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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 20-F
(MARK ONE)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-32793
WORLD GAMING PLC
----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
England and Wales
(Jurisdiction of Incorporation or Organization)
33 St. James Square
London, England
Tel: (44) 207-661-9332 Fax: (44) 207-661-9400
(Address of Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Ordinary
Shares, nominal value (pound)0.002 per share, represented by American Depositary
Shares evidenced by American Depositary Receipts.
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
NONE
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report:
As of April 30, 2001, the Registrant had 2 Ordinary Shares issued and
outstanding, nominal value (pound)0.01 per share.
Indicate by check mark whether the registrant: (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 / /
Indicate by check mark which financial statement item the registrant
has elected to follow.
/X/ Item 17 / / Item 18
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WORLD GAMING PLC
ANNUAL REPORT ON FORM 20-F
FOR THE FISCAL YEAR ENDED APRIL 30, 2001
TABLE OF CONTENTS
<Table>
CERTAIN DEFINITIONS AND CONVENTIONS...............................................................................1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................................................1
PART I............................................................................................................2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS................................................2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................................................2
ITEM 3. KEY INFORMATION......................................................................................2
SELECTED FINANCIAL DATA..............................................................................2
RISK FACTORS.........................................................................................3
ITEM 4. INFORMATION ON THE COMPANY...........................................................................9
HISTORY AND DEVELOPMENT..............................................................................9
OUR OPERATIONS......................................................................................10
RESTRUCTURING OF OPERATIONS.........................................................................11
MARKETING...........................................................................................12
COMPETITIVE ENVIRONMENT.............................................................................12
INTELLECTUAL PROPERTY...............................................................................12
TECHNOLOGY..........................................................................................13
PRODUCTS AND SERVICES...............................................................................14
GAMING PRODUCTS UNDER DEVELOPMENT...................................................................16
WORLD GAMING LICENSEES..............................................................................17
BUSINESS STRATEGY...................................................................................18
ORGANIZATIONAL STRUCTURE............................................................................19
GOVERNMENT LICENSING AND REGULATION AND RELATED RISKS...............................................21
PROPERTY, PLANTS AND EQUIPMENT......................................................................23
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................................................24
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)........................................................24
LIQUIDITY AND CAPITAL RESOURCES (CURRENCY AMOUNTS IN THOUSANDS).....................................26
CONTINGENCIES AND COMMITMENTS.......................................................................27
RESEARCH AND PRODUCT DEVELOPMENT....................................................................27
TREND INFORMATION...................................................................................28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................................................28
DIRECTORS AND SENIOR MANAGEMENT.....................................................................28
BACKGROUND INFORMATION CONCERNING DIRECTORS AND SENIOR MANAGEMENT...................................28
BACKGROUND INFORMATION CONCERNING CERTAIN KEY EMPLOYEES.............................................30
COMPENSATION........................................................................................31
WORLD GAMING PLC 2001 SHARE OPTION PLAN.............................................................33
BOARD PRACTICES.....................................................................................34
COMMITTEES OF THE BOARD OF DIRECTORS................................................................35
EMPLOYEES...........................................................................................35
SHARE OWNERSHIP OF SENIOR MANAGEMENT................................................................36
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................................................36
MAJOR SHAREHOLDERS..................................................................................36
RELATED PARTY TRANSACTIONS..........................................................................37
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ITEM 8. FINANCIAL INFORMATION...............................................................................37
CONSOLIDATED FINANCIAL STATEMENTS...................................................................37
LEGAL PROCEEDINGS...................................................................................37
POLICY ON DIVIDEND DISTRIBUTION.....................................................................40
ITEM 9. THE OFFER AND LISTING...............................................................................40
NATURE OF TRADING MARKET............................................................................40
DIVIDEND INFORMATION................................................................................41
REGISTRAR, TRANSFER AGENT AND DEPOSITARY............................................................41
ITEM 10. ADDITIONAL INFORMATION..............................................................................41
MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION...............................................41
BOARD ACTION AND POWERS.............................................................................42
DESCRIPTION OF SHARE CAPITAL........................................................................44
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS..................................48
CHANGE OF CONTROL...................................................................................49
MATERIAL CONTRACTS..................................................................................49
EMPLOYMENT AND CONSULTING AGREEMENTS................................................................51
TAXATION............................................................................................53
UNITED KINGDOM TAX CONSEQUENCES.....................................................................54
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.......................................................57
TAX CONSEQUENCES FOR U.S. HOLDERS...................................................................57
TAX CONSEQUENCES FOR NON-U.S. HOLDERS...............................................................62
TAXATION OF THE COMPANY.............................................................................63
DOCUMENTS ON DISPLAY................................................................................64
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................64
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............................................64
PART II..........................................................................................................64
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................................................64
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS........................65
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS............................................65
USE OF PROCEEDS FROM OFFERING.......................................................................65
PART III.........................................................................................................65
ITEM 17. FINANCIAL STATEMENTS................................................................................65
CONSOLIDATED FINANCIAL STATEMENTS...................................................................65
ITEM 18. FINANCIAL STATEMENTS................................................................................65
ITEM 19. EXHIBITS............................................................................................65
</Table>
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CERTAIN DEFINITIONS AND CONVENTIONS
IN THIS ANNUAL REPORT, REFERENCES TO THE "COMPANY", "WE", "US" AND
"OUR" REFER TO WORLD GAMING PLC AND ONE OR MORE OF ITS OPERATING SUBSIDIARIES
AS THE CONTEXT MAY REQUIRE. WORLD GAMING PLC AND ITS SUBSIDIARY, WG
INTERNATIONAL LTD, ARE HOLDING COMPANIES AND THEY CONDUCT THEIR BUSINESSES
THROUGH THEIR OPERATING SUBSIDIARIES. ALL REFERENCES TO "STARNET" REFER TO
ONE OF OUR SUBSIDIARIES, STARNET COMMUNICATIONS INTERNATIONAL, INC. AS A
RESULT OF A HOLDING COMPANY REORGANIZATION EFFECTIVE IN MAY 2001, WE BECAME A
SUCCESSOR TO THE BUSINESS OF STARNET. REFERENCES TO $ AND "U.S. DOLLARS" ARE
TO UNITED STATES CURRENCY, ANY REFERENCES TO "(POUND)", "POUNDS STERLING",
"PENCE" OR "P" ARE TO U.K. CURRENCY, AND ANY REFERENCES TO "CDN" ARE
REFERENCES TO CANADIAN CURRENCY. PERCENTAGES AND CERTAIN AMOUNTS CONTAINED
HEREIN HAVE BEEN ROUNDED FOR EASE OF PRESENTATION. ANY DISCREPANCIES IN ANY
TABLE BETWEEN TOTALS AND THE SUMS OF AMOUNTS LISTED ARE DUE TO ROUNDING.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make certain forward-looking statements in this Form 20-F within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, relating to
our financial condition, profitability, liquidity, resources, business
outlook, proposed acquisitions, market forces, corporate strategies,
contractual commitments, capital requirements and other matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, we
note that a variety of factors could cause our actual results and experience
to differ substantially from the anticipated results or other expectations
expressed in our forward-looking statements. When words and expressions such
as: "believes," "expects," "anticipates," "estimates," "plans," "intends,"
"objectives," "goals," "aims," "projects," "forecasts," "possible," "seeks,"
"may," "could," "should," "might," "likely," "enable" or similar words or
expressions are used in this Form 20-F, as well as statements containing
phrases such as "in our view," "there can be no assurance," "although no
assurance can be given" or "there is no way to anticipate with certainty,"
forward-looking statements are being made. These forward-looking statements
speak as of the date of this Form 20-F.
The forward-looking statements are not guarantees of future
performance and involve risk and uncertainties. These risks and uncertainties
may affect the operation, performance, development and results of our
business and could cause future outcomes to differ materially from those set
forth in our forward-looking statements. These statements are based on our
current beliefs as to the outcome and timing of future events, and actual
results may differ materially from those projected or implied in the forward
looking statements. Further, some forward-looking statements are based upon
assumptions of future events which may not prove to be accurate. The
forward-looking statements involve risks and uncertainties including, but not
limited to, the risks and uncertainties referred to under "Item 3. KEY
INFORMATION - RISK FACTORS," and elsewhere within the document and in other
of our filings with the Securities and Exchange Commission.
We undertake no obligation to publicly update or revise any
forward-looking statements as a result of future developments, events and
conditions outside of our control. New risk factors emerge from time to time
and it is not possible for us to predict all such risk factors, nor can we
assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to
differ significantly from those forecast in any forward-looking statements.
Given these risks and uncertainties, investors should not overly rely or
attach undue weight to our forward-looking statements as an indication of our
actual future results.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
SELECTED FINANCIAL DATA
The data below should be read in conjunction with "Item 5. OPERATING
AND FINANCIAL REVIEW AND PROSPECTS" and our audited consolidated financial
statements and notes relating thereto appearing elsewhere in this annual
report, and which have been audited by HJ & Associates, LLC, our independent
auditors, as at and for the year ended April 30, 2001 and 2000, and by Ernst
& Young, our prior independent auditors, as at and for the year ended
April 30, 1999. The selected financial data for the financial years ended
April 30, 2000, 1999, 1998 and 1997 is derived from the financial statements
of our subsidiary Starnet, which we acquired subsequent to the fiscal year
ended April 30, 2001 pursuant to a holding company reorganization.
The data below, except for share information, is in thousands of
U.S. dollars.
FOR THE YEARS ENDED APRIL 30,
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2001 2000 1999 1998 1997
------------ ------------ ------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Net sales $20,153 $17,881 $6,255 $257 --
Income (loss) from operations (17,019) (4,886) 1,004 (746)
Income (loss) from continuing
operations (16,756) (4,462) 1,031 (818) --
Income (loss) from continuing
operations per common share (0.52) (0.16) 0.04 (0.04) --
Weighted average number of
shares 32,201,181 29,625,460 22,951,546 21,002,885 20,000,000
Diluted earnings per share -- -- 0.08 -- --
Cash dividends declared per
common share -- -- -- -- --
Prior to 1998, activities of Starnet were limited to activities that
have since been classified as discontinued operations.
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Selected balance sheet data as at April 30 for the years indicated
(in thousands of U.S. dollars):
AS OF APRIL 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- --------- --------
BALANCE SHEET DATA:
Total assets $20,188 $27,983 $13,439 $3,275 $1,197
Net assets 2,211 19,376 9,420 1,298 (71)
Long-term obligations 2,784 979 818 419 312
Capital stock 22,394 22,143 8,584 2,421 20
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN MAKING AN
INVESTMENT DECISION REGARDING THE COMPANY. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
MAY SUFFER. AS A RESULT, THE TRADING PRICE OF OUR AMERICAN DEPOSITARY SHARES
AND THE VALUE OF OUR ORDINARY SHARES COULD DECLINE, AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
WE HAVE EXPERIENCED NET LOSSES IN THE PAST.
We had negative cash flows during the fiscal year ended April 30,
2001, and while we had previously reached profitability, we are not now
profitable. We had net losses from continuing operations of approximately
$4.4 million for the year ended April 30, 2000, and approximately $16.7
million for the year ended April 30, 2001. Even if we achieve profitability,
we may not be able to sustain or increase profitability on an annual basis in
the future. Our future performance will depend in part, on the amount and
rates of growth in our net revenue from licensing of our gaming software
products and revenues generated by our own Internet gaming business, and on
our ability to control our operating expenses. In addition, our future
success will depend upon many factors, including those which may be beyond
our control or which cannot be predicted at this time, such as the emergence
of additional competitors, downturn in the global economy, emergence of new
technologies and changes in governmental regulations. As a result of these
and other factors, there can be no assurance that we will ever achieve
profitability.
WE HAVE THREE CUSTOMERS WHO ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES,
AND THE LOSS OF ANY OF THEM MAY SIGNIFICANTLY IMPACT OUR CASH FLOW.
Three of our licensees account for a substantial portion of our
consolidated revenue. Our three largest licensees account for 31.5%, 13.8%
and 9.8% respectively of our consolidated revenue. The loss of any of these
three licensees may adversely and significantly affect our cash flow.
WE NEED ADDITIONAL FINANCING AND THERE IS NO ASSURANCE IT CAN BE OBTAINED.
We currently have insufficient capital to meet our future
development plans for new gaming products, and require an inflow of
additional capital or financing. There can be no assurance that any such
capital or additional financing will be available on terms acceptable to us,
or at all. Any such additional financing, if available, could result in
substantial dilution of the equity interests of existing shareholders. If
additional financing is not available, we are not certain whether we will
have sufficient cash flow and expense flexibility to bring us into a positive
cash flow position.
WE HAVE BEEN INVOLVED IN CIVIL AND CRIMINAL LITIGATION, WHICH HAS RESULTED IN
SIGNIFICANT EXPENSES AND OTHER CONSEQUENCES.
We have been involved in several lawsuits and have been investigated
by the Canadian government. One such lawsuit was brought by a former licensee
of one of our subsidiaries, Starnet Systems International, Inc. There is a
risk that Starnet Systems could lose this pending lawsuit and be
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subject to significant damages. We have also defended ourselves against a
class action lawsuit that alleged that Starnet knowingly made material
misrepresentations regarding the nature and inherent risks of Starnet's
business in filings to the United States Securities and Exchange Commission,
press releases and other public statements. We have entered into a memorandum
of understanding to settle the class action litigation, but no assurances can
be made that the settlement will proceed as planned or that Starnet will be
able to complete the settlement or that it will be approved by the court. The
investigation by the Canadian government authorities was settled in August
2001 and resulted in a guilty plea by Starnet to a criminal charge and a
fine. There is a risk that we or our subsidiaries will be subject to similar
lawsuits or government actions in the future. (See Item 8. LEGAL PROCEEDINGS
and see also Item 4. GOVERNMENT REGULATION AND RELATED RISKS).
THE INTERNET GAMING INDUSTRY MAY BE SENSITIVE TO ECONOMIC CONDITIONS.
The Internet gaming industry is relatively new and there is
insufficient history for us to predict the impact that changes in economic
conditions will have on our business. Although it is likely that a downturn
in the economy will have a negative impact on our revenues, the extent of
such impact is uncertain. During the last fiscal year, the economies of the
major developed nations have been declining, and some private economists
declared that in the aftermath of the terrorist attacks in the United States
a global recession is inevitable. We have suffered losses due to the
cancellation of the sporting events after the terrorist attacks in the United
States. If consumer confidence does not rise and the global economy does not
show signs of recovery in the near future, we may lose a significant portion
of our business and revenues.
WE MAY BE SUBJECT TO REGULATION OF INTERNET GAMING.
The licensees of our software products, and the Company itself, are
subject to applicable laws in various jurisdictions. As companies and
consumers involved in Internet gaming are located around the globe, including
the end-users of our licensees, there is uncertainty regarding exactly which
governments have jurisdiction or authority to regulate or legislate with
respect to various aspects of the industry. The uncertainty surrounding the
regulation of Internet gaming could have a material adverse effect on our
business, revenues, operating results and financial condition. In addition,
legislation designed to restrict or prohibit Internet gaming may be adopted
in the future by the United States or other jurisdictions. Also, existing
legislation around the world, including the United States and its individual
states, could be construed to prohibit or restrict gaming through the use of
the Internet and there is a risk governmental authorities may view us or our
licensees as having violated such legislation. There is a risk that criminal
and civil proceedings could be initiated in such jurisdictions against us or
our licensees, and such proceedings could involve substantial litigation
expense, penalties, fines, diversion of the attention of key executives,
injunctions or other prohibitions being invoked against us or our licensees.
Such proceedings could have a material adverse effect on our business,
revenues, operating results and financial condition. In addition, as
electronic commerce develops further, it may generally be the subject of
government regulation. Also, current laws that pre-date or are incompatible
with Internet electronic commerce may be enforced in a manner that restricts
the electronic commerce market. Any such developments could have a material
adverse effect on our business, revenues, operating results and financial
condition. (See Item 4. GOVERNMENT LICENSING AND REGULATION AND RELATED
RISKS; and Item 8. LEGAL PROCEEDINGS.)
WE FACE SIGNIFICANT COMPETITION AND THERE IS NO ASSURANCE THAT WE WILL BE
ABLE TO COMPETE.
The Internet entertainment industry involves rapid technological
change and is characterized by intense and substantial competition. Many of
our competitors are well established, substantially larger and have
substantially greater resources than we do. It is also likely that other
competitors will emerge in the future. Additionally, we will have to compete
with other companies that have greater market recognition, greater resources
and broader distribution capabilities than us. Increased competition by
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existing and future competitors could materially and adversely affect our
business, financial condition and results of operations.
OUR SOFTWARE AND HARDWARE SYSTEMS MAY FACE PROBLEMS IF THE VOLUME OF USAGE
INCREASES.
The performance of our online services is critical to our reputation
and to achieving market acceptance. Any system failure, including network,
software or hardware failure, that causes interruption or an increase in
response time of our online services could result in decreased usage of our
services and, if sustained or repeated, could reduce the attractiveness of
our online services to our clients. An increase in the volume of usage of
online services could strain the capacity of the software or the hardware
employed, which could lead to slower response time or system failures,
thereby adversely affecting our revenues.
The process of managing traffic within large, high traffic Internet
online services such as those provided by us is an increasingly important and
complex task. Our operations are dependent in part upon our ability to
protect our operating systems against physical damage from acts of God, power
loss, telecommunications failures, physical break-ins and similar events. The
occurrence of any of these events could result in interruptions, delays or
cessation in service to users of our online services, which could have a
material adverse effect on our business, financial condition and results of
operations. A large portion of our network infrastructure is located at a
single, leased facility in Antigua, West Indies. Our systems and operations
are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, Internet failure, break-ins, hurricanes and
similar events. While we do not have redundant facilities at a secondary
location in the event of an emergency, we have a variety of backup servers at
our primary site to deal with system failures.
Services based on sophisticated software and computer systems often
encounter development delays and the underlying software may contain
undetected errors that could cause system failures when introduced. We are
also dependent upon search engines, web browsers, Internet service providers
("ISPs") and online service providers ("OSPs") to provide Internet users
access to our web sites. Our clients may experience difficulties accessing or
using our web sites due to system failures or delays unrelated to our
systems. We do not carry business interruption insurance to compensate us for
these types of losses.
OUR FUTURE GROWTH DEPENDS ON CONTINUED GROWTH IN THE USE OF THE INTERNET.
Our future success is substantially dependent upon continued growth
in the use of the Internet and, as it relates to our business, in the
acceptance and volume of commercial transactions on the Internet. There can
be no assurance that the number of Internet users will continue to grow or
that commerce over the Internet will become more widespread. The Internet may
not prove to be a viable commercial marketplace for a number of reasons,
including:
o lack of acceptable security technologies,
o lack of access and ease of use,
o congestion of traffic,
o inconsistent quality of service and lack of availability of
cost-effective, high-speed service,
o potentially inadequate development of the necessary infrastructure,
o excessive governmental regulation, and
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o uncertainty regarding intellectual property ownership or timely
development and commercialization of performance improvements,
including high speed modems.
Our success also depends upon, among other things, the continued
development and maintenance of a viable Internet infrastructure to support
the continued growth in the use of the Internet. The maintenance and
improvement of this infrastructure will require timely development of
products, such as high speed modems and communications equipment, to continue
to provide reliable Internet access and improved content. The current
Internet infrastructure may not be able to support an increased number of
users or the increased bandwidth requirements of users and, as such, the
performance or reliability of the Internet may be adversely affected.
Furthermore, the Internet has experienced certain outages and delays as a
result of damage to portions of its infrastructure. Similar outages and
delays in the future could adversely affect the level of traffic on our web
site destination.
The effectiveness of the Internet may decline due to delays in the
development or adoption of new standards and next-generation Internet
protocols designed to support increased levels of activity, and our results
of operations and financial condition could be materially and adversely
affected. Such infrastructure, standards or protocols, including additional
domain levels, or complementary products, services or facilities may cause us
to incur substantial expenditures in order to adapt our services to changing
or emerging technologies. To the extent additional domain levels are added,
their existence may greatly increase the level of competition for our web
site destination.
OUR COMPUTER SYSTEMS FACE ONLINE SECURITY RISKS.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. For example, given the content of our web sites, there is an
incentive for "hackers" to penetrate our network security. A party that is
able to circumvent security measures could misappropriate proprietary
information and, perhaps, most critically, cause interruptions in our
operations. ISPs and OSPs have in the past experienced, and may in the future
experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or
others. We may be required to expend significant capital or other resources
to protect against the threat of security breaches or to alleviate problems
caused by such breaches. There can be no assurance that any measures
implemented will not be circumvented in the future. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to clients accessing our web sites, which
could have a material adverse effect on our business, results of operations
and financial condition.
OUR LICENSEES RELY ON CREDIT CARDS FOR A SUBSTANTIAL PORTION OF THE DEPOSITS BY
THEIR CUSTOMERS.
We derive most of our revenues from the revenues of our licensees,
which are directly dependent on the amounts of funds deposited by their
customers. A substantial portion of these deposits are made by credit cards.
Many issuing banks of the major credit cards, Visa and MasterCard,
particularly in the United States, currently will not process transactions
with the industry code for Internet gaming when the credit card is not
physically presented to the merchant, due to the perceived increased risk of
chargebacks. If additional issuing banks also decide not to process such
transactions, this will make it more difficult for customers to deposit funds
for betting. This would likely lead to lower revenues for the licensees and
consequently would have a negative effect on our royalty revenues. We support
the industry efforts to lobby banks and credit card companies and help
educate them as to the nature of the industry.
THE MARKET FOR INTERNET SERVICES IS IN A STATE OF RAPID TECHNOLOGICAL CHANGE AND
WE MAY NOT BE ABLE TO KEEP UP.
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The market for Internet services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require us to effectively use leading technologies,
continue to develop our technological expertise, enhance our current services
and continue to improve the performance, features and reliability of our web
sites. There can be no assurance that we will be successful in responding
quickly, cost effectively and sufficiently to these or other such developments.
In addition, the widespread adoption of new Internet technologies or standards
could require substantial expenditures to modify or adapt our web sites. A
failure to respond rapidly to technological developments could have a material
adverse effect on our business, results of operations and financial condition.
WE MUST CONTINUE TO IMPROVE AND EXPAND OUR SKILLS AND PERSONNEL TO EXPAND OUR
BUSINESS OPERATIONS, BUT MAY NOT BE ABLE TO DO SO.
In order to expand our business operations, we must continue to
improve and expand the expertise of our personnel and must attract, train and
manage qualified managers and employees to oversee and manage our
contemplated expanded operations. There can be no assurance that we will be
able to manage effectively the expansion of our operations or that our
current personnel, systems, procedures and controls will be adequate to
support operations. Any failure of management to manage effectively our
growth could have a material adverse effect on our business, results of
operations and financial conditions. Although management intends to ensure
that our internal controls remain adequate to meet the demands of further
growth, there can be no assurance that our systems, controls or personnel
will be sufficient to meet these demands. Inadequacies in these areas could
have a material adverse effect on our business, financial condition and
results of operations.
WE HAVE LIMITED INTELLECTUAL PROPERTY PROTECTION AND THERE IS RISK THAT OUR
COMPETITORS WILL BE ABLE TO APPROPRIATE OUR TECHNOLOGY.
We regard to our proprietary software, trade secrets and similar
intellectual property as critical to our success. In that context, we rely on
a combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions.
There is no guarantee that these efforts will be adequate, or that third
parties will not infringe upon or misappropriate our proprietary rights. In
addition, if we obtain copyright and trademark protection, effective
copyright and trademark protection may be unenforceable or limited in certain
countries, and the global nature of the Internet makes it impossible to
control the ultimate destination of our web sites. Since trademark and
copyright protections are not "self-enforcing", future litigation may be
necessary to enforce and protect our secrets and other intellectual property
rights. We may also may be sued for claims of infringement of the rights of
others or to determine the scope and validity of the intellectual property
rights of others. Such litigation could result in substantial costs. An
adverse outcome could require us to cease using such intellectual property.
Any litigation regarding propriety rights could be costly and divert
management's attention, result in the loss of certain of proprietary rights,
require us to seek licensees from third parties and prevent us from selling
our services, any one of which could have a material adverse effect on our
business, results of operations and financial condition.
WE MAY BE HELD LIABLE FOR THE CONTENT OF OUR WEB SITES.
As a distributor of Internet content, we face potential liability
for negligence, copyright, patent, trademark infringement, defamation,
indecency, disparagement and other claims based on the nature and content of
the materials that we transmit. Any imposition of liability that is not
covered by insurance, is in excess of insurance coverage or is not covered by
an indemnification by a content provider could have a material adverse effect
on our business, results of operations and financial condition.
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THE TRADING MARKET FOR OUR SHARES MAY BE ILLIQUID.
Our ordinary shares in the form of American Depositary Shares are
quoted on the National Association of Securities Dealers' Over-The-Counter
Bulletin Board ("OTC Bulletin Board"). This quotation system generally
supports companies that do not meet the listing requirements of the NASDAQ
SmallCap Market. As a result, investors may find it more difficult to dispose
of or to obtain accurate quotations of our shares. In addition, quotations on
the OTC Bulletin Board depend on the willingness of broker-dealers to make a
market for the shares. There can be no assurance that our shares will
continue to be quoted on the OTC Bulletin Board or that there will continue
to be a market for such shares.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, AND WE LACK PRODUCT LIABILITY
INSURANCE.
We face an inherent risk of exposure to product liability claims in
the event that the products we develop and license contain errors, "bugs" or
defects. There can be no assurance that we will avoid significant product
liability exposure. We do not currently have product liability insurance, and
there can be no assurance that insurance coverage will be available in the
future on commercially reasonable terms, or at all. Further, there can be no
assurance that such insurance, if obtained, will be adequate to cover
potential product liability claims, or that a loss of insurance coverage or
the assertion of a product liability claim or claims would not materially
adversely affect our business, financial condition and results of operations.
WE MAY BECOME SUBJECT TO CHANGES IN ENGLISH LAW OR POLITICAL CIRCUMSTANCES.
In July 2001, the Gambling Review Report, chaired by Sir Alan Budd,
was published following the British government's request for a review of the
country's gaming laws and regulations. In particular the review was
precipitated by an acknowledgement that much of the existing legislation
pre-dated the Internet and was no longer relevant and an awareness of the
loss of tax revenue from gaming concerns located offshore. The
recommendations of the Report are generally supportive of the industry
provided it takes place in a properly regulated environment. The British
government is currently considering the recommendations of the Report. We are
unable to predict with certainty the full response to the Report and it is
unclear when any resulting legislation may be enacted. Therefore, there
remains a risk that any future legislation could be unfavorable to our
business.
YOU MAY BE SUBJECT TO BOTH UNITED STATES AND UNITED KINGDOM TAXES.
We strongly urge you to consult with your tax advisors concerning
the consequences of investing in our ordinary shares. Our ordinary shares
represented by American Depositary Shares are traded in the United States,
but we are incorporated under the laws of England and Wales. A U.S. holder of
our American Depositary Shares will be treated as the owner of the underlying
ordinary shares for purposes of U.S. and U.K. tax laws. Therefore, U.S.
federal, state and local tax laws and U.K. tax laws may apply to ownership of
our American Depositary Shares and the underlying ordinary shares. Tax laws
of other jurisdictions may also apply.
UNITED STATES CIVIL LIABILITIES MAY NOT BE ENFORCEABLE AGAINST US.
Most of our directors, all of our executive officers and certain of
the experts named in this annual report are not residents of the United
States, and virtually all of the assets of these non-U.S. persons, and
virtually all of our assets are located outside the United States. As a
result, it may not be possible for you to serve summons and complaints within
the United States upon these persons. Similarly, it may not be possible to
enforce in U.S. courts, against these persons or against us, judgments of the
U.S. courts based upon civil liability provisions of the U.S. federal or
state securities laws. In addition, it may be difficult for you in original
suits or in suits for the enforcement of judgments of U.S. courts to enforce
certain civil
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liabilities based upon U.S. federal or state securities laws in England
against us, our directors, executive officers, or our experts.
OUR REPORTING OBLIGATIONS UNDER THE U.S. SECURITIES LAWS DIFFER FROM THOSE OF
U.S. ISSUERS, AND YOU MAY FIND IT DIFFICULT TO EVALUATE OUR PERFORMANCE
QUARTERLY.
We are a foreign private issuer for the purposes of reporting to the
SEC, and we are not required under the Exchange Act of 1934 to file quarterly
reports on Form 10-Q after the end of each financial quarter. We are exempt
from the rules prescribing furnishing of proxies and content of annual
reports and proxy statements to our shareholders. Additionally, major
shareholders and insiders are not required to report their transactions with
our stock. As a result it may not be possible for you to evaluate our
financial performance as often as you could for a U.S. issuer. You may not
become aware of trading activities of our insiders and major shareholders,
and may generally be less informed in making a decision on how to vote your
shares at the shareholders meetings.
UNDER ENGLISH LAW A VOTE OF THE HOLDERS OF 75% OR MORE OF OUR OUTSTANDING
SHARES IS REQUIRED TO APPROVE CERTAIN CORPORATE MATTERS.
Under English law we are required to obtain the vote or consent of
holders of 75% or more of our outstanding shares to complete certain
significant transactions, including amendments to our memorandum and articles
of association. This supermajority requirement may make it more difficult for
shareholders to approve certain transactions if the Board recommends and
approves such transactions.
WE MAY BE SUBJECT TO TAX IN MANY JURISDICTIONS, FOR WHICH NO PROVISION HAS
BEEN MADE.
We may be subject to tax in many jurisdictions, including
jurisdictions where our subsidiaries are incorporated in, or have a branch or
agency or permanent establishment or office. We may also be subject to tax in
jurisdictions where any of our servers or ISPs or computers or customers or
licensees are situated or operate from. Most laws relating to taxation in
most jurisdictions pre-date or are not drafted with the potential of their
applying to internet trading. Consequently, there is uncertainty as to the
jurisdictions in which our subsidiaries could be subject to tax, the extent
to which they could be so subject to tax and what their overall tax liability
in respect of any income, profit or gain could be. There is a risk that the
overall tax liability could be quite high, depending on the construction of
the legislation relating to tax in each of the relevant jurisdictions. No
provision has been made by us for such tax liabilities. To the extent that
such risk materializes, this could materially adversely affect our business,
financial condition and results of operation.
SIGNIFICANT ADVERSE U.S. FEDERAL TAX CONSEQUENCES COULD ARISE FOR U.S.
HOLDERS UNDER THE PASSIVE FOREIGN INVESTMENT COMPANY RULES.
If we are a passive foreign investment company, or PFIC, a U.S.
Holder of our American Depositary Shares or ordinary shares could be subject
to significant adverse U.S. federal tax consequences. Part or all of our
distributions, and gain inherent in our American Depositary Shares or ordinary
shares at the time of a disposition thereof, whether or not that disposition
is a taxable event, could be subject to a special set of rules. In general,
those rules would treat the distributions, whether or not they are dividends
paid out of our earnings and profits, and the gain as realized ratably over
the period the U.S. Holder held, or is treated as having held, the American
Depositary Shares or ordinary shares. Income or gain allocable to prior years
would be taxable at the highest effective rates in effect in those years,
regardless of the rate actually applicable to the U.S. Holder, would be
treated as ordinary income, and could not be offset by any losses available in
those years, and the foregoing amount would be subject to an interest charge
as if the tax on those amounts were due in the prior years. Income or gain
allocable to the year of the distribution or disposition would be treated as
ordinary income. Stock in a PFIC is generally not eligible for a step-up in
basis on the death of a holder.
Certain elections can be available to change the tax consequences to
U.S. Holders described in the preceding paragraph. One of those elections,
the "qualified electing fund", or QEF, election, however, requires the
electing U.S. Holder to include in income each year his share of our ordinary
earnings and profits and net capital gain, whether or not distributed to
him. However, a QEF election generally is available to U.S. Holders only if
we provide certain information to our U.S. Holders, and we provide no
assurance that we will make that information available. Another election, a
mark-to-market election, requires the electing U.S. Holder to pay U.S.
federal income tax as if he sold his American Depositary Receipts or ordinary
shares at the end of each year, recognizing gains and, subject to
limitations, certain losses. However, a mark-to-market election is available
only if our American Depositary Shares or ordinary shares are "marketable
stock" as specially defined in Treasury regulations. We believe that our
American Depositary Shares and ordinary share are not "marketable stock" at
this time within the meaning of those Treasury regulations.
We have not undertaken any determination of whether we are a PFIC
and therefore cannot provide any assurance that we are not. In addition, we
can provide no assurance that we will make any determination in the future
whether we are a PFIC at that time. In the absence of an analysis of our
status as a PFIC performed by us, any assertion by the IRS with respect to a
U.S. Holder that we are a PFIC could be upheld against that U.S. Holder,
whether or not we are in fact a PFIC.
Accordingly, U.S. Holders should take into account the risk that
they may be subject to the rules described in the second preceding paragraph.
You are urged to read the more detailed rules regarding PFICs set forth in the
discussion below under the headings "Taxation--United States Federal Income
Tax Consequences--TAX CONSEQUENCES FOR U.S. HOLDER--TAX CONSEQUENCES IF WE
ARE A PASSIVE FOREIGN INVESTMENT COMPANY." In addition, you are strongly
urged to consult your tax adviser regarding the risk that our American
Depositary Shares and ordinary shares may be treated as stock in a PFIC,
whether or not we are a PFIC, the unavailability of various elections
regarding the tax treatment of stock in PFICs and the tax consequences to you
under the PFIC rules with respect to an investment in our American Depositary
Shares or ordinary shares.
ITEM 4. INFORMATION ON THE COMPANY.
HISTORY AND DEVELOPMENT
World Gaming plc is a holding company incorporated under the laws of
England and Wales, and conducts its business through its operating
subsidiaries. As a result of a recent holding company reorganization, which
we describe below, we have become a successor to the business of Starnet
Communications International Inc. ("Starnet"), which now functions as one of
our subsidiaries. Our other subsidiaries comprise WG International Ltd.,
World Gaming Europe Limited, Starnet Systems International Inc., EFS USA
Inc., EFS International Inc., EFS Australian Pty Ltd., Inphinity Interactive
Inc., World Gaming Services Inc., EFS St. Kitts Inc., and 602662 British
Columbia Ltd. (See Item 4 "ORGANIZATION STRUCTURE").
Starnet was incorporated on June 28, 1996 in the State of Nevada as
Creative Sports Marketing Inc., and subsequently its name was changed to
Gelato Brats Inc. On February 24, 1997, the name of the
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company was changed to Starnet Communications International Inc. In March of
1997, Starnet was redomiciled in Delaware.
On March 25, 1997, Starnet entered into a share purchase agreement
with Murray Partners (BVI) Inc. ("Murray Partners"), pursuant to which
Starnet acquired all of the outstanding shares of Starnet Communications
Canada Inc. ("Starnet Canada"), a company incorporated in British Columbia
that provided adult entertainment services via the Internet. In exchange,
Murray Partners received 10,000,000 Class A Common Voting Shares of Starnet.
Shares held by Murray Partners were subsequently distributed to its
constituent members. On March 17, 2000, Starnet and its subsidiaries sold all
assets related to the adult entertainment business in order to focus on the
Internet gaming business. Additionally, in 1999, Starnet and its subsidiaries
relocated their gaming operations to Antigua and in June of 2000, they moved
their development activities to other offices in Canada.
Starnet became our wholly-owned subsidiary through a holding company
reorganization completed in May 2001. The reorganization was structured as a
merger, in accordance with the laws of the State of Delaware, of Starnet with
WG Reorganization Sub, Inc., our wholly-owned subsidiary, formed for the
purposes of the reorganization, with Starnet as the surviving company. The
reorganization was approved by the shareholders of Starnet who exchanged
their shares of Starnet common stock for our American Depositary Shares
(ADSs), each representing one ordinary share, on a one-for-one basis. Each
American Depositary Share issued in connection with the reorganization was
evidenced by one American Depositary Receipt (ADR) issued in accordance with
a Deposit Agreement with Continental Stock Transfer and Trust Company.
Subsequently, all of Starnet's stock was exchanged for shares of WG
International Limited, our wholly-owned subsidiary. The acquisition by WG
International Limited, was effected by way of a share for share exchange such
that the existing shares held by us in WG International Limited were
subdivided and redesignated as B shares of (pound)0.002 each. The balance of
the authorized share capital was subdivided and redesignated as A shares of
(pound)0.002 each, 20,000 of which were issued and allotted to us as
consideration for the acquisition of Starnet's stock.
Through our wholly-owned subsidiaries, we now focus our business on
the development, production and licensing of Internet technologies for gaming
applications. Our business strategy is to identify and commercialize leading
edge technologies for the online gaming markets.
Our office is located at 33 St. James Square, London, England, and
the telephone number is (44) (207) 661-9332.
OUR OPERATIONS
We are a leading developer and provider of Internet gaming systems.
Through various wholly-owned subsidiaries (see Item 4. ORGANIZATIONAL
STRUCTURE below), we develop and provide our software products, transaction
system and online gaming management services to independent licensees. Our
gaming systems have been designed to: (i) offer customers a user-friendly
interface, superior interactive experience and a wide selection of gaming
options; (ii) provide licensees with financially attractive returns, easy
site maintenance and limited administration; and (iii) protect gaming
customers and licensees through our proprietary fully integrated technology.
We invested the profits and technology from our earlier,
entertainment-oriented online interactive business to build a worldwide
Internet gaming business. By growing a gaming licensee network along with our
own site operations, we plan to continue rapidly expanding our market share
in this emerging Internet commerce industry. We offer fully integrated gaming
software and systems, developed by our wholly-owned Vancouver-based
subsidiary, Inphinity Interactive Inc. ("Inphinity"), along with fee-based
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use of our Electronic Financial Services ("EFS") Internet transaction system.
Our gaming software is owned by our wholly-owned Antigua-based licensing
subsidiary, Starnet Systems International, Inc. ("Starnet Systems") which
licenses the software to a growing list of licensees. Starnet Systems
provides a licensee with an installed turnkey gaming system. Starnet Systems
receives a monthly royalty based on the licensee's net revenues in exchange
for hosting the licensee's interactive casino. In addition, the licensee must
obtain a gaming license from the Government of Antigua and Barbuda or another
jurisdiction that licenses online gaming systems. Our first license sale
closed in March 1998, and we had 34 licensees signed and operating by fiscal
year ended April 30, 2001.
Along with the current suite of gaming products which include over
20 C++ casino games, a variety of "instant play" Java Games and a complete
live sports wagering product line, the we added a live pari-mutuel betting
system this year with plans to add multiplayer Bingo, wireless, and
multi-player poker.
We develop the new licensee's interactive casino to reflect their
intended market segment. This development can reflect a particular motif
(e.g. sports theme or French Riviera theme) or ethnic market (e.g., Japan,
China, Indonesia, or Latin America). Our gaming systems are now available in
a variety of languages including English, Portuguese, Chinese (traditional
and simplified) and Japanese, with additional variations planned for 2002.
RESTRUCTURING OF OPERATIONS
In March 2000, our subsidiary, Starnet Canada, completed the sale of
substantially all of the assets and undertakings comprising its adult
entertainment division. The sale price for the assets was $2.3 million, of
which $460,000 was paid on March 31, 2000 into an attorney trust account, but
subsequently released to Starnet Canada on April 30, 2000, and the balance
was to be paid in monthly installments through July 1, 2003. The deferred
portion of the purchase price is secured by a general security agreement in
favor of Starnet Canada, and a pledge of the shares of the company holding
the assets.
The monthly installments referred to above which were to begin July
1, 2000 have not been paid by the purchaser. Consequently, at April 30, 2001,
we have reserved for the potential of not being able to collect the principal
amount from the buyer. We are presently reviewing the remedies available to
us under the agreement.
In January 2001, we terminated the employment of 26 employees at
Inphinity's development office in Vancouver, Canada, in order to reduce
expenditure levels and increase operational efficiencies. The employees
affected were in the areas of management, administration, operational support
and production. Inphinity's core development team remained intact.
In April 2001, we restructured our operations in both St. John's,
Antigua and Vancouver, Canada to decrease our costs by reducing
inefficiencies and eliminating duplicated functions. Reductions in staff were
made throughout the organization and included management and administration,
sales, marketing, software development, production and operations. A total of
29 staff were terminated, 11 in Antigua and 18 in Canada. The combined cost
of the terminations both in January and April of 2001 was $1,536,000.
MARKETING
We have to date focused our marketing efforts in the Americas,
Europe and Asia as these are the areas that have relatively high internet
usage, an interest in gambling activities, and disposable income for
gambling. We concentrate our marketing on attracting licensees and the
licensees, in turn, advertise their sites to the end user. In addition to
potential licensees, we seek strategic partnerships for content as well as
other entertainment and media opportunities.
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We utilize internet based marketing activities, such as e-mail
broadcasts and affiliate programs, as well as traditional media, such as
print in industry publications. We also regularly sponsor industry trade
shows and attend such shows as an exhibitor.
COMPETITIVE ENVIRONMENT
The Internet gaming and wagering industry is increasingly
competitive. New competitors have entered segments such as development and
licensing of casino games, sports betting software, pari-mutuel wagering, and
lottery and bingo products. In each of these segments there currently exist
several major competitors. However, nearly all these competitors offer only a
portion of the breadth of product that we offer.
Our largest competitors for casino products - Boss Media,
Cryptologic, and Microgaming - do not offer any complementary products such
as sportsbook. Because these competitors focus on delivering limited
products, as opposed to a full suite of products as we do, the competition
may offer an equivalent or superior single product compared to ours. However,
we believe we currently have a competitive advantage by offering
complementary products.
One company, IQ-Ludorum, is a key competitor in the sportsbook
product segment. It is also now offering a downloadable casino software
package, which although not as extensive as ours, increases its competitive
threat.
We also face increased competition from name brand land based
sportsbooks and casinos. European companies, such as William Hill, already
have an online presence and compete for end-users. In addition, three
land-based casino operators -- Sun International, Littlewoods, and MGM-Mirage
- have been granted online gaming licenses from the Isle of Man. This is a
very real direct threat to our licensees and therefore also to us.
We expect to compete directly with all the companies discussed
above, as well as other established companies that may enter the industry.
Many of our current and potential competitors have far greater resources than
us.
INTELLECTUAL PROPERTY
Our intellectual property includes all software products and URLs.
We own the software that we license to third parties and we own copyright in
the source code to that software. Our software that is completed and in
development is protected through a combination of non-disclosure and
non-competition agreements with employees, restricted and controlled use of
third party developers, a check in/check out system for code, and copyright
law (though no software is registered). Our products are dependent on
platforms that are licensed from other parties. These include Oracle
databases, SONA for wireless communications, Sun Microsystems for Java
products, and Microsoft for C++/xml applications. Trademark protection for
the World Gaming brand has not yet been applied for, but we possess common
law trademark rights in the various trademarks and service marks used in our
business.
TECHNOLOGY
REDUNDANT HIGH-SPEED NETWORK.
Our network is connected to the Internet via redundant high-speed
fiber, ensuring multiple backup connections to the Internet. This high
performance network infrastructure ensures reliable and responsive game play
for our licensees and the end users/players. Most of the critical system
components, such as the game servers and web servers, are distributed across
multiple machines, which protect the
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gaming service from failures due to malfunctioning equipment. The highly
scalable nature of the design of our system makes provisioning for additional
capacity relatively easy. The network monitoring staff tracks the system at
all times to maintain constant awareness of the system's operating
parameters. New equipment is installed when necessary to compensate for
increased activity or anticipated peak demands for popular events.
The high quality Internet connection at our network facility in
Antigua is provided by an international service provider and contributes to
responsive game play. Each gaming transaction is stored on a database that is
replicated for redundancy and backed up daily to prevent data loss and the
gaming components communicate using the Secure Sockets Layer (SSL) to encrypt
and protect sensitive data from potential hackers.
In addition to our digital network serving gaming content, we have
developed a state of the art proprietary Electronic Funds Transfer System
that provides a high level of security and integrity for funds wagered.
We are working on creating a fully-redundant data center, because at
present there is a risk of failure of the communication line into our
operations center in Antigua.
SECURITY MEASURES.
We offer four protective security layers of prevention, protection,
and response. These components, available 24 hours a day, 7 days a week, 365
days a year consist of:
o SOFTWARE. Our engines are designed to assume that all communication is
from "hostile" clients so that only specific message types from a known
game client are acknowledged. The software incorporates industry "DE
FACTO" security standards such as Checkpoint Firewall 1, 128 bit
encryption and SSL. The `n-tier' software architecture has been
designed with security at the forefront and is monitored through
`real-time' System and Game event monitoring and logging.
The Gaming Client Application is a casino graphical interface. The game
server performs gaming calculations, while the client application
displays the results and accepts input from the player for further
interaction. Communications between the client and server are encrypted
using the SSL protocol. The SSL prevents hackers from monitoring a
gaming session should they be able to intercept communications.
o FRAUD DETECTION AND LEGAL COMPLIANCE. We ensure legal compliance and
player protection through industry leading financial fraud protection
provided by HNC. Further, Address Verification Services (AVS), a basic
fraud detection system offered by the financial industry, is
incorporated into our fraud detection solution.
HNC Software Inc., a leader in on-line fraud detection, is a specialist
in solutions incorporating intelligent response, decision management
and customer analytics for acquiring, managing and retaining customers
in the financial, insurance, telecommunications and e-commerce
industries. HNC's intelligent software suite helps businesses make
decisions in real time that leads to managing customers more profitably
and developing loyal customers.
While no system is 100% secure, we believe that we have the ability to
identify attempts and prevent attacks such as Denial of Service and
`Invasive' hacks into game payout code or customer information.
Specifically, Denial of Service Attacks can be alleviated through our
network of close business partnerships with global ISP's. Using a
combination of the aforementioned four layers of security i.e.
Software, Fraud Detection, Hardware and Vigilance,
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we offer security protection that reduces the risks that would lead to
prolonged periods of irregular game play and access to, and
manipulation of, the game code.
We have implemented a leading software-based Random Number Generator to
support our game play payouts. The Random Number Algorithm employed by
us is known as the "Mersenne Twister" algorithm. This algorithm is
employed to determine the random pattern in which numbers are generated
for casino games. The algorithm was originally created at the
University of Keio in Japan. We retained Dr. James Ngai (Ph.D.
University of British Columbia), to conduct an independent study of the
algorithm, which resulted in his finding that at a rate of calling 50
random numbers per second, it would take 10 to the power of 5994.56
days before the generator will repeat itself.
To tamper with the odds and payouts, a hacker would have to modify the
game server or database system. Both of these systems are protected
from external access. The game server can only be accessed using the
gaming client. Learning the client/server protocol will not aid a
hacker in gaining additional winnings from the system, since he/she
would still be limited by the game server's rules and constraints. The
machines that the game server processes run on are only accessible from
our private network. Users cannot connect to these servers using
telnet, rlogin, ssh, X windows, or any other login method. Therefore,
we believe that it would be almost impossible for a hacker to tamper
with game server code. The database systems are completely shut off
from the Internet and can only be accessed by a limited number of
applications on a closed network, such as the game servers and report
generators.
o HARDWARE. Our dual entry hardware network utilizes industry leading
Cisco routers, switches, load balancers and firewalls, to maximize
security protection.
o VIGILANCE. We maintain staff 24 hours a day, 7 days a week, 365 days a
year for surveillance, fraud investigation and continuous security
enhancements and upgrades. In addition, the HNC Consortium consisting
of Visa, Master Card and 14 out of the top 25 world banks, provide
real-time security and fraud updates to which we have immediate access.
Further, we utilize third-party reviews of our four layers of
protective security.
All the information provided to us is kept strictly confidential, and
is used only to support the player's relationship with us and the licensee.
PRODUCTS AND SERVICES
Our current software product areas include casino gaming, sportsbook
wagering, and pari-mutuel wagering, while multiplayer bingo, play-for-fun,
and multiplayer poker are under development. During the last fiscal year,
casino gaming contributed approximately 50% of gaming and licensee revenue,
while sportsbook wagering accounted for the remaining 50%.
CASINO GAMES
Our casino games can be categorized into two types: Java games and C++
downloadable software.
Our Java games utilize the Java language to provide easily accessible
online games to the licensees' websites. The cross-platform nature of Java makes
it possible to play these games on all major operating systems, online, with
virtually no downloading required. The games are simplified to optimize loading
times. We currently have 10 Java Casino games (Blackjack, Blackjack Super 7s,
Bermuda Poker, Free Ride, Pai Gow Poker, two Slot Machines, and three Video
Pokers) and 6 Java Lottery games (Cash
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Explosion, High Roller, Zodiac, Scratch Bingo, 3-Pointer Pulltabs, and Las
Vegas Slots Pulltabs) for players to wager on, with several additional Java
games projected to be released throughout the current fiscal year. This
represents an increase of 12 casino games over last year.
More than 20 different casino games are available in the C++ version of
the casino gaming product line. These games are provided for players who are
willing to take the time required to download and install the games. However,
once downloaded, they are easy and convenient to play and offer a more
heightened visual and audio experience. The C++ games are also offered by most
software licensees via a CDROM, which is mailed to players who request this
version.
THE SPORTSBOOK
The Sportsbook generates revenues based on booking bets that have fixed
payouts. These payouts have a commission that provides revenue for the
Sportsbook. There are varying commissions that are dependent on a variety of bet
offerings. These include: pointspreads, totals, moneylines, straight wagers,
parlays, teasers, futures, propositions and others. The Sportsbook's overall
commission is typically between 3 to 5% of total wagering dollars.
PARTNER'S PROGRAM
Our affiliate program provides a powerful marketing tool for our
licensees by creating an advertising vehicle with no up-front costs. The
affiliate program effectively transforms webmasters into a sales force for our
licensees, as webmasters earn a commission on the "sales" they make. The
webmasters will earn their commission based on the players that they send
through their sites. The licensee pays the webmaster only after the casino has
generated revenues from the webmaster's players.
Additional functionality like "sliding scale" percentage payouts,
detailed banner statistics, and IP/cookie tracking, is another key component of
our affiliate program that promises to enhance the licensee's ability to market.
PARI-MUTUEL GAMING
We fully launched our pari-mutuel games on July 31, 2001, and are in
the process of adding additional content for customers. In developing the
proprietary, interactive pari-mutuel software, our subsidiary Inphinity again
employed the cross-platform nature of Java, making it possible to play this game
on all major operating systems, online, with virtually no downloading required.
This interface is simplified to optimize loading times.
After signing a simulcast distribution agreement with the host raceway,
this system links directly to the host track's pool, enabling instant access to
real-time betting lines and the live host pool. The live audio and video
satellite signal from the host track are up-linked via satellite and
subsequently web-cast directly to the customer's computer.
Strategic partnerships with prestigious organizations such as Amtote
International, The Daily Racing Form, Bloodstock Research Information Systems
(BRIS) and TrackData provide customers with easy access to handicapping
information and up to-date content on current Thoroughbred, Standardbred,
Quarter Horse, Greyhound and Jai-Alai events from North America and around the
world. (See Item 10. MATERIAL CONTRACTS).
Pari-mutuel wagering is the lowest maintenance form of wagering a
company can offer. The bettors wager against themselves and not against the
house, therefore lowering the house exposure to zero. The house makes its profit
by taking a predetermined commission (or take-out) from the total pool,
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usually between 10% and 20%. Because the players are wagering against each
other there is no need for the lines (or odds) to be monitored. The lines are
determined by the amount of money wagered on each competitor/team involved in
the wager. The more money wagered on one specific outcome the lower the odds
for that competitor will be.
EFS SERVER, REPORTING AND TOOLS
We launched our fully functional e-commerce system known as the EFS
Server in 2001. The EFS Server provides licensees with a fully scalable
financial system running on an Oracle database designed to handle thousands of
simultaneous players.
The EFS Server also supports several reporting and management tools.
These tools include:
o Eye-in-the-Sky reports, more than 50 management reports
produced in popular Adobe Acrobat and Microsoft XML file
formats;
o Command Center, a licensee management tool that allows full
control over promotions, bonuses, payouts and other features;
o Customer Service Dashboard, a fully integrated set of customer
service tools and reports that provide real-time information
on a customer's status; and
o Money Manager, a management tool set that provides us and our
licensees the ability to track and monitor the flow of
deposits and payouts including a fully integrated security
monitoring system.
GAMING PRODUCTS UNDER DEVELOPMENT
BINGO
Two types of bingo games are in development. "Multi-player" bingo games
will link players from around the world and provide them with fun, fast-paced
games in a variety of themed, interactive Bingo communities. "Personal play"
bingo games are also being developed, where players will be able to play instant
bingo games online that offer favorable odds of winning cash prizes. Both types
of bingo products are scheduled to launch during 2002.
POKER
We have identified the positive implications of offering a Multiplayer
Poker product to our Licensee base. We intend to either develop the software,
license external software, or acquire a multiplayer poker software developer.
WIRELESS CASINO/SPORTSBOOK
We have announced our intention to expand our product line into
wireless delivery systems facilitated by extensive cellular networks globally.
We have entered into an agreement with a wireless software company, Sona
Innovations Inc., to develop wireless blackjack, slots and Sportsbook for Palm
and Windows CE devices. The wireless strategy also extends to I-mode phones
currently experiencing wide-spread adoption in Japan and other Pacific Asia
markets.
SPORTS BETTING
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In addition to maintenance of the current turnkey Sportsbook product,
Inphinity is developing new proprietary sports betting software. This sports
betting software encapsulates our current Sportsbook features, provides
additional Sportsbook betting options that are geographically specific and
exciting new products such as pools and pari-mutuels. In addition, the new
product will allow for a variety of operational flexibility for licensees. The
launch, which is dependent on successful testing, is targeted for the first
quarter of 2002.
OUR LICENSEES
We have historically focused our growth strategy on licensing our
software and services in order to become a leading technology provider to the
online gaming industry. Our gaming software is owned by our Antigua-based
licensing subsidiary, Starnet Systems, which licenses its fully-integrated
systems to a growing list of licensees. A one-time license fee provides an
installed, fully operational system. The licensee's interactive casino is
generally operational within 90-120 days of signing a license agreement. We
receive monthly fees and a royalty based on the licensee's revenues, in exchange
for continuing to host and maintain the site. The licensee must obtain a gaming
license from the jurisdiction where the gaming servers are located, which
currently is Antigua. We modify the new licensee's interactive casino to reflect
its intended market segment. We never modify the random number generator or the
game rules and cannot, therefore, affect the odds. This change can reflect a
particular motif or niche market (e.g., Japanese, Indonesia, or Latin America).
We also provide continuous support for both software and hardware, 24 hours a
day and 7 days a week. We seek a licensee with knowledge of the target market in
order to maximize sales potential. Licensees generally establish their marketing
efforts from within their target market and are generally expected to be capable
of investing more than $1 million to purchase the software, apply for the gaming
license and invest in marketing.
Pursuant to the terms of the license agreements, the licensee is solely
responsible for determining from which geographic locations they will accept
customers, although licensees are contractually prohibited from accepting wagers
from residents of Canada.
Should any licensee become delinquent in payment to us, we have the
technological ability to "shut down" the licensee's interactive casino(s)
remotely.
Our largest licensee accounts for 31% of our consolidated revenues, and
the loss of this licensee would have a material adverse effect on our results of
operations. This licensee has committed to use our software on its current sites
for a period of at least three years.
It is anticipated that the majority of our future revenue and earnings
growth will come from our ongoing participation in the licensees' revenue
stream, not from initial license fees. We receive a sliding scale from 25% - 10%
of a licensee's net revenue (wagers less payouts, less chargebacks (credit card
reversals), house bonuses and other compensation). For most customers, we
convert available credit on credit cards to Internet gaming funds, known as
V-chips, through our offshore E-commerce subsidiary, EFS. Our primary cost
against continuing license income is the cost of continuing software
improvements, direct site operating costs and merchant banking fees.
Management emphasizes that the licensees are structured operationally
so that a licensee's prime responsibility, aside from the ownership of the
customer data base and the casino web pages, is to market its gaming site to its
respective market. Management notes that its monthly license fees, which it
believes are lower than many current competitors, should make more funds
available for marketing, which increases site utilization and revenues.
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BUSINESS STRATEGY
The development of telecommunications and the emergence of new
technology have created opportunities to develop new, efficient and secure ways
to deliver information and entertainment to customers. We intend to capitalize
on our technological expertise to become a world leader in online gaming
systems. Our key strategic objectives are to: (i) maintain our role as a leading
provider of Internet gaming technologies and to build on the success of our
existing licensee base; and (ii) lead the consolidation of the industry by
pursuing strategic alliances, partnerships and joint ventures.
We intend to implement our business strategy by: (i) maintaining and
enhancing our technological lead; (ii) seeking key strategic alliances; and
(iii) developing a global brand name in on-line gaming. The following summarizes
our strategic focus and operating strategy:
RAPIDLY PENETRATE THE INTERNET GAMING MARKETS
We intend to capitalize on our technological lead and early market
entry to capture a significant share of the Internet Gaming market. We believe
that we are well positioned to achieve this goal since we possess the
competitive advantage of being one of the first to both operate and license
proprietary turnkey gaming systems, which incorporate the industry's largest
selection of gaming products and services.
PROVIDE HIGH QUALITY, INNOVATIVE AND SUPERIOR PRODUCTS AND SERVICES
We, in collaboration with our strategic partners, have focused on
designing a gaming experience using state-of-the-art technology. Additionally,
licensees may benefit from other methods of revenue generation that conventional
gaming machines cannot provide, such as data mining customer information and
sublicensing sites to other software operators.
MAINTAIN TECHNOLOGICAL LEAD
We have achieved our technological lead through the development of
proprietary software and networked architecture. Furthermore, we have made a
strong commitment to continue research and development activities to enhance our
products and software and to develop new applications for potential markets. We
will continue to use such methods to protect our technology and mitigate
competition from current and future entrants. In addition, we are committed to
developing the technical capabilities to facilitate integration between our
platform and third party platforms.
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ORGANIZATIONAL STRUCTURE
[GRAPHIC OF
ORGANIZATIONAL CHART]
SUBSIDIARIES OF WORLD GAMING PLC:
WG International Ltd
SUBSIDIARIES OF WG INTERNATIONAL LTD:
World Gaming Europe Limited
Starnet Communications International, Inc.
SUBSIDIARIES OF STARNET COMMUNICATIONS INTERNATIONAL, INC.
Starnet Systems International Inc.
EFS International Inc.
EFS USA Inc.
EFS Austrialia Pty Ltd
EFS St. Kitts Inc.
Inphinity Interactive Inc.
602662 British Columbia Ltd
World Gaming Services Inc.
Starnet Communications Canada Inc.
We are a holding company and conduct our operations worldwide through
our operating subsidiaries, which are located in various jurisdictions as
described elsewhere in this annual report.
WG INTERNATIONAL LIMITED.
We created WG International Ltd. as an intermediate holding company to
hold interests in Starnet, which in turn holds the interests in the operating
subsidiaries.
WORLD GAMING EUROPE LIMITED.
World Gaming Europe Limited was incorporated to provide us with a
European-based company to market the services of our various subsidiaries,
including Starnet.
STARNET COMMUNICATIONS INTERNATIONAL, INC.
Starnet holds the interests in our operating subsidiaries. It became
our subsidiary in the course of the holding company reorganization discussed
elsewhere in this annual report. (See Item 4. HISTORY AND DEVELOPMENT).
STARNET SYSTEMS INTERNATIONAL INC.
Starnet Systems, based in St. John's, Antigua, is in the business of
licensing customized, fully-integrated Internet gaming systems (similar to our
World Gaming virtual gaming system) to independent parties wishing to enter the
online gaming industry. Starnet Systems provides a complete range of services
that the operator needs in order to launch an online gaming website, including
customized software, website development and management on our network, custom
database systems to manage
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customer accounts, 24-hour technical support for the licensee and its
customers, and an EFS gateway to facilitate online wagers and financial
transactions. Starnet Systems provides these services in exchange for a
monthly royalty fee, providing us with the opportunity to spread our gaming
development and operating costs among multiple operators and broaden our
penetration of the market.
EFS SUBSIDIARIES.
There are four subsidiaries dedicated to the electronic transferring
of funds: EFS International Inc. (based in Antigua) ("EFS International"), EFS
USA Inc. (based in Nevada), EFS Australia Pty Ltd., and EFS St. Kitts Inc.
("EFS Subsidiaries") The EFS Subsidiaries are established in these countries
in order to facilitate local banking relationships for transaction processing.
Online revenues generated by our subsidiaries and licensees are processed
through the EFS Subsidiary appropriate to the country they are domiciled in.
The EFS Subsidiaries utilize proprietary processing technology which processes
credit card transactions via the Internet with ease and security.
The EFS Subsidiaries intend to expand their services to the constantly
increasing number of independent online licensees and establish subsidiaries in
several other key financial centers as needed.
INPHINITY INTERACTIVE INC.
Inphinity Interactive Inc. ("Inphinity") was incorporated in British
Columbia in 1999 as our software development arm and its primary focus is to
design, create and develop software products for the interactive gaming
industry. Traditional gaming product categories have been adapted to online
applications for real-time wagering capabilities while new types of gaming
have been created strictly for the Internet environment. Inphinity employs
over 50 software professionals who provide a variety of products and services
to our Antigua-based licensing subsidiary, Starnet Systems. Inphinity entered
into a strategic partnership with Akamai for Internet broadcasting services.
(See Item 10. MATERIAL CONTRACTS).
602662 BRITISH COLUMBIA LTD.
602662 British Columbia Ltd. was incorporated as a wholly-owned
subsidiary of Starnet in March 2000 to provide our investor relations services
and administrative support. It is currently dormant.
WORLD GAMING SERVICES INC.
World Gaming Services, Inc. ("World Gaming Services")
(www.play.worldgaming.com), also based in Antigua, is a full-service online
gaming operation. Through its product lines, World Gaming Services accepts,
processes and manages wagers for casino-style games of chance and sporting
events. World Gaming Services enables users resident outside of Canada and the
United States to wager with real funds, which can be deposited, converted to
"Virtual Chips," or withdrawn from personal accounts with complete security.
World Gaming site has been translated into five European languages and stand
alone Japanese (www.pachinkocasino.com) and Chinese (www.joyluckcasino.com)
sites have been developed to target the emerging Asian Internet gaming market.
WORLDBROADCASTS.COM INC.
WorldBroadcasts.com Inc. was incorporated in September 1999 as a
wholly-owned subsidiary of Starnet. It is now dormant.
STARNET COMMUNICATIONS CANADA INC.
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Since the sale of substantially all of the assets and undertakings
comprising the adult entertainment division of Starnet Canada, and the
transfer of substantially all of its other assets to Inphinity, Starnet
Canada has been inactive.
GOVERNMENT LICENSING AND REGULATION AND RELATED RISKS
Our subsidiaries have various connections with the online gaming
industry. Inphinity develops interactive gaming software under contract with
Starnet Systems. Starnet Systems, in turn, licenses online gaming systems to
various licensees, including affiliates, which deploy such software for the
purpose of conducting interactive gaming casinos utilizing the Internet.
These licensees are licensed to operate interactive casinos in the country
where their gaming equipment is physically located. For World Gaming
Services, it is the Country of Antigua and Barbuda. Most of the licensees of
our software are also licensed by the Country of Antigua and Barbuda to
operate interactive casinos. In addition, some of the licensees of our
software are licensed by other countries as well. EFS International (Antigua)
from its offices in Antigua performs various services for our licensees,
including financial transaction processing. Starnet Systems, from its offices
in Antigua, performs various services for the licensees, including, but not
limited to, providing customer support and technical support. Inphinity also
provides support to Starnet Systems, which benefits our licensees, by
maintaining software systems developed by Inphinity for Starnet Systems.
The licensees operate their interactive casinos from servers
maintained by Starnet Systems and located in Antigua. All our licensees are,
to our knowledge, licensed by the Country of Antigua and Barbuda and other
jurisdictions where their respective operations are located.
A significant debate exists whether the laws of any country other
than the country where the computer gaming servers are physically located
have jurisdiction over the operations of the licensees of Starnet Systems. In
addition, a significant debate exists whether the laws of any country other
than the country where the computer gaming servers are physically located
have jurisdiction over the operations of our affiliates, which perform
services for the licensees. Many licensees believe that they are not subject
to the laws of any country other than the laws of the country where they are
licensed. As a result, they accept customers from any country, without regard
to the laws of the country where the customer is located, including the
United States. For our proprietary site, WWW.PLAY.WORLDGAMING.COM, we have a
policy not to accept wagers from the residents of the United States and
Canada and have implemented procedures that prevent customers from collecting
on winnings from wagers from the residents of such countries, but our
licensees may choose to accept wagers from the United States for their sites.
While such procedures, as with most precautions, may be able to be
circumvented, we believe that the procedures largely prevent such wagers from
occurring.
Historically, gaming activities have been subject to extensive
statutory and regulatory control by government authorities, and have been
very dependant and likely significantly affected by any changes in the
political climate and economic and regulatory policies of the countries where
gaming facilities are located. These changes may impact our operations in a
materially adverse way. Various laws and regulations could have a direct and
material effect on the business, and indirectly could have a material effect
on the public demand for our gaming software. Most countries and
jurisdictions within countries have laws or regulations restricting gaming
activities. For example, in the United States, the Federal Interstate Wire
Act contains provisions which make it a crime for anyone in the business of
gaming to use an interstate or international wire communication line to make
wagers or to transmit information assisting in the placing of wagers, except,
with respect to transmitting information, the wagering is legal in the
jurisdictions from which and into which the transmission is made. Other
United States laws impacting gaming activities include the Interstate Horse
Racing Act, the Interstate Wagering Paraphernalia Act, the Travel Act and the
Organized Crime Control Act.
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We believe that the activities of our subsidiaries do not violate or
are not subject to such laws and regulations. However, because there is very
little clear statutory and case law authority, this conclusion is not free
from doubt. We face the risk of either civil or criminal proceedings brought
by governmental or private litigants who disagree with our interpretation of
laws and regulations. Because there is little guiding authority, there is a
risk that the we could lose such lawsuits or actions and be subject to
significant damages or civil or criminal penalties and fines. Such
proceedings could also involve substantial litigation expense, diversion of
the attention of key executives, injunctions or other prohibitions being
invoked against our licensees or us and our subsidiaries. The uncertainty
surrounding the regulation of the Internet gaming could have a material
adverse effect on our business, revenues, operating results and financial
condition.
Several countries, most notably law enforcement agencies in the
United States, believe that the laws of their country restrict, and in some
instances prohibit, interactive gaming operators from doing business with
residents of their countries and, in some instances, prohibit or restrict
residents of their respective countries from doing business with interactive
gaming operators located in a foreign country. The Department of Justice of
the United States of America has taken the position that the federal criminal
laws of the United States do, in fact, address interactive gaming operators
that accept wagers from residents of the United States. They have taken this
position on legislation pending in Congress, discussed below, and have also
pursued various criminal prosecutions. For example, of several indictments
issued at the request of the United States Attorney for the Southern District
of New York, one case that went to trial involved Jay Cohen, an owner of
World Sports Exchange, a licensed gaming operator in Antigua. On February 28,
2000 the jury in the Federal District Court case found Jay Cohen guilty of
violating the United States federal law (18 U.S.C. ss. 1084), commonly
referred to as the Wire Act, a federal statute that purports to make it
illegal for a betting or wagering business to use a wire communication
facility to transmit bets or wagers in interstate or foreign commerce.
Several of the counts for which Mr. Cohen was found guilty solely involved
his Internet operations. More recently, the Federal District Court for the
Southern District of Louisiana concluded that various United States residents
who wagered in an online casino with an online operator located outside of
the United States did not violate the Wire Act nor the laws of the various
states where the customers were located. The decision is on appeal.
As a result of the debate on the effectiveness of laws in the United
States to address activities of interactive gaming operators, there has been
an extended effort in the United States to prohibit certain types of
interactive gaming by companies engaged in the business of gaming. After
previous similar proposals failed to pass in 1998, on March 23, 1999, Senator
Jon Kyl of the United States Senate introduced a revised proposal intended to
prohibit and criminalize Internet gambling. This bill passed the Senate on
November 11, 1999, but it was not passed by the House of Representatives and
did not become law.
On October 21, 1999, the Representative Bob Goodlatte introduced a
bill in the United States House of Representatives (H.R. 3125) with similar
language as the Kyl bill. H.R. 3125 was voted on by the House of
Representatives on July 17, 2000 under suspension of the rules, which limited
debate and required a two-thirds vote for passage. The vote failed to achieve
the necessary two-thirds vote required for passage. However, it was supported
by over sixty percent (60%) of those voting. The 2000 legislative session
concluded without further action on the bill. It did not become law.
A Bill, H.R. 4419, introduced in May, 2000 in the United States
House of Representatives, was titled the Internet Gambling Funding
Prohibition Act. In the form introduced, this bill would prohibit any
gambling business from accepting any financial instrument (defined as any
check, wire, credit card charge or any other transaction facilitated by a
financial institution) for the purpose of Internet gaming. At a Banking
Committee hearing on June 28, 2000, the bill passed out of Committee with
amendments that
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largely removed the international reach of the bill and also added exceptions
to the prohibitions for pari-mutuel and lottery. It was referred to the House
Judiciary Committee for consideration. The 2000 legislative session concluded
without further action on the bill. It did not become law.
In the current legislative session, Representative Goodlatte while
promising to reintroduce legislation, has not introduced any legislation
seeking to prohibit Internet gaming. Representative Leach has introduce a
bill in the House of Representatives, H.R. 556, titled the Unlawful Internet
Gambling Funding Prohibition Act, which is designed to prohibit financial
institutions from processing financial instruments for the purpose of
unlawful Internet gambling. The bill has been referred to the House Committee
on the Judiciary and its Subcommittee on Crime and to the House Committee on
Financial Services and its Subcommittee on Financial Institutions and
Consumer Credit. The bill has not yet been reported out of either committee.
If passed in its current form, the legislation could have a material adverse
effect on our business, revenues, operating results and financial conditions.
We believe that if current laws or any future laws become applicable
to activities of our licensees or our affiliates that perform services for
the licensees, such laws would have a material adverse effect on our
business, revenues, operating results and financial condition. If it was
determined that such law was applicable to the activities of our licensees
and affiliates, the licensees would have to change the types of wagering
provided to residents of the United States. This would impact their current
operations and there may be a delay in offering acceptable wagering products
to such customers. There would be no assurance that the wagering products
offered to such customers would be as profitable to our licensees or to our
affiliates as the wagering products currently offered to such customers by
the licensees.
PROPERTY, PLANTS AND EQUIPMENT
UNITED KINGDOM
Our corporate office and European marketing team of our subsidiary,
Starnet Systems, are located at 33 St. James Square, London U.K. The premises
consist of 680 square feet of office space leased through February 21, 2002
at an annual cost of $108,000.
ANTIGUA
The operations of Starnet Systems and EFS International (Antigua)
are located in 6,400 square feet of commercial space at the CIBC Banking
Centre, Old Parham Road, St. John's, Antigua at an annual cost of
approximately $170,000 plus utilities. The last year of the term is expiring
on November 1, 2001, and after that it will be on a month to month basis.
Starnet Systems and EFS International (Antigua) may relocate to a new
premises but has not made any definite plans yet.
CANADA
Inphinity leases 27,000 square feet for its development and
production activities at 1401 West 8th Avenue, Vancouver, Canada. The base
rent is approximately $198,000 per year for the term of the lease. The five
year lease expires May 31, 2005 with an option to renew for an additional
five years at market rates. The annual cost is approximately $382,000. We are
currently attempting to sublease 15,000 square feet of the premises.
We also lease 7,508 square feet of office space at 510 Front Street
West, Toronto, Canada for marketing, sales and administrative support. The
lease has a term of five years and a base rent of approximately $90,000 in
the first year, increasing to approximately $100,000 per year by the end of
the lease. Annual operating costs are estimated at $37,000 per year. There is
an option to renew for an additional five year term at market rates.
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EQUIPMENT
During the fiscal years ended April 30, 1999, 2000 and 2001, we made
capital expenditures of approximately $3.2 million, $5.2 million and $1.3
million, respectively. The expenditures were primarily for computer equipment
and related items in order to increase our capacity to process transactions.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION
WITH "ITEM 3. SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO SET FORTH ELSEWHERE IN THIS ANNUAL REPORT. IN
ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" APPEARING
ON PAGE 1 OF THIS ANNUAL REPORT.
RESULTS OF OPERATIONS
(Currency Amounts in Thousands)
Starnet Systems licenses its gaming software to third parties for an
initial licensing fee and monthly royalties. Inphinity develops gaming
software and web pages. Our Internet casino, which targets only customers
outside North America, is operated by our subsidiary, World Gaming Services.
In April 2000, we sold the assets of our adult entertainment business to a
third party to focus entirely on the Internet gaming industry. The adult
business has been classified separately as discontinued operations.
Additionally, in 2000, we relocated our gaming operations to Antigua and
moved our development activities to other offices in Canada. The following
tables set out selected consolidated information from the statements of
operations for the years ended April 30, 2001 and April 30, 2000 and the
balance sheets as at April 30, 2001 and April 30, 2000:
<Table>
<Caption>
SELECTED STATEMENT OF OPERATIONS INFORMATION
FOR THE YEAR ENDED
-------------------------------------------
APRIL 30, 2001 APRIL 30, 2000
--------------------- ---------------------
Net Sales $20,153 $17,881
Gross Margin 14,224 12,738
Operating Expenses 31,243 17,624
Income (Loss) From Continuing Operations (16,756) (4,462)
Net Loss (16,756) (3,255)
<Caption>
SELECTED BALANCE SHEET INFORMATION
AT APRIL 30, 2001 AT APRIL 30, 2000
--------------------- ---------------------
Working Capital $(576) $6,714
Total Assets 20,188 27,983
Long Term Debt 2,784 979
Accumulated Deficit (19,127) (2,371)
Total Shareholders' Equity 2,211 19,376
</Table>
Revenues from all components of the gaming business, which include
licensing, casino operations and financial transaction processing, have
continued to grow in fiscal 2001 and generated revenues of $20,153, representing
an increase of 13% over the gaming revenues of $17,881 for the year ended
April 30, 2000.
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The revenue growth is primarily due to a 33% increase in royalties
and fees generated from gaming operations, financial transaction processing
and web site production for licensees, from $13,853 in 2000 to $18,376 in
2001. Revenue from software licensing, including Antigua gaming licenses
decreased 56%, from $4,028 to $1,777, representing 9% of total revenue
compared to 23% in 2000.
During fiscal year 2001, we completed software for 9 new licensees
but cancelled or lost 20 licensees largely in an effort to eliminate
non-compliant or high risk licensees from our portfolio and as a result of
some smaller, low revenue licensees merging with larger licensees, resulting
in a net decrease of 16 for a total of 35 active licensees as of April 30,
2001. Royalty revenue from one of the operating licensees represented
approximately 31% of our total sales in fiscal year 2001 compared to 23% in
fiscal 2000.
Along with the growth in sales, gross margin increased to $14,224
for the year ended April 30, 2001, up from $12,738 for the prior year. The
gross margin decreased slightly from 71.2% for the year ended April 30, 2000
to 70.6% for the year ended April 30, 2001 due to increased costs in
financial transaction processing.
As a result of significant restructuring throughout the organization
and to support the rapid growth of the underlying business, we invested
heavily in all areas of the business with an emphasis on operations and
software development. Consequently, our development, sales and general
administrative expenses combined increased by 54% to $18,074 for the year
ended April 30, 2001 from $11,704 for the prior fiscal year.
Starnet's business operations have been under investigation by the
Canadian authorities (See Item 8. LEGAL PROCEEDINGS) and its management has
been cooperating fully with the Canadian government. As a result, we have
successfully refocused our efforts on the online gaming industry. We have
also succeeded in resolving this and a number of other legal matters and
continue to perform a comprehensive review of licensee operations to ensure
the continued development of the underlying business. This process has
resulted in the identification of several adjustments and provisions that
impact our financial results for the year ended April 30, 2001. They are as
follows:
- A bad debt provision of $3,290, consisting of write-off of long-term
receivables of $1,512, licensee receivables of $1,031, merchant
processor receivables of $674, and other of $73.
- Legal expenses of $974 relating to reorganization resulting in the
acquisition of Starnet and legal expenses other than those relating to
the investigation, shareholder class action suits, and the Las Vegas
Casino law suit. As indicated earlier, the investigation and the class
action suits have essentially been concluded since the fiscal year
ended April 30, 2001. During the fiscal year, we incurred considerable
non-recurring expenses relating to these items, however, these costs
were charged against the accruals made in 2000 for these issues. For
the fiscal year ended April 30, 2001, we had recognized a liability of
$5,409 to cover anticipated costs related to these two issues.
- Accrued expense for settlement of legal issues of $4,524 relate to the
estimated costs of settling the investigation ($3,482) and the class
action suits ($1,042). These amounts are net of accruals made in 2000
for these issues and include costs for legal and other fees.
Depreciation and amortization increased to $2,610 in the fiscal year
ended April 30, 2001, from $2,011 for the year ended April 30, 2000 as new
computer equipment was purchased to handle the increase in network traffic.
(See Item 4. PROPERTY, PLANTS AND EQUIPMENT).
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The loss from continuing operations for the year ended April 30,
2001 was $16,756 compared to $4,462 for the year ended April 30, 2000.
Restructuring charges, bad debts and accrued settlement charges account for
$7,616 of the increase in losses. In addition, we continued to make
substantial investments in software development and operations during the
fiscal year ended April 30, 2001 in anticipation of the launch of the new
software platform and expanded offerings including pari-mutuel betting for
which revenues are not anticipated to result until the second quarter of
fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
(Currency Amounts in Thousands)
At April 30, 2001, we had $4,518 in cash and cash equivalents
compared to $5,984 at April 30, 2000. In addition, we classify reserves held
by the merchant banks as reserves and deposits with credit card processors.
At April 30, 2001, as a result of the pending investigation by Canadian
authorities, we did not have access to $3,602 of the $4,518 reported cash
balance. Those funds were released to us on August 17, 2001. Between April
30, 2001 and August 17, 2001, the unrestricted cash available to us was not
sufficient to cover customer deposits. It was management's position, that the
outcome of the investigation would result in the release of funds to correct
the situation. This situation was corrected by the release of the funds on
August 17, 2001 upon conclusion of the investigation. Of the $3,763 on hand,
a significant portion ($2,976) is held as a rolling reserve, which is released
to us after six months. The majority of these amounts ($2,701) are payable to
licensees for whom we perform merchant services. Once released to us, these
amounts are forwarded to the licensees. Amounts owing for rolling reserves
are included in accounts payable and accrued liabilities on our balance sheet.
On August 17, 2001, we reached a settlement with Canadian
authorities whereby Starnet, our subsidiary, plead guilty to a single charge
under the Criminal Code of Canada. Starnet was fined $64.93 plus a $9.75
victim surcharge. As well, we consented to a forfeiture of amounts set aside
as restricted cash totaling $3,925. These amounts had been accrued on April
30, 2001 and are included in accrued settlement of legal issues on our
balance sheet and are not included in the cash and cash equivalents amount
above. (See Item 8. LEGAL PROCEEDINGS)
Working capital at April 30, 2001 decreased to $(576) from $6,714 at
April 30, 2000. Included in working capital is $1,271 related to the
anticipated settlement of the class action lawsuit. This is calculated as the
value of shares expected to be issued for settlement of the suit and no cash
is anticipated to be paid to cover this amount. Accounts receivable decreased
from $2,022 at April 30, 2000 to $1,535 at April 30, 2001. The majority of
the receivables are from new licensees that were offered an installment
payment plan on the initial licensing fees and from operating licensees that
have their own merchant accounts. Prepaid expenses and deposits decreased by
$40 to $576 at April 30, 2001. Deferred gaming license costs for the year
ended April 30, 2001 dropped to $300 from $1,349 for the year ended April 30,
2000. The decrease is the net effect of prepayments made to the Antiguan
Government for the purchase of additional casino licenses less the portion
allocated to costs of sales during the year. The casino licenses are held for
sale to prospective licensees. Of the original cost of $2,250, $1,049 has
been expensed in the current fiscal year against gaming license revenue of
$1,178.
Net cash used by operations for the year ended April 30, 2001 was
$3,428 compared to $557 for the year ended April 30, 2000. The decrease in
cash from operations was mainly due to increased costs associated with
Antiguan operations. By April 30, 2001, we had not achieved cash
profitability. Given our working cash balance in April 30, 2001, we have
taken a number of steps in an attempt to preserve cash and to achieve cash
profitability. These include:
- In April 2001, we restructured our operations both in Antigua and
Vancouver to decrease our costs by reducing inefficiencies and
eliminating duplicate functions. A total of 29 staff were
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terminated. We continue to evaluate our operations to determine
additional ways to reduce costs and improve efficiencies through
restructuring.
- We have increased efforts to improve cash flow from transaction
processing intermediaries by sourcing and implementing additional
processors and by improving the administration of transaction
processing.
Net cash provided by investing activities for the year ended April
30, 2001 was $835 compared to a net use of $9,548 for the year ended April
30, 2000. The majority of the difference is due to the significant decrease
in restricted cash of $2,961 as a result of the settlement of the
investigation by the Canadian authorities subsequent to year end and a
significant reduction in the purchase of capital assets for use in
operations. The majority of capital asset purchases relate to the purchase of
computer equipment for use in operations.
Net cash provided by financing activities for the year ended April
30, 2001 was $1,560 compared to $11,035 for the year ended April 30, 2000.
The majority of the cash provided from this source in fiscal year 2001 was
generated from long term debt.
We are currently in arrears on payments to two of our equipment
suppliers. Please see discussion in Item 13 in Part II of this report.
CONTINGENCIES AND COMMITMENTS
On September 16, 1999, Las Vegas Casino Inc. ("LVC") commenced an
action against Starnet, a number of its subsidiaries and various employees of
Starnet and its subsidiaries. LVC, a former software licensee of Starnet
Systems, alleges a $1 billion loss arising from alleged misappropriation of
funds, and breach and wrongful termination of its software license agreement.
Starnet Systems terminated the software license agreement with LVC on July
22, 1999 as a result of LVC's failure to pay over $200,000 in fees owed to
Starnet Systems. On July 12, 2000, Starnet Systems was granted a stay of the
lawsuit as against it only, with the result that LVC's claim and Starnet
Systems' claim for unpaid fees will proceed to arbitration. We believe that
LVC's allegations are without merit and we intend to defend LVC's lawsuit and
to contest arbitration proceedings vigorously. As this matter is at a
preliminary stage, its financial impact, if any, cannot be determined at this
time, although we are of the opinion that it will not result in any
significant losses to us.
Between October 15, 1999 and December 9, 1999, ten class action
claims were commenced in the United States against Starnet and some of its
directors and officers. The class action lawsuits allege that material
misrepresentations regarding the nature and inherent risks of Starnet's
business were knowingly made in filings to the United States Securities and
Exchange Commission, press releases and other public statements. The amount
of the damages claimed is unspecified. These actions have now been
consolidated in a single proceeding. On June 20, 2001, Starnet entered into a
memorandum of understanding with the plaintiffs for the settlement of the
litigation, which is still subject to the court's approval. The amount of the
settlement and related costs totaling $1,420,000 were included in the current
year financial statements for the year ended April 30, 2001.
RESEARCH AND PRODUCT DEVELOPMENT
New product development will be our primary focus for the current
fiscal year. As the traditional casino gaming market and the interactive
online gaming market begin to converge, new games that redefine the online
gaming market will emerge. We hope to lead this convergence by redefining the
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online gaming experience. We plan to focus on a variety of different types,
styles and themes of games, focusing on different demographic and niche
markets in order to penetrate a larger user base. Different revenue models
may also be explored, as we consider developing games of skill as well as the
traditional games of chance. Research and development expenses reported for
fiscal year ended April 30, 2001 were $3.6 million, as against $2.3 million
for fiscal year ended April 30, 2000.
TREND INFORMATION
We have not identified any changes in trends in our operations since
the end of the financial period ended April 30, 2001. The postponement of
sporting events in North America immediately following the terrorist attacks
in New York, USA, on September 11, 2001 had a short term effect on our
revenues. However, upon resumption of these events, our revenues have
returned to expected levels. We are uncertain as to what effect future
threatened or actual military action may have on our operations.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
DIRECTORS AND SENIOR MANAGEMENT
The names, positions and ages of our directors and senior management as
of October 10, 2001 are as follows:
<Table>
<Caption>
NAME AGE POSITION DATE APPOINTED
--------------------- -------- ------------------------------------------- -------------------------------------
Frederick Hazell 54 Chairman of the Board, Director October 18, 2000
Michael Aymong 37 President & CEO, Director April 9, 2001, elected to the Board
on September 4, 2001
Rodney Davis 34 CFO, Vice-President Finance July 7, 2001
Wolf Bergelt 57 Director October 18, 2000
Clare Roberts 52 Director October 18, 2000
Nicholas Jackson 58 Director October 18, 2000
Jason Bolduc 26 Director October 18, 2000
David Pasieka 44 Chief Operating Officer July 9, 2001
Liam Gillen 48 Managing Director, Antigua Operations November 27, 2000
Michael Steele 39 Managing Director, Inphinity April 12, 2001
Interactive, Inc.
</Table>
BACKGROUND INFORMATION CONCERNING DIRECTORS AND SENIOR MANAGEMENT
FREDERICK EVERTON HAZELL, CHAIRMAN OF THE BOARD
Mr. Hazell has served as a director and Chairman of our Board since
October 18, 2000. He has also served as a director of our subsidiary,
Starnet, since February 10, 2000, and as its Chairman of the Board since
April 2000. He is also a member of the Audit Committee and the Compensation
Committee of our Board. From September 2000 until April 2001 he served as
Acting President & CEO. Mr. Hazell is currently President & CEO of the
PCL Financial Group Inc., a Toronto, Canada-based organization that
provides clients with access to offshore banking and investment
services as well as funding required for major ventures. Mr. Hazell has
held this position with the PCL Financial Group Inc. since 1994.
MICHAEL AYMONG, PRESIDENT AND CHIEF EXECUTIVE OFFICER, DIRECTOR
Mr. Aymong has served as a director of World Gaming plc since
September 2001. Prior to joining Starnet in April of 2001, Mr. Aymong served
for two years as Executive Vice President of
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Marketing, Sales, and Customer Service at GT Group Telecom (NASDAQ: GTTLB;
TSE: GTG.A, GTG.B). He spearheaded the telecommunication service provider's
aggressive nation-wide launch, leading to successful initial public offerings
in both Canada and the U.S. Prior to GT Group, Mr. Aymong provided senior
executive leadership to TELUS Advanced Communications (TSE: T, T.A; NYSE: TU)
in his capacity as the Vice President of Marketing and Director of Marketing
and Operations. Here, he played a critically important role in molding a
truly cross-functional and profit-focused billion-dollar data communications
company. Prior to TELUS, Mr. Aymong served for two years as Director of
Operations and Support at MetroNet Communications. His vision and strategy
helped drive the company's success, measured by a significant increase in the
stock price from $21 to more than $75 per share during his tenure. Michael
Aymong is a graduate of the Executive MBA program at the University of
Western Ontario. He also serves as a member of the Board of Directors of
Vicom Communications Inc., Big Picture Technologies Inc., CharterHub and the
Art Gallery of Ontario.
CLARE KAMAU ROBERTS, DIRECTOR
Mr. Roberts has served as our director since October 18, 2000. He
has also served as a director of our subsidiary, Starnet, since May of 1999.
He is a member of our Compensation Committee. Mr. Roberts is a former
Attorney General & Minister of Justice and Legal Affairs of Antigua and
Barbuda from 1994 to 1997. Mr. Roberts has been founder and principal at
Roberts & Company, Attorneys at Law, since 1986. He served as a consultant to
the government of Antigua from 1986 to 1990 and preceding that, served as
Solicitor General for Antigua and Barbuda as well as Parliamentary Counsel.
He is a founding member and director of the National Development Foundation
of Antigua and Barbuda and Vice President of the Antigua offshore
Association. He is presently a director and chairman of ACB Mortgage and
Trust Company Limited, a wholly owned subsidiary of Antigua Commercial Bank,
the leading bank in Antigua. He has served as a consultant to various
government agencies throughout the Caribbean region and has led many seminars
and workshops. Mr. Roberts received a BA and LL.B. from the University of the
West Indies, a Legal Education Certificate from the Caribbean Council of
Legal Education, a Diploma in Legislative Drafting from the University of
Ottawa in Canada and attended Harvard University for a program of instruction
for lawyers in 1995 and 1996.
WOLF BERGELT, DIRECTOR
Mr. Bergelt was elected to our Board on October 18, 2000. He serves
as the Chairman of our Audit Committee. He has also served as a director of
our subsidiary Starnet since April 1, 1999. Mr. Bergelt is a corporate
financial consultant who has worked with a number of publicly traded
companies including Lions Gate Entertainment Corp., Rogers Cantel Inc, and
was Chief Financial Officer of First City Trustco Inc. He is a Chartered
Accountant by training and attended the Masters of Business Administration
program at Simon Fraser University, British Columbia, Canada.
HAROLD NICHOLAS SHAW JACKSON, DIRECTOR
Mr. Jackson was elected to our Board on October 18, 2000. He has
served as a director of Starnet since April 12, 1999. As an outside director,
Mr. Jackson brings over 30 years of international business and financial
experience to the board. Raised and educated in South Africa, Mr. Jackson has
been involved in a number of very successful entrepreneurial ventures,
establishing his first company, Jackson's Fiberglass (PTY) Ltd. in 1964,
followed by a number of other highly successful businesses across Europe. Mr.
Jackson serves as an executive and consultant at Enyati Valley Anthracite Pty
Ltd., a coal company in Belgium and South Africa involved in trading and
shipping of coal.
JASON JOSEPH BOLDUC, DIRECTOR
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Mr. Bolduc was elected to our Board on October 18, 2000. He has
served as a director of Starnet since January 27, 1997. Having served
previously as President and Technical Director for Starnet, Mr. Bolduc has
extensive experience in the information technology industry and was a
managing partner of Wiz Zone Computers Inc. between 1990 and 1995. Since
1998, Mr. Bolduc has held the position of a director of Private Messenger
Inc., a company that provides private and secure communication services for
the offshore industry. Mr. Bolduc also serves as a director and chief
technology officer of CharterHub Inc., an online air charter reservation
service.
BACKGROUND INFORMATION CONCERNING CERTAIN KEY EMPLOYEES
DAVID PASIEKA, CHIEF OPERATING OFFICER
Mr. Pasieka has served as our Chief Operating Officer since July 9,
2001. Prior to joining us, Mr. Pasieka was a senior vice president
(applications hosting and IT) of 724 Solutions Inc. Previously, Mr. Pasieka
spent nine years at Bell Canada, where he focused on facilities
administration, operations planning, and cost and performance. He left Bell
Canada to join AT&T Canada (Unitel/CNCP Telecommunications) to work in areas
of business and operations planning, customer and network services, marketing
and access management. Next, Mr. Pasieka joined MetroNet Communications
Corporation as a vice president and general manager. Mr. Pasieka holds a
Bachelor of Science Degree from the University of Waterloo and a MBA from
York University. He also attended the Strategic Product Management program
for AT&T School of Business and the Executive Marketing Program at the
Western School of Business. He is a member of the advisory boards of NTG
Clarity Networks and Conceptwave Software.
RODNEY DAVIS, CHIEF FINANCIAL OFFICER
Mr. Davis has served as our Chief Financial Officer since July 7,
2001. With almost 15 years experience, Mr. Davis brings to the Company a
successful track record in the areas of strategic and business planning,
public market financings, corporate restructurings, public financial
reporting, acquisition negotiations and execution. Most recently, he held the
position of CFO at MGI Software Corporation, a leading global provider of
visual media software and infrastructure solutions distributed in over 40
countries. At MGI, Mr. Davis successfully completed a $23 million bought deal
in Canada, co-led by National Bank and BMO Nesbitt Burns. Further, he
introduced processes and accountabilities to the company that led to
better-informed decision-making and resource allocations. Prior to joining
MGI, Mr. Davis was a vice president (corporate development) of Maxxcom Inc.
where he managed the company's acquisition program and participated in taking
the company public. In 1997, he was appointed vice president and corporate
controller for Southam Inc., a media company with annual revenues of $1.3
billion. At Southam, Mr. Davis was responsible for all acquisitions, all
financial reporting, as well as approving business plans and capital
expenditures for all divisions. Mr. Davis obtained his CA designation while
working at KPMG LLP.
LIAM GILLEN, MANAGING DIRECTOR, ANTIGUA
Mr. Gillen is our Managing Director, Antigua Operations. Mr. Gillen
has served as a Chief Operating Officer of Starnet from November 27, 2000
until April 15, 2001. He brings a comprehensive understanding of gaming
operations and vendor relationships through more than 25 years experience in
casino operations. Before joining Starnet he served as President of Global
Interactive, as a country head at Asian Village, Antigua, and as a director
of enrollment at Management Training University.
MICHAEL STEELE, MANAGING DIRECTOR, INPHINITY INTERACTIVE INC.
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Mr. Steele has served as Managing Director of Inphinity Interactive,
Inc., our operating subsidiary based out of Vancouver, Canada, from April 12,
2001. Mr. Steele now oversees all maintenance, upgrades, support and
development of our proprietary software products, as well as the team that
implements software integration. Mr. Steele has extensive experience in
developing and executing product strategies for technology companies. He
first worked with Mr. Aymong as a private consultant to telecommunications
service provider MetroNet (AT&T Canada) and later GT Group Telecom, in the
areas of strategic planning and market development. With GT, he consulted on
the company's first retail take-to-market plan for its national expansion
across Canada and participated in the analysis team that supported nearly $1
billion in acquisitions. Mr. Steele also implemented the service development
process for TELUS Advanced Communications prior to its merger with BC TEL and
led the marketing efforts for three software companies in Calgary, Canada.
COMPENSATION
We have entered into agreements with our independent directors which
provide that each independent director receives a fee of $12,000 per year
plus $1,000 per day for attending our Board of Directors meetings as it
relates to the year ended April 30, 2001. In addition Frederick Hazell, our
Chairman of the Board, receives a fee of $24,000, however, during the period
that Mr. Hazell acted as President and CEO of the Company he did not receive
the base director's or chairman's fee. Directors who are employees receive no
cash compensation for serving on our Board of Directors. Directors who
resigned during the year were paid pro rata up to when they ceased performing
duties for us. All directors are reimbursed for their reasonable expenses
incurred to attend meetings of the Board of Directors. We anticipate that our
Board of Directors will hold regularly scheduled meetings at least quarterly.
COMPENSATION OF OUR SENIOR MANAGEMENT
The following table sets forth all compensation we paid to our
senior management and directors including the stock options grants during the
fiscal year ended April 30, 2001, in U.S. dollars. All of the options listed
in the table below represent options to purchase our ordinary shares or ADSs.
Options granted to our directors will vest and become exercisable as to 25%
of the original number of option shares on the date of grant and a further
25% upon the expiration of each of the following three periods of three
months. All new options granted to our employees and officers will normally
vest over a three-year period from the date of the grant. Any options that
were granted in exchange for the former Starnet's options normally vest over
a two-year period.
OPTION GRANTS/ ALL OTHER
VESTED OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) AS OF 10/05/01 ($)
--------------------------- --------- -------------------- ------------
Michael Aymong, President & CEO (1) 18,181 2,940,000/1,581,815 --
R. Michael Steele, Managing Director - Inphinity
Interactive (2) 3,169 175,000/34,028 5,000
Frederick Hazell, Chairman of the Board, former Acting
President & CEO (3) 108,000 370,928/270,928 31,500
Wolf Bergelt, Director & former Consultant (4) 96,000 426,967/326,967 23,000
Winston Brown, former Chief Operating Officer (5) 65,000 200,000/200,000 39,867
Meldon Ellis, former Consultant (6) 125,000 377,623/377,623 58,000
Liam Gillen, Managing Director - Operations (7) 41,455 165,000/30,000 22,483
Jason King, former CEO Inphinity (8) 103,243 195,000/195,000 7,886
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OPTION GRANTS/ ALL OTHER
VESTED OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) AS OF 10/05/01 ($)
--------------------------- --------- -------------------- ------------
Eugene Nizker, Former Chief Technical Officer,
Inphinity Interactive (9) 100,596 135,000/135,000 2,581
Jason Bolduc, Director (10) 300,000/200,000 20,000
Clare Roberts, Director (11) 350,000/250,000 22,000
Brownell Combs II, Director (12) 309,016/309,016 22,000
Mathew Stasior, Director (13) 309,016/309,016 31,000
Nicholas Jackson, Director (14) 352,459/252,459 26,000
Chris Thompson, former CFO (15) 132,000 100,000/100,000 75,000
(1) Michael Aymong's employment with Starnet began April 9, 2001. Payments due
to him under his contract for housing and car allowances have not been paid
as a house and car in Antigua have been provided to him. Options: 1,200,000
have an exercise price of $0.31, subject to 6 month hold requirement upon
exercise; 1,200,000 vest over 22 months (54,545 each month) with the
exercise prices as follows: first 200,000 at $1.25, second 200,000 at
$2.25, third 200,000 at $4.25, fourth 200,000 at $4.25, fifth 200,000 at
$6.25, sixth 200,000 at $8.25. 400,000 options vest on April 30, 2003, and
are exercisable at the closing market price on March 31, 2003. Pursuant to
antidilution provisions of Mr. Aymong's employment agreement, he was
granted 140,000 options in connection with the issuance of ordinary shares
to AIM Investments Ltd., these options have vested and are exercisable at
the closing market price on May 25, 2001 per share. (See Item 10. MATERIAL
CONTRACTS).
(2) R. Michael Steele's employment began April 12, 2001 and has an annual
salary of $64,000. Options have an exercise price of $0.75 per share. (See
Item 10. MATERIAL CONTRACTS).
(3) Fred Hazell was paid for acting as President and CEO for the period
September 15, 2000 to April 9, 2001. During that period he did not receive
a base director's fee or chairman's fee. Options: 110,298 have an exercise
price of $2.13; 200,000 are exercisable at $0.31; and 60,000 at $0.31.
(4) Wolf Bergelt served as a consultant pursuant to a consulting agreement with
us, which was terminated on August 31, 2001. The consulting agreement
provided for a fee of $8,000 per month through April 30, 2002, and we
agreed that we will pay to Mr. Bergelt the amounts remaining under his
consulting agreement. He continues to serve as our director. During the
fiscal year ended April 30, 2001 he was paid for his consulting services
and for his services as the director. 70,000 options are exercisable at
$1.44 per share. 106,967 options are exercisable at $2.13 per share, 50,000
at $0.62, and 200,000 options, of which 100,000 have vested, are
exercisable at $0.31 per share.
(5) Winston Brown was an employee from July 1, 2000 to December 31, 2000. His
stock options are vested and exercisable at $3.03 per share.
(6) Meldon Ellis ceased office of President and CEO on September 15, 2000 but
continued a contractual relationship as a consultant with us through
September 30, 2001. All of his options are vested; 10,000 are exercisable
at $8.72, 50,000 at $3.06, 300,000 at $3.03 and 17,623 at 2.13.
(7) Liam Gillen's employment began November 27, 2000. Stock options: 50,000
vest in equal monthly tranches over a period of 36 months (1/36 each month)
at an exercise price of $.75; 115,000 vest in three years at an exercise
price of $1.18.(See Item 10. MATERIAL CONTRACTS).
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(8) Jason King's duties as President and CEO of Inphinity Interactive ceased on
January 4, 2001 but he continued receiving his salary under the terms of
severance through December 31, 2001. 45,000 of his options are exercisable
at $1.44, and 150,000 at $3.03.
(9) Mr. Nizker's options became vested upon the termination of his employment.
20,000 of his options are exercisable at $12.50, 50,000 at $3.06, and
65,000 at $3.03.
(10) Mr. Bolduc was paid director's fees and was granted 300,000 stock options,
of which 100,000 are exercisable at $2.12, and 200,000 at $0.31.
(11) Mr. Roberts was paid director's fees and granted options, of which 100,000
are exercisable at $2.13; 50,000 at $1.44; and 200,000 at $0.31.
(12) Mr. Combs resigned as a director on October 2, 2001. He was paid
director's fees and granted stock options. His stock options are vested,
and 109,016 are exercisable at $2.13, and 200,00 at $0.31.
(13) Mr. Stasior resigned as a director on October 2, 2001. He was paid
director's fees and granted stock options. His stock options are vested,
and 109,016 are exercisable at $2.13, and 200,00 at $0.31.
(14) Mr. Jackson serves as our director. He was paid director's fees and granted
stock options, of which 102, 459 are exercisable at $2.13, 50,000 at $1.44,
and 200,000 at $0.31.
(15) Mr. Thompson served as our chief financial officer until July 31, 2001, his
100,000 stock options are vested and exercisable at $3.03. Recently Mr.
Thompson filed a lawsuit against us described elsewhere in this report.
(See Item 8. LEGAL PROCEEDINGS).
WORLD GAMING PLC 2001 SHARE OPTION PLAN
We operate a share option plan, the World Gaming plc 2001 Share
Option Plan (the "2001 Plan"), under which eligible persons may acquire
options to purchase ordinary shares or ADSs as determined by the Share Option
Committee. Our Compensation Committee serves as the Share Option Committee.
The 2001 Plan was adopted by our Board of Directors on May 17, 2001 and
approved by ordinary resolution of our shareholders on May 17, 2001 in
substitution of the Starnet Stock Option Plans (1997, 1999 and 1999 (No. 2)),
which were terminated in the course of the reorganization and options
thereunder were exchanged for new options in the 2001 Plan.
NUMBER OF ORDINARY SHARES
The maximum number of the ordinary shares (or ADSs) with respect to
which options may be granted under the 2001 Plan is 15,000,000. If any option
shall lapse or shall be cancelled, then the shares represented by such option
shall become available for new options. An option may be exercised for an
ordinary share or an ADS.
ELIGIBILITY
All employees, officers, directors and all other persons who provide
services to the us or any of our subsidiaries, as determined by the Board of
Directors, are eligible to participate in the 2001 Plan.
GRANT OF OPTIONS
Our Compensation Committee administers the 2001 Plan and has
discretion in awarding share options to the eligible participants. (See Item
6. COMMITTEES OF THE BOARD below).
OPTION PRICE
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Options will be granted at exercise prices to be determined by the
Compensation Committee, which may be more or less than 100% of the fair
market value of the ordinary shares (or ADSs) on the date of grant. Fair
market value for these purposes means the closing price of our American
Depositary Shares, as traded on the OTC Bulletin Board or the other principal
U.S. market for our securities, on the business day immediately preceding the
date of grant.
EXERCISE OF OPTIONS
Our share option agreement provides that the options granted to
directors will vest and become exercisable as to 25% of the original number
of option shares on the date of grant and a further 25% upon the expiration
of each of the following three periods of three months. Options granted to
our employees and officers and the employees and officers of our subsidiaries
will normally vest over a three year period from the date of the grant. The
options granted in exchange for Starnet's options vest over a two-year
period. The exercise of the options for other categories of optionholders may
be tied to certain performance conditions. Any new options to be granted to
an officer, director or a major shareholder shall not become exercisable
until at least six months after the date of such grant. Options will
terminate if an optionholder's employment is terminated for cause, or if an
option holder voluntarily resigns without appropriate or agreed notice and
termination terms, unless otherwise agreed by the Compensation Committee. If
the employment or office or directorship is terminated for another reason not
contemplated by an option agreement then the option shall be exercisable for
a period of 12 months after termination but only to the extent that it is
vested and exercisable on the date of termination, except as permitted by the
Compensation Committee. If an optionholder's employment or office or
directorship is terminated due to his or her death or disability, the options
will remain exercisable for a period of 12 months after termination but only
to the extent that they have vested and are exercisable on the date of
termination. Notwithstanding the foregoing, all options lapse at the end of
the option period applicable to them. Options are not transferable and may
only be exercised by the persons to whom they are granted, except in the case
of the death or disability of the optionholder in which case they would be
exercisable by the guardian or personal representative of the optionholder
(as the case may be).
ISSUES OF ORDINARY SHARES OR ADSs
Ordinary shares or ADSs issued upon the exercise of options will
rank equally with ordinary shares or ADSs, as applicable, of the same class
as them, but shall not be entitled to any dividends or other distributions
declared prior to the date of the exercise.
VARIATION IN SHARE CAPITAL
Options may be adjusted following certain variations in our share
capital, including a capitalization or rights issue.
TERMINATION OF THE 2001 PLAN
No options may be granted under the 2001 Plan after the tenth
anniversary of its adoption.
AMENDMENTS
The Board of Directors may amend the 2001 Plan, provided that no
amendment or modification will become effective without shareholder approval,
if such approval is required by law or exchange rules, except for minor
amendments relating to administrative matters. Additionally, no amendments
which would adversely affect the rights of the existing optionholders may be
made without their consent.
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BOARD PRACTICES
In English companies, when a director ceases to be a director,
whether voluntarily or otherwise, we say that the director has "retired." Our
directors are subject to retirement by rotation. At every one of our annual
general meetings, one-third of our directors who are subject to retirement by
rotation or, if their number is not three or a multiple of three, the number
nearest to one-third of our directors, shall retire from office. If there is
only one director who is subject to retirement by rotation, that director
shall retire. Subject to the provisions of the U.K. Companies Act 1985, the
directors to retire by rotation shall be those who have been longest in
office since their last appointment or retirement. As between persons who
became or were last reappointed directors on the same day, those to retire
shall be determined by lot unless they otherwise agree among themselves. If a
director retires by rotation and he is not reappointed, the retiring director
may retain its office until the meeting appoints someone in his place or
until the end of the meeting. However, the director in that situation shall
not be deemed to be reappointed, if the shareholders determine not to fill
the vacancy or a resolution to reappoint the director is voted upon and
defeated. Our shareholders holding a majority of our ordinary shares may
remove any director from office at any time, with or without cause, subject
to the requirements of the U.K. Companies Act of 1985 and our Articles of
Association.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has appointed an Audit Committee, a
Compensation Committee and a Strategic Planning Committee.
AUDIT COMMITTEE
The Audit Committee has the authority to recommend to our Board of
Directors independent public accountants to be nominated for shareholder
ratification to audit our books, records and financial statements and to
review our systems of accounting (including systems of internal control).
During the fiscal year ended April 30, 2001 Mr. Brownell Combs served as
Chairman of the Audit Committee until July 2001, at which time Mr. Bergelt
took over as an interim Chairman. The current members of the Audit Committee
are Wolf Bergelt, Fred Hazell and Jason Bolduc.
COMPENSATION COMMITTEE
The Compensation Committee is responsible for administering the
operation of the 2001 Plan and for recommending to our Board of Directors
compensation plans and arrangements, including awards of any stock options,
with respect to our executive officers, directors, and key personnel. The
current members of the Compensation Committee are Nicholas Jackson, Chairman,
Fred Hazell and Clare Roberts.
STRATEGIC PLANNING COMMITTEE
The Strategic Planning Committee is responsible for recommending to
the Board of Directors the long term strategic direction which the Company
should pursue. Matthew Stasior was Chairman of the Strategic Planning Committee
until his resignation as director in October 2001. The current members of the
Strategic Planning Committee are Wolf Bergelt and Jason Bolduc.
EMPLOYEES
The number of employees by location for each of the last three
fiscal years (as of April 30) is as follows:
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2001 2000 1999
-------- -------- --------
Antigua 79 64 0
Canada 54 114 163
-------- -------- --------
Total 133 178 163
======== ======== ========
</Table>
The London office is our corporate office and it is also a marketing
office for our software and licensing activities based in Antigua.
Development and administrative functions are in Canada. In January and April
of 2001, layoffs occurred in Antigua and Canada affecting a total of 55 staff
members.
Our employees are not represented by a union or other collective
bargaining organization and we have never experienced a work stoppage. We
believe that our employee relations are good.
SHARE OWNERSHIP OF SENIOR MANAGEMENT
The table below sets forth certain information concerning the share
ownership of our directors and senior management as of October 5, 2001.
NUMBER OF
ORDINARY
SHARES OR PERCENTAGE OF
NUMBER OF (ADSs) WHICH ORDINARY
ORDINARY MAY BE RANGE OF SHARES OR
SHARES OR ACQUIRED EXERCISE RANGE OF ADSs
ADSs UNDER SHARE PRICES OF EXPIRATION DATES OF BENEFICIALLY
NAME OWNED OPTION PLAN OPTIONS($) OPTIONS OWNED (3)
-------------------------- ---------- --------------- --------------- ------------------- --------------
Michael Aymong 120,000 2,940,000 .31 - 8.25(1) 4/06 .35%
Wolf Bergelt 11,200 426,967 .31 - 2.13 12/03 - 4/06 .033%
Jason Bolduc 670,000 300,000 .31 - 2.13 4/05 - 4/06 1.959%
Rodney Davis 0 250,000 1.34-2.25 7/06 0%
Liam Gillen 30,000 165,000 .75 - 1.18 11/05 .088%
Fred Hazell 0 370,928 .31 - 2.13 4/05 - 7/06 0%
Nicholas Jackson 0 352,459 .31 - 2.13 4/04 - 4/06 0%
David Pasieka 0 1,022,000 .69 - 8.25(2) 05/06 0%
Clare Roberts 0 350,000 .31 - 2.13 1/04 - 4/06 0%
R. Michael Steele 0 175,000 .75 4/06 0%
-----------------
(1) The exercise price for 400,000 of Mr. Aymong's options shall be equal to
the closing price on March 31, 2003.
(2) The exercise price for 200,000 of Mr. Pasieka's options shall be equal to
the closing price on May 3, 2003.
(3) The information in this table is based on our records, information provided
to us by our directors and executive officers and a review of any Schedules 13D
and 13G filed by our shareholders with the Securities and Exchange Commission.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes shares over which the indicated
beneficial owner exercises voting and/or investment power. This information is
based on 34,193,181 ordinary shares issued and outstanding as of October 5,
2001.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
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MAJOR SHAREHOLDERS
The following table contains information regarding the beneficial
ownership of our ordinary shares, including our American Depositary Shares,
as of October 5, 2001, for all shareholders known by us to beneficially own
5% or more of our ordinary shares.
NUMBER OF PERCENTAGE OF
ORDINARY SHARES OR OUTSTANDING ORDINARY
ADSs BENEFICIALLY SHARES OR ADSs
NAME OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
-------------------------------------------------- ------------------ -------------------------
AIM Investments Ltd. 2,000,000 (1) 5.8%
</Table>
(1) The information in this table is based on our records, information provided
to us by our directors and executive officers and a review of any Schedules 13D
and 13G filed by our shareholders with the Securities and Exchange Commission.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes shares over which the indicated
beneficial owner exercises voting and/or investment power. This information is
based on 34,193,181 ordinary shares issued and outstanding as of October 5,
2001.
SIGNIFICANT CHANGES IN OWNERSHIP OF ORDINARY SHARES
There were no significant changes in ownership of our ordinary
shares. However, prior to the holding company reorganization, Starnet issued
2,000,000 shares of its common stock to AIM Investments Ltd. pursuant to
Starnet's agreement with AIM Investments Ltd's parent Simpson Bay Ltd.
described elsewhere in this report. (See Item 6. RELATED PARTY TRANSACTIONS
AND MATERIAL CONTRACTS).
SECURITIES AND RECORD HOLDERS IN THE UNITED STATES
As of October 10, 2001, 30,486,647 American Depositary Shares were
held in the name of CEDE & Co., which is not obligated to disclose publicly
the residence of the beneficial owners of those shares. We know that,
excluding CEDE & Co. shares, approximately 6.2% of our ordinary shares were
held by 142 U.S. record holders.
CHANGE OF CONTROL
We are not aware of any arrangements, the operation of which may at
a subsequent date result in a change in control of the Company.
RELATED PARTY TRANSACTIONS
SIMPSON BAY LTD. AND AIM INVESTMENTS LTD
AIM Investments Ltd, an affiliate of Simpson Bay Ltd., is a 5.8%
shareholder of the Company holding 2,000,000 ADSs. It became a shareholder
when Starnet issued 2,000,000 common shares to AIM Investments Ltd. as
repayment in full of a June 2000 loan of $1,500,000 extended to Starnet by
Simpson Bay Ltd. The Starnet shares owned by AIM were exchanged for our ADSs
in the course of the holding company reorganization. Additionally, Simpson
Bay Ltd. is one of our significant licensees. (See Item 10. MATERIAL
CONTRACTS).
ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED FINANCIAL STATEMENTS
Our consolidated financial statements for the years ended April 30,
2001, 2000 and 1999 set forth in this report following Part III, are hereby
incorporated herein by reference.
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LEGAL PROCEEDINGS
The following are material existing and pending or recently
concluded legal claims against us and our subsidiaries:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
On August 25, 1999, the Royal Canadian Mounted Police ("RCMP")
obtained an ex parte restraint order from the Honorable Associate Chief
Justice of the Supreme Court of British Columbia pursuant to the provisions
of the Criminal Code of Canada. This order prevented Starnet and Starnet
Systems from accessing funds located in their Canadian bank accounts. The
amount of money in these accounts was approximately $7,620,000 as of August
17, 2001. The basis for the claim was the allegation that the funds in these
bank accounts are proceeds of crime, obtained as a result of the breach of
certain gaming provisions contained in the Criminal Code of Canada, and
should therefore be forfeited to the Crown. The restraint Order was extended
several times, with the last extension extending the restraint until August
24, 2001. During the pendency of the Restraint Orders, the RCMP continued an
investigation into whether Starnet or Starnet Systems, and certain of its
former officers and directors, engaged in unlawful activities in Canada from
the time period up to August, 1999, in connection with the business of such
companies in licensing and providing support services to licensees engaged in
online gaming.
The investigation of Starnet and Starnet Systems by the RCMP in
Vancouver, Canada, was concluded on August 17, 2001, with a single charge
against Starnet, a plea to such charge, the imposition of a fine and a
forfeiture of funds. Specifically, a charge was laid against Starnet as
follows:
Starnet Communications International, Inc., between the 1st day of
May, 1997 and the 20th day of August, 1999, at or near the City of Vancouver,
Province of British Columbia, in Antigua and Barbuda and elsewhere, did keep
a device for gambling or betting, to wit, computer services and computer
applications operating on a computer system, or systems, which systems, when
accessed via the internet, enabled persons to engage in gambling or betting
contrary to section 202(1)(b) of the Criminal Code of Canada.
Starnet plead guilty to this charge. In response to a joint
submission by the Crown and Starnet, a Provincial Court in Vancouver imposed
a fine of $100,000 CDN, together with a statutory victim surcharge of $15,000
CDN. In addition, an order was entered providing for the forfeiture of
$3,925,000 out of restrained funds held by the RCMP in connection with the
investigation. No individuals have been charged. The balance of the funds,
approximately $3,620,000, was returned to Starnet and Starnet Systems.
The investigation is now concluded, and during the hearing before
the Court, the Crown agreed that there was no legal complaint with regard to
Starnet's operations since August, 1999 and as of the date of the plea.
LAS VEGAS CASINO INC. LAWSUIT
In an action commenced in Vancouver, British Columbia, Canada, in
1999 by Las Vegas Casino, Inc. ("LVC"), plaintiff LVC sued a number of our
subsidiaries and various employees. LVC, a former software licensee of
Starnet Systems, alleges that Starnet, a number of its subsidiaries,
including Starnet Systems (formerly Softec Systems Caribbean Inc.), and
various its employees and employees of its subsidiaries, caused a $1 billion
loss arising by reason of alleged misappropriation of funds and breach and
wrongful termination of its software license agreement with Starnet Systems.
The relief sought includes general and exemplary damages, declarative relief,
an accounting, interest and costs. Starnet
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Systems terminated the software license agreement with LVC on July 22, 1999
as a result of LVC's failure to pay over $200,000 in fees owed to Starnet
Systems.
On July 12, 2000, Starnet Systems was granted a stay of the lawsuit
as against it only, with the result that, pursuant to the terms of the
software license agreement, LVC's claim and Starnet Systems' claim for unpaid
fees must proceed under arbitration. Should LVC wish to proceed with its
claim against Starnet Systems, it must do so through the arbitration process
provided for in the software license agreement. LVC has not yet taken any
steps to do so. At the present time, we have plans to depose the plaintiff
and otherwise proceed with discovery. In addition, we are responding to
discovery requests made by LVC.
We believe that LVC's allegations are without merit and we intend to
defend LVC's lawsuit and contest arbitration proceedings vigorously. The
financial impact of this action, if any, cannot be determined at this time,
although we are of the opinion that it will not result in any significant
losses to us.
U.S. DELAWARE CLASS ACTION CLAIMS
Starnet and certain officers and directors were named as defendants
in ten class action lawsuits filed in 1999. The class alleged in the class
action claims consists of all persons who purchased the Starnet's common
stock from March 11, 1999 to August 20, 1999 inclusive, excluding the
defendants and persons connected with Starnet. The basis for all of the class
action claims is similar; the plaintiffs generally allege that Starnet:
o Failed to properly advise its investors of the risks associated with
the business;
o Misled its investors as to the risks associated with the business;
o Misled its investors by stating that Starnet did not accept wagers from
persons resident in Canada or the United States, when, in fact, it did
do so; and
o Misled its investors by stating that their business was legal within
Canada and the United States when it was not.
The relief sought included declaration of a class, damages and costs
for the class. The amount of the damages claimed is unspecified.
On March 7, 2000, the United States District Court for the District
of Delaware ordered that these ten actions be consolidated under the heading
In Re Starnet Communications International Inc. Securities Litigation, C.A.
No. 99-681 (SLR). On June 7, 2000, plaintiff filed an Amended Consolidated
Class Action Complaint (the "Amended Complaint"), which supercedes all prior
complaints in all of the actions.
Starnet filed a motion to dismiss the Amended Complaint on September
14, 2000. In light of ongoing settlement discussions, the parties sought, and
the court granted, several extensions to the briefing schedule. On May 10,
2001, the court denied Starnet's motion to dismiss without prejudice to its
rights to renew the motion if settlement discussions failed.
On June 20, 2001, the parties signed a Memorandum of Understanding
(the "MOU") containing the essential terms of a settlement of the class
action litigation. Under the MOU, the Class will receive 1,050,000 American
Depositary Shares of the Company (the "Settlement Shares") with a minimum
value of $1,050,000. If, in the ten trading days preceding the effective date
of the settlement, the weighted
39
<Page>
mean trading price (as calculated in the MOU) of each ADS is less than $1.00,
the Class will receive additional ADSs so that the value of the Settlement
Shares equals $1,050,000. In addition, we will pay certain administrative
expenses, up to $50,000, and certain expenses incurred by plaintiff's co-lead
counsel. The plaintiffs have the right to conduct limited discovery of
Starnet.
The settlement of the class action is conditioned on the occurrence
of several events. The parties must draft a mutually acceptable Stipulation
of Settlement to be filed with the court. This has since been drafted by
plaintiffs' counsel and is being reviewed by defendants' counsel. The court
must give preliminary approval to the terms of the settlement. Notice must be
sent to the class members advising them of the terms of the settlement and of
their right to object to the terms of the settlement. Finally, the Court must
approve the settlement after holding a hearing on its terms. In addition, the
settlement is conditioned on the issuance of our ordinary shares underlying
the Settlement Shares in accordance with English law. We have the right to
withdraw from the settlement in the event that members of the class holding
more than 3% of our outstanding shares as of the date the settlement is
filed, opt out of the settlement.
OUR CLAIMS AGAINST WIREMIX MEDIA INC.
On August 28, 2001 our subsidiary, Starnet Canada, filed a complaint
against Wiremix Media Inc. in Vancouver, Canada for approximately $154,645
CDN due under an asset purchase agreement dated February 18, 2000. Under the
asset purchase agreement, Wiremix Media purchased certain assets from Starnet
Canada. Wiremix Media filed its answer to Starnet Canada's complaint and
filed a separate action in Vancouver, Canada on October 1, 2001 against
another of our subsidiaries, Starnet Systems, for a breach of contract. In
its lawsuit, Wiremix Media alleges that Starnet Systems arbitrarily
terminated a marketing and consulting agreement with Wiremix, pursuant to
which Wiremix was to provide Internet marketing services to Starnet Systems,
and claims damages of approximately $2 million remaining under the contract.
We intend to prosecute our claim against Wiremix Media. We believe that
Wiremix Media's allegations in its lawsuit against Starnet Systems are
without merit and we intend to defend the lawsuit vigorously. The financial
impact of these actions, if any, cannot be determined at this time, although
we are of the opinion that they will not result in any significant losses to
us.
LAWSUIT BY OUR FORMER CHIEF FINANCIAL OFFICER CHRIS THOMPSON
On August 2, 2001, our former Chief Financial Officer Chris Thompson
brought a wrongful termination claim against us alleging that we breached his
employment agreement and claiming damages of approximately $196,800. We
believe that Mr. Thompson's allegations are without merit and we intend to
defend the lawsuit vigorously. The financial impact of this action, if any,
cannot be determined at this time, although we are of the opinion that it
will not result in any significant losses to us.
SUBPOENAS RECEIVED BY OUR AUDITORS AND FORMER DIRECTORS
We have learned that our auditors have received two subpoenas, one
in August 2001 and the other in September 2001, from the Securities and
Exchange Commission ("SEC") requesting copies of documentation in their
possession related to their audits of us. The subpoenas have been issued with
respect to an investigation of a third party unrelated to us. We have also
learned that some of our former directors have received subpoenas from the
SEC relating to the same matter. We have not received any subpoenas or any
requests for information from the SEC, nor are we aware of the nature of the
investigation.
POLICY ON DIVIDEND DISTRIBUTION
Our Articles of Association provide that dividends are declared by
the shareholders upon the recommendation of the Board of Directors.
SIGNIFICANT CHANGES
There have been no significant changes in the Company since the date
of the annual financial statements other than those disclosed in those
financial statements.
ITEM 9. THE OFFER AND LISTING.
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NATURE OF TRADING MARKET
Our ordinary shares are not directly publicly traded in the United
States or any foreign market. Our American Depositary Shares are traded on the
OTC Bulletin Board. Each American Depositary Share represents one ordinary
share. Price quotations for our American Depositary Shares were reported on the
OTC Bulletin Board under the symbol "WGMGY" beginning on May 29, 2001. As of
October 5, 2001, we had 34,193,181 ordinary shares issued and outstanding, all
of which are represented by American Depositary Shares evidenced by American
Depositary Receipts issued by Continental Stock Transfer and Trust Company, as
depositary. As of October 5, 2001, 34,193,180 of our ordinary shares were held
of record by Continental Stock Transfer and Trust Company, one ordinary share
was held by Continental Stock Transfer and Trust Company and Mr. Steve Nelson
jointly. This represents 100% of our issued and outstanding ordinary shares.
The following table sets forth the high and low closing sale prices for
our American Depositary Shares on the OTC Bulletin Board, from the beginning of
trading on May 29, 2001 to August 30, 2001 and for Starnet, as the Company's
predecessor, starting on September 22, 1997 to May 28, 2001. Such prices do not
reflect retail markup, markdown or commissions and may not necessarily represent
actual transactions.
<Table>
<Caption>
HIGH LOW
------ -----
FIVE MOST RECENT FINANCIAL YEARS
Year ended April 30, 1997.............................................. -- --
Year ended April 30, 1998.............................................. 3.375 0.500
Year ended April 30, 1999.............................................. 17.010 0.375
Year ended April 30, 2000.............................................. 29.000 1.750
Year ended April 30, 2001.............................................. 4.187 0.312
FISCAL 2000
First Quarter.......................................................... 29.000 8.560
Second Quarter......................................................... 15.940 3.000
Third Quarter.......................................................... 4.560 1.750
Fourth Quarter......................................................... 10.000 2.810
FISCAL 2001
First Quarter.......................................................... 4.187 2.343
Second Quarter......................................................... 3.937 1.125
Third Quarter.......................................................... 1.687 0.312
Fourth Quarter......................................................... 1.500 0.593
FISCAL 2002
First Quarter.......................................................... 2.250 0.620
MOST RECENT SIX MONTHS
March 2001............................................................. 1.125 0.593
April 2001............................................................. 0.906 0.600
May 2001............................................................... 1.370 0.620
June 2001.............................................................. 2.250 1.120
July 2001.............................................................. 1.640 1.260
August 2001............................................................ 1.720 0.910
</Table>
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DIVIDEND INFORMATION
We have never paid cash dividends on our ordinary shares and do not
anticipate paying cash dividends on our ordinary shares in the foreseeable
future.
REGISTRAR, TRANSFER AGENT AND DEPOSITARY
From June 25, 2001, Continental Stock Transfer and Trust Company has
acted as our registrar, transfer agent and depositary with respect to our
American Depositary Receipts. Prior to that our registrar, transfer agent and
depositary was Pacific Stock Transfer.
ITEM 10. ADDITIONAL INFORMATION.
MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION
Set forth below is information concerning our equity capital structure
and related summary information concerning provisions of our Memorandum of
Association and Articles of Association and applicable English law. Since it is
a summary, it does not contain all of the information that may be important to
you, and the summary is qualified in its entirety by reference to the U.K.
Companies Acts of 1985 and 1989, our Memorandum of Association and our Articles
of Association. Our Memorandum of Association was filed as Exhibit 3.1 to
Registration Statement on Form F-4 (SEC File No. 333-48280) on October 19, 2000.
Our Articles of Association, adopted by special resolution on May 17, 2001, were
filed as Exhibit 4.2 to Registration Statement on Form S-8 (SEC File No.
333-70056) on September 24, 2001.
We are incorporated under the name World Gaming plc and our company is
incorporated in England and Wales with the registered number 4094204. Our
Articles of Association do not include a stated purpose.
BOARD ACTION AND POWERS
Our Articles of Association provide that unless otherwise determined by
ordinary resolution, our Board of Directors shall consist of not less than two
nor more than 10 members.
Except as noted below, the Board of Directors may at any time appoint
any person to be a director either to fill a vacancy or as an additional
director, provided that the number of directors does not exceed 10. Any person
so appointed by the Board of Directors shall hold office only until the next
annual general meeting of shareholders and shall then be eligible for election
by the shareholders, but shall not be taken into account in determining the
number of directors who are to retire by rotation at such meeting as set out
below.
At each annual general meeting of shareholders, one-third of our
directors (or, if their number is not a multiple of three, the number nearest to
but not greater than one-third) must retire from office by rotation. The
directors to retire by rotation shall be in addition to any director who wishes
to retire and not to offer himself for re-election. The directors to retire by
rotation shall include those members who have served the longest on the Board of
Directors. A retiring director is eligible for immediate re-election.
Any provisions of the U.K. Companies Act 1985 or other United Kingdom
statutes applicable to us which would have the effect of rendering any person
ineligible for appointment as a director or liable to vacate office as a
director by virtue of his having reached any specified age or of requiring
special notice or any other special formality in connection with the appointment
or election of any director over a specified age, do not apply to us.
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<Page>
Directors are not required to hold any of our ordinary shares by way of
qualification. A director who is not a shareholder shall nevertheless be
entitled to attend and speak at shareholders' meetings.
BORROWING POWERS
Subject to the limitations noted below, the directors may exercise all
our powers to borrow money and to mortgage or charge our undertaking, property
and uncalled capital or any part or parts thereof, and to issue debentures and
other securities, whether outright or as collateral security for any debt,
liability or obligation of us or of any third party.
COMPENSATION AND EXPENSES
The compensation of the directors is determined by the Board of
Directors but may not in the aggregate exceed (pound)100,000 per year
(disregarding any compensation payable to directors in their capacity as
executives) or such higher amount as may from time to time be determined by an
ordinary resolution of our Board. Such compensation shall (unless such
resolution otherwise provides) be divisible among the directors as the Board of
Directors may decide, or, failing agreement, equally, except that any director
who holds office for only part of the period with respect to which such
compensation is payable is entitled only to rank in such division for a
proportion of compensation related to the period during which he has held
office. Any director who is employed, or holds executive office may be paid such
extra compensation by way of a fixed sum of money, or in whole or in part by
participating in profits or otherwise, as the Board of Directors may determine,
and such compensation may be in addition to or instead of a fee payable to him
for his services as director. The directors may repay to any director all
reasonable expenses as he may incur in attending and returning from meetings of
the directors or of any committee of the directors or shareholders' meetings or
otherwise in connection with our business.
PENSIONS AND OTHER BENEFITS
The directors shall have the power to pay and agree to pay gratuities,
pensions or other retirement benefits, death or disability benefits to (or to
any person in respect of) any director or ex-director and, for the purpose of
providing any such gratuities, pensions, or other benefits, to contribute to
such scheme or to pay premiums.
INTERESTED DIRECTOR TRANSACTIONS
Subject to certain provisions of the U.K. Companies Acts 1985 and 1989
designed to enforce fair dealing by directors and prevent their taking financial
advantage, and provided that a director has disclosed to the directors the
nature and extent of any interest, a director:
o may be party to or otherwise interested in any contract, transaction,
or arrangement with us or in which we are otherwise interested;
o may be a director or other officer of or employed by a party to any
contract, transaction or arrangement with or otherwise interested in
any corporate body promoted by us or in which we are in any way
interested (or any firm of which he is a partner, employee or member) ;
and
o may act in a professional capacity for us (other than as auditor) and
be compensated therefor and shall not (unless otherwise agreed by him)
be accountable to us for any benefit which he derives from any such
contract, transaction or arrangement or from any such office or
employment or from any interest in any such corporate body or for such
compensation.
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No such contract, transaction or arrangement shall be liable to be
avoided on the grounds of any such interest or benefit.
Except as otherwise provided below, a director shall not vote in
respect of any contract or arrangement or any other proposal whatsoever in which
he has any material interest otherwise than by virtue of interests in shares or
debentures or other securities of, or otherwise in or through, us. A director
shall not be counted in the quorum of a meeting in relation to any resolution on
which he is not entitled to vote. Provided that a director has disclosed the
nature and extent of his interests, a director shall (in the absence of some
other material interest than is indicated below) be entitled to vote (and be
counted in the quorum) in respect of any resolution concerning any of the
following matters:
o the giving of any security, guarantee or indemnity with respect to (a)
money lent or obligations incurred by him or by any other person at the
request of or for our benefit of our company or the benefit of any of
our subsidiaries, or (b) a debt or other obligation of the Company or
any of our subsidiaries for which he himself has assumed responsibility
in whole or in part under a guarantee or indemnity or by the giving of
security;
o any proposal concerning an offer of shares or debentures or other
securities of or by us or any of our subsidiaries in which offer he is
or may be entitled to participate as a holder of securities or in the
underwriting or subunderwriting of which he is to participate;
o any proposal concerning any other corporate body in which he is
interested, directly or indirectly, and whether as an officer or
shareholder or otherwise, provided that he (together with persons
connected with him (within the meaning of Section 346 of the U.K.
Companies Act 1985)) does not have any interest (as that term is used
in Sections 198 to 211 of the U.K. Companies Act 1985) in 1% or more of
the issued equity share capital of any class of such body corporate (or
of any third company through which his interest is derived) or of the
voting rights available to members of the relevant corporate body;
o any proposal relating to an arrangement for the benefit of our
employees or those of any of our subsidiaries which does not award him
any privilege or benefit not generally awarded to the employees to whom
such arrangement relates; and
o any proposal concerning insurance which we propose to maintain or
purchase for the benefit of directors or for the benefit of persons who
include directors.
INDEMNIFICATION OF DIRECTORS
Our Articles of Association entitles every director, secretary or
manager of the Company, to be indemnified by the Company against liabilities
incurred during the discharge of his or her duties including where judgment is
given in his or her favor or if the claim is disposed of where he or she has not
been found to have been in material breach of his or her duty.
DESCRIPTION OF SHARE CAPITAL
GENERAL
Our authorized share capital is (pound)1,000,000 divided into
500,000,000 ordinary shares of (pound).002 nominal value per share.
ORDINARY SHARES
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As of October 5, 2001, 34,193,181 of our ordinary shares were issued
and outstanding and are fully paid or credited as fully paid, each of which is
in registered form. No holder of ordinary shares will be required to make
additional contributions of capital in respect of those shares in the future.
There are no rights of pre-emption attaching to the ordinary shares, save as set
out below under "Issuance of Share". Furthermore, they are not issued as
redeemable shares. However, it should be noted that the Company may choose to
utilize the power conferred upon it by Part V Chapter VII of the Companies Act
1985 to issue redeemable shares subject to obtaining an appropriate authority
from the shareholders. Neither our Memorandum of Association, Articles of
Association, nor any statutory provision in England and Wales restrict in any
way the ownership of, or voting rights attaching to, the ordinary shares held by
persons resident outside the United Kingdom. Under the terms of our Articles of
Association, the Company is obliged to give notice of shareholder meetings to
all persons, including those with an address for service outside the United
Kingdom.
ISSUANCE OF SHARES
Subject to any special rights previously conferred on the holders of
any issued shares or class of shares, any share of ours may be issued with any
preferred, deferred, or other special rights. They may also be issued subject to
restrictions, including without limitation restrictions on dividends, return of
capital, voting or otherwise, as an ordinary resolution of a general meeting of
our shareholders may from time to time direct, and failing such direction, as
our Board of Directors may determine.
Subject to the provisions of the U.K. Companies Act 1985, the
authorized but not issued shares are at the disposal of the directors who may
issue, grant options over or otherwise dispose of them to those persons and on
whatever terms they deem appropriate.
Pursuant to Section 80 of the U.K. Companies Act 1985, our directors
are authorized to issue shares (or grant any right to subscribe for or convert
other securities into shares) up to (pound)1,000,000, and such authorization
will expire five years from the date our incorporation.
If ordinary shares are to be issued for cash, Section 89 of the U.K.
Companies Act 1985 requires, subject to limited exceptions in respect of
employee share schemes, that those shares first be offered to existing holders
of shares in proportion to their holdings. However, Section 95 of the U.K.
Companies Act 1985 provides that in certain circumstances the directors of a
company may by special resolution be given power to issue shares as if Section
89 did not apply. Our Articles of Association render Section 89 inapplicable up
to the aggregate nominal amount of (pound)50,000, and this authority will expire
at the close of business on May 17, 2006.
ALTERATION OF SHARE CAPITAL
We may from time to time by ordinary resolution approved by our
shareholders at a general meeting:
o increase our share capital by the sum, to be divided into shares of
those amounts, as the resolution shall prescribe;
o consolidate and divide all or any of our share capital into shares of
larger amount than our existing shares;
o cancel any shares which, at the date of the passing of the resolution,
have not been taken, or agreed to be taken, by any person and diminish
the amount of our capital by the amount of the shares so canceled; and
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o subdivide our shares, or any of them, into shares of smaller amount,
and so that the resolution whereby any share is subdivided may
determine that the shares resulting from that subdivision may, as
compared with the others, have any preferred, or other special rights
or be subject to any restrictions.
We may purchase or enter into a contract under which we will or may
purchase any of our own shares of any class (including any redeemable shares, if
any then exist) on such terms and in such manner as permitted by the law.
We may, by special resolution approved by our shareholders at a general
meeting, reduce our share capital or any capital redemption reserve, share
premium account, or other undistributable reserve in any way, subject to the
rights of the existing shares and English law.
DIVIDEND RIGHTS
Holders of ordinary shares are entitled to receive those dividends as
may be recommended by our Board of Directors and declared by the shareholders in
a general meeting, but no larger dividend may be declared than is recommended by
our Board of Directors. No unpaid dividend bears interest as against the Company
unless otherwise provided by the rights attached to the shares.
RIGHTS IN LIQUIDATION
In the event of our liquidation, after satisfaction of liabilities to
creditors, holders of ordinary shares are entitled to share pro rata in the net
assets of the Company.
NOTIFICATION OF INTEREST IN ORDINARY SHARES
Section 198 of the U.K. Companies Act 1985 obliges any person (subject
to exception) who acquires an interest of 3% or more of our ordinary shares to
notify us of his interest within two business days following the day on which
the obligation to notify arises. After the 3% level is exceeded, similar
notification must be made if the whole percentage figure increases or decreases,
rounded down to the next whole number. For the purposes of the notification
obligation, the interest of a person in the shares means any kind of interest in
shares (subject to certain exceptions) including any shares (1) in which his
spouse or his child or stepchild, is interested, (2) in which a corporate body
is interested where either (a) that corporate body or its directors are
accustomed to act in accordance with that person's directions or instructions,
or (b) that person controls one third or more of the voting power of that
corporate body, or (3) in which another party is interested where the person and
that other party are parties to a "concert party" agreement under Section 204 of
the U.K. Companies Act 1985 and any interest in shares is in fact acquired by
any one of the parties pursuant to the agreement. A "concert party" agreement is
an agreement which provides for one or more parties to it to acquire interests
in shares of a particular company and imposes obligations or restrictions on any
one or more of the parties as to the use, retention or disposal of the
interests.
In addition, Section 212 of the U.K. Companies Act 1985 enables us, by
notice in writing, to require a person whom we know or have reasonable cause to
believe to be, or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in shares to
confirm that fact or (as the case may be) to indicate whether or not that is the
case, and where he holds or has during this relevant time held an interest in
the shares, to give further information as may be required relating to his
interest and any other interest in the shares of which he is aware.
In addition to the restrictions on the rights attaching to shares
imposed by the U.K. Companies Act 1985 for noncompliance with Section 212 of
that Act, our Articles of Association apply additional
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restrictions. The restrictions imposed or applied can potentially include
disenfranchisement, loss of entitlement to dividends and other payments and
restrictions on alienability.
VOTING RIGHTS OF ORDINARY SHARES AND SHAREHOLDER MEETINGS
Under English law, there are two types of general meeting of
shareholders: annual general meetings and extraordinary general meetings. An
annual general meeting must be held at least once in each calendar year and not
later than 15 months from the previous annual general meeting. At the annual
general meeting matters such as the election of directors, appointment of
auditors and the fixing of their remuneration, approval of the annual accounts
and the directors' report and declaration of dividends are considered. Any other
general meeting is known as an extraordinary general meeting.
The directors may convene an extraordinary general meeting and must
convene one if demanded by holders of not less than 10% of the paid-up shares.
An annual general meeting and an extraordinary general meeting called to pass a
special resolution must be called by at least 21 days' notice specifying the
place, day and time of the meeting and the general nature of the business to be
transacted. No business may be transacted at any general meeting unless a quorum
of two persons entitled to vote on the business to be transacted is present in
person or by proxy.
At a general meeting, a simple majority of the votes cast is sufficient
to pass an ordinary resolution. A special or extraordinary resolution is decided
on a poll. A special or extraordinary resolution can only be considered if the
Company's shareholders receive at least 21 days' prior notice of the meeting at
which such resolution will be considered.
Subject to the restrictions referred to in the following paragraph, at
a meeting of shareholders every holder of shares who (being an individual) is
present in person or (being a corporation) is present by a representative or
proxy not being himself a member shall have one vote on a show of hands, and on
a poll, every holder of shares present in person or by proxy shall have one vote
for every share held. A special or extraordinary resolution (such as, for
example, a resolution amending our Memorandum of Association or Articles of
Association or approving a winding-up of the company) requires approval of the
holders of 75% of the ordinary shares of the Company represented at the meeting,
in person or by proxy, and voting thereon. Shareholders are not entitled to
cumulative voting rights. A poll can be demanded by:
o the chairman of the meeting;
o not less than five shareholders present in person or by proxy having
the right to vote at the meeting;
o a holder or holders of shares or his or their proxy representing not
less than 10% of the total voting rights of all shareholders having the
right to attend and vote at the meeting; or
o by a holder or holders of shares or his or their proxy conferring a
right to attend and vote at the meeting on which an aggregate sum has
been paid up equal to not less than one tenth of the total sum paid up
on all shares conferring that right.
A holder of shares shall not be entitled (except as a proxy for another
shareholder) to be present or vote at any general meeting:
o in respect of any shares held by him in relation to which he or any
other person appearing to be interested in those shares has been served
with a notice under Section 212 of the U.K. Companies Act 1985,
requiring him to provide information in accordance with that section
and containing a
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statement that upon failure to supply such information before the
expiration period specified in the notice (which may not be less than
28 days) the registered holder of the share is not entitled to vote in
respect of those shares, and the person on whom such notice was served
fails to supply the information within the specified period; or
o unless all amounts presently payable by him in respect of such shares
have been paid.
TRANSFER OF SHARES
Fully paid ordinary shares are issued in registered form and may be
freely transferred pursuant to our Articles of Association. The instrument of
transfer of a share may be in any usual form or in any other form of which the
directors approve and shall be executed by or on behalf of the transferor and,
unless the share is fully paid, by or on behalf of the transferee. The directors
may restrict the transfer of a share which is not fully paid provided that any
such restriction will not prevent dealings in the shares from taking place on an
open and proper basis. Subject to the provisions of English law, our Articles of
Association provide that we may issue shares which may be held, evidenced and
transferred through a relevant system in an uncertificated form.
ISSUANCE OF AMERICAN DEPOSITARY SHARES
The terms of our Deposit Agreement with Continental Stock Transfer &
Trust Company, as depositary ("ADS Depositary"), permits issuance of American
Depositary Receipts, or ADRs, evidencing American Depositary Shares, or ADSs,
for ordinary shares accepted for deposit by the depositary. Our ADS Depositary
also serves as an initial custodian.
The Deposit Agreement provides that every person depositing ordinary
shares is deemed to represent to the depositary that
o such shares are validly issued and outstanding;
o were not acquired in violation of any pre-emptive rights;
o such person is duly authorized to make such deposit; and
o such shares are not restricted securities as defined in Rule 144 under
the Securities Act unless at the time of deposit they may be freely
transferred under that rule, or have been registered under the
Securities Act.
The ADS Depositary may require a written delivery order listing the
persons in whose name an ADR or ADRs evidencing the ADSs representing such
deposited ordinary shares are to be issued. ADRs are issued only in
denominations of any whole number of ADSs. The Company is obligated to transmit
to the depositary a copy of all communications it makes generally available to
holders of ordinary shares or to any securities regulatory authority or stock
exchange as public information. The depositary will make such publication
obligations available to the holders. Our depositary keeps a register for the
registration, registration of transfer, combination or split-up of ADSs at its
offices in New York at 2 Broadway, New York, New York 10004, and such register
is open for inspection by registered holders of ADSs. In the registration
statement that the Company filed with the SEC on Form F-6 (SEC File No.
333-13286) on May 24, 2001, the Company registered 50,000,000 ADSs, where each
ADS represented one ordinary share. The Deposit Agreement and a form of ADR have
been filed as Exhibit (a) to a registration statement on Form-6 (SEC File No.
333-13286) effective as of May 24, 2001.
VOTING OF ADSS BY PROXY
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The ADS Depositary can appoint more than one person to be its proxy.
The appointment shall set out the number of ordinary shares in relation to which
such proxy has been appointed, and such number shall not exceed the number of
the ordinary shares registered in the name of the ADS Depositary. The appointed
proxy may attend general meetings so long as it provides the Company with
written evidence of its appointment. At a general meeting, the appointed proxy
is entitled to the same rights and has the same obligations with respect to the
appointed number of the ordinary shares as if it were a registered owner of such
shares, or as if it were a duly appointed proxy in relation to those ordinary
shares.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no United Kingdom foreign exchange control
restrictions on the payment of dividends or other payments to holders of
ordinary shares or on the conduct of our operations.
There are currently no restrictions under our Articles of Association
or under English law which limit the rights of non-resident or foreign owners to
freely hold, vote and transfer ordinary shares in the same manner as United
Kingdom residents or nationals.
CHANGE OF CONTROL
We have a "classified" Board of Directors because our directors must
retire by rotation. This means that only approximately one-third of our
directors are eligible for election each year. Therefore, if shareholders wish
to change the composition of the Board of Directors, it would take at least two
years to remove a majority of the existing directors, and three years to change
all directors.
MATERIAL CONTRACTS
The following is a summary of our material contracts. We have included
the contracts entered into by our operating subsidiaries that we consider
material to our operations.
ACCORD AND SATISFACTION AGREEMENT AMONG STARNET, STARNET SYSTEMS, SIMPSON BAY,
LTD., AND AIM INVESTMENTS LTD
An Accord and Satisfaction Agreement among Starnet, Starnet Systems,
Simpson Bay, Ltd., and AIM Investments Ltd. was entered into on May 17, 2001.
Simpson Bay loaned to Starnet Systems, a subsidiary of Starnet, $1,500,000
pursuant to a loan agreement dated June 23, 2000, which provided for the
conversion of the Loan into shares of Starnet. The Accord and Satisfaction
Agreement was entered into to effect such conversion. Pursuant to the agreement,
2,000,000 unregistered shares of Starnet's common stock were issued to Simpson
Bay as repayment in full of the loan. The parties further agreed that Starnet
would be free to utilize the equipment that had been located in Gibraltar in
other countries. Simpson Bay agreed to exclusively use Starnet software on its
sites WWW.PLAYERSONLY.COM, WWW.SPORTSBOOK.COM, and WWW.ACESCASINO.COM for four
years from August 15, 2000. Starnet will have a right of first opportunity to
design new gaming software to Simpson Bay so long as it can be competitive with
other providers. An affiliate of Simpson Bay will give Starnet a right of first
refusal for two years to provide new Starnet sportsbook and casino software for
the new casino sublicensee sites that will be launched by such affiliates so
long as Starnet's software is competitive. In the event of change of control of
Simpson Bay such right will terminate. Simpson Bay and Starnet also agreed that
they will attempt to integrate Starnet's casino with the back-end software on
the Starnet's back-end when they launch a European sportsbook.
AKAMAI TECHNOLOGIES, INC. FREEFLOW STREAMING SERVICE LEVEL AGREEMENT
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On March 27, 2001, Inphinity Interactive, Inc. entered into a FreeFlow
Streaming Service Level Agreement with Akamai Technologies, Inc. Through this
Service Level Agreement, Akamai provides Inphinity access to Akamai's network of
streaming media servers, Akamai DNS service, and Akamai's SteadyStream
technology in addition to other incidental services. Additionally, Akamai will
provide Inphinity with co-location space in San Diego, California. The term of
the Service Level Agreement is twelve months, and it will renew indefinitely for
additional one year terms unless terminated. After the first 12 months, either
party may terminate the Service Agreement on 15 days written notice. Inphinity
is required to pay Akamai at least $5,000 per month for the services offered
under the Service Level Agreement.
THE DAILY RACING FORM ONLINE AFFILIATE AGREEMENT BETWEEN DAILY RACING FORM, LLC
AND STARNET
The Daily Racing Form Online Affiliate Agreement between Daily Racing
Form, LLC and Starnet was entered into on April 1, 2000. According to this
agreement, Starnet may link to Daily Racing Form's website in order to post
handicapping information provided by Daily Racing Form on its website. Daily
Racing Form will pay Starnet a 10% commission for all subscriptions to its
service generated though Starnet's website. The term of the agreement is three
years and it may be extended for an additional period of three years. Daily
Racing Form may terminate the agreement without cause upon 30 days notice. The
agreement may also be terminated if either party breaches it or becomes
insolvent.
SOFTWARE LICENSE AGREEMENT BETWEEN GLOBAL INTERACTIVE AND STARNET SYSTEMS
A Software License Agreement between Global Interactive and Starnet
Systems was entered into on February 19, 2000. Global Interactive of St. Kitts,
West Indies, licensed Starnet Systems' Internet casino software in order to
operate an Internet gaming site. The non-exclusive license covers two casinos
including such games as blackjack, roulette, pai gow poker, video poker and slot
machine, a sportsbook web site, an HTML version of the sportsbook, and a lottery
ticket distribution web site. Starnet Systems was to provide all necessary
computer hardware to run Global Interactive's site. The term of the license is
three years and five months, and it will renew indefinitely for additional one
year terms. During such renewal terms Global Interactive may cancel the license
upon at least 45 days notice prior to the end of such term, and Starnet Systems
may cancel upon at least six months notice. The agreement can also be terminated
if either party becomes insolvent; if Starnet Systems becomes the subject to
serious third party civil or criminal litigation as a result of Global
Interactive's actions; or in the event of breach by either party, the other
party may terminate this agreement. Global Interactive is required to pay to
Starnet Systems a monthly fee of not less than $25,000.
OPERATING AGREEMENT BETWEEN TRACKDATA SYSTEMS CORPORATION AND STARNET
An Operating Agreement between TrackData Systems Corporation and
Starnet was entered into February 18, 2000. According to the agreement, Starnet
agreed to place a banner on its website to serve as a link to TrackData website
for advertising purposes. TrackData is responsible for processing registrations
and orders generated through such link and will pay to Starnet a commission of
20% upon the sales of TrackData's products. Starnet agreed not to purchase
TrackData's products for resale or commercial use of any kind.
OPERATING AGREEMENT BETWEEN BLOODSTOCK RESEARCH INFORMATION SERVICES, INC. AND
STARNET
An Operating Agreement between Bloodstock Research Information
Services, Inc. ("BRIS") and Starnet was entered into on January 18, 2000. This
agreement allows Starnet to place a banner advertising and link its website to
BRIS's website. BRIS is responsible for processing all customer orders for BRIS
products and will pay Starnet a 20% commission on any sale generated through
Starnet's website. Starnet agreed not to purchase BRIS's products for commercial
use of any kind. The term of this
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agreement is two years and will renew automatically for successive two year
periods. This agreement may be terminated by either party upon notice given
not less than one year before the expiration of the then current term, or in
the event of a breach by the other party.
AMTOTE INTERNATIONAL TOTALISATOR SERVICE AGREEMENT
World Gaming Services, Inc. and AmTote International, Inc. entered
into a Totalisator Service Agreement on October 12, 1999 through which AmTote
is the exclusive provider of totalisator pari-mutuel wagering services to
World Gaming Services outside the United States. Specifically, World Gaming
Services leases and licenses AmTote hardware and software in order for World
Gaming Services' customers to interface with the AmTote pari-mutuel wagering
totalisator system. Through the Totalisator Agreement, World Gaming Services
customers can place on-line wagers with World Gaming Services in Antigua on
live horse races across the United States. If World Gaming Services chooses
to offer the AmTote totalisator pari-mutuel wagering services to United
States citizens, World Gaming Services must provide AmTote six months notice
and an opinion of counsel stating it is legal to do so. The term of the
Totalisator Agreement is four years and AmTote has the option of renewing it
by matching any competing offers following the Totalisator Agreement's
termination. World Gaming Services will be charged a fee of .25% of each
wager placed with AmTote's totalisator system subject to minimum annual
amounts. There are also additional agreements through which World Gaming
Services has paid AmTote to train technicians to maintain AmTote's hardware
and software in World Gaming Services' facilities.
SOFTWARE LICENSE AGREEMENT BETWEEN INTERNATIONAL GAMING LTD (F.K.A BBF
INTERNATIONAL GAMING ANTIGUA INC.) AND STARNET SYSTEMS
A Software License Agreement between BBF International Gaming
Antigua Inc. and Starnet Systems' predecessor, Softec Systems Caribbean Inc.
was entered into on January 18, 1999. Starnet Systems licensed its Internet
casino software in order to allow BBF International to operate an Internet
gaming site. The non-exclusive license permits no more than three casinos
including such games as blackjack, roulette, pai gow poker, video poker and
slot machine, a sportsbook web site, an HTML version of the sportsbook, and a
lottery ticket distribution web site. Starnet Systems was to provide all
necessary computer hardware to run BBF International's site. The term of the
license is for one year, and it will renew indefinitely for additional one
year terms. During such renewal terms BBF International may cancel the
license upon at least 45 days notice prior to the end of such term, and
Starnet Systems may cancel upon at least six months notice. In the event of
breach by either party, the other party may terminate this agreement. Starnet
can also terminate this agreement if it becomes the subject of a serious
third party civil or criminal litigation as a result of BBF's actions. The
agreement can also be terminated by either party if the other party becomes
insolvent. BBF International is required to pay to Starnet Systems a monthly
fee of not less than $10,000.
EMPLOYMENT AND CONSULTING AGREEMENTS
MICHAEL AYMONG, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Starnet entered into an employment agreement with its President and
Chief Executive Officer, Michael A. Aymong on April 6, 2001. Mr. Aymong's
employment agreement is not restricted for a particular period of time and
provides for full-time employment. Mr. Aymong's base salary in the calendar
year 2001 is $350,000, and he may be entitled to receive a bonus up to 100%
of his base salary, if such bonus is approved by the Board of Directors. As
part of his compensation package, Mr. Aymong received 2,400,000 options to
purchase Starnet's stock, of which 1,200,000, at $.31 per share, have vested
The remaining options (to be exercised at different prices) will vest over
the period of 22 months. Additionally, he received 400,000 bonus options that
will vest on April 30, 2003 at the closing market
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price on March 31, 2003. Mr. Aymong has the right to purchase up to 7% of any
new stock issuance from the treasury of Starnet at the closing market price
on the date of any such issuance. The agreement provides for $2,000 per month
as a vehicle allowance and $4,000 per month as a housing allowance for
housing in Canada and/or Antigua.
The employment agreement may be terminated by Starnet without notice
and without severance compensation of any kind with the prior written consent
of Mr. Aymong, or if Starnet has just cause for termination, which includes
any material, intentional breach of the terms of employment, or any conduct
which constitutes just cause for summary dismissal under the law. If Mr.
Aymong's employment agreement is terminated without just cause, or if a
change of control occurs, Starnet will be required to pay him a severance
payment of up to two years base salary plus benefits and any accrued bonuses.
Additionally, upon such termination, Mr. Aymong's stock options will
accelerate and become exercisable, and Starnet will assign to him the vehicle
lease. The employment agreement contains post-termination restrictive
covenants relating to non-competition with Starnet, non-solicitation of its
customers, non-dealing with its customers and non-solicitation of its
employees. The employment agreement contains an express obligation of
confidentiality in respect of its trade secrets and confidential information.
After the holding company reorganization, his options under the
Starnet Option Plans were replaced with options under the 2001 Plan to buy
our ordinary shares or ADSs.
DAVID PASIEKA, CHIEF OPERATING OFFICER
Starnet entered into an employment agreement with its Chief
Operating Officer, David Pasieka on May 2, 2001. Mr. Pasieka's employment
agreement is not restricted for a particular period of time and provides for
full-time employment. Mr. Pasieka's base salary in the calendar year 2001 is
$142,857 and he may be entitled to receive a bonus up to 70% of his base
salary, if such bonus is approved by the Board of Directors. Additionally, he
may be entitled to receive a financing bonus of up to 36% of his base salary
if Starnet achieves financing in excess of $5,000,000. As part of his
compensation package, Mr. Pasieka received 800,000 options to purchase
Starnet's stock under the Starnet Option Plans, of which 150,000, at $.69 per
share, have vested, and the remaining options (to be exercised at different
prices) will vest over a period of 27 months. He also received 200,000 bonus
options under the Starnet Option Plan that will vest on May 2, 2003 at the
closing market price on May 1, 2003. Mr. Pasieka has the right to purchase up
to 2.9% of any new stock issuance from the treasury of Starnet at the closing
market price on the date of any such issuance. Starnet provides Mr. Pasieka
with $1,000 per month vehicle allowance.
The employment agreement may be terminated by Starnet without notice
and without severance compensation of any kind with prior written consent of
Mr. Pasieka, or if Starnet has just cause for termination, which includes any
material, intentional breach of the terms of employment, or any conduct which
constitutes just cause for summary dismissal under the law. If Mr. Pasieka's
employment agreement is terminated without just cause, or if a change of
control occurs, Starnet will be required to pay him a severance payment of up
to two years base salary plus benefits and any accrued bonuses. Additionally,
upon such termination, Mr. Pasieka's stock options will accelerate and shall
vest and become exercisable. The employment agreement contains
post-termination restrictive covenants relating to non-competition with
Starnet, non-solicitation of its customers, non-dealing with its customers
and non-solicitation of its employees. The employment agreement contains an
express obligation of confidentiality in respect of its trade secrets and
confidential information.
After the holding company reorganization, his options under the
Starnet Option Plans were replaced with options to buy our ordinary shares or
ADSs under the 2001 Plan.
RODNEY DAVIS, CHIEF FINANCIAL OFFICER
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Mr. Rodney Davis accepted an offer for employment made by the
Company to serve as the Company's CFO on July 7, 2001. Mr. Davis's base
salary in the year 2001 is $129,870 and he may be entitled to receive a bonus
up to 50% of his base salary. As part of his compensation package, Mr. Davis
received 250,000 options to purchase Company ordinary shares or ADSs, of
which 200,000 have an exercise price of $1.34 per share and 50,000 have an
exercise price of $2.25 per share. All of the options will vest ratably over
a period of three years on a quarterly basis.
If Mr. Davis's employment is terminated by the Company without
notice and without cause in the first 6 months of his employment, he will
receive 3 months salary as severance. If Mr. Davis's employment is terminated
by the Company without notice and without cause after the first 6 months of
his employment but within the first 12 months of his employment, he will
receive 6 months salary as severance. If Mr. Davis's employment is terminated
by the Company without notice and without cause after the first 12 months of
his employment but within the first 24 months of his employment, he will
receive 12 months salary as severance. Mr. Davis has agreed to execute a
confidentiality agreement that will remain in effect for 6 months following
the termination of his employment.
LIAM GILLEN, MANAGING DIRECTOR OF OPERATIONS
Starnet entered into an employment agreement with Liam Gillen on
November 27, 2000. Mr. Gillen's employment agreement is for a term of two
years, which term may be extended upon the written agreement of the parties,
and provides for full-time employment. Mr. Gillen's base salary in the year
2001 is $96,000. As part of his compensation package, Mr. Gillen received
50,000 options pursuant to the Starnet Option Plans to purchase Starnet's
stock. Starnet pays Mr. Gillen $1,000 per month as a vehicle allowance,
$3,000 per month as a housing allowance for housing in Antigua and $5,000 per
year as a travel allowance. Starnet also provided Mr. Gillen with an
interest-free loan of $25,000, repayable in 24 installments, to obtain a
credit card in Antigua and a $2,500 moving allowance to move to Antigua.
The employment agreement may be terminated by Starnet for cause,
which includes any breach of the terms of the employment agreement or any
common law cause for termination. If Mr. Gillen's employment agreement is
terminated without cause, or if a change of control occurs, Starnet will be
required to pay him a severance payment of six months base salary plus six
months of benefits and a moving allowance. Additionally, upon such
termination, Mr. Gillen's stock options will accelerate and become
exercisable. The employment agreement contains post-termination restrictive
covenants relating to non-competition with Starnet, non-solicitation of its
customers, non-dealing with its customers and non-solicitation of its
employees. The employment agreement contains an express obligation of
confidentiality in respect of its trade secrets and confidential information.
After the holding company reorganization his options under the
Starnet Option Plans were replaced with options to buy our ordinary shares or
ADSs under the 2001 Plan.
TAXATION
The following discussion sets forth the material U.S. federal income
tax consequences and the material U.K. tax consequences of the ownership and
disposition of our American Depositary Shares or ordinary shares by a U.S.
Holder. This summary is for general information purposes only. A U.S. Holder is
a beneficial owner of our American Depositary Shares or ordinary shares that is:
- a citizen or individual resident of the United States;
- a corporation or other entity taxable as a corporation for U.S.
federal income tax purposes that is created or organized in the United
States or under the law of the United States or of any state or the
District of Columbia;
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- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or
more United States persons have the authority to control all
substantial decisions of the trust, or (2) the trust was in existence
on August 20, 1996 and properly elected to continue to be treated as a
United States person.
The following discussion addresses only the tax consequences to a
U.S. Holder that is a portfolio investor, that is, a U.S. Holder that does
not own at any time, directly or indirectly, American Depositary Shares or
ordinary shares representing ten percent or more of the voting power of our
stock.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISERS REGARDING YOUR PARTICULAR TAX
CONSEQUENCES.
UNITED KINGDOM TAX CONSEQUENCES
The following discussion sets forth the material U.K. tax
consequences of the ownership and disposition of our ordinary shares or
American Depositary Shares by Qualifying U.S. Holders. A "Qualifying U.S.
Holder" is a U.S. Holder who is a resident of the United States for purposes
of the current U.S.-U.K. income tax treaty and who has acquired his American
Depositary Shares or ordinary shares for bona fide commercial reasons as an
investment and not in connection with any business carried on through a
permanent establishment situated in the United Kingdom or for the purposes of
securing the benefit of Article 10, relating to dividends, of the U.S.-U.K.
income tax treaty. This summary is for general information purposes only. It
does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to each U.S. Holder. This discussion is
based on the current provisions of United Kingdom domestic tax law, current
regulations promulgated thereunder, judicial decisions and published
positions of the Inland Revenue and/or Customs and Excise and other
applicable authorities, all as in effect as of the date hereof, and each of
which is subject to change or to differing interpretations, possibly with
retroactive effect. This discussion does not address all aspects of U.K.
taxation that may be relevant to any particular shareholder based on the
shareholder's individual circumstances.
For the purposes of U.K. tax on distributions on ordinary shares,
the holders of American Depository Shares are treated as the beneficial
owners of the ordinary shares of the Company underlying their American
Depository Shares. A new U.S.-U.K. income tax treaty has been agreed but the
new treaty has not come into force and will only come into force when
ratified by both countries. The summary set out below, therefore, does not
take any account of the provisions of the proposed new treaty. For the
purposes of this summary it is assumed, and the Company is of the opinion,
that the Company's business is managed and controlled in the United Kingdom.
DISTRIBUTIONS ON AMERICAN DEPOSITARY SHARES OR ORDINARY SHARES
Currently, an individual shareholder resident in the United Kingdom
generally is entitled to a tax credit, referred to as the "U.K. tax credit",
in respect of any cash dividend received equal to one-ninth of the dividend.
Under the U.S.-U.K. income tax treaty, the payment from the U.K. Inland
Revenue to a Qualifying U.S. Holder is reduced by a U.K. withholding tax
equal to the lesser of (1) 15 percent of the sum of the dividend and the
amount of the U.K. tax credit and (2) the amount of the U.K. tax credit.
Currently, a Qualifying U.S. Holder would not be entitled to receive
any cash payment in respect of the U.K. tax credit for dividends paid by the
Company. For example, if a Qualifying U.S. Holder receives a dividend
of (pound)90, that U.S. Holder would be entitled to a U.K. tax credit
of (pound)10. However,
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because the maximum U.K. withholding tax, which would be 15 percent of
(pound)100, exceeds the U.K. tax credit, the U.K. Inland Revenue would not
make any actual payment, and the Qualifying U.S. Holder would receive only
the cash dividend, which in this case would be (pound)90.
U.S. Holders that are not Qualifying U.S. Holders, depending on
their personal circumstances, may be liable to U.K. tax in respect of
dividends at a rate of up to 32.5 percent.
TAXATION OF CAPITAL GAINS OF U.S. HOLDERS
A U.S. Holder who is neither resident nor ordinarily resident in the
United Kingdom for U.K. tax purposes generally will not be subject to U.K.
tax on capital gains realized on the disposition of the Company's American
Depositary Shares or ordinary shares.
A U.S. Holder who is resident or ordinarily resident in the United
Kingdom at the time of any disposal of his American Depositary Shares or
ordinary shares in the Company, or at a time when he is deemed to have made
such a disposal, or if the disposal is deemed, for the purposes of U.K. tax,
to occur at such a time, may, depending on his circumstances, be subject to
U.K. capital gains tax at a rate of up to 40 percent, in the case of disposal
of ordinary shares, on the whole or, in the case of disposal of American
Depositary Shares, almost the whole, of the chargeable gain arising on the
disposal.
A U.S. Holder who owns his American Depositary Shares or ordinary
shares in the Company in connection with any business or otherwise than as a
capital investment, depending on his circumstances, may be subject to U.K.
tax on any gain he makes on any disposal of his American Depositary Shares or
ordinary shares of the Company at a rate of up to 40 percent, whether or not
he is resident or ordinarily resident in the United Kingdom.
INHERITANCE TAX AND GIFT TAXES ON U.S. HOLDERS
Our ordinary shares and almost all of the American Depositary Shares
are assets situated in the United Kingdom for the purposes of U.K.
inheritance tax. An individual who is domiciled in the United States and who
is not a national of the United Kingdom for purposes of the U.S.-U.K. estate
and gift tax treaty, however, generally will not be subject to U.K.
inheritance tax in respect of our American Depositary Shares or ordinary
shares on the individual's death or to U.K. gift tax on a gift of the
Company's American Depositary Shares or ordinary shares during the
individual's lifetime, provided that any applicable U.S. federal estate or
gift tax liability is paid. In the exceptional case where the Company's
American Depositary Shares or ordinary shares are subject both to U.K.
inheritance tax and to U.S. federal estate or gift tax, the U.S.-U.K. estate
and gift tax treaty generally provides for any tax paid to the United Kingdom
to be credited against tax payable to the United States or for any tax paid
to the United States to be credited against tax payable to the United Kingdom
based on priority rules set out in that treaty. Where, however, the ordinary
shares or American Depositary Shares are shares or American Depositary Shares
in a company which, when taken with its subsidiaries, exists wholly or mainly
for trading purposes, business property relief from U.K. inheritance tax may
be available to reduce or eliminate the tax unless, as in the case of our
American Depositary Shares or ordinary shares, they may be deemed "quoted on
a recognized stock exchange" for the purposes of U.K. domestic inheritance
tax, if the shareholding in questions does not carry control.
STAMP DUTY AND STAMP DUTY RESERVE TAX
A transfer for value of our ordinary shares will normally be subject
to ad valorem stamp duty or to stamp duty reserve tax. Stamp duty tax will
arise on the execution of an instrument to transfer the Company's ordinary
shares. Stamp duty reserve tax will arise on the entry into an agreement to
transfer our ordinary shares, but the charge may be canceled if stamp duty
has been paid. Stamp duty and stamp
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duty reserve tax are normally a liability of the purchaser. The rate of stamp
duty payable is 0.5 percent of the consideration rounded to the nearest
(pound)5, and 0.5 percent of the consideration in the case of stamp duty
reserve tax. There is no charge to U.K. stamp or other duties on the issue by
a U.K. incorporated company of shares in itself.
There should be no charge to U.K. stamp duty on the transfer of
American Depositary Shares in the Company, provided the agreement and the
conveyance of transfer, if any, are executed outside the United Kingdom.
TAXATION OF THE COMPANY
A company that is incorporated in the United Kingdom generally is
treated as being resident in the United Kingdom for tax purposes. However,
this treatment will not apply if the management and control of the U.K.
resident company, that is, broadly, the exercise by the board of directors of
that U.K. resident company of their function, takes place in another country
with which the United Kingdom has an appropriate double tax treaty. A company
whose management and control is exercised in the United Kingdom is also
generally resident in the United Kingdom. A company that is tax resident in
the United Kingdom is liable to U.K. tax on its worldwide income and gains at
a maximum effective rate of up to 30 percent. Tax credit for foreign taxes on
the foreign income is generally given. If the tax residence of a U.K. company
changes from the United Kingdom to that of another jurisdiction, by virtue of
the above provisions it would be deemed to have disposed of all of its
chargeable assets, i.e., its shares in its subsidiaries and any other
chargeable assets that it owns, including the goodwill of any trade carried
on by it, for each asset's market value at the date of the change of
residence. It is, therefore, crucial to ensure that the exercise by the board
of directors of their functions is exercised so as to ensure that there is no
change of a U.K. resident company's tax residence out of the United Kingdom.
TAXATION OF A U.K. COMPANY THAT CONTROLS CERTAIN CONTROLLED FOREIGN COMPANIES
If any of the subsidiaries of a U.K. resident company are deemed
resident in another tax jurisdiction so that that subsidiary is liable to tax
or its profits, other than capital gains, that is less than 75 percent of the
tax it would have paid on those profits if liable to tax in the United
Kingdom, then unless 90 percent of that subsidiary's profits are paid up as a
dividend to a U.K. resident company, within 18 months of the end of the
accounting period in which they are earned or an exemption from these rules
applies, those profits will be treated as profits of the U.K. company and
taxed accordingly (with credit for foreign tax calculated in accordance with
the applicable U.K. laws). Therefore, in relevant circumstances, the Company
would be subject to U.K. tax (currently at the rate of 30 percent) on the
profits of the overseas subsidiaries, subject to appropriate credit for the
relevant overseas tax in respect of such profits.
TAXATION OF CERTAIN DIVIDENDS RECEIVED BY A U.K. HOLDING COMPANY
After the reorganization, the Company owns WG International Limited,
which in turn owns the entire issued share capital of Starnet, which in turn
wholly owns the operating subsidiaries of Starnet. Thus, dividends received
by WG International Limited and the Company will have passed through its U.S.
subsidiary and have been subjected, in addition to any tax payable in the
country of the operating subsidiaries, to U.S. federal income tax, generally
at a rate of 34 percent or 35 percent, after giving credit, subject to
limitations, for foreign income tax paid by the operating subsidiary. A
dividend paid by the U.S. subsidiary will be subject to a U.S. withholding
tax unless the earnings of the operating subsidiaries qualify the dividend
for an exemption from that tax. Pursuant to the current U.S.-U.K. income tax
treaty, the 30% withholding tax imposed by U.S. federal income tax law is
reduced to five percent for non-exempt dividends from the U.S. subsidiary to
WG International Limited. Under the proposed new U.S.-U.K. income tax treaty,
if adopted, it is possible that WG International Limited would not qualify
for the benefits of the treaty, in which case that rate reduction would not
apply, and dividends from Starnet to
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WG International Limited would be subject to a 30% U.S. withholding tax. We
believe, based on the current ownership and trading of our stock, that WG
International Limited would not qualify for the benefits of the proposed new
treaty. Alternatively, if WG International Limited were to qualify for the
benefits of the proposed new treaty, if adopted, it is possible that U.S.
withholding tax on those dividends would be eliminated entirely. For U.K.
corporation tax purposes, the dividend from the U.S. subsidiary will be
subject to U.K. tax payable at effective rates of between 20 percent and 30
percent, depending on the level of deemed or actual profits of the Starnet
group, but will be reduced by means of a credit for any U.S. withholding tax
and for the federal and state income tax paid by Starnet on the earnings
distributed by it and, to the extent that Starnet's income is derived from
dividends received from its operating subsidiaries, the corporate income tax
paid by such operating subsidiaries in their countries of operation. However,
the credit cannot exceed the effective U.K. corporation tax payable and is
further restricted by detailed and complicated tax anti-avoidance and other
provisions. Thus, the U.S. tax and the taxes paid in the countries in which
the operating subsidiaries are situated, if relevant, will exceed the U.K.
tax, and no credit will be available in respect of the excess. Further, the
credit against foreign taxes suffered on profits from which a dividend is
paid is based on an assumption that all available relief and exemptions from
the foreign tax have been claimed by the overseas company.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, referred to as the Code, current and
proposed Treasury regulations promulgated thereunder, judicial decisions and
published positions of the U.S. Internal Revenue Service, known as the "IRS",
and other applicable authorities, all as in effect as of the date hereof, and
each of which is subject to change or to differing interpretations, possibly
with retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to any particular shareholder
based on the shareholder's individual circumstances. In particular, this
discussion considers only U.S. Holders that will own American Depositary
Shares or ordinary shares as capital assets and does not address the
potential application of the alternative minimum tax or the U.S. federal
income tax consequences to U.S. Holders that are subject to special
treatment, including U.S. Holders that:
- are broker-dealers;
- have elected mark-to-market accounting;
- are tax-exempt organizations;
- are financial institutions or insurance companies or other entities
that derive financial services income;
- hold American Depositary Shares or ordinary shares as part of a
straddle, "hedge", "conversion transaction" or other risk reduction
strategy with other investments;
- have a functional currency that is not the U.S. dollar; or
- are regulated investment companies.
In addition, this discussion does not consider the tax treatment of
persons who hold American Depositary Shares or ordinary shares through a
partnership or other pass-through entity. This discussion does not address
any aspect of state, local or non-U.S. tax laws or any U.S. federal tax laws
other than U.S. federal income tax laws.
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Subject to the limitations described in the next paragraph, the
following discussion describes the material U.S. federal income tax
consequences to a U.S. Holder. In addition, certain material aspects of U.S.
federal income tax relevant to a holder other than a U.S. Holder, referred to
as a Non-U.S. Holder, are discussed below.
TAX CONSEQUENCES FOR U.S. HOLDERS
For U.S. Federal income tax purposes, a holder of an American
Depositary Share will be treated as the owner of the ordinary share
underlying the American Depositary Share.
TAXATION OF DIVIDENDS PAID ON AMERICAN DEPOSITARY SHARES OR ORDINARY SHARES
A U.S. Holder will be required to include in gross income as
ordinary income the amount of any distribution paid on an American Depositary
Share or ordinary share, including any U.K. tax withheld from the amount
paid, on the date the distribution is received, to the extent the
distribution is paid out of our current and/or accumulated earnings and
profits as determined for U.S. federal income tax purposes. A distribution in
excess of earnings and profits will be treated first as a nontaxable return
of capital, reducing the U.S. Holder's basis in the American Depositary Share
or ordinary share and, to the extent in excess of basis, will be treated as
gain from the sale or exchange of the American Depositary Share or ordinary
share. The amount of any distribution paid in any currency other than the
U.S. dollar will equal the U.S. dollar value of the other currency calculated
by reference to the exchange rate in effect on the date the distribution is
received by the Depositary, in the case of American Depositary Shares, or by
the U.S. Holder, in the case of ordinary shares, regardless, in each case, of
whether the other currency is converted into U.S. dollars. Gain or loss, if
any, realized on a sale or other disposition of the other currency will be
ordinary income or loss. Our dividends will not qualify for the dividends
received deduction generally available to corporations.
A portfolio U.S. Holder, as defined above, may elect to be treated
as receiving the U.K. tax credit in respect of a dividend paid by the
Company, as described above in "Taxation --United Kingdom Tax
Consequences--Tax Consequences for U.S. Holders--Distributions on American
Depositary Shares or Ordinary Shares". A U.S. Holder that makes this election
will be treated (1) as having received additional dividend income equal to
the gross amount of the U.K. tax credit unreduced by any U.K. withholding tax
and (2) as having paid U.K. withholding tax in the same amount. Following the
example above in "Taxation -United Kingdom Tax Consequences -- Distributions
on American Depositary Shares or Ordinary Shares", a U.S. Holder that made
this election would be treated for U.S. federal income tax purposes as
receiving a dividend in an amount equal to the U.S. dollar value of
(pound)100 and as having paid U.K. withholding tax in an amount equal to the
U.S. dollar value of (pound)10. U.S. Holders that are not portfolio U.S.
Holders are subject to different rules. Those rules, and the procedures for
making the election described above, are set forth in Revenue Procedure
2000-13.
A U.S. Holder generally may elect either to deduct or to credit all
of the foreign income taxes it pays or accrues in any taxable year and,
consistent with that election, may deduct or credit any U.K. income tax
withheld at the source on dividends we pay. A deduction reduces the amount of
income that is subject to tax, while a credit is a dollar-for-dollar
reduction of the U.S. Holder's U.S. federal income tax liability. An
individual who does not elect to credit foreign income taxes and who does not
claim itemized deductions, but instead utilizes the standard deduction, may
not claim a deduction for the amount of U.K. withholding taxes.
The amount of foreign income tax that may be claimed as a credit in
any year is subject to complex limitations, which apply on a
shareholder-by-shareholder basis. The limitations include, among others,
rules that divide a U.S. Holder's foreign source income among specified
classes, or "baskets", and prevent the credit for foreign income taxes
imposed on any class of foreign source income from
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exceeding the U.S. Holder's liability for U.S. federal income tax on that
class of income. For foreign tax credit purposes, our dividends generally
will be foreign source passive income.
In addition, a U.S. Holder cannot credit U.K. tax withheld on a
dividend received on any American Depositary Share or ordinary share that the
U.S. Holder has not held for at least 16 days of the 30-day period beginning
on the date that is 15 days before the ex-dividend date or to the extent the
U.S. Holder is under an obligation to make related payments with respect to
substantially similar or related property. Any days during which a U.S.
Holder has substantially diminished its risk of loss on the American
Depositary Share or ordinary share are not counted toward meeting the 16-day
holding period required by the statute.
The foreign tax credit rules in the Code are exceedingly complex,
and each U.S. Holder is urged to consult its own tax adviser regarding those
rules.
TAXATION ON DISPOSITION OF ORDINARY SHARES
Subject to the rules applicable to passive foreign investment
companies, controlled foreign corporations and foreign investment companies,
discussed below, upon the sale, exchange or other disposition of an American
Depositary Share or ordinary share, a U.S. Holder will recognize capital gain
or loss in an amount equal to the difference, if any, between the U.S.
Holder's basis in the American Depositary Share or ordinary share, which
usually is the U.S. Holder's cost of the American Depositary Share or
ordinary share, and the amount realized on the disposition computed in U.S.
dollars. Capital gain from the sale, exchange or other disposition of an
American Depositary Share or ordinary share held more than one year,
including any capital gain recognized on a distribution that exceeds earnings
and profits and basis in the American Depositary Share or ordinary share on
which it is paid, is long-term capital gain, and, in the case of a U.S.
Holder that is not a corporation, is eligible for a maximum 20 percent rate
of taxation. Gain or loss recognized by a U.S. Holder on a sale, exchange or
other disposition of an American Depositary Share or ordinary share generally
will be treated as U.S. source income or loss for purposes of the U.S.
foreign tax credit limitations. Unless an exception to that general source
rule applies, or unless the U.S. Holder has other foreign source income in
the same class or "basket" that is subject to foreign tax at a rate below the
U.S. federal income tax rate on that income, the limitations on the foreign
tax credit may prevent the U.S. Holder from claiming a foreign tax credit for
part or all of any U.K. tax paid by the U.S. Holder on the disposition of an
American Depositary Share or ordinary share. The deductibility of a capital
loss recognized on the sale, exchange or other disposition of an American
Depositary Share or ordinary share is subject to limitations. An exchange,
deposit or withdrawal by a U.S. Holder of ordinary shares in exchange for
American Depositary Shares, or vice versa, will not be subject to any U.S.
Federal income tax.
TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY
In general, we will be a passive foreign investment company, or
PFIC, for any taxable year if either (1) 75 percent or more of our gross
income in the taxable year is passive income, or (2) 50 percent or more of
the average value, or, if our American Depositary Shares or ordinary shares
are not regularly traded on any of certain designated stock exchanges and if
we so elect, the adjusted basis, of our assets in the taxable year produces,
or is held for the production of, passive income. The IRS takes the position
that interest on working capital or any other cash is passive income and that
the corresponding asset is an asset that produces or is held for the
production of passive income. The PFIC rules can produce unfavorable tax
consequences for a U.S. Holder if we are treated as a PFIC for any year while
a U.S. Holder owns our American Depositary Shares or ordinary shares, and if
that U.S. Holder does not make, or has not made, a timely election that
remains in effect, for the first taxable year the U.S. Holder owns our
American Depositary Shares or ordinary shares, and we are a PFIC, either to
treat us as a "qualified
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electing fund" or to mark the holder's American Depositary Shares or ordinary
shares to market. As described below, a "qualified electing fund" election
will not be available to a U.S. Holder unless we provide certain information
to U.S. Holders, and we provide no assurance that we will make that
information available. In addition, a mark-to-market election will not be
available to a U.S. Holder unless our American Depositary Shares or ordinary
shares held by the U.S. Holder are "marketable stock", which at the present
time we believe they are not. If neither of those elections is available to,
or, if available, is made by, a U.S. Holder, as described more fully below,
the U.S. Holder will be subject to the adverse tax consequences described in
the following paragraph if we are a PFIC. We have not undertaken any
determination of whether we are a PFIC and therefore cannot provide any
assurance that we are not. Therefore, we may be a PFIC. Moreover, in the
absence of an analysis of our status as a PFIC performed by us, any assertion
by the IRS with respect to a U.S. Holder that we are a PFIC could be upheld
against that U.S. Holder, whether or not we are in fact a PFIC.
Under the PFIC provisions, in any year in which the U.S. Holder
either disposes of an American Depositary Share or ordinary share at a gain
or receives an "excess distribution," special rules apply to the taxation of
the gain and the excess distribution. For purposes of these rules, "excess
distributions" are the portion of our distributions in any taxable year,
whether or not out of our earnings and profits, that exceed 125 percent of
the average of the distributions (whose amount is subject to adjustment to
the extent there were excess distributions) that the U.S. Holder received on
the American Depositary Share or ordinary share during the previous three
years, or, if shorter, the U.S. Holder's holding period for the American
Depositary Share or ordinary share on which the distributions are paid. A
disposition of an American Depositary Share or ordinary share, for purposes
of these rules, includes many transactions on which gain or loss is not
realized under general U.S. federal income tax rules. The gain or the excess
distributions must be allocated ratably to each day the U.S. Holder has held
the American Depositary Share or ordinary share. Amounts allocated to each
year are taxable as ordinary income in their entirety and not as capital
gain, and amounts allocable to prior years may not be offset by any
deductions or losses. Amounts allocated to each prior year are taxable at the
highest rate in effect for that year and are subject to an interest charge at
the rates applicable to deficiencies for income tax for those periods. In
addition, a U.S. Holder's tax basis in an American Depositary Share or
ordinary share that is acquired from a decedent would not receive a step-up
to fair market value as of the date of the decedent's death but instead would
be equal to the decedent's basis, if lower.
The special PFIC rules described in the preceding paragraph will not
apply to a U.S. Holder if the U.S. Holder makes a timely election, which
remains in effect, to treat us as a "qualified electing fund," or QEF, for
the first taxable year in which the U.S. Holder owns an American Depositary
Share or ordinary share and in which we are a PFIC. A U.S. Holder generally
may make a QEF election only if we provide to the U.S. Holder certain
information regarding our earnings and profits and net capital gain and
certain other information regarding us. As indicated above, we provide no
assurance that we will make any of that information available. A U.S. Holder
that has made a valid QEF election is required for each taxable year to
include in income a pro rata share of our ordinary earnings as ordinary
income and a pro rata share of our net capital gain as long-term capital
gain, subject to a separate election to defer payment of taxes, which
deferral is subject to an interest charge. The QEF election is made on a
shareholder-by-shareholder basis and can be revoked only with the consent of
the IRS. A shareholder makes a QEF election by attaching to a timely filed
U.S. federal income tax return a properly completed IRS Form 8621 that
reflects the information provided in the PFIC Annual Information Statement
supplied by us to the shareholder and by filing a second copy of that form
with the IRS Service Center in Philadelphia, Pennsylvania. As indicated
above, we provide no assurance that we will make any of that information
available. If we do not provide that information, a U.S. Holder will not be
able to make a QEF election, in which case, unless our American Depositary
Shares or ordinary shares held by a U.S. Holder are "marketable stock" (which
we do not believe they are at this time) or become "marketable stock", a U.S.
Holder will be subject to the rules described in the preceding paragraph with
respect to our American Depositary Shares or ordinary shares unless if we are
a PFIC or unless the U.S. Holder is able to rebut an assertion by the IRS that
we are a PFIC. Without information provided by us a U.S. Holder may not be
able to rebut an assertion by the IRS that we are a PFIC.
Even if a QEF election is not made, if we are a PFIC in the hands of
a U.S. Holder, that U.S. Holder must file each year a completed IRS Form 8621
with its U.S. Federal income tax return and file a second copy of that form
with the IRS Service Center in Philadelphia, Pennsylvania. The annual Form
8621 filed by a person who has made a QEF election must include the
information provided to the shareholder in the PFIC Annual Information
Statement. As indicated above, we provide no assurance that we will make any
of that information available. If we were to make that information available
but later were to cease to make that information available, a QEF election by
a U.S. Holder likely would terminate. We provide no assurance that, if we
make any of that information available, we will continue to do so. Although a
QEF election generally cannot be revoked, if a U.S. Holder made a timely QEF
election for the first taxable year it owned an American Depositary Share or
ordinary share and we are a PFIC, the QEF election does not apply in a later
taxable year in which we do not satisfy the tests to be a PFIC. If a QEF
election was not made for that first taxable year, certain elections can be
made while a foreign corporation continues to satisfy the definition of a
PFIC that, combined with a valid QEF election, provided that election is
available by reason of our provision of necessary information, can cause the
QEF election to be treated as having been made for that first taxable year.
Those elections may require the electing shareholder to recognize gain on a
constructive sale or to be taxable on the shareholder's share of certain
undistributed profits of the foreign corporation. If gain or income is
recognized pursuant
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to one of these elections, the rules set forth in the preceding paragraph
would apply to that gain or income.
Even if a QEF election ceases to apply because in a later taxable
year we cease to satisfy the tests to be a PFIC, the QEF election will apply
again in any subsequent year in which we again satisfy the tests to be a PFIC
provided that election is available by reason of our provision of necessary
information. Moreover, if you sell all of the American Depositary Shares or
ordinary shares you own and later reacquire other ordinary shares, any QEF
election you have made that remains in effect will apply to the shares
acquired later provided that election is available by reason of our provision
of necessary information. Treasury regulations provide that the Commissioner
of Internal Revenue has the discretion to invalidate or terminate a QEF
election if the U S. Holder or we, or an intermediary, fails to satisfy the
requirements for the QEF election. As noted above, we provide no assurance
that we will make any of the necessary information available.
The special PFIC rules described above also will not apply to a U.S.
Holder if the U.S. Holder elects to mark the U.S. Holder's American Depositary
Shares or ordinary shares to market each year, provided our stock is considered
"marketable stock" within the meaning of the Treasury regulations. A U.S. Holder
that makes this election will recognize as ordinary income or loss each year an
amount equal to the difference, if any, as of the close of the taxable year
between the fair market value of the holder's American Depositary Shares or
ordinary shares and the holder's adjusted tax basis in the American Depositary
Shares or ordinary shares. Losses would be allowed only to the extent of net
mark-to-market gain previously included in income by the U.S. Holder under the
election for prior taxable years. If the mark-to-market election were made, then
the rules set forth above would not apply for periods covered by the election.
In general, the American Depositary Shares or ordinary shares will
be marketable stock within the meaning of the Treasury regulations if they
are traded, other than in DE MINIMIS quantities, at least 15 days during each
calendar quarter on a "qualified exchange or other market" within the meaning
of the Treasury regulations. A U.S. exchange is a "qualified exchange or
other market" if such exchange is a national securities exchange registered
with the SEC, or the national market system established pursuant to section
11A of the Securities Exchange Act of 1934. A non-U.S. exchange is a
"qualified exchange or other market" if the exchange is regulated or
supervised by a governmental authority of the country where the market is
located and (1) the exchange has trading volume, listing, financial
disclosure, surveillance and other requirements designed to prevent
fraudulent and manipulative acts and practices, to remove impediments to and
perfect the mechanism of a free and open, fair and orderly market, and to
protect investors, and the laws of the country where the exchange is located
and the rules of the exchange ensure that those requirements are actually
enforced, and (2) the rules of the exchange effectively promote active
trading of listed stocks. If a non-U.S. exchange has more than one tier or
market level on which stock may be separately listed or traded, each such
tier is treated as a separate exchange. We believe that our American
Depositary Shares and ordinary shares are not "marketable stock" within the
meaning of the Treasury regulations. In that event, the mark-to-market
election will not be available to U.S. Holders. If a QEF election also is not
available, for example, because we do not provide the necessary information
to U.S. Holders, or if a U.S. Holder does not make a QEF election, the
adverse PFIC rules set forth in the fifth preceding paragraph will apply to
all U.S. Holders or a non-electing U.S. Holder. As noted above, we provide no
assurance that we will make available any of the information necessary for a
QEF election.
If a market-to-market election were available or were to become
available, and if a U.S. Holder were to make a mark-to-market election, but
does not make that election for the first taxable year in which the U.S.
Holder owns an American Depositary Share or ordinary share and in which we
are a PFIC, and if the U.S. Holder had not made a valid QEF election for that
first such taxable year, the rules set forth in the sixth preceding paragraph
will apply to any distributions on an American Depositary Share or ordinary
share in the year of the mark-to-market election, and to any gain recognized
on an actual sale of an American Depositary Share or ordinary share in that
year, as well as in any prior year that U.S. Holder owned our American
Depositary Shares or ordinary shares, and to any gain recognized in that year
pursuant to the mark-to-market election. Unlike the QEF rules, under which a
U.S. Holder is not required to continue to include in income any of our
undistributed earnings in any year we do not satisfy the tests to be a PFIC
if the U.S. Holder made, or is treated as making, the QEF election in the
first taxable year the U.S. Holder owned our American Depositary Shares or
ordinary and we were a PFIC, the mark-to-market rules generally
61
<Page>
continue to apply to a U.S. Holder who makes the mark-to-market election,
even in years we do not satisfy the tests to be a PFIC.
A U.S. Holder who owns American Depositary Shares or ordinary shares
during a year we are a PFIC, who did not make a valid and timely QEF election
for the first taxable year in which the U.S. Holder owns an American
Depositary Share or ordinary share and in which we are a PFIC, or a valid QEF
election in a later year while we continue to satisfy the definition of a
PFIC, as described in the fifth preceding paragraph, and who has not made a
valid mark-to-market election generally will remain subject to the rules set
forth in the seventh preceding paragraph for all taxable years. In that
event, those rules will apply to any gains on dispositions of American
Depositary Shares or ordinary shares and to any "excess distributions." It
is, however, possible for a U.S. Holder to avoid this "once a PFIC, always a
PFIC" result by electing to treat all of the U.S. Holder's American
Depositary Shares or ordinary shares as sold for their fair market value as
of the last day of the last taxable year we satisfy the tests to be a PFIC,
provided that election is made within three years of the due date, including
extensions, for the U.S. Holder's taxable year that includes the last day of
the taxable year we satisfy the tests to be a PFIC. If a gain is recognized
on that constructive sale, the rules set forth in the seventh preceding
paragraph would apply to that gain.
We may be a PFIC for the year 2001. Many aspects of the taxation of
internet businesses that could be relevant to our status as a PFIC are
subject to considerable uncertainty. In addition, as noted above, we have not
undertaken any determination of whether we are a PFIC and therefore cannot
provide any assurance that we are not. In addition, the tests for determining
PFIC status are applied annually, and it is difficult to make accurate
predictions of future income and assets, which are relevant to this
determination. Accordingly, there can be no assurance that, even if we were
not a PFIC for the year 2001, we will not be a PFIC in 2002 or any subsequent
year. Moreover, we provide no assurance that we will make any determination
in the future whether we are a PFIC at that time. Finally, in the absence of
an analysis of our status as a PFIC performed by us,any assertion by the IRS
with respect to a U.S. Holder that we are in any particular year a PFIC could
be upheld against that U.S. Holder, whether or not we are in fact a PFIC.
U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT THE PFIC
RULES, INCLUDING THE CONSEQUENCES TO THEM OF MAKING A QEF OR MARK-TO-MARKET
ELECTION, PROVIDED THOSE ELECTIONS ARE AVAILABLE, WITH RESPECT TO OUR AMERICAN
DEPOSITARY SHARES OR ORDINARY SHARES IF WE ARE A PFIC.
CONTROLLED FOREIGN CORPORATION RULES
Special U.S. federal income tax rules apply to certain holders in a
foreign corporation classified as a "controlled foreign corporation," or CFC. A
foreign corporation will not constitute a CFC unless U.S. shareholders, each of
whom owns ten percent or more of its voting power, referred to hereafter as "10%
Voting U.S. Shareholders", collectively own more than 50 percent of the total
combined voting power or total value of the corporation's stock. Any U.S. person
that owns, directly or indirectly through foreign persons, or is considered to
own, by application of certain constructive ownership rules, ten percent or more
of the total combined voting power of all classes of stock of a foreign
corporation will be considered to be a 10% Voting U.S. Shareholder.
For purposes of the special rules that apply on a taxable disposition
of stock, the status of the foreign corporation as a CFC or the status of a U.S.
Holder as a 10% Voting U.S. Shareholder at any time within five years prior to
the taxable disposition can cause those rules to apply. Based on the current
ownership of its American Depositary Shares and ordinary stock, we believe that
we are not a CFC.
FOREIGN PERSONAL HOLDING COMPANY AND PERSONAL HOLDING COMPANY RULES
Special U.S. federal income tax rules apply to a holder in a "foreign
personal holding company," or FPHC, and to the U.S. source income of a foreign
corporation that is a "personal holding company." A foreign corporation will not
constitute a FPHC unless five or fewer individuals who are U.S. citizens or
residents own, directly or constructively, more than 50 percent of the voting
power or the value of its
62
<Page>
shares. A corporation will not constitute a "personal holding company," or
PHC, unless five or fewer individuals own, directly or constructively, more
than 50 percent of the value of its shares at any time during the last half
of its taxable year. Based upon the current ownership of our stock, we
believe that we are not a FPHC or PHC.
FOREIGN INVESTMENT COMPANY RULES
Special rules also apply to treat as ordinary income any gain realized
on the sale of shares of a "foreign investment company." We believe that we will
conduct our business and obtain controlling interests in subsidiaries so as not
to be a "foreign investment company."
TAX CONSEQUENCES FOR NON-U.S. HOLDERS
Except as described in "Information reporting and back-up withholding"
below, a Non-U.S. Holder of an American Depositary Share or ordinary share will
not be subject to U.S. federal income or withholding tax on any gain recognized
on the payment of dividends on, or gain from a disposition of, an American
Depositary Share or ordinary share, unless:
o the income or gain is effectively connected with the conduct by the
Non-U.S. Holder of trade or business in the United States and, in the
case of a resident of a country that has a treaty with the United
States, the income is attributable to a permanent establishment or, in
the case of an individual, a fixed place of business, in the United
States;
o in case of gain from a disposition of an American Depositary Share or
ordinary share, the Non-U.S. Holder is an individual who holds the
American Depositary Share or ordinary share as a capital asset and is
present in the United States for 183 days or more in the taxable year
of the disposition and does not qualify for an exemption; or
o the Non-U.S. Holder is subject to tax pursuant to the provisions of
U.S. tax law applicable to U.S. expatriates.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
Under current U.S. federal income tax regulations, dividends we pay on
American Depositary Shares or ordinary shares will not be subject to U.S.
information reporting or to backup withholding unless they are paid in the
United States through a U.S. or U.S.-related paying agent, including a broker.
If a U.S. Holder furnishes the paying agent with a duly completed and signed IRS
Form W-9, the dividends will not be subject to backup withholding. Non-U.S.
Holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or upon the disposition of the
Company's American Depositary Shares or ordinary shares, provided that the
non-U.S. Holder provides a taxpayer identification number, certifies to its
foreign status or otherwise establishes an exemption.
The amount of any back-up withholding will be allowed as a credit
against a U.S. or Non-U.S. Holder's U.S. federal income tax liability and may
entitle the holder to a refund, provided certain required information is
furnished to the IRS.
TAXATION OF THE COMPANY
The Company is subject to U.S. federal income tax only to the extent
that it derives U.S. source income that is subject to U.S. withholding tax or
income that is effectively connected with the conduct of trade or business
within the United States and is not exempt from U.S. tax under the U.S.-U.K.
income
63
<Page>
tax treaty. Our indirect U.S. subsidiary will continue to be subject to U.S.
tax on its worldwide income, including dividends, if any, it receives from
non-U.S. subsidiaries, and dividends, if any, it pays to WG International
Limited may be subject to a U.S. withholding tax, unless the earnings of the
operating subsidiaries qualify the dividends for an exemption from that tax.
Pursuant to the current U.S.-U.K. income tax treaty, the 30% withholding tax
imposed by U.S. Federal income tax law is reduced to five percent for
non-exempt dividends from the U.S. subsidiary to WG International Limited.
Under the proposed new U.S.-U.K. income tax treaty, if adopted, it is
possible that WG International Limited would not qualify for the benefits of
the treaty, in which case that rate reduction would not apply, and dividends
from Starnet to WG International Limited would be subject to a 30% U.S.
withholding tax. We believe, based on the current ownership and trading of
our stock, that neither WG International Limited nor World Gaming plc would
qualify for benefits under the proposed new treaty. Alternatively, if WG
International Limited were to qualify for the benefits of the proposed new
treaty, if adopted, it is possible that U.S. withholding tax on those
dividends would be eliminated entirely. In addition, if the proposed new
U.S.-U.K. income tax treaty is adopted, and WG International Limited were not
to qualify for the benefits of that treaty, other income of WG International
or World Gaming plc that is from U.S. sources or that is effectively
connected with trade or business conducted in the United States may become
subject to U.S. federal income tax or may become subject to U.S. Federal
income tax at higher rates.
DOCUMENTS ON DISPLAY
We have filed this Annual Report on Form 20-F with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
Statements made in this annual report as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to this annual report, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
We are subject to the informational requirements of the Securities
Exchange Act and file reports and other information with the Securities and
Exchange Commission. Reports and other information which we file with the
Securities and Exchange Commission, including this Annual Report on Form 20-F,
may be inspected and copies at the public reference facilities of the Securities
and Exchange Commission at: 450 Fifth Street N.W., Room 1024, Washington, D.C.
20549. Additionally, copies of this material may also be obtained from the
Securities and Exchange Commission's Interest site at http://www.sec.gov. The
Commission's telephone number is 1-800-SEC-0330.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our reporting currency is the U.S. dollar. We are exposed to foreign
exchange risk on our net Canadian dollar asset position (approximately $6.5
million Canadian or $4.2 million U.S. as of April 30, 2001). The main exposure
in this regard is the Canadian dollar weakening against the U.S. dollar, which
would cause our net Canadian position to "decline" after translation to the U.S.
dollar.
Exposure arises primarily from the operations of our subsidiaries in
Canada which incur development and certain administrative expenses in Canadian
dollars (approximately $11.0 million CDN or $7.3 million for the year ending
April 30, 2001) but do not derive any sales directly from customers. Funding for
Inphinity comes from the Company's non-Canadian subsidiaries that derive their
sales in U.S. dollars. Therefore the ultimate cost of the Company's operations
in Canada are dependent on the relative strength of the Canadian dollar to the
U.S. dollar. We have not hedged against this risk.
Our net Canadian asset position is summarized as follows (in thousands
of U.S. dollars):
Cash and cash equivalents $100
64
<Page>
Other current assets 1,000
------------
Total current assets 1,100
Other assets 4,900
Current liabilities (1,300)
Long-term liabilities (500)
------------
Net Canadian dollar denominated assets 4,200
============
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
The Company is in arrears on payments under two of its equipment
suppliers. The net present value of the total obligation is approximately
$1,134,000. The total amount of payments in arrears as of September 1, 2001 is
approximately $251,000. The Company is presently in discussions with these
suppliers to alter the terms of the leases.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
There are no material modifications to the rights of security holders
that are required to be disclosed.
USE OF PROCEEDS FROM OFFERING
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
Our consolidated financial statements together with the report of HJ &
Associates LLC with respect to fiscal years 2001 and 2000 and the report of
Ernst & Young LLP with respect to fiscal year 1999 are filed as part of this
annual report.
CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Page
Independent Auditors' Report of HJ & Associates, LLC....................................................... F-3
Report of Independent Auditors of Ernst & Young LLP........................................................ F-4
Consolidated Balance Sheets as of April 30, 2001 and 2000................................................. F-5
Consolidated Statements of Operations and Accumulated Other Comprehensive Income (Loss) for the years
ended April 30, 2001, 2000, and 1999.................................................................... F-7
Consolidated Statements of Stockholders' Equity for the years ended April 30 2001, 2000 and 1999........... F-9
Consolidated Statements of Cash Flows for the years ended April 30, 2001, 2000, and 1999................... F-10
Notes to Consolidated Financial Statements................................................................. F-12
</Table>
65
<Page>
ITEM 18. FINANCIAL STATEMENTS.
Our consolidated financial statements have been prepared in accordance
with Item 17 hereof.
ITEM 19. EXHIBITS.
<Table>
1.1 Memorandum of Association of World Gaming plc (incorporated by reference from Exhibit 3.1 to
Registration Statement on Form F-4 (SEC File No. 333-48280, dated 10/19/00) filed by World
Gaming plc.)
1.2 Articles of Association of World Gaming plc adopted by special resolution on May 17, 2001
(incorporated by reference from Exhibit 4.2 to Registration Statement on Form S-8 (SEC File No.
333-70056, dated 09/24/01) filed by World Gaming plc.)
2.1 Form of ordinary share certificate of World Gaming plc. (incorporated by reference as contained
in Registration Statement on Form 8-A (Sec File No. 000-32793, dated 05/23/01) filed by World
Gaming plc.)
2.2 Form ADR (incorporated by reference from Exhibit A to the Form Deposit Agreement filed as
Exhibit (a) to Registration Statement on Form F-6 (SEC File No.333-13286, dated 05/24/01) filed
by World Gaming plc)
2.3 Form Deposit Agreement among World Gaming plc and Continental Stock Transfer and Trust Company,
as depositary, and others named therein dated as of March 2001 (incorporated by reference from
Exhibit (a) to Registration Statement on Form F-6 (SEC File No.333-13286, dated 05/24/01) filed
by World Gaming plc)
2.4 World Gaming 2001 Share Option Plan (incorporated by reference from Exhibit 4.3 to Registration
statement on Form S-8 (SEC File No. 333-70056, dated 09/24/01) filed by World Gaming plc)
4.1 Agreement and Plan of Reorganization (incorporated by reference from Exhibit 2.1 to a report on
Form 8-K (SEC File No. 000-29290, dated 06/14/01) filed by Starnet Communications International,
Inc.)
4.2 Employment Agreement between Starnet Communications International and Michael Aymong, dated
04/06/01 (incorporated by reference from Exhibit 10.15 to a report on Form 8-K (SEC File No.
000-29290, dated 04/11/01) filed by Starnet Communications International, Inc.)
4.3 Settlement Agreement between Starnet Communications International, Inc. and Meldon Ellis dated
September 13, 2000 (incorporated by reference from Exhibit 10.13 to quarterly report on Form
10-Q (SEC File No. 000-29290, dated 12/15/00) filed by Starnet Communications International,
Inc.)
4.4* Employment Agreement of David Pasieka, dated May 2, 2001
4.5* Accord and Satisfaction Agreement among Starnet Systems International, Inc., Simpson Bay Ltd.
and AIM Investments Ltd., dated May 17, 2001
4.6* Operating agreement between TrackData Systems Corporation and Starnet Communications
International, Inc., dated February 18, 2000
4.7* Operating agreement between Bloodstock Research Information Services, Inc. and Starnet
Communications, Inc., dated January 18, 2000
4.8* The Daily Racing Form Online Affiliate Agreement with Starnet Communications International,
Inc., dated August 1, 2000
4.9* Software License Agreement between International Gaming Ltd (f.k.a. BBF International Gaming
Antigua Inc. and Softec Systems Caribbean Inc., dated January 18, 1999
66
<Page>
4.10* Employment Agreement of Rodney Davis, dated July 7, 2001
4.11 Employment Agreement of Liam Gillen, dated November 27, 2000 (incorporated by reference from
Exhibit 10.14 to a quarterly report on Form 10-Q (File No. 000-29290, dated 03/19/01) filed by
Starnet Communications International, Inc.
4.12 Software License Agreement between Starnet Systems International Inc. and Global Interactive
Ltd. dated February 19, 2000 (incorporated by reference from an annual report on Form 10-K (SEC
File 0-29290 dated 07/31/00) filed by Starnet Communications International, Inc.
8.1* List of Subsidiaries
9.1* Consent of HJ & Associates, Independent Auditors
9.2* Consent of Ernst & Young, Independent Auditors
</Table>
------------------
* Filed herewith.
67
<Page>
WORLD GAMING PLC
(FORMERLY STARNET COMMUNICATIONS INTERNATIONAL INC.)
CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2001
F-1
<Page>
C O N T E N T S
<Table>
Independent Auditors' Report of HJ & Associates LLC.............................................................F-3
Report of Independent Auditors of Ernst & Young LLP.............................................................F-4
Consolidated Balance Sheets.....................................................................................F-5
Consolidated Statements of Operations and Other Comprehensive Income (Loss).....................................F-7
Consolidated Statements of Stockholders' Equity.................................................................F-9
Consolidated Statements of Cash Flows..........................................................................F-10
Notes to the Consolidated Financial Statements.................................................................F-12
</Table>
F-2
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of World Gaming Plc (Formerly Starnet
Communications International Inc.)
We have audited the accompanying consolidated balance sheets of World Gaming Plc
(formerly Starnet Communications International Inc.) as of April 30, 2001 and
2000 and the related consolidated statements of operations and other
comprehensive income (loss), stockholders' equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements for the year ended April 30, 1999 were audited by other
auditors, whose report dated June 30, 1999, expressed an unqualified opinion.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 World
Gaming Plc (formerly Starnet Communications International Inc.) at April 30,
2001 and 2000 and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
July 20, 2001, except for Note 18 which is August 24, 2001.
F-3
<Page>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
STARNET COMMUNICATIONS INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of STARNET
COMMUNICATIONS INTERNATIONAL INC. as of April 30, 1999 and 1998 and the
related consolidated statements of income (loss) and retained earnings
(deficit), shareholders' equity (deficiency) and cash flows for each of the
two years periods ended April 30, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Starnet
Communications International Inc. at April 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years ended
April 30, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Vancouver, Canada,
June 30, 1999 (except as to note 13 which is at Chartered Accountants
July 28, 1999)
------------------------------- ERNST & YOUNG ---------------------------------
F-4
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Balance Sheets
(In Thousands of US $ except per share amounts)
<Table>
<Caption>
ASSETS
April 30,
---------------------------------------
2001 2000
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 4,518 $ 5,984
Reserves and deposits with credit card processors
(Note 3) 3,763 3,857
Accounts receivable (Note 4) 1,476 2,008
Employee advances - current portion 59 14
Prepaid expenses and deposits 576 616
Deferred gaming license costs (Note 5) 300 1,349
Current portion of long-term receivables (Note 14) - 514
Restricted cash (Note 6) 3,925 -
----------------- -----------------
Total Current Assets 14,617 14,342
----------------- -----------------
CAPITAL ASSETS - NET (Note 7) 5,239 4,868
----------------- -----------------
OTHER ASSETS
Long-term receivables (Note 14) - 1,539
Restricted cash (Note 6) - 7,024
Deposits 289 210
Employee advances - long-term portion 43 -
----------------- -----------------
Total Other Assets 332 8,773
----------------- -----------------
TOTAL ASSETS $ 20,188 $ 27,983
================= =================
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Balance Sheets (Continued)
(In Thousands of US $ except per share amounts)
<Table>
<Caption>
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30,
---------------------------------------
2001 2000
----------------- -----------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 6,182 $ 5,223
Accrued settlement of legal issues (Notes 12 and 18) 5,409 -
Funds held on deposit (Note 9) 3,452 2,118
Deferred revenue 150 287
Current portion of capital lease obligations (Note 10) 677 476
----------------- -----------------
Total Current Liabilities 15,870 8,104
----------------- -----------------
LONG-TERM LIABILITIES
Non-current portion of capital lease obligations (Note 10) 607 503
Note payable (Note 16) 1,500 -
----------------- -----------------
Total Long-Term Liabilities 2,107 503
----------------- -----------------
Total Liabilities 17,977 8,607
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY
Common stock (Note 11) 22,394 22,143
Subscription receivable (310) (381)
Deferred compensation (38) -
Accumulated other comprehensive income (loss) (708) (15)
Accumulated deficit (19,127) (2,371)
----------------- -----------------
Total Stockholders' Equity 2,211 19,376
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,188 $ 27,983
================= =================
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Statements of Operations and
Other Comprehensive Income (Loss)
(In Thousands of US $ except per share amounts)
<Table>
<Caption>
For the Years Ended
April 30,
---------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------
REVENUE
Sales
Royalties and fees $ 18,376 $ 13,853 $ 4,645
Licensing 1,777 4,028 1,610
------------------ ------------------ -----------------
Total Sales 20,153 17,881 6,255
------------------ ------------------ -----------------
Cost of sales 5,929 5,143 875
------------------ ------------------ -----------------
Gross Profit 14,224 12,738 5,380
------------------ ------------------ -----------------
OPERATING EXPENSES
Development, selling, general
and administrative 18,074 11,704 2,891
Provision for bad debts 3,290 1,734 250
Legal 974 2,082 198
Restructuring of operations (Note 15) 1,536 - -
Accrued settlement of legal issues (Note 12) 4,524 - -
Depreciation 2,610 2,011 997
Interest and bank charges 235 93 40
------------------ ------------------ -----------------
Total Operating Expenses 31,243 17,624 4,376
------------------ ------------------ -----------------
INCOME (LOSS) FROM OPERATIONS (17,019) (4,886) 1,004
OTHER INCOME 263 308 27
------------------ ------------------ -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (16,756) (4,578) 1,031
------------------ ------------------ -----------------
INCOME TAX EXPENSE (RECOVERY)
Current (Note 8) - (266) -
Deferred (Note 8) - 150 -
------------------ ------------------ -----------------
Total Income Taxes - (116) -
------------------ ------------------ -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (16,756) $ (4,462) $ 1,031
------------------ ------------------ -----------------
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Statements of Operations and
Other Comprehensive Income (Loss) (Continued)
(In Thousands of US $ except per share amounts)
<Table>
<Caption>
For the Years Ended
April 30,
---------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS OF THE ON-LINE INTER-
ACTIVE MEDIA DIVISION (LESS
APPLICABLE INCOME TAXES) (Note 13) $ - $ (355) $ 1,011
GAIN ON SALE OF THE ON-LINE
INTERACTIVE MEDIA DIVISION
(INCLUDING APPLICABLE INCOME
TAXES OF $-0-) (Note 13) - 1,562 -
------------------ ------------------ -----------------
NET INCOME (LOSS) FOR THE YEAR (16,756) (3,255) 2,042
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation (693) 33 (83)
------------------ ------------------ -----------------
Total Other Comprehensive Income
(Loss) (693) 33 (83)
------------------ ------------------ -----------------
NET COMPREHENSIVE INCOME (LOSS) $ (17,449) $ (3,222) $ 1,959
================== ================== =================
BASIC EARNINGS (LOSS) PER SHARE
FROM CONTINUING OPERATIONS $ (0.52) $ (0.16) $ 0.04
================== ================== =================
BASIC EARNINGS (LOSS) PER SHARE $ (0.52) $ (0.12) $ 0.09
================== ================== =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 32,201,181 29,625,460 22,951,546
================== ================== =================
DILUTED EARNINGS PER SHARE FROM
CONTINUING OPERATIONS $ - $ - $ 0.04
================== ================== =================
DILUTED EARNINGS PER SHARE $ - $ - $ 0.08
================== ================== =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING FOR
DILUTED EARNINGS PER SHARE - - 25,960,005
================== ================== =================
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-8
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Statements of Stockholders' Equity
For the Years Ended April 30, 1999, 2000 and 2001
(In Thousands of US $)
<Table>
<Caption>
Common Stock Accumulated
---------------------------- Other Retained
Subscription Deferred Comprehensive Earnings
Shares Amount Receivable Compensation Income (Loss) (Deficit)
------------- ------------ ------------- --------------- -------------- ------------
Balance, April 30, 1998 22,450,000 $ 2,421 $ - $ - $ 35 $ (1,158)
Shares issued for cash
pursuant to exercise of options 1,602,434 1,263 - - - -
Shares issued for cash
pursuant to exercise of
warrants 2,450,000 4,900 - - - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments - - - - (83) -
Net income for the year ended
April 30, 1999 - - - - - 2,042
------------- ------------ ------------- --------------- -------------- -----------
Balance, April 30, 1999 26,502,434 8,584 - - (48) 884
Shares issued for cash pursuant
to exercise of options 3,109,692 3,759 (381) - - -
Shares issued for cash pursuant
to exercise of warrants 2,450,000 9,800 - - - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments - - - - 33 -
Net loss for the year
ended April 30, 2000 - - - - - (3,255)
------------- ------------ ------------- --------------- -------------- -----------
Balance, April 30, 2000 32,062,126 22,143 (381) - (15) (2,371)
Shares issued for cash pursuant
to exercise of options 131,055 192 - - - -
Options issued below market value - 59 - (38) - -
Cash received on subscription
receivable - - 71 - - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments - - - - (693) -
Net loss for the year ended
April 30, 2001 - - - - - (16,756)
------------- ------------ ------------- --------------- -------------- -----------
Balance, April 30, 2001 32,193,181 $ 22,394 $ (310) $ (38) $ (708) $ (19,127)
============= ============ ============= =============== ============== ============
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-9
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Statements of Cash Flows
(In Thousands of US $)
<Table>
<Caption>
For the Years Ended
April 30,
-------------------------------------------------------
2001 2000 1999
----------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (16,756) $ (3,255) $ 2,042
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,610 1,665 706
Amortization of deferred website costs - 159 394
Amortization of software development costs - 611 189
Option based compensation expense 22 - -
Deferred income tax - 150 -
Write-off of long-term receivable 1,512 - -
Gain on disposal of fixed assets - (1,562) -
Changes in current assets and liabilities:
Decrease (increase) in reserves and deposits
with credit card processors 94 (2,520) (1,141)
Decrease (increase) in accounts receivable and employee
advances 515 242 (2,537)
Increase in prepaid expenses and deposits (39) (384) (87)
Decrease (increase) in other assets 1,049 75 (1,410)
Increase in accounts payable and accrued liabilities 6,368 3,687 851
Increase (decrease) in income taxes payable - (268) 193
Increase in funds held on deposit 1,334 1,129 1,043
Increase (decrease) in deferred revenue (137) (286) 48
----------------- --------------- ------------------
Net Cash Provided by (Used In) Operating
Activities (3,428) (557) 291
----------------- --------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (2,205) (4,428) (570)
Transfer from (to) restricted cash 3,040 (7,173) 500
Proceeds from sale of on-line entertainment assets - 1,944 -
Proceeds from sale of marketing assets - 109 -
Deferred website costs - - (423)
Software development costs - - (334)
----------------- --------------- ------------------
Net Cash Provided by (Used in) Investing Activities $ 835 $ (9,548) $ (827)
----------------- --------------- ------------------
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-10
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Consolidated Statements of Cash Flows (Continued)
(In Thousands of US $)
<Table>
<Caption>
For the Years Ended
April 30,
-------------------------------------------------------
2001 2000 1999
----------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Increase) decrease in bank indebtedness $ - $ - $ (466)
Increase in long-term receivable - (2,053) -
Payments received on long-term receivable 493 - -
Proceeds from issuance of shares 192 13,559 6,163
Proceeds from note payable 1,500 - -
Principal repayments under capital lease obligations (625) (471) (281)
----------------- --------------- ------------------
Net Cash Provided by Financing Activities 1,560 11,035 5,416
----------------- --------------- ------------------
EFFECT OF EXCHANGE RATES ON CASH (433) 54 (21)
----------------- --------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS DURING THE YEAR (1,466) 984 4,859
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 5,984 5,000 141
----------------- --------------- ------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,518 $ 5,984 $ 5,000
================= =============== ==================
Other non-cash transactions:
Leased assets acquired $ 1,001 $ 732 $ 685
Compensation from options issued below market value $ 59 $ - $ -
Supplemental cash flow information:
Interest paid $ 158 $ 84 $ 93
Income tax paid $ - $ 128 $ -
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-11
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
World Gaming Plc (formerly Starnet Communications International
Inc.) (the "Company") (Note 18) develops, operates and markets
proprietary software that is currently being used for on-line
gaming. The Company's revenues are earned from licensing fees,
service fees and royalties from licensees located outside North
America.
The Company also provided software for interactive media but the
division was sold in 2000 enabling the Company to focus on on-line
gaming. The results from the interactive media division are
classified as discontinued operations (Note 13).
NOTE 2 - ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. A summary of significant accounting
policies is set out below:
a. Basis of Presentation
The consolidated financial statements include the accounts of the
Company and all its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Unless otherwise stated, all amounts are in thousands of US
Dollars.
b. Revenue Recognition
Initial license fees of gaming software are recognized as revenue
upon the completion of the license sale transactions. Before the
revenues are recognized, deposits from licensees are recorded as
deferred revenue.
Gaming and monthly licensing royalty revenues and other fees are
recognized over the period services are provided.
Revenues from the resale of Antigua government issued gaming
licenses are recognized when collection is assured.
Gaming revenues, which represent less than 1% of total revenues,
are presented net of customer winnings.
c. Capital Assets
Property and equipment are recorded at cost and are depreciated or
amortized using the straight-line method over the estimated useful
life of the assets at the following rates:
<Table>
Furniture and fixtures 3 years
Computer hardware and equipment 3 years
Computer software 3 years
Automobiles 4 years
</Table>
F-12
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - ACCOUNTING POLICIES (Continued)
c. Capital Assets (Continued)
Leasehold improvements are amortized over the term of the related
lease using the straight-line method.
One-half of the normal depreciation rate is applied in the year of
acquisition or capitalization of the capital assets.
d. Cash and Cash Equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents consist of cash on hand, balances with banks,
available balances with credit card processors and investments in
money market instruments.
e. Foreign Currency Translation
All transactions in currencies other than the United States dollar
during the year are translated at the exchange rates on the
transaction dates. Monetary assets and liabilities denominated in
a foreign currency are translated at the prevailing year-end rates
of exchange. Exchange gains or losses are included in the
consolidated statements of income (loss) and retained earnings
(deficit).
The financial statements of all subsidiaries expressed in
currencies other than the United States dollar are translated. All
assets and liabilities are translated at the exchange rate on the
balance sheet date and all revenues and expenditures are
translated at the average rate for the year. Translation
adjustments are reflected as a separate component of stockholders'
equity.
f. Leases
Leases which transfer substantially all of the benefits and risks
of ownership are recorded as the acquisition of assets and
incurrence of obligations. Under this method of accounting, both
assets and obligations, including interest thereon, are amortized
over the life of the lease.
g. Advertising
The Company expenses the costs of advertising as incurred.
h. Net Earnings Per Common Share
The Company has adopted Statement of Financial Accounting
Standards No. 128 ("FAS 128") regarding the determination and
disclosure of earnings per share for the purpose of preparing its
financial statements. The calculations of net earnings per common
share are based upon the weighted average number of common shares
of the Company outstanding during each year.
The adoption of FAS 128 has no impact on previously reported
information.
F-13
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - ACCOUNTING POLICIES (Continued)
i. Stock Options
The Company has elected to follow Accounting Principles Board
Opinion No. 25 in accounting for stock based awards and
consequently has not recognized compensation expense for these
awards made during the year.
j. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
related notes to the consolidated financial statements. Actual
results may differ from those estimates.
k. Recent Accounting Pronouncements
The Company has adopted the provisions of FASB Statement No. 138
"Accounting for Certain Derivative Instruments and Hedging
Activities, (an amendment of FASB Statement No. 133.)" Because the
Company had adopted the provisions of FASB Statement No. 133,
prior to June 15, 2000, this statement is effective for all fiscal
quarters beginning after June 15, 2000. The adoption of this
principal had no material effect on the Company's consolidated
financial statements.
The Company has adopted the provisions of FASB Statement No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (a replacement of FASB Statement
No. 125.)" This statement provides accounting and reporting
standard for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on
consistent application of a financial-components approach that
focuses on control. Under that approach, the transfer of financial
assets, the Company recognized the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of this
principal had no material effect on the Company's consolidated
financial statements.
F-14
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - ACCOUNTING POLICIES (Continued)
k. Recent Accounting Pronouncements (Continued)
The Company has adopted the provisions of FIN 44 "Accounting for
Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25.)" This interpretation is
effective July 1, 2000. FIN 44 clarifies the application of
Opinion No. 25 for only certain issues. It does not address any
issues related to the application of the fair value method in
Statement No. 123. Among other issues, FIN 44 clarifies the
definition of employee for purposes of applying Opinion 25, the
criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and accounting for an exchange of stock compensation awards
in a business combination. The adoption of this principal had no
material effect on the Company's consolidated financial
statements.
l. Pronouncements Issued Not Yet Adopted
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, BUSINESS COMBINATIONS, and Statement
142, GOODWILL AND OTHER INTANGIBLE ASSETS, which will potentially
impact the Company's accounting for its intangible assets.
Statement 141:
o Eliminates the pooling method for accounting for business
combinations
o Requires that intangible assets that meet certain criteria be
reported separately from goodwill.
o Requires negative goodwill arising from a business
combination to be recorded as an extraordinary gain.
Statement 142:
o Eliminates the amortization of goodwill and other intangibles
that are determined to have an indefinite life.
o Requires, at a minimum, annual impairment tests for goodwill
an other intangible assets that are determined to have an
indefinite life.
Upon adoption of these Statements, the Company is required to:
o Re-evaluate goodwill and other intangible assets that arose
from business combinations entered into before July 1, 2001.
If the recorded other intangibles assets do not meet the
criteria for recognition, they should be reclassified to
goodwill. Similarly, if there are other intangible assets that
meet the criteria for recognition but were not separately
recorded from goodwill, they should be reclassified from
goodwill.
F-15
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 2 - ACCOUNTING POLICIES (Continued)
l. Pronouncements Issued Not Yet Adopted (Continued)
o Reassess the useful lives of intangible assets and adjust the
remaining amortization periods accordingly.
o Write-off any remaining negative goodwill.
The Company has not yet completed its full assessment of the
effects of these new pronouncements on its financial statements
and so is uncertain as to the impact. The standards generally are
required to be implemented by the Company in its 2002 financial
statements.
m. Reclassifications
Certain prior year amounts have been reclassified to conform to
2001 presentations.
NOTE 3 - RESERVES AND DEPOSITS WITH CREDIT CARD PROCESSORS
Reserves and deposits with credit card processors consist of
rolling reserves held by merchant banks and funds for transactions
processed and awaiting transfer to the Company's bank accounts. At
April 30, 2001 and 2000, the balance of these reserves and
deposits were $3,763 and $3,857, respectively.
NOTE 4 - ACCOUNTS RECEIVABLE
<Table>
<Caption>
Accounts receivable consist of the following:
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Amounts due from licensees $ 1,596 $ 3,174
Income tax receivable (Note 8) 123 128
Other 648 413
Less: allowance for bad debts (891) (1,707)
------------------ ------------------
$ 1,476 $ 2,008
================== ==================
</Table>
The Company incurred significant credit losses during the year as
a result of the ongoing investigation into the business operations
of the Company by the Canadian authorities. These amounts have
been fully reserved for.
NOTE 5 - DEFERRED GAMING LICENSE COSTS
Deferred gaming license costs of $300 (2000 - $1,349) relate to
amounts paid to the Antiguan government for the purchase of casino
licenses. These licenses are held for sale to prospective
licensees.
F-16
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 6 - RESTRICTED CASH
<Table>
<Caption>
April 30,
---------------------------------------
2001 2000
----------------- -----------------
Funds restricted by Canadian Authorities (Note 17) $ 3,925 $ 7,024
================= =================
</Table>
The balance is classified as current at April 30, 2001 because the
lawsuit was settled and the funds were used to pay off a current
liability.
Subsequent to year end, $3,602 of the funds previously restricted
by the Canadian authorities was released and is included in cash
and cash equivalents.
NOTE 7 - CAPITAL ASSETS
Capital assets are recorded at cost less accumulated depreciation
and consist of the following:
<Table>
<Caption>
Accumulated Net Book
Cost Depreciation Value
--------------- ------------- -------------------
APRIL 30, 2001
Computer hardware and equipment $ 5,246 $ 2,911 $ 2,335
Computer hardware under capital
leases 1,626 487 1,139
Automobiles under capital leases 114 42 72
Leasehold improvements 459 100 359
Furniture and fixtures 352 160 192
Computer software 2,176 1,061 1,115
Domain name 45 18 27
--------------- --------------- -----------------
$ 10,018 $ 4,779 $ 5,239
=============== =============== =================
APRIL 30, 2000
Computer hardware and equipment $ 3,298 $ 1,140 $ 2,158
Computer hardware under capital
leases 1,174 734 440
Automobiles 202 44 158
Leasehold improvements 509 220 289
Furniture and fixtures 203 97 106
Computer software 2,074 393 1,681
Domain name 45 9 36
--------------- --------------- -----------------
$ 7,505 $ 2,637 $ 4,868
=============== =============== =================
</Table>
F-17
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 8 - INCOME TAXES
The Company's operations located in Canada are subject to tax to
the extent that income is generated in the country. In 2001 and
2000, the losses related to development activities allow a
recovery of tax previously paid:
<Table>
<Caption>
For the Years Ended
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Tax payable (receivable) - beginning of year $ (128) $ 268
Provision for (recovery of) current income tax - (266)
Payments of tax - (128)
Difference due to exchange rate 5 (2)
------------------ ------------------
Tax receivable - end of year (Note 4) $ (123) $ (128)
================== ==================
Deferred asset - beginning of year $ - $ (146)
Deferred income tax expense - 150
Difference due to exchange rate - (4)
------------------ ------------------
Deferred income tax asset, end of year $ - $ -
================== ==================
</Table>
At April 30, 2001, the Company had net operating loss
carryforwards in its Canadian companies of approximately $4,940
that may be offset against future taxable income in Canada through
2008. No tax benefit has been reported in the consolidated
financial statements as the Company believes that the
carryforwards may expire unused. Accordingly, the potential tax
benefits of the net operating loss carryforwards are offset by a
valuation allowance of the same amount.
The income tax benefit differs from the amount computed at income
tax rates of approximately 45% as follows:
<Table>
<Caption>
For the Years Ended
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Income tax benefit at statutory rate $ 1,465 $ 760
Change in valuation allowance (1,465) (760)
------------------ ------------------
$ - $ -
================== ==================
</Table>
<Table>
<Caption>
Deferred tax assets (liabilities) are comprised of the following:
For the Years Ended
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Income tax benefit at statutory rate $ 2,225 $ 760
Change in valuation allowance (2,225) (760)
------------------ ------------------
$ - $ -
================== ==================
</Table>
NOTE 9 - FUNDS HELD ON DEPOSIT
As of April 30, 2001, the Company held $3,452 (2000 - $2,118) in
cash representing funds held on deposit in the form of e-cash
balances. These deposits are non-interest bearing and repayable on
demand.
F-18
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 10 - CAPITAL LEASE OBLIGATIONS
At April 30, 2001, the Company had entered into capital leases
for equipment and automobiles. The future payments for the 12
months ended April 30 are:
<Table>
2002 $ 808
2003 502
2004 143
2005 13
2006 6
------------------
Total minimum lease payments 1,472
Less amounts representing interest at rates varying
from 6% to 18% (188)
------------------
Present value of minimum lease payments 1,284
Current portion of capital lease obligations (677)
------------------
$ 607
==================
</Table>
Some of the equipment leases require the Company to pledge term
deposits for $89 (2000 - $210). The term deposits will be
returned upon the expiration of the leases and are interest
bearing.
NOTE 11 - CAPITAL STOCK
Authorized
100,000,000 Class A voting common shares, par value $0.001
50,000,000 Class B nonvoting common shares, par value $0.001
50,000,000 Preferred shares, par value $0.001
<Table>
<Caption>
(a) The Company had the following shares and warrants issued and outstanding:
2001 2000
--------------------------------- ---------------------------------
Shares Amount Shares Amount
---------------- --------------- --------------- ----------------
Outstanding Class A
shares, beginning of
year 32,062,126 $ 22,143 26,502,434 $ 8,584
Options issued below
market value - 59 - -
Shares issued for cash
pursuant to exercise
of options 131,055 192 3,109,692 3,759
Shares issued for cash
pursuant to exercise
of warrants - - 2,450,000 9,800
---------------- --------------- --------------- ----------------
Outstanding Class A
shares, end of year 32,193,181 $ 22,394 32,062,126 $ 22,143
================ =============== =============== ================
</Table>
F-19
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 11 - CAPITAL STOCK (Continued)
On December 2, 1997, the Company completed an offering of
2,450,000 units at $1.00 per unit. Each unit consisted of one
Class A voting common share and a single warrant exercisable at
$2.00. Each warrant exercised at $2.00 entitled the purchaser to
one Class A voting common share and a second warrant (the
"Piggyback Warrant"). Each Piggyback Warrant was exercisable,
within one year of the Piggyback Warrant being issued, at $4.00.
The exercising of the Piggyback Warrant entitled the purchaser to
one share of common stock.
During the year ended April 30, 1999, all 2.45 million warrants
at $2.00 had been exercised. During the year ended April 30,
2000, all of the 2.45 million Piggyback Warrants were exercised
at $4.00 for total proceeds of $9.8 million.
(b) Stock Options
On March 12, 1998, the Board of Directors approved a stock option
plan, which authorized the issuance of 3,000,000 options to
employees of the Company and its subsidiaries at an exercise
price of $0.74. The options expire on January 1, 2008. On
December 31, 1998, the Board of Directors authorized the issuance
of up to 4,000,000 additional options at an exercise price to be
determined based on the trading price of the Company's shares on
the grant date. On December 23, 1999, the Board of Directors
authorized the issuance of up to 5,000,000 additional options at
an exercise price to be determined based on the trading price of
the Company's shares on the grant date.
Options issued to employees generally vest straight-line on a
monthly basis over two years while options issued to directors
vest one-half immediately and one-half after one year. Options
expire ten years after the date granted. As at April 30, 2001,
7,128,995 shares were reserved for issuance pursuant to the
exercise of options.
A summary of the Company's stock option activity and related
information follows:
<Table>
<Caption>
2001 2000
--------------------------------- ---------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
---------------- --------------- --------------- ----------------
Outstanding at May 1 5,244,724 $ 2.99 5,136,795 $ 1.45
Granted 4,296,371 2.47 3,719,900 3.67
Exercised (131,055) 1.47 (3,109,692) 1.21
Forfeited (1,610,583) 3.19 (502,279) 3.04
---------------- --------------- --------------- ----------------
Outstanding at April 30, 7,799,457 $ 2.64 5,244,724 $ 2.99
================ =============== =============== ================
</Table>
F-20
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 11 - CAPITAL STOCK (Continued)
At April 30, 2001, options outstanding were as follows:
<Table>
<Caption>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Prices Options Life (Years) Price Options Price
-------------------- ------------- ------------- ---------------- --------------- ---------------
$0.31 - $1.43 1,708,893 9.8 $ 0.49 714,908 $ 0.38
$1.44 - $2.50 1,241,116 8.1 1.74 1,058,356 1.65
$2.51 - $5.99 4,336,884 8.9 3.13 3,196,244 3.09
$6.00 - $11.00 469,696 9.7 7.36 83,044 7.86
$11.01 - $23.06 42,868 8.1 13.73 40,222 13.70
-------------------- ------------- --------------- ---------------- --------------- ---------------
$0.31 - $23.06 7,799,457 9.5 $ 3.14 5,092,774 $ 3.07
==================== ============= =============== ================ =============== ===============
</Table>
c. Accounting for Stock Based Compensation
The Company has adopted the disclosure-only provisions of FAS
123, Accounting for "Stock-Based Compensation". Accordingly, no
compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards
in 2001 and 2000 consistent with the provisions of SFAS No. 123,
the Company's loss and loss per share would have been increased
to the pro forma amounts indicated below:
<Table>
<Caption>
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Net income (loss) as reported $ (16,756) $ (3,255)
Pro forma net income (loss) under FAS 123 (19,455) (3,255)
Net income (loss) per share - basic, as reported (0.52) (0.16)
Pro forma net income (loss) per share - basic,
under FAS 123 (0.60) (0.16)
Net income (loss) per share - diluted, as reported - -
Pro forma net income (loss) per share - diluted,
under FAS 123 - -
</Table>
For purposes of pro forma disclosures, the estimated fair value
of options granted is amortized to expense over a 2 year period.
The fair value of option grants is estimated on the date of grant
using the Black-Scholes option-pricing model discounted for lack
of liquidity with the following weighted-average assumptions.
<Table>
<Caption>
April 30,
--------------------------------------
2001 2000
------------------ ------------------
Dividend yield 0% 0%
Expected volatility 171% 219%
Risk-free interest rate 5.98% 5.08%
Expected lives 2 years 2 years
</Table>
F-21
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At April 30, 2001, the Company has entered into commitments for
leases for premises and equipment. The future payments for the 12
months ended April 30 are:
<Table>
2002 $ 386
2003 386
2004 386
2005 379
2006 32
------------
$ 1,569
============
</Table>
On August 20, 1999, the Royal Canadian Mounted Police (RCMP)
obtained a search warrant and searched the Vancouver, Canada
offices of Starnet Communications Canada, Inc., a subsidiary of
the company. The basis for the search and continuing
investigation ("the Investigation") was the allegation of the
RCMP that the Company and some of its officers, directors and
employees were breaching certain gaming provisions contained in
the Criminal Code of Canada.
On August 25, 1999, the RCMP obtained an ex parte restraint order
pursuant to the provisions of the Criminal Code of Canada. This
order prevents the Company and Starnet Systems International Inc.
from accessing certain funds located in their Canadian bank
accounts. In September 1999, the Company brought an application
to have the restraint order revoked. This application was
unsuccessful. On February 24, 2000, the restraint order was
renewed for a further six months.
As of April 30, 2001, the Company has accrued a liability of
$4,000 for the settlement of the Investigation and is included in
the accrued settlement of legal issues account on the balance
sheet. The Investigation was settled and completed subsequent to
year end (see Note 18).
Between October 15, 1999 and December 9, 1999, ten class action
claims were commenced in the United States against the Company
and some of its directors and officers. These class action
lawsuits allege that material misrepresentations regarding the
nature and inherent risks of the Company's business were
knowingly made in filings to the United States Securities and
Exchange Commission, press releases and other public statements.
The amount of the damages claimed is unspecified. These actions
have now been consolidated in a single proceeding.
On June 20, 2001, the parties signed a Memorandum of
Understanding (MOU) containing the essential terms of a
settlement between the Company and the Plaintiffs. Under the MOU,
the Plaintiffs will receive 1,050,000 shares of the Company's
common stock. In addition, the Company will pay certain
administrative expenses and expenses incurred by Plaintiff's
co-lead counsel up to $100. As of April 30, 2001, the Company has
accrued a liability for this class action lawsuit in the amount
of $1,409 consisting of the value of the shares on June 20, 2001
(1,050,000 shares at $1.21 per share), the additional expenses up
to $100 and an estimated $39 of additional legal expense. The
amount is included in the accrued settlement of legal issues
account. See Note 18 for additional explanations.
F-22
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
On September 16, 1999, Las Vegas Casino Inc. ("LVC") commenced an
action against the Company, a number of its subsidiaries and
various employees of the Company and its subsidiaries. LVC
alleges that the Company breached and wrongfully terminated its
license agreement and misappropriated $15 million from LVC, and
that LVC lost gambling revenues in the amount of $1 billion as a
result of the breach and wrongful termination. LVC had previously
entered into a license agreement with Starnet Systems
International Inc. ("Starnet Systems"). Starnet Systems
terminated the license agreement because of LVC's non-payment of
its royalty fees.
On July 12, 2000, the Supreme Court of British Columbia granted a
stay of the lawsuit as against Starnet Systems only. Should LVC
wish to proceed with its claim against Starnet Systems, it must
do so through the arbitration process provided for in the
software license agreement. LVC has not yet taken any steps to do
so. The Company filed a motion with the Supreme Court of British
Columbia to require LVC to post security for costs sought against
the Company. The court denied the Company's motion on February
22, 2001, while allowing the Company the opportunity to reapply
as it may wish. At the present time, the Company believes that
these allegations are without merit and management has been
unable to determine the likely outcome. Consequently, no
provision for loss has been made.
NOTE 13 - SALE OF BUSINESS SEGMENTS
a. Marketing Department
On February 18, 2000, the Company sold certain assets to a group
of former employees who were previously employed in the marketing
department. The Company also entered into an agreement whereby
the new company would employ a number of employees comprising the
marketing department of the Company and provide marketing
services to the Company for a period of three years.
The assets with a net book value of $109 were sold for total
consideration of $109 consisting of a promissory note. The amount
is subject to interest at a rate of 5% per annum and is repayable
in 36 installments of $3 per month, ending February 2003. There
was no gain or loss recorded on the transaction.
<Table>
Total consideration $ 109
Net book value of assets sold $ 109
Net gain or loss $ -
</Table>
F-23
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 13 - SALE OF BUSINESS SEGMENTS (Continued)
b. On-line Entertainment Division
On March 31, 2000, the Company sold certain assets, consisting
primarily of computer equipment, furniture, and website URL
domain names, for total consideration of $2,300. The amount is
payable over a three year period, including a down payment upon
closing of $460, and is non-interest bearing. The Company has
recorded an 8% discount on the total amount receivable amounting
to $356. The minimum monthly payment is $10 but at such time that
the cumulative net profit of the business, before tax, amounts to
$460, the remaining amount, less a $700 final payment due on July
1, 2003, will be paid in equal monthly installments from that
date until July 1, 2003 at which time any remaining amount will
be due. The parties have also entered into an escrow agreement
whereby the URL domains will be used as security until the
purchase price is paid in full.
The gain of $1,562 during the year ended April 30, 2000 is
calculated as follows:
<Table>
Total sale price $ 2,300
Discount at 8% (356)
------------------
1,944
Exchange rate difference 16
Net book value of assets sold (398)
------------------
Net gain on sale $ 1,562
==================
</Table>
The following is a summary of the discontinued operations for the
years ended April 30.
<Table>
2001 2000 1999
------------------ ------------------ ------------------
Sales $ - $ 2,705 $ 3,518
Cost of sales - 1,586 1,321
General and administrative - 1,175 860
Depreciation and amortization - 299 224
Interest and bank charges - - 69
Income tax - - 33
------------------ ------------------ ------------------
Income (loss) from discontinued
operations $ - $ (355) $ 1,011
================== ================== ==================
</Table>
No income tax expense or benefit has been attributed to the
discontinued operations.
F-24
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 14 - LONG-TERM RECEIVABLES
Payments due to the Company under the long-term receivables for
the twelve months ended April 30 are:
<Table>
<Caption>
2001
------------------
2002 $ 259
2003 170
2004 1,444
2005 -
------------------
Total minimum payments 1,873
Less: interest portion (341)
------------------
Present value of minimum payments 1,532
Less: allowance for bad debts (1,532)
------------------
Total $ -
==================
</Table>
The long-term receivables related to the sale of business
segments (Note 13).
NOTE 15 - RESTRUCTURING OF OPERATIONS
The restructuring expense consists of:
<Table>
Termination benefits - January 2001 $ 299
Termination benefits - April 2001 1,179
Other restructuring costs - April 2001 58
------------------
$ 1,536
==================
</Table>
In January 2001, the Company terminated 26 employees at a cost of
$299 at its development office in Vancouver, Canada. The
employees affected were in the areas of management,
administration, and operational support.
In April 2001, the Company restructured its operations in both
St. John's, Antigua and Vancouver, Canada to decrease its costs
by reducing inefficiencies and eliminating duplicated functions.
Reductions in staff were made throughout the organization and
included management and administration, sales, marketing,
development, and operations. A total of 29 staff were terminated,
11 in Antigua and 18 in Canada, for a total cost of $1,179.
The Company has accrued a further $58 for costs associated with
downsizing the physical requirements of the reduced staffing
levels.
Of the total amount expensed, $1,276 remains accrued at April 30,
2001 and is included in the accounts payable and accrued
liabilities.
F-25
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 16 - NOTE PAYABLE
Note payable consists of the following:
<Table>
<Caption>
April 30,
2001
------------------
Note payable to a company, interest at 8.0% per annum, payable
monthly; principal balance due December 31, 2001 and is
convertible into common shares of the Company at the option of
the note holder; secured by equipment
of the Company. $ 1,500
------------------
Total Note Payable $ 1,500
==================
</Table>
The note payable is classified as long-term because it was
converted to equity subsequent to the year end (see Note 18).
NOTE 17 - MAJOR CUSTOMERS
Pertinent details of the gross sales to major customers during
the year ended April 30, 2001 are as follows:
<Table>
<Caption>
Percent
Customer Gross Sales Gross Sales
--------------------------------- ------------------ ------------------
Customer A $ 6,338 31%
Customer B 2,786 14%
Customer C 1,973 10%
------------------ ------------------
$ 11,097 55%
================== ==================
</Table>
NOTE 18 - SUBSEQUENT EVENTS
CORPORATE REORGANIZATION
On May 25, 2001, pursuant to an Agreement and Plan of
Reorganization executed on May 17, 2001 ("Reorganization
Agreement"), Starnet Communications International Inc.
("Starnet") became a direct, wholly-owned subsidiary of World
Gaming Plc ("World Gaming"), a company organized in England and
Wales for the purpose of facilitating the reorganization of
Starnet into a new holding company structure ("Reorganization").
In the Reorganization, each share of Class A common stock of
Starnet issued and outstanding was converted into one American
Depositary Share of World Gaming ("ADS"), where each ADS
represents one ordinary share of World Gaming. The Reorganization
was effected by merging a newly-formed direct, wholly-owned
Delaware subsidiary of World Gaming with and into Starnet with
Starnet surviving. As part of the reorganization, World Gaming
established December 31 as its year end.
F-26
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
NOTE 18 - SUBSEQUENT EVENTS (Continued)
CONVERSION OF NOTE PAYABLE
On May 17, 2001, the holder of the note payable (Note 16) agreed
to convert the principal balance of $1,500 into 2,000,000 shares
of the Company. Consequently, the note is deemed to have been
repaid in all respects, and the Company has no further obligation
with respect to the note, including any interest that may have
been payable under the original terms of the note.
SETTLEMENT OF INVESTIGATION
On August 17, 2001, the Company reached a settlement with
Canadian authorities whereby a subsidiary of the Company plead
guilty to a single charge under the Criminal Code of Canada. The
subsidiary was fined $100 CDN plus $15 CDN victim surcharge. As
well, the Company consented to a forfeiture of restricted cash
(Note 6) in the amount of $3,925 US. The amount of the settlement
is included in the accrued settlement of legal issues liability
on the balance sheet at April 30, 2001.
MEMORANDUM OF UNDERSTANDING IN CLASS ACTION LAWSUIT
On June 20, 2001, the parties signed a Memorandum of
Understanding (MOU) containing the essential terms of a
settlement between the Company and the Class Action Plaintiffs
(Class) (see Note 12). Under the MOU, the Class will receive
1,050,000 shares of ADRs of World Gaming Plc ("Settlement
Shares") with a minimum value of $1,050,000. If in the 10 trading
days preceding the effective date of the settlement the weighted
mean trading price (as calculated by a formula in the MOU) of the
shares of ADRs of World Gaming is less than $1.00 per share, the
Class will receive additional shares so that the value of the
Settlement Shares equals $1,050,000. Also under the Settlement,
the Company will pay certain administrative expenses, up to
$50,000, and certain expenses incurred by Plaintiffs' Co-Lead
Counsel, up to $50,000. The Plaintiffs have the right to conduct
limited confirmatory discovery of the Company.
The Settlement is conditioned upon the occurrence of several
events. The parties must draft a mutually acceptable Stipulation
of Settlement to be filed with the Court. The Court must give
preliminary approval to the terms of the Settlement. Notice must
be sent to the class members advising them of the terms of the
Settlement and of their right to opt out or object to the terms
of the Settlement. Finally, the Court must approve the Settlement
after holding a hearing on its terms. In addition, the Settlement
is conditioned on the issuance of the ordinary shares of World
Gaming Plc underlying the Settlement Shares. The Company has the
right under the MOU to withdraw from the Settlement in the event
that members of the Class holding more than 3% of the outstanding
shares of ADRs of World Gaming Plc outstanding as of the date the
settlement is filed determine to opt out of the Settlement.
F-27
<Page>
WORLD GAMING PLC
(Formerly Starnet Communications International Inc.)
Notes to Consolidated Financial Statements
April 30, 2001, 2000 and 1999
<Table>
NOTE 19 - FOURTH QUARTER LOSS RECONCILIATION
Pursuant to APB 28, "Interim Financial Reporting", the following
is a reconciliation of the net loss as reported in the Company's
January 31, 2000 consolidated financial statements to the net
loss as recorded at April 30, 2001.
Net loss reported January 31, 2001 $ (3,284)
4th quarter accrual for settlement of RCMP Investigation (3,482)
4th quarter accrual for memorandum of understanding for
settlement of the class action lawsuit (1,042)
4th quarter accrual for restructuring charges (1,237)
4th quarter adjustment to funds held on deposit (1,097)
4th quarter provision for bad debts (3,150)
Other 4th quarter adjustments including redomiciling costs
and general loss from operations in the 4th quarter. (3,464)
------------------
Net loss reported April 30, 2001 $ (16,756)
==================
</Table>
F-28
<Page>
SIGNATURES
----------
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: October 31, 2001 WORLD GAMING PLC
Date: October 31, 2001 By: /s/ MICHAEL AYMONG
-------------------------------------------------
Michael Aymong
President, Chief Executive Officer and Director
Date: October 31, 2001 By: /s/ RODNEY DAVIS
-------------------------------------------------
Rodney Davis
Chief Financial Officer, Vice-President, Finance
Date: October 31, 2001 By: /s/ CLARE ROBERTS
-------------------------------------------------
Clare Roberts
Director
Date: October 31, 2001 By: /s/ NICHOLAS JACKSON
-------------------------------------------------
Nicholas Jackson
Director
Date: October 31, 2001 By: /s/ JASON BOLDUC
-------------------------------------------------
Jason Bolduc
Director
Date: October 31, 2001 By: /s/ WOLF BERGELT
-------------------------------------------------
Wolf Bergelt
Director
Date: October 31, 2001 By: /s/ FRED HAZELL
-------------------------------------------------
Fred Hazell
Director