nor has any
event occurred which, with the passage of time or giving of notice, would
constitute such a default by PrimeLine and no other party to any such contract
or agreement is in default in any material respect thereunder nor has any such
event occurred with respect to such party.
3.7 PrimeLine Financial Statements. PrimeLine has delivered to
------------------------------
Virtgame the unaudited balance sheet of PrimeLine as of December 20, 1999 and
the related unaudited statements of income from the date of incorporation to
December 20, 1999, along with appropriate notes thereto (collectively the
"PrimeLine Financial Statements"). The PrimeLine Financial Statements are
correct in all material respects and fairly and accurately present the financial
position of PrimeLine as of the dates indicated and the results of its
operations for the periods indicated.
3.8 Absence of Undisclosed Liabilities. PrimeLine has no material
----------------------------------
liabilities or material obligations of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, which are not
reflected in the balance sheet included in the PrimeLine Financial Statements as
of the relevant date as a liability or by adequate reserves therefor or, in the
case of contingent liabilities, reflected in the notes thereto. There is no
fact known to PrimeLine which materially adversely affects or in the future is
likely to materially adversely affect the businesses, properties, assets or
revenues of PrimeLine which has not been described or set forth in the PrimeLine
Financial Statements.
5
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3.9 Absence of Adverse Changes. Except as disclosed in the PrimeLine
--------------------------
Financial Statements, since December 20, 1999, there has not been any material
adverse change in the working capital, financial condition, assets, liabilities
(whether absolute, accrued, contingent or otherwise), reserves, businesses,
properties or operations of PrimeLine.
3.10 Intellectual Property. The PrimeLine Disclosure Schedule sets
---------------------
forth all trademarks, trade names, copyrights, or applications (collectively,
the "Intellectual Property") therefor which are owned, used, registered in the
name of or licensed to PrimeLine. Except as disclosed in the PrimeLine
Disclosure Schedule, PrimeLine is the exclusive owner of all rights to the
Intellectual Property and no proceedings have been instituted or are pending or
threatened or contemplated which challenge the validity of the ownership by
PrimeLine of any item of such Intellectual Property. Except as disclosed in the
PrimeLine Disclosure Schedule, PrimeLine has not licensed, assigned or otherwise
granted to a third party any rights of use to any such Intellectual Property
and, to the Stockholder's and PrimeLine's knowledge, there have been no
assignments or licensing of such rights.
3.11 Employee or Consulting Agreements. The PrimeLine Disclosure
---------------------------------
Schedule lists all plans, contracts, and arrangements, oral, implied or written,
including but not limited to union contracts, employment agreements, consulting
agreements, employee manuals, incentive payment plans and employee benefit
plans, whereunder PrimeLine has any obligations (other than obligations to make
current wage or salary payments terminable on notice of 90 days or less) to its
officers or employees or other persons or their beneficiaries or whereunder any
of such person owes money to PrimeLine, except to the extent any such obligation
is set forth in the PrimeLine Disclosure Schedule or the PrimeLine Financial
Statements.
3.12 Insurance. PrimeLine does not maintain any policies of fire and
---------
casualty, liability and other forms of insurance. PrimeLine is not subject to
any liabilities as a self-insurer of its business and property which could have
a material adverse impact on its business, properties or prospects, taken as a
whole.
3.13 Permits and Other Operating Rights. PrimeLine currently
----------------------------------
possesses all permits, licenses, certificates and other authorizations from
third parties, including, without limitation, foreign and domestic governmental
authorities, necessary or required by applicable provisions of law and judicial
decisions, and by the property and contract rights of third parties, for it to
own or lease its properties and assets and to operate its business in the manner
in which it is intended.
3.14 Personal Property, Inventories and Title to Property. All
----------------------------------------------------
personal property owned, leased or used by PrimeLine is reflected in the
PrimeLine Disclosure Schedule or the PrimeLine Financial Statements, and is in
good operating and working condition and fit for operation in the usual course
of business, ordinary wear and tear excepted. PrimeLine has good and marketable
title to all of its assets, and a good and valid leasehold interest in all
property leased by the corporation, free and clear of all liens.
3.15 Environmental Matters. There has been no manufacture, refining,
---------------------
storage, disposal or treatment of Hazardous Substances (as hereinafter defined)
by PrimeLine at any real property currently or in the past owned, operated,
used, leased or contracted for by PrimeLine, or
6
<PAGE>
otherwise in violation of any Environmental Laws (as hereinafter defined) or
which would require remedial action under any Environmental Law. PrimeLine has
not received (a) notice of any such violation with respect to any Hazardous
Substance at or by any of such real property, (b) notice from any governmental
agency that PrimeLine, or any present or former owner, lessee or operator of
such real property, is a potentially responsible party for cleanup liability
with respect to the emission, discharge or release of any Hazardous Substance or
for any other matter arising under the Environmental Laws or in any litigation,
administrative proceeding, finding, order, citation, notice, investigation or
complaint under any Environmental Law, or (c) notice of violation, citation,
complaint, request for information, order, directive, compliance schedule,
notice of claim, proceeding or litigation from any party concerning PrimeLine's
compliance with any Environmental Law. As used herein "Environmental Laws" means
the all laws, regulations, orders or decrees issued or promulgated within the
U.S. or any jurisdiction within its boundaries relating to pollution, the
protection of the environment or the health and safety of workers or the general
public. As used herein "Hazardous Substance" means any hazardous substance,
hazardous or toxic waste, hazardous material, pollutant or contaminant, as those
or similar terms are used in the Environmental Laws, including, without
limitation, asbestos and asbestos-related products, chlorofluorocarbons, oils or
petroleum derived compounds, polychlorinated biphenyl, pesticides and radon.
3.16 Tax Matters. PrimeLine has timely filed all tax returns and all
-----------
information returns and reports required to be filed by or with respect to it
under the laws of its jurisdiction for all periods ending on or prior to the
date hereof and will timely file all such returns and reports required to be
filed from the date hereof through the Closing Date. PrimeLine has paid all
taxes which have become due or payable, and will pay on or prior to the Closing
Date all taxes which have become due or payable on or prior to the Closing Date.
3.17 Transactions with Affiliates. PrimeLine has not purchased,
----------------------------
acquired or leased any property or services from, or sold, transferred or leased
any property or services to, or loaned or advanced any money to, or borrowed any
money from, or guaranteed or otherwise become liable for any indebtedness or
other obligations of, or acquired any capital stock, obligations or securities
of, or made any management, consulting or similar fee arrangement with any
officer, director, employee or stockholder of PrimeLine nor any spouse, child or
entity controlled, controlling or under common control by any such person, nor
is PrimeLine a party to any agreement oral or written with respect to any of the
foregoing.
3.18 Brokerage. No broker or finder has acted directly or indirectly
---------
for PrimeLine or any Stockholder in connection with this Agreement or the
transactions contemplated hereby, and no broker or finder is entitled to any
brokerage or finder's fee or other commission in respect thereof based in any
way on agreements, arrangements or understandings made by or on behalf of
PrimeLine or any Stockholder.
3.19 Other Information. No portion of this Agreement, any Schedule
-----------------
or Exhibit attached hereto or any other document furnished or to be furnished by
PrimeLine or any Stockholder or any of its authorized representatives to
Virtgame or any of its authorized representatives is false or misleading or
omits to state a fact required to be stated therein in order to make any of the
statements therein not misleading in light of the circumstances under which they
were made. There is no fact known to PrimeLine or any Stockholder which
adversely
7
<PAGE>
affects or in the future is likely to adversely affect PrimeLine which has not
been described or set forth or referred to in this Agreement, any Schedule or
Exhibit hereto or any other document.
4. REPRESENTATIONS AND WARRANTIES OF VIRTGAME. Virtgame represents,
------------------------------------------
warrants and covenants to and with each of the Stockholders as follows:
4.1 Organization and Good Standing. Virtgame 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.
4.2 Capitalization. The authorized capital stock of Virtgame
--------------
consists of 10,000,000 shares of Preferred Stock, $.00001 par value, of which no
shares are issued, and 30,000,000 shares of Virtgame Common Stock, $.00001 par
value, of which 9,922,084 shares are issued and outstanding as of the date of
this Agreement. All outstanding shares of Virtgame Common Stock have been duly
authorized and validly issued, and are fully paid, nonassessable, and free of
any preemptive rights.
4.3 No Governmental or Other Proceeding or Litigation. Virtgame
-------------------------------------------------
represents that, to its knowledge, no order of any court or administrative
agency is in effect which restrains or prohibits Virtgame from consummating the
transactions contemplated hereby, and no suit, action, investigation, inquiry or
proceeding by any governmental body or other person or legal or administrative
proceeding has been instituted or threatened which questions the validity or
legality of Virtgame's consummation of the transactions contemplated hereby.
4.4 Validity of Transactions. This Agreement, and each document
------------------------
executed and delivered by Virtgame in connection with the transactions
contemplated by this Agreement, and the performance of the transactions
contemplated therein have been duly authorized, executed and delivered by
Virtgame and is each the valid and legally binding obligation of Virtgame,
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 Virtgame Shares issuable hereunder, when issued in accordance
with the terms of this Agreement, will be duly authorized, validly issued, fully
paid and nonassessable. The Virtgame Shares will be free of any liens or
encumbrances, except for any restrictions imposed by federal or state securities
laws.
4.5 Approvals and Consents. Virtgame represents that, to its best
----------------------
knowledge, there are no permits, consents, mandates or approvals of public
authorities, either federal, state or local, or of any third party necessary for
Virtgame's consummation of the transactions contemplated hereby.
4.6 Financial Statements; SEC Reports. Virtgame has furnished to the
---------------------------------
Stockholders its consolidated balance sheet as of the end of its fiscal year
ended December 31, 1998 and its consolidated statements of earnings,
stockholders' equity and cash flows for the fiscal years ended December 31,
1998, 1997 and 1996, together with appropriate notes to such consolidated
financial statements, accompanied by reports thereon containing opinions without
comment or qualification, except as therein noted, by its independent certified
public
8
<PAGE>
accountants. Virtgame has also furnished to the Stockholders its unaudited
consolidated condensed balance sheet as of September 30, 1999 and its unaudited
consolidated condensed statements of earnings and cash flows of the nine months
ended September 30, 1999.
All of the foregoing consolidated financial statements (collectively,
the "Virtgame Financial Statements"), including in each case the related notes,
have been prepared in conformity with generally accepted accounting principles
consistently applied and are correct and complete in all material respects and
such consolidated financial statements fairly present the financial position of
Virtgame as of the dates of such balance sheets and the results of operations
for the respective periods indicated.
Virtgame has also furnished to the Stockholders (i) its Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998, (ii) all quarterly
reports on Form 10-QSB and current reports on Form 8-K which it has filed with
the SEC since December 31, 1998, and (iii) its private placement memorandum
dated September 7, 1999. The aforementioned reports and memoranda are sometimes
collectively referred to as the "Virtgame Disclosure Reports."
4.7 Absence Of Undisclosed Liabilities. Virtgame has no material
----------------------------------
liabilities, fixed or contingent, other than (i) liabilities fully reflected in
the Virtgame Financial Statements, or (ii) liabilities incurred since September
30, 1999 in the ordinary course of business or as contemplated or permitted by
this Agreement, all of which in the aggregate, taking into consideration all
other changes in the financial condition of Virtgame in the ordinary course of
business, have had no material adverse effect on the financial position or
results of operations of Virtgame or on the conduct of its businesses.
4.8 Absence Of Adverse Changes. Except as disclosed in the Virtgame
--------------------------
Financial Statements, since September 30, 1999, there has not been any material
adverse change in the assets or liabilities or in the condition, financial or
otherwise, or business, properties, earnings or net worth of Virtgame, or (ii)
any damage or destruction in the nature of a casualty loss, whether covered by
insurance or not, materially and adversely affecting any property or business of
Virtgame which is material to the consolidated financial condition, operation or
business of Virtgame.
4.9 Other Information. No portion of this Agreement, any Schedule or
-----------------
Exhibit attached hereto or any other document furnished or to be furnished by
Virtgame or any of its authorized representatives to the Stockholders or any of
their authorized representatives is false or misleading or omits to state a fact
required to be stated therein in order to make any of the statements therein not
misleading in light of the circumstances under which they were made. There is
no fact known to Virtgame which adversely affects or in the future is likely to
adversely affect Virtgame which has not been described or set forth or referred
to in this Agreement, any Schedule or Exhibit hereto or any other document.
5. CERTAIN ADDITIONAL UNDERSTANDINGS AND AGREEMENTS.
------------------------------------------------
5.1 PrimeLine Sports Book System. Each of the Stockholders further
----------------------------
represents, warrants and covenants with respect to the PrimeLine Sports Book
System (as defined below) as follows:
9
<PAGE>
5.1.1 At the time of the formation of PrimeLine, I contributed to
PrimeLine all of my right, title and interest in and to that certain License
Agreement ("License Agreement") dated June 15, 1997 between ASEG, Inc. and the
Stockholders, including all of my right, title and interest in and to the
Licensed Products (as that term is defined in Section 1.3 of the License
Agreement") and any improvements to, advancements on and successions to the
Licensed Products from the date of the License Agreement (collectively referred
to as the "PrimeLine Sports Book System"). I hereby confirm that I have no
interest in or rights to the PrimeLine Sports Book System or any competing
technology and, to my knowledge, other than as set forth on the Disclosure
Schedule other, no other person has any interest in or rights to the PrimeLine
Sports Book System other than PrimeLine.
5.1.2 I agree that, upon request and without compensation therefor,
but at no expense to or commitment of significant time by me, I will do all
lawful acts, including the execution of papers and lawful oaths and the giving
of testimony, that in the opinion of PrimeLine, its successors and assigns, may
be necessary or desirable in obtaining, sustaining, reissuing, extending and
enforcing United States and foreign Letters Patent, including design patents, on
the PrimeLine Sports Book System, and for perfecting, affirming, maintaining and
recording Primeline's complete ownership and title thereto, and to otherwise
cooperate in all proceedings and matters relating thereto.
5.1.3 I agree that all right, title and interest in any and all
copyrights, copyright registrations and copyrightable subject matter relating to
the PrimeLine Sports Book System which occurred as a result of my employment
with PrimeLine shall be the sole and exclusive property of PrimeLine, and agree
that any such works comprised works made for hire. I hereby assign, and agree
to assign, all right, title and interest in any and all copyrights, copyright
registration and copyrightable subject matter which occurred as a result of my
employment to PrimeLine. I hereby irrevocably appoint PrimeLine as my attorney-
in-fact for the purpose of executing any and all documents and performing any
and all other acts necessary to give effect and legality to the provisions of
this paragraph and paragraph 5.1.2.
5.2 Approvals and Consents.
----------------------
5.2.1 In General. The parties hereto shall each use all reasonable
----------
best efforts to obtain, and shall not take any action which jeopardizes
obtaining, the necessary approvals and consents of other persons and
governmental authorities required to be obtained to consummate the transactions
contemplated by this Agreement.
5.2.2 PrimeLine and Stockholders Compliance with Securities Laws.
----------------------------------------------------------
PrimeLine and each Stockholder shall take such actions as shall be required in
order to exempt the transfer of the PrimeLine Shares to Virtgame from the
registration and prospectus delivery requirements under the Securities Act and
applicable state securities laws.
5.2.3 Virtgame Compliance with Securities Laws. Virtgame shall
----------------------------------------
cooperate with the Stockholders in taking such actions as shall be required in
order to exempt the
10
<PAGE>
offer and sale of the Virtgame Shares to the Stockholders from the registration
and prospectus delivery requirements under the Securities Act and applicable
state securities laws.
5.3 Survival of Representations and Warranties.
------------------------------------------
5.3.1 PrimeLine and Stockholders. The representations and warranties
--------------------------
of PrimeLine and the Stockholders made herein shall not be affected by any
information furnished to, or investigations made by Virtgame or any of its
employees or representatives in connection with the subject matter of this
Agreement. The representations and warranties of the Stockholders shall survive
the execution and delivery of this Agreement and the consummation of the
transactions contemplated thereby for a period of four (4) years after the
Closing Date. The representations and warranties of PrimeLine shall not survive
the Closing.
5.3.2 Virtgame. The representations and warranties of Virtgame made
--------
herein shall not be affected by any information furnished to, or investigations
made by, PrimeLine or the Stockholders, or any of their employees or
representatives, in connection with the subject matter of this Agreement and
shall survive the execution and delivery of this Agreement and the consummation
of the transactions contemplated thereby for period of four (4) years after the
Closing Date.
5.4 Conduct of Business Prior to the Closing Date. From the date hereof
---------------------------------------------
until the Closing Date, PrimeLine and the Stockholders shall each act as
follows, except as otherwise expressly consented to in writing by Virtgame or
for such actions taken to consummate the transactions in accordance with this
Agreement as contemplated thereby:
5.4.1 Notification. PrimeLine and the Stockholders shall each
------------
immediately notify Virtgame the other of any material breaches of the
representations and warranties or any material nonfulfillment of the covenants,
agreements or obligations of it or of any developments which could materially
adversely affect the value of the PrimeLine Shares. Without limiting the
foregoing, PrimeLine and the Stockholders shall each immediately notify Virtgame
of (1) any unexpected emergency or other material change in the normal course of
business or in the operation of PrimeLine's properties, (2) the instigation of
or any material development in any litigation or regulatory proceedings,
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) in which PrimeLine is named as a
party, and (3) budgets, capital expenditures and material decisions involving
its material properties or assets. PrimeLine and the Stockholders shall each
keep Virtgame fully informed of such events and permit its representatives
access to all materials prepared in connection therewith.
5.4.2 Forbearance. From the effective date hereof to the Closing
-----------
Date, PrimeLine shall not: (1) amend its articles of incorporation or bylaws;
(2) issue any shares of capital stock or securities convertible into any such
securities or enter into any agreement or commitment with respect to the
issuance or purchase of any such securities; (3) declare, pay or set aside for
payment any dividend or distribution in respect to any securities, or redeem,
purchase or otherwise acquire any securities any options, warrants or other
rights to purchase or subscribe to any securities; (4) make or contract for any
capital investment, capital expenditure, capital addition or capital
improvement; (5) negotiate with any person other than Virtgame
11
<PAGE>
concerning any merger, disposition of all or substantially all of its business,
properties, or assets, any tender offer, acquisition or other business
combination, other than the transactions provided for in this Agreement; (6)
borrow or agree to borrow any funds; (7) pay, discharge or satisfy any claims,
liabilities or obligations except in the ordinary course of business; (8) permit
or allow any of the assets to be subjected to any lien; (9) cancel or amend any
debts, waive any claims or rights or sell, transfer or otherwise dispose of any
properties or assets, (other than (i) inventory in the ordinary course of
business or (ii) for such debts, claims, rights, properties or assets which,
individually or in the aggregate, are not material to the conduct of its
business; (10) license, sell, transfer, pledge, modify, disclose, dispose of or
permit to lapse any right to the use of any Intellectual Property rights; (11)
make or enter into any commitment for capital expenditures for additions to
property, plant or equipment of PrimeLine individually in excess of $5,000.00;
(12) pay, lend or advance any amounts to, or sell, transfer or lease any
properties or assets to, or enter into any agreement or arrangement with, any
shareholder, director, officer or employee of the Company; (13) acquire any of
the business or assets of any other person, firm, association or corporation;
(14) organize any new subsidiary, acquire any capital stock or other debt or
equity securities of any corporation, enter into any partnership or joint
venture or acquire any equity or ownership interest in any business; or (15)
take any action which would cause or constitute a material breach, or would, if
it had been taken prior to the date hereof, have caused a material breach of the
representations and warranties of it set forth herein.
5.5 Access. Each of the parties hereto may, prior to the Closing
------
Date, through its respective representatives, make such reasonable investigation
as is permitted by the laws of its respective jurisdiction of organization of
the property, records and the financial condition of the other parties hereto as
it reasonably deems necessary or advisable to assure itself of the accuracy of
the representations and warranties of the other parties hereto and compliance by
the other parties hereto with all agreements and conditions to be satisfied by
them. Such investigation shall be done at reasonable times and under reasonable
circumstances. Each party shall each keep confidential in the same manner in
which it preserves its own confidential information any information so obtained
which is not otherwise publicly available or ascertainable and to which it has
been given access by another party, subject to applicable reporting and
disclosure requirements under applicable federal and state laws, including
without limitation securities laws. Nothing in this Section 5.4 shall be deemed
to constitute a waiver by any party, or an agreement of any party to waive, with
respect to any document, any claim of attorney-client privilege or legal or
contractual privilege or requirement of confidentiality; provided, however, that
the party claiming such privilege or requirement shall identify to the extent it
is legally permitted the subject matter thereof to the party seeking such
document.
5.6 Indemnification.
---------------
5.6.1 Indemnification by Virtgame. Virtgame agrees to
---------------------------
indemnify, defend and hold harmless the Stockholders against and in respect of
any and all claims, demands, losses, costs, expenses, liabilities and damages,
including interest, penalties, and reasonable attorneys' fees, that the
Stockholders shall incur or suffer which arise, result from or relate to any
material inaccuracy in or material breach or nonfulfillment of any of the
representations, warranties, covenants or agreements made by Virtgame in this
Agreement, the schedules or exhibits hereto or in any other document furnished
by Virtgame under this Agreement.
12
<PAGE>
5.6.2 Indemnification by PrimeLine and the Stockholders. PrimeLine
-------------------------------------------------
and each Stockholder agrees to indemnify, defend and hold harmless Virtgame
against and in respect of any and all claims, demands, losses, costs, expenses,
liabilities and damages, including interest, penalties, and reasonable
attorneys' fees, that Virtgame shall incur or suffer which arise, result from or
relate to any material inaccuracy in or material breach of nonfulfillment of any
of the representations, warranties, covenants or agreements made by PrimeLine or
the Stockholder in this Agreement, the schedules or exhibits hereto or in any
other document furnished by PrimeLine or the Stockholder under this Agreement.
5.6.3 Procedures; Rights to Separate Counsel. In the event any party
--------------------------------------
receives a complaint, claim or other notice of any loss, claim or damage,
liability or action, giving rise to a claim for indemnification under this
Section 5.5, the party claiming indemnification shall promptly notify the
indemnifying party of such complaint, notice, claim or action, and such
indemnifying party shall have the right to investigate and defend any such loss,
claim, damage, liability or action. The party claiming indemnification shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof but the fees and expenses of such counsel shall not be at
the expense of the indemnifying party, unless the indemnifying party fails to
promptly defend, in which case the fees and expenses of such separate counsel
shall be borne by the indemnifying party. In no event shall an indemnifying
party be obligated to indemnify another party for any settlement of any claim or
action effected without the indemnifying party's prior written consent.
6. Conditions to the Obligations of PrimeLine and the Stockholders.
---------------------------------------------------------------
The obligations of PrimeLine and the Stockholders, hereunder are subject to the
fulfillment at or before the Closing, of the following conditions (any of which
may be waived in writing by PrimeLine and the Stockholders):
6.1 Representations and Warranties, Etc. The representations and
-----------------------------------
warranties of Virtgame contained herein shall have been true and correct in all
material respects when made and as of the Closing, except as affected by actions
taken after the date hereof with the prior written consent of the Stockholders.
6.2 Performance of Covenants. Virtgame shall have performed and
------------------------
complied in all material respects with all covenants, agreements, terms and
conditions and executed all documents required by this Agreement to be
performed, complied with, or executed by it prior to the Closing.
6.3 No Governmental or Other Proceeding or Litigation. No order of
-------------------------------------------------
any court or administrative agency shall be in effect which restrains or
prohibits the transactions contemplated hereby, and no suit, action,
investigation, inquiry or proceeding by any governmental body or other person or
legal or administrative proceeding shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated
hereby.
6.4 Approvals and Consents. All permits, consents or approvals of
----------------------
applications to public authorities, federal, state or local, and all approvals
of any third persons, including without limitation all approvals or consents
under applicable federal or state securities
13
<PAGE>
laws, the granting of which are necessary for the consummation of the
transactions contemplated hereby shall have been obtained.
6.5 Delivery of Instruments of Transfer. Virtgame shall have
-----------------------------------
delivered to the Stockholders or their representatives certificates evidencing
Virtgame Shares.
7. Conditions to the Obligations of Virtgame. The obligations of
-----------------------------------------
Virtgame hereunder are subject to the fulfillment on or before the Closing, of
the following conditions (any of which may be waived in writing by Virtgame):
7.1 Representations and Warranties. The representations and
------------------------------
warranties of PrimeLine and the Stockholders contained herein shall have been
true and correct in all material respects when made and shall be true and
correct in all material respects as of the Closing.
7.2 Performance of Covenants. PrimeLine and the Stockholders shall
------------------------
have performed and complied in all material respects with all covenants,
agreements, terms and conditions and executed all documents required by this
Agreement to be performed, complied with or executed by them prior to or at the
Closing.
7.3 No Governmental or Other Proceeding or Litigation. No order of
-------------------------------------------------
any court or administrative agency shall be in effect which restrains or
prohibits the transactions contemplated hereby, and no suit, action,
investigation, inquiry or proceeding by any governmental body or other person or
legal or administrative proceeding shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated
hereby.
7.4 Approvals and Consents. All permits, consents or approvals of
----------------------
applications to public authorities, federal, state or local, and all approvals
of any third persons, including without limitation all approvals or consents
under applicable federal or state securities laws, the granting of which are
necessary for the consummation of the transactions contemplated hereby shall
have been obtained.
7.5 Instruments of Transfer. The Stockholders shall have delivered
-----------------------
to Virtgame certificates representing their PrimeLine Shares, along with duly
executed stock powers, in form and substance reasonably satisfactory to Virtgame
and its counsel as shall be necessary to effectively transfer all of the
Stockholders' right, title and interest in the PrimeLine Shares to Virtgame.
8. MISCELLANEOUS.
-------------
8.1 Cumulative Remedies. Any person having any rights under any
-------------------
provision of this Agreement will be entitled to enforce such rights
specifically, to recover damages by reason of any breach of any provision of
this Agreement, and to exercise all other rights granted by law, which rights
may be exercised cumulative and not alternatively.
8.2 Successors And Assigns. The rights and obligations of the
----------------------
parties under this Agreement shall not be assignable without the written consent
of PrimeLine and the Stockholders, on the one hand, and Virtgame, on the other
and any such purported assignment
14
<PAGE>
without their written consent shall be void ab initio. Except as otherwise
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
8.3 Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement or the other documents.
8.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts when taken together will constitute one and the
same agreement.
8.5 Notices. Any approvals, consents or notices required or
-------
permitted to be sent or given shall be delivered in writing personally or
mailed, certified mail, return receipt requested, to the following addresses and
shall be deemed to have been received within five days after such mailing:
If to PrimeLine: PrimeLine Gaming Technologies, Inc.
11543 Hadar Drive
San Diego, California 92126
Attn: Ronald M. Anders, President
If to the Stockholders: Address set forth on Exhibit A
If to Virtgame: Virtgame. Com Corp.
12625 High Bluff Drive, Suite 205A
San Diego, California 92130
Attn: Joseph R. Paravia, Chief Executive
Officer
8.6 Governing Law; Arbitration. The validity, meaning and effect of
--------------------------
this Agreement shall be determined in accordance with the laws of the State of
California applicable to contracts made and to be performed in that state,
without regard to its conflicts of laws rules; provided however that the Federal
Arbitration Act of the United States shall govern issues as to arbitrability.
If a dispute arises in connection with or relating to this Agreement and the
parties are unable to resolve it within forty-five (45) days through direct
negotiations, the dispute shall be referred to final and binding arbitration to
be held in San Diego, California, in accordance with the rules of the American
Arbitration Association for International Arbitration (as they may be amended
from time to time). The award of the arbitrator(s) shall be final and binding
upon the parties hereto and may be enforced by any court of competent
jurisdiction.
8.7 Schedules And Exhibits. The Recitals and all schedules and
----------------------
exhibits are an integral part of this Agreement and are incorporated herein by
this reference.
8.8 Litigation Costs. If any legal action or any arbitration or
----------------
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach,
15
<PAGE>
default, or misrepresentation in connection with any of the provisions thereof,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.9 Entire Agreement. This Agreement constitutes the entire
----------------
agreement and understanding of the parties with respect to the subject matter
thereof, and supersedes all prior and contemporaneous agreements and
understandings.
8.10 Time. Time is of the essence of this Agreement.
----
IN WITNESS WHEREOF, each of the parties to this Agreement has executed or caused
this Agreement to be executed as of the date first above written.
"VIRTGAME.COM CORP."
Virtgame.Com Corp.,
a Delaware corporation
By:__________________________
Joseph R. Paravia, President
PrimeLine Gaming Technologies, Inc.,
a California corporation
By:___________________________
________________________
Ronald M. Anders
________________________
Hal S. Mirsky
________________________
Gary M. Baker
________________________
Steven G. Lutz
16
<PAGE>
EXHIBIT A
LIST OF STOCKHOLDERS
--------------------
Name and Address Number of PrimeLine
Shares Owned by
Stockholder
Ronald M. Anders 32,333 1/3
Hal S. Mirsky 32,333 1/3
Gary M. Baker 32,333 1/3
Steven G. Lutz 3,000
17
<PAGE>
EXHIBIT 10.9
SOFTWARE DEVELOPMENT, SERVICE AND LICENSE AGREEMENT
THIS SOFTWARE DEVELOPMENT, SERVICE AND LICENSE AGREEMENT (the "Agreement")
is entered into as of the date of the execution of this agreement between
VIRTGAME.COM CORP., a Delaware corporation ("Virtgame"), and COAST HOTELS AND
CASINOS, INC., a Nevada corporation ("Coast"). The Agreement shall not be
effective unless and until approved by the Board of Directors of Coast at its
January 17, 2000 meeting.
RECITALS
--------
A. Virtgame is engaged in the business of offering over the Internet
casino-style gaming operations and has successfully developed a web-based
software platform that allows Virtgame to accept sports wagers over the internet
from citizens of countries other than the United States of America.
B. Coast is engaged in the business of operating land-based casinos
licensed by the Nevada Gaming Commission ("Commission").
C. Coast wishes to engage Virtgame to develop a web-based software
platform and client interface that can be combined with Coast's existing and
future sportsbook network and operating procedures in order to allow Coast to
operate a closed loop intranet sports wagering system for individuals who are
using computers located in the State of Nevada.
D. Coast also wishes to obtain a non-exclusive 20 year license from
Virtgame for the developed system and to enter into an agreement with Virtgame
guaranteeing Coast that Virtgame will service (repair, upgrade and integrate)
the software for a ten year period at a specified price.
NOW THEREFORE, in consideration of the mutual covenants and promises of the
parties, the sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. The Service. Virtgame hereby agrees to develop, implement and install
-----------
on behalf of Coast a web-based software platform and client interface that can
be combined with Coast's existing and future sportsbook network and operating
procedures in order to allow Coast to operate a closed loop intranet sports
wagering system for individuals who are using computers located in the state of
Nevada. ("the Service"). Virtgame shall make available to Coast (at Virtgame's
wholesale cost), certain data processing machines and associated hardware and a
nonexclusive license to Virtgame's proprietary PrimeLine\\(Tm)\\ ticket
writer/cashier, administration, and server executable software for the Service
(herein referred to as the "PrimeLine Software"). All machines and hardware
made part of the Service shall be purchased at Coast's expense and, upon payment
thereof by Coast, shall be the property of Coast. It is currently estimated
that the cost of this hardware will be $45,000.
2. License. In connection with its provision of the Service, Virtgame
hereby grants Coast a nonexclusive and non-assignable 20 year license to the
PrimeLine Software. Coast shall have the right to utilize the PrimeLine "source
code" as necessary to make modifications to the
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
system to further the business goals of Coast but shall have no right to
disseminate the source code to any third party other than as necessary to modify
the software platform to further the business goals of Coast. Any disclosure to
a third party of the source code shall be accompanied by a "confidentiality
agreement" to be supplied by Virtgame and agreed to by Coast. The "source code"
shall be kept in escrow at Virtgame's attorneys' office at Oppenheimer, Wolff
and Donnelly in Newport Beach, California, using a standard software escrow
agreement provided by Virtgame and agreed to by Coast. Agreement with respect
to the escrow agreement shall be a condition precedent to the effectiveness of
this contract.
3. Duties and Responsibilities of Virtgame.
---------------------------------------
3.1 General Description of the Service. Virtgame shall be responsible for
----------------------------------
developing a web-based software platform to allow Coast to operate a closed loop
intranet sports wagering system for individuals who are using computers located
in the State of Nevada under performance standards that are at least equivalent
to services currently offered by "Sports Xction" which operates at the Union
Plaza Hotel in Las Vegas Nevada. Virtgame shall also be responsible for
obtaining approval from the Nevada Gaming Commission to have such software
installed for gaming licensees in the State of Nevada. Reports must be
generated which comply with the requirements of the Nevada Gaming Control Board.
Virtgame shall also assist Coast, at no additional charge, in integrating the
closed loop intranet sports wagering system with any other software system used
by Coast to operate writer/cashier and administration facilities.
Virtgame shall provide the following services:
a. General Features
1. Internet Portal with Coast Storefront (interface with current
homepage)
2. Server based homepage
3. User/Client Internet Interfaces and Accounts
4. Access Screening; Nevada Residents Only
5. Windows NT based Implementation
b. Internet Fixed-Odds Sports Portal
1. Real-Time Update to sporting event with lines displayed/updated
and selectable
2. User account definition and maintenance
3. Wagering and verification operating through a standard browser:
Netscape or Explorer
4. One Write feature that changes odds for both sides of a game
(or total on game) with one push of a button
-2-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
5. Must be able to take bets on round robins and parlays.
c. Back Office and Book Database
1. Fixed-Odds Sports Betting Back Office and Database
2. PC Windows NT-based hardware configurations
3. Full suite of Gaming Control Board approved reports
4. CD ROM report backup
5. Graphic Users Interface
The Service will be developed as described above, in accordance with the
various standards and models, as may be modified by mutual written agreement of
the parties. The relevant portions of Paragraph 3.1 may be superseded, as
applicable, by the detailed specifications for each module of the Service as the
parties may agree in writing from time to time.
3.2 Services of Virtgame. Virtgame agrees to:
--------------------
(a) develop, test and implement a real-time interface between
the PrimeLine Software, on the one hand, and Coast's
existing or future ticket writer/cashier and
administration facilities, on the other hand;
(b) provide overall monitoring of the volume of activity on
the Service and related network connections to anticipate
and facilitate provision of additional equipment as may be
required from time to time; and
(c) provide technical and application level support to Coast
in connection with its use of the Service.
3.3. Timeline. Virtgame will perform the Services described in this
paragraph and agree to have a working system installed for testing by
the Nevada Gaming Control Board no later than June 15, 2000.
4. Duties and Responsibilities of Coast. Coast shall be responsible for
------------------------------------
procuring all governmental approvals and licenses to utilize the PrimeLine
software in the acceptance of wagers and ensuring that the Service and its
operation complies with all applicable Federal and state gaming laws. In
addition, Coast shall:
(a) provide to Virtgame reasonable access to Coast's existing
ticket writer/cashier and administration facilities throughout
the term of this Agreement;
(b) provide Virtgame with the technical and other details
about Coast's existing and future ticket writer/cashier and
administration facilities and
-3-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
reasonable Coast staff resources necessary to allow Virtgame to
design a client interface for its PrimeLine Software programs
and combine that software platform with Coast's existing ticket
writer/cashier and administration facilities;
(c) purchase additional equipment after the date of
commencement of the Services, as necessary, according to the
volumes of usage of the Service;
(d) verify and authorize all users of the Service for
purposes of ensuring compliance with all applicable Federal and
state gaming laws;
(e) develop and implement a marketing plan to promote the
Service to existing and prospective Coast customers; and
(f) Permit Virtgame to conduct all "tests" required by the
Gaming Control Board at one of the hotel-casino properties
operated by Coast.
In addition to the foregoing, Coast shall use its best efforts to assist
Virtgame in marketing software systems similar to the Service to other land-
based casinos. In connection therewith, Coast shall allow other land-based
casinos access to the Service, upon reasonable advance notice, for purposes of
observing the Service and its operation. In consideration of Coast's efforts
under this paragraph, Virtgame shall pay to Coast ten percent (1 0%) of all
software license fees received by Virtgame from Nevada land-based casinos up to
an amount equal to the total amount of the Software Development and License Fees
paid by Coast under Section 5. 1.
5. Fees and Expenses. In consideration of its services hereunder, Coast
-----------------
shall pay Virtgame the following:
5.1 Software Development and License Fee. A software development and
------------------------------------
license fee in the amount of $175,000 only upon the occurrence of the following
conditions:
(a) successful installation of the system by Virtgame;
(b) written acceptance of the system by Coast; and
(c) Coast being licensed to operate the system by the Nevada Gaming
Commission.
If the system does not operate as required by paragraph 3 herein, Coast has
no obligation to make any payment to Virtgame and Virtgame shall not be entitled
to any sums from Coast under any legal or equitable theory until such time as
the system supplied by Virtgame, complies with the specifications set forth in
paragraph 3.1 and the requirements of paragraph 5.1 herein.
5.2 Monthly Maintenance Fees. A monthly maintenance and servicing fee of
------------------------
$800 payable on the 15th day of each month after installation and acceptance.
Virtgame shall be obligated to provide the monthly maintenance and servicing for
the sum of $800 per month for a ten year period and may increase such amount on
an annual basis by no more than the percentage
-4-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
increase in the Consumer Price Index for the Las Vegas metropolitan area. If
Virtgame wishes to increase the service fee, written notice of such increase,
within the parameters set forth herein, must be given to Coast at least 60 days
before the fee increase. Coast may cancel the maintenance and service contract
at any time upon 30 day written notice to Virtgame.
6. Termination A party may terminate this Agreement immediately upon
-----------
giving written notice of termination to the other party upon the occurrence of
any of the following events: (i) the other party failing to cure a material
breach hereof committed by that party within 30 days after receiving written
notice thereof, such notice to provide adequate description of the nature of the
breach; (ii) the institution of proceedings by the other party under bankruptcy
or insolvency laws, for corporate reorganization, receivership or dissolution,
or similar proceedings; (iii) the pendency for more than 90 days of proceedings
against the other party under bankruptcy or insolvency laws, for corporate
reorganization, receivership or dissolution, or similar proceedings; (iv) the
other party making a general assignment for the benefit of creditors; (v) the
other party becoming insolvent; or (vi) either party ceasing to do business or
to do business relevant hereunder.
7. Hold Harmless. Virtgame and Coast mutually agree to hold each other
-------------
harmless against any damages resulting from, but not limited to, data
transmission delays, telecommunications errors, server failures, power failures,
or any other event that brings about a disruption of the use of the Service,
unless such damages are caused by the negligence of the other party.
8. Copyright and Licensing Rights. Coast acknowledges and agrees that
------------------------------
the PrimeLine Software program is and shall remain the exclusive property of
Virtgame, subject to the non-exclusive license and source code access granted
under Section 2. Coast further acknowledges and agrees that the PrimeLine
Software comprises trade secrets protected by copyright law. Coast agrees not
to use, copy, modify or transfer any element of the PrimeLine Software except as
expressly provided for herein. Specifically, Coast agrees that it shall not
cause or allow the PrimeLine Software programs to be reverse engineered,
decompiled or disassembled, nor shall Coast otherwise attempt in any fashion to
obtain the source codes for the PrimeLine Software programs other than as
provided in paragraph 2. Coast acknowledges that Virtgame shall own all right,
title and interest in and to the PrimeLine Software program, along with the
underlying intellectual property and all modifications, translations and
improvements thereto.
9. Confidentiality
---------------
9.1 Confidentiality Obligations. During the term of this Agreement
---------------------------
and thereafter, except as specifically provided herein or to the extent
reasonably necessary to perform its obligations or exercise or enforce its
rights hereunder, neither party shall provide or disclose to any third party, or
itself use, unless authorized in writing to do so by the other party or required
by law, any information or matter that (i) constitutes or concerns the terms and
conditions of this Agreement, (ii) is provided to it by the other party
hereunder or as a result hereof, (iii) is owned by the other party as set forth
in Section 8, or (iv) regards any dealings or negotiations with the other party
related to this Agreement; provided, however, that the parties may consult with
their respective officers, employees, accountants, counsel, agents and advisors
-5-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
with respect to such information and matters if said parties agree to abide by
the terms and conditions of this Section 9.
9.2 Limitation on Confidentially. Except with respect to information
----------------------------
and matter constituting or concerning the terms and conditions of this Agreement
or regarding any dealings or negotiations between the parties hereunder, the
parties shall have no confidentiality obligation under Section 9.1 hereof with
respect to any information or matter specified therein that (i) is already known
to them, (ii) is rightfully disclosed to them by a third party that is not
acting as an agent or representative for the other party, (iii) is independently
developed by or for them, (iv) is publicly known, or (v) is generally utilized
by unaffiliated third parties engaged in the same business or businesses as the
parties. Any party claiming an exception to Section 9.1 hereof under this
Section 9.2 shall have the burden of proving the basis for the exception.
9.3. Confidentiality Standards. The parties shall follow the same
-------------------------
procedures to ensure their compliance with the requirements of Section 9.1
hereof as they follow to protect their own confidential and proprietary
information and matter of a similar nature.
9.4. Injunctive Relief Each party shall be entitled to injunctive
-----------------
relief to enforce the other party's compliance with the obligations contained in
Section 9.1 hereof, it being understood and agreed that the parties will not
have an adequate remedy at law if such obligations are not complied with.
10. Miscellaneous
-------------
10.1 Relationship of the Parties. The parties shall be independent
---------------------------
contractors hereunder and neither party shall have the power or authority to
bind the other party with respect to any third party. Except as specifically
provided herein, each party shall bear its own costs and expenses.
10.2. Effect of Agreement. This Agreement embodies the entire
-------------------
understanding between the parties with respect to the subject matter hereof and
supersedes any and all prior understandings and agreements, oral or written,
relating thereto. Any amendment hereof must be in writing and signed by both
parties.
10.3. Force Majeure. Each party's performance hereunder is subject
-------------
to interruption and delay due to causes beyond its reasonable control such as
acts of God, acts of any government, war or other hostility, the elements, fire,
explosion, industrial or labor dispute, inability to obtain necessary supplies
power failures, software failures, equipment failures, and telecommunication
failures and the like. In the event of such interruptions or delays, the period
of performance shall be extended for a period of time equal to the interruption
or delay; provided, however, that, if any such interruption or delay continues
for more than 90 days, the party whose performance is not affected may terminate
this Agreement immediately upon giving written notice of termination to the
other party.
10.4 LIMITATION OF LIABILITY. EXCEPT AS SPECIFICALLY
-----------------------
PROVIDED HEREIN, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY
HEREUNDER FOR ANY PROFITS LOST BY THE OTHER PARTY OR FOR ANY
CONSEQUENTIAL, EXEMPLARY, INCIDENTAL, INDIRECT OR SPECIAL DAMAGES
-6-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
SUFFERED BY THE OTHER PARTY, EVEN IF THE PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
10.5. Limitation of Claims. No claim, regardless of form, which in
--------------------
any way arises out of this Agreement or the parties' performance of this
Agreement may be made, nor action based upon such a claim brought, by either
party more than one year after the basis for the claim becomes known to the
party desiring to assert it.
10.6. Assignment. Neither this Agreement nor any part or portion
----------
hereof shall be assigned, sublicensed or otherwise transferred by either party
without the other party's prior written consent.
10.7 Severability. Should any provision of this Agreement be held
------------
to be void, invalid, unenforceable or illegal by a court, the validity and
enforceability of the other provisions shall not be affected thereby.
10.8. Non-waiver. Failure of either party to enforce any provision
of this Agreement shall not constitute or be construed as a waiver of such
provision nor of the right to enforce such provision.
10.9. Notices. All notices required to be given hereunder shall be
given in writing by personal delivery or by overnight mail to Virtgame at 12625
High Bluff Drive, Suite 205A, San Diego, California 92130, Attention: Joseph R.
Paravia or such other address as Virtgame may so designate, and to Coast at 4500
West Tropicana Ave., Las Vegas, Nevada 89103, Attention: President or such other
address as Coast may designate, with a copy mailed to Barry Lieberman, Esq.,
General Counsel, 4500 West Tropicana Ave., Las Vegas, Nevada 89103. Notice
shall be deemed given upon such delivery or when so mailed, respectively.
10.10. Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of Nevada.
10.11. Disputes. The parties shall attempt to resolve all disputes
--------
arising out of this Agreement in a spirit of cooperation without formal
proceedings. Any dispute which cannot be so resolved shall be subject to
arbitration upon written demand of either party. Arbitration shall take place
in Las Vegas, Nevada, or at another location if the parties so agree. The
arbitration shall take place before an arbitration panel chosen as follows: The
parties shall each choose an arbitrator, and the two arbitrators shall choose a
third arbitrator and determine the third arbitrator's compensation. Each party
shall have one veto over the choice of the third arbitrator. The three
arbitrators shall schedule an informal proceeding, hear the arguments, and
decide the matter by secret majority vote. Unless the arbitrators decide
otherwise, each party shall pay the costs of its own arbitrator, and shall pay
half of the other costs of the arbitration proceeding. Each party shall have
the right to have the proceedings transcribed. The arbitrators shall not have
the authority to award punitive damages or any other form of relief not
contemplated in the contract. The majority of arbitrators shall render a
written opinion setting forth the basis on which they arrived at the decision
regarding each issue submitted to arbitration; the dissenting arbitrator, if
any, shall not issue a dissenting opinion. Regarding each issue submitted to
arbitration, the decision shall be final and binding only to the extent it is
accompanied by a
-7-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
written explanation of the basis upon which it was arrived at. Judgment upon
the award if any, rendered by the arbitrators may be entered in any court having
jurisdiction thereof Should any legal action permissible under this agreement be
instituted to enforce the terms and conditions of this agreement, in particular
the right to collect money due on unpaid invoices, the prevailing party shall be
entitled to recover reasonable attorney's fees and expenses incurred at both the
trail and appellate levels.
10.12 Headings And Captions. The headings and captions contained in
---------------------
this Agreement are inserted for convenience only and shall not constitute a part
hereof.
11. Warranties and Representations. Virtgame warrants as follows:
------------------------------
(a) It has the legal authority and ability to enter into this
Agreement and to license the software that is the subject of this
agreement;
(b) That for a period of one year from the date of installation the
software installed shall be free from any defects;
(c) If within the warranty period, any Software defect is
discovered, Coast shall notify Virtgame of the defect. Within two
business days of any receipt of written notice of a software defect to
Virtgame, Virtgame shall repair the defect.
(d) Virtgame will provide service under the warranty and under the
maintenance agreement 12 hours per day, seven days per week. Non-
emergency support via telephone access will be provided from 6 a.m to
6 p.m. Pacific Standard Time, seven days per week
(e) It will indemnify Coast for all costs and attorneys fees incurred by
Coast in connection with any claims of patent infringement by third parties
against Coast arising from the operation by Coast of the Virtgame Primeline
system. Coast shall notify Virtgame of any claim of infringement within 20 days
after notice is received by Coast. Virtgame shall have the right to assume the
defense of any action claiming infringement and will not be liable to indemnify
Coast for costs and attorneys fees incurred by Coast after Virtgame notifies
Coast of its decision to assume the defense of the infringement case.
-8-
<PAGE>
DRAFT DATED NOVEMBER 17, 1999
IN WITNESS WHEREOF, the parties have executed this Agreement by their
authorized representatives as of the day and year first written above.
"VIRTGAME.COM"
VIRTGAME.COM CORP.,
a Delaware corporation
By: ___________________________
J R. Paravia, Chief Executive Officer
"COAST"
COAST HOTELS AND CASINOS, INC.
a Nevada corporation
By:___________________________
-9-
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<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 499,923
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 34,353
<INVENTORY> 0
<CURRENT-ASSETS> 734,936
<PP&E> 1,298,231
<DEPRECIATION> 266,154
<TOTAL-ASSETS> 2,052,096
<CURRENT-LIABILITIES> 528,934
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0
0
<COMMON> 105
<OTHER-SE> 1,523,059
<TOTAL-LIABILITY-AND-EQUITY> 2,052,099
<SALES> 465,327
<TOTAL-REVENUES> 465,327
<CGS> 80,654
<TOTAL-COSTS> 80,654
<OTHER-EXPENSES> 3,402,652
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<INTEREST-EXPENSE> 35,635
<INCOME-PRETAX> (3,047,832)
<INCOME-TAX> 2,887
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<NET-INCOME> (3,050,719)
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