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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 December 31, 2002
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
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(Exact Name of Registrant as Specified in Its Charter)
England and Wales
(Jurisdiction of Incorporation or Organization)
47 Castle Street
Reading, England
Tel: (268) 480-1650 Fax: (268) 480-1656
(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 December 31, 2002, the Registrant had 34,193,182 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 DECEMBER 31, 2002
TABLE OF CONTENTS
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...........................................................................11
History and Development.............................................................................11
Our Operations......................................................................................12
Restructuring of Operations.........................................................................13
Business Strategy...................................................................................14
Marketing...........................................................................................14
Competitive Environment.............................................................................15
Intellectual Property...............................................................................15
Technology..........................................................................................15
Products and Services...............................................................................17
Gaming Products Under Development...................................................................18
Our Licensees.......................................................................................19
Organizational Structure............................................................................20
Government Licensing and Regulation and Related Risks...............................................22
Property, Plants and Equipment......................................................................24
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................................................24
Change in Fiscal Year...............................................................................25
Results of Operations...............................................................................25
Operating Results for Fiscal 2002...................................................................26
Operating Results for Fiscal 2001...................................................................28
Liquidity and Capital Resources.....................................................................29
Research and Product Development....................................................................31
Trend Information...................................................................................31
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................................................31
Directors and Senior Management.....................................................................31
Background Information Concerning Directors.........................................................32
Background Information Concerning Senior Management and Certain Key Employees.......................33
Compensation........................................................................................34
World Gaming plc 2001 Share Option Plan.............................................................38
Board Practices.....................................................................................39
Committees of the Board of Directors................................................................39
Employees...........................................................................................40
Share Ownership of Senior Management and Directors..................................................40
i
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................................................41
Major Shareholders..................................................................................41
Related Party Transactions..........................................................................42
Item 8. FINANCIAL INFORMATION................................................................................43
Consolidated Financial Statements...................................................................43
Legal Proceedings...................................................................................43
Dividend Policy.....................................................................................45
Significant Changes.................................................................................45
Item 9. THE OFFER AND LISTING................................................................................45
Nature of Trading Market............................................................................45
Registrar, Transfer Agent and Depositary............................................................47
Item 10. ADDITIONAL INFORMATION..............................................................................47
Memorandum of Association and Articles of Association...............................................47
Board Action and Powers.............................................................................47
Description of Share Capital........................................................................49
Exchange Controls and Other Limitations Affecting Security Holders..................................54
Change of Control...................................................................................54
Material Contracts..................................................................................54
Employment and Consulting Agreements................................................................57
Taxation............................................................................................61
United Kingdom Tax Consequences.....................................................................61
United States Federal Income Tax Consequences.......................................................65
Tax Consequences for U.S. Holders...................................................................65
Tax Consequences for Non-U.S. holders...............................................................71
Taxation of the Company.............................................................................72
Documents on Display................................................................................72
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................72
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............................................73
PART II..........................................................................................................73
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES......................................................73
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS........................73
Material Modifications to the Rights of Security Holders............................................73
Use of Proceeds from Offering.......................................................................73
Item 15. CONTROLS AND PROCEDURES.............................................................................73
PART III.........................................................................................................74
Item 17. FINANCIAL STATEMENTS................................................................................74
Item 18. FINANCIAL STATEMENTS................................................................................74
Item 19. EXHIBITS............................................................................................74
ii
CERTAIN DEFINITIONS AND CONVENTIONS
IN THIS ANNUAL REPORT, REFERENCES TO THE "COMPANY", "OUR COMPANY,"
"WORLD GAMING," "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 EFFECTED 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.
1
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 our independent auditors, Baker Tilly, as of and
for the year ended December 31, 2002; by HJ & Associates, our prior independent
auditors as of and for the eight months ended December 31, 2001 and as of and
for the years ended April 30, 2001 and 2000; and by Ernst & Young, our prior
independent auditors, as of and for the year ended April 30, 1999. The selected
financial data for the financial years ended April 30, 2000, 1999 and 1998 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 per share information, is in thousands of
U.S. dollars.
EIGHT MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31 FOR THE YEARS ENDED APRIL 30,
--------------------- -------- -----------------------------------------------
2002 2001* 2001 2001 2000 1999 1998
(UNAUDITED)
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
Net sales .............. $ 16,777 $ 18,175 $ 12,107 $ 20,153 $ 17,881 $ 6,255 $ 257
Income (loss) from
operations .......... (5,410) (16,465) (2,371) (17,019) (4,886) 1,004 (746)
Income (loss) from
continuing operations (5,318) (16,277) (2,236) (16,756) (4,462) 1,031 (818)
Income (loss) from
operations per share (0.16) (0.49) (0.07) (0.52) (0.17) 0.04 (0.04)
Income (loss) from
continuing
operations per share (0.16) (0.50) (0.07) (0.52) (0.16) 0.04 (0.04)
Basic Income (loss) .... (0.16) (0.50) (0.07) (0.52) (0.12) 0.094 (0.054)
Weighted average number
of shares (in
thousands) .......... 34,193 33,442 33,997 32,201 29,625 22,952 21,003
Diluted earnings per
share ............... $ - $ - $ - $ - $ - $ 0.08 $ -
Cash dividends declared
per common share .... $ - $ - $ - $ - $ - $ - $ -
2
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* IN CONNECTION WITH THE COMPANY'S HOLDING COMPANY REORGANIZATION ON MAY 17,
2001, THE COMPANY CHANGED ITS FISCAL YEAR END FROM APRIL 30 TO DECEMBER 31.
ALTHOUGH THE COMPANY HAS INCLUDED FINANCIAL INFORMATION FOR THE YEAR ENDED APRIL
30, 2001 AND EIGHT MONTHS ENDED DECEMBER 31, 2001, THE COMPANY HAS ALSO INCLUDED
UNAUDITED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2001 FOR
COMPARATIVE PURPOSES.
Selected balance sheet data as at December 31 and April 30 for the
years indicated (in thousands of U.S. dollars):
AS OF DECEMBER 31, AS OF APRIL 30,
------------------- ------------------------------------
2002 2001 2001 2000 1999 1998
-------- ------- ------- ------- ------- ------
BALANCE SHEET DATA:
Total assets ...... $ 8,377 $12,181 $20,188 $27,983 $13,439 $3,275
Net assets ........ (3,545) 1,686 2,211 19,376 9,420 1,298
Debt obligations .. 3,804 1,083 2,784 979 818 419
Capital stock ..... 24,192 24,188 22,394 22,143 8,584 2,421
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN MAKING AN
INVESTMENT DECISION REGARDING OUR 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 have experienced net losses from continuing operations of
approximately $5.2 million for the year ended December 31, 2002. Our independent
auditors have noted that we have accumulated significant losses, have negative
working capital and a deficit in stockholders' equity, all of which the
independent auditors believe raises concern about our ability to continue as a
going concern. 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,
on management's ability to control our operating expenses. In addition, our
future success will depend upon many factors, including those which may be
beyond control or which cannot be predicted at this time, such as the emergence
of additional competitors, further 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 achieve profitability.
3
WE HAVE ONE CUSTOMER WHO ACCOUNTS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES, AND THE LOSS OF THIS CUSTOMER WOULD SIGNIFICANTLY IMPACT OUR
CASH FLOW.
The Company's largest licensee accounts for 67% of the Company's
consolidated revenues for the year ended December 31, 2002. The loss of this
licensee would materially and adversely affect the Company's business, financial
condition, results of operations and cash flow.
WE MAY NEED ADDITIONAL FINANCING AND THERE IS NO ASSURANCE IT CAN BE
OBTAINED.
Although we have recently completed a financing on April 4, 2003 which
was subsequent to the fiscal year ended December 31, 2002, we continue to have
insufficient capital to meet our future development plans for new gaming
products, and management believes the Company may 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 further 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 and continue
to improve our products.
WE HAVE BEEN INVOLVED IN CIVIL AND IN THE PAST CRIMINAL LITIGATION,
WHICH HAS RESULTED IN SIGNIFICANT EXPENSES AND OTHER CONSEQUENCES.
We are presently involved in several significant lawsuits. We could
lose these pending lawsuits and be 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. In accordance
with a court-approved settlement of the class action lawsuit, we issued
6,506,204 American Depositary Shares in March 2003. There is a risk that the
Company or its subsidiaries could 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).
WE HAVE EXPERIENCED TURNOVER AMONG OUR SENIOR MANAGEMENT AND DIRECTORS.
Several of our senior management including the Chairman of the Board,
the Chief Executive Officer, and the Chief Financial Officer have recently
resigned during the first five months of 2003. Effective in April 2003, an
aggregate of four new members were added to the Board of Directors as well as a
new Chief Executive Officer. During June 2003, one of the recent additions to
the Board of Directors resigned. Such senior management turnover may affect our
earnings, product development schedules, and relationships with our customers
and licensees. While we believe otherwise, there is a risk that we will continue
to experience the senior management turnover and would not be able to attract
and keep the experienced senior personnel necessary for our stability and
development.
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 over extended time. Although it is likely
that a downturn in the economy may have a negative impact on our revenues, the
extent of such impact is uncertain. The U.S. economy and the economy of many
other nations are in recession. If consumer confidence does not rise and the
economies of the U.S. and other nations continue to experience further recession
or deflation and do not show signs of recovery in the near future, we could lose
a significant portion of our business and revenues.
4
WE MAY BE SUBJECT TO REGULATION OR PROHIBITION OF INTERNET GAMING IN
CERTAIN JURISDICTIONS, INCLUDING THE UNITED STATES, WHICH COULD HAVE A
SIGNIFICANT ADVERSE EFFECT ON OUR BUSINESS.
The licensees of our software products, and our 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. Such issues have not been tested by the
courts of jurisdictions in which the company conducts its business. The
uncertainty surrounding the regulation of Internet gaming could have a material
adverse effect on our business, revenues, operating results and financial
condition.
There is a risk that criminal and civil proceedings could be initiated
in various jurisdictions against our licensees, or even the Company, and such
proceedings could involve substantial litigation expense, penalties, fines,
diversion of the attention of key executives, injunctions or other prohibitions
being invoked against our licensee or us. 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 including taxation which could
impact our financial position. 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.
The Company and the industry as a whole are under threat from certain
factions within the U.S. Congress that seek to ban certain Internet gambling.
Although many of the prior attempts to enact legislation have failed, on 10 June
2003, the Unlawful Internet Gambling Funding Prohibition Act (HR 2143) was
passed by the U.S. House of Representatives. This bill was introduced by Rep.
Spencer Bachus, (R-Ala) with the intent of making it illegal to use credit
cards, wire transfers and other banking instruments to deposit into accounts for
Internet gambling activities. The legislation has now moved to the U.S. Senate
for consideration. IF THIS LEGISLATION PASSES AND BECOMES LAW, IT WOULD HAVE AN
IMMEDIATE DETRIMENTAL EFFECT ON THE INDUSTRY AND WOULD POSE A SERIOUS THREAT TO
THE COMPANY'S CONTINUED OPERATION. (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 offering
gaming software technology 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 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 provided to our licensees 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.
5
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 ("bugs") 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 COMPUTER SYSTEMS FACE ONLINE SECURITY RISKS.
Despite the implementation of security measures by the Company, 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 major credit cards (i.e., Visa and MasterCard) such as
MBNA, Bank of America, Chase Manhattan Bank and Citibank have announced that
they will decline authorization to U.S. persons who try to use their credit
cards for online gaming. Non-U.S. Banks processing the online gaming
transactions can become targets of U.S. criminal proceedings under the newly
enacted Patriot Act. The jurisdiction of the United States, under the Patriot
Act, now extends to all non-U.S. banks that have correspondent accounts in the
United States. The United States can freeze the non-U.S. bank's U.S.
correspondent account, if that bank is processing U.S. gaming transactions or
holding operating funds or the profits of an operator accepting U.S. wagers,
because the U.S. Department of Justice currently views all offshore gaming funds
as tainted, and all offshore gaming as illegal. This creates a serious
disincentive to the banks to process online gaming transactions and adversely
impacts the revenues of our licensees.
6
Additionally, many banks 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 charge-backs
by end users for reasons including card sequencing and unauthorized use of
credit card. 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.
THE MARKET FOR INTERNET SERVICES IS IN A STATE OF RAPID TECHNOLOGICAL
CHANGE AND WE MAY NOT BE ABLE TO KEEP UP.
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. In addition, the widespread adoption of new Internet technologies or
standards could require substantial expenditures to modify or adapt our web
sites. There can be no assurance that we will be successful in responding
quickly and sufficiently to these or other such developments which 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. 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 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,
although 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 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. 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.
7
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.
THE TRADING MARKET FOR OUR SHARES MAY BE ILLIQUID.
Our ordinary shares represented by American Depositary Shares are
presently quoted on the National Association of Securities Dealers' ("NASD")
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. A lack of volume in
the trading of our shares could impact prices for any shareholder wishing to
dispose of such 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 March 26, 2002 the British Government published a white paper "Safe
Bet For Success-Modernizing Britain's Gambling Laws" in response to the Gambling
Review Report of 2001 prepared by the Gambling Review Body. The recommendations
in the white paper are generally supportive of the industry provided it takes
place in a properly regulated environment. The government intends to introduce
licensing and regulatory procedures for the Internet gaming operators in the
United Kingdom. We are unable to predict with certainty when any resulting
legislation may be enacted, and what impact it will have on our business.
Therefore, there remains a risk that any future legislation could be unfavorable
to our business which is not carried on in the United Kingdom.
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.
8
UNITED STATES CIVIL LIABILITIES MAY NOT BE ENFORCEABLE AGAINST US.
Most of our directors and all of our executive officers 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 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 Securities Exchange Act of 1934 to file
quarterly reports 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 regarding 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 reasonable decision on how to vote your shares.
UNDER ENGLISH LAW A VOTE OF THE HOLDERS OF 75% OR MORE OF OUR ISSUED
ORDINARY SHARES REPRESENTED AT A SHAREHOLDERS MEETING IS REQUIRED TO
APPROVE CERTAIN CORPORATE MATTERS.
Under English law a vote of 75% or more of our issued ordinary shares
represented at a shareholders meeting is required to complete certain corporate
matters. This supermajority requirement may make it more difficult for
shareholders to approve certain transactions if the Board recommends and
approves such transactions.
CERTAIN PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND OTHER CONTRACTUAL
RESTRICTIONS TO WHICH WE ARE SUBJECT TO MAY HAVE THE EFFECT OF
DETERRING ANY ACQUISITION OR SALE OF THE COMPANY NOT APPROVED BY THE
BOARD OR CERTAIN OTHER PERSONS.
We have a "classified" Board of Directors because our directors must
retire by rotation. This means that (if the retiring directors are willing to
continue to act and are approved by the Board and offer themselves for
re-election) only approximately one-third of our directors are eligible for
election each year (in addition to any directors appointed by the Board since
the last annual general meeting).
In addition to the shareholders rights not to re-appoint retiring
directors who are willing to continue to act and are approved by the Board of
Directors and to re-appoint directors appointed by the Board since the last
annual general meeting, shareholders can remove directors by ordinary resolution
or the holders of 50% of our issued ordinary shares represented at a
shareholders meeting.
Pursuant to a financing completed in April 2003, we agreed to certain
restrictions on our corporate actions and other corporate governance matters.
These restrictions included (i) an agreement to seek approval of a resolution
restricting certain issuances of our shares and (ii) a covenant not to take the
following actions (subject to certain qualifications) without the consent of the
party providing such financing (see Item 10. ADDITIONAL INFORMATION - MATERIAL
CONTRACTS):
9
o any change to World Gaming's Memorandum and Articles of Association
other than as contemplated by the Stock Acquisition Agreement between
the Company and Goodison Park Limited ("Acquisition Agreement");
o the presentation of any petition for winding-up or petition for an
administration order;
o any change in the share capital or the creation, allotment or issue of
any shares or of any other subscribe for or to convert any instrument
into such shares or securities other than as contemplated by the
Acquisition Agreement and other than any shares issued pursuant to the
normal operation of World Gaming's 2001 Share Option Plan but excluding
all executive arrangements;
o any reduction of the share capital or variation of the rights attaching
to any class of shares or any redemption, purchase or other acquisition
of any shares or other securities;
o the adoption after April 2003 of any bonus or profit-sharing scheme,
any share option or share incentive scheme or employee share trust or
share ownership plan or retirement benefit scheme;
o capital expenditure of greater than US$200,000;
o the entry into of any contract or commitment under which World Gaming
may incur costs of US$200,000 or more or which may not be fulfilled or
completed within one year or with a director or connected person of a
director;
o the borrowing of amounts (or indebtedness in the nature of borrowings)
other than in the ordinary course of trading or the creation of any
charge or other security over any of the Company's assets or property;
o the giving of any guarantee or indemnity; and
o the commencement or settlement of any litigation, arbitration, or other
proceedings which are material in the context of the Company's
business.
WE MAY BE SUBJECT TO TAX IN A NUMBER OF JURISDICTIONS, FOR WHICH NO
PROVISION HAS BEEN MADE.
We may be subject to tax in a number of 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
10
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 any gain inherent in the shares of the Company
as being 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. The income or gain 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. 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 Shares 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. HOLDERS--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.
OUR CURRENT BUSINESS IS SUBJECT TO SIGNIFICANT SEASONALITY.
Because of the current mix of our products and services, our revenues
from licensees decrease significantly during periods when American professional
and college football is not played. This substantially reduces our cash flow and
makes it difficult to meet our commitments.
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 holding company reorganization effected in May 2001, which is
described below, we have become a successor to the business of Starnet
11
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 NV., EFS Australian Pty Ltd., Inphinity Interactive
Inc., World Gaming Services Inc., EFS St. Kitts Inc., Starnet Communications
Canada Inc., WorldBroadcasts.com 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 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.
On January 1, 2000, Starnet transferred its software development business from
Starnet Canada to Inphinity Interactive, Inc.
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 located in New York,
New York, USA.
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 re-designated as B shares of (pound)0.002 each. The balance of the
authorized share capital was subdivided AND re-designated 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 and production of Internet technologies for gaming applications by
our licensees. Our business strategy is to identify and commercialize leading
edge technologies for the online gaming markets.
Our corporate office is located at 47 Castle Street, Reading, England,
with operations managed out of our office in Antigua located at the KFH
Building, Liat Rd, Coolidge, Antigua W.I. The telephone number is 1 (268)
480-1650.
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:
12
o offer customers a user-friendly interface, superior interactive
experience and a wide selection of gaming options;
o provide licensees with the tools to potentially generate financially
attractive returns, easy site maintenance and limited administration;
and
o protect gaming customers and licensees through our proprietary fully
integrated technology.
We offer fully integrated gaming software and systems, developed by our
wholly-owned Vancouver-based subsidiary, Inphinity Interactive Inc.
("Inphinity"), along with fee-based 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. 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 and sportsbook. In addition, the licensee must
obtain a gaming license from the Government of Antigua and Barbuda or another
jurisdiction that licenses online gaming systems. The Company's first license
sale closed in March 1998, and as of December 31, 2002, the Company had 24
licensees signed and operating.
Along with the current suite of gaming products which include over 17
C++ casino games, a variety of "instant play" Java Games and a complete live
sports wagering product line, we are currently working on enhancement to our
pari-mutuel betting system, which went live last year, and have plans to add
Horsebook, virtual games, 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.
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. (SEE ALSO ITEM 7. "RELATED PARTY Transactions").
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 remains intact.
In April 2001, we restructured our operations in 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.
In June 2002, we closed our Toronto sales office and terminated four
employees. This was done as part of the relocation of our administrative
functions to London. In May 2003, we closed our London office and terminated
three staff members. This was done as part of the relocation of our corporate
activity to the Antigua office.
13
BUSINESS STRATEGY
We are emerging from a difficult time that has seen us accumulate
excessive levels of debt resulting in a negative working capital position, lose
focus of our key strengths, and lack competitiveness for valuable new business.
Our intention is to improve our products, services and infrastructure. Various
well-documented distractions have hindered the Company's ability to adequately
manage these key aspects. We will refocus on our strengths, that is, developing
software and working closely with our licensees will grow our existing revenue
streams. Success in this direction will allow us to attract qualified and
existing new licensee business that can accelerate the growth in our Company's
value.
The Board's long term goals for business development are as follows:
o Concentrate on improving our software functionality to ensure
competitiveness within the market. As we have large numbers of bettors
already playing on our licensees' web sites, by offering them more
choice in product they will have wider betting options that will
increase total turnover. With the additional features our licensees
will in turn increase their revenues and this will have a follow on
effect with our revenues. (The main new product features are listed
below in the GAMING PRODUCTS UNDER DEVELOPMENT section below).
o Continue business rationalization through improvements in internal
process and cost reductions. The board has already made a number of
decisions that are intended to have a significant effect on the ongoing
cash flow including: ceasing the loss making worldgaming.com website,
closing down the London office, ceasing the Curacao license and
reviewing the pricing structure of loss making aspects of the business.
Although this is a move in the right direction, additional further
efficiencies within the operations will be investigated over the coming
12 months with the goal of reducing our cost base.
o During the period when American professional and college football is
not played our revenues decrease significantly due to seasonality. We
aim to address this situation by offering more products that are less
susceptible to seasonality. Examples of these products include the
expanded horse racing offering and virtual games.
o We recognize the need to spread the revenue base over more licensees.
This will be achieved by adding new licensees that preferably are
already in the business and need a software provider that (a) can offer
a wide variety of premium betting products and (b) can handle large
amounts of simultaneous betting transactions. As the industry continues
to go through a consolidation World Gaming can put itself in a position
to be the provider to these industry players. Within the medium to long
term, the Board believes that this is the most sensible path forward.
MARKETING
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.
Our licensees utilize internet based marketing activities, such as
e-mail broadcasts and affiliate programs, as well as traditional media, such as
print in industry publications. In the past we regularly sponsored industry
trade shows and attended such shows as an exhibitor. We are currently focused in
widening our product range and intend on increasing our marketing focus over the
next twelve to twenty-four months.
14
COMPETITIVE ENVIRONMENT
The Internet gaming and software industry is increasingly competitive.
New competitors have entered industry 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.
The Company's largest competitors for casino products - Boss Media,
Cryptologic, and Microgaming - do not offer any complementary products such as
sportsbook. Because these competitors presently 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, it is
believed that the Company currently has a competitive advantage by offering
complementary products.
One company, IQ-Ludorum, is a 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 and Ladbrokes,
already have an online presence and compete for end-users. This is a 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, 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 dual Fast Ethernet
connections, 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 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.
15
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.
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:
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.
FRAUD DETECTION AND LEGAL COMPLIANCE. We ensure legal compliance and
player protection through industry leading financial fraud protection
software provided by Vscrub. Further, Address Verification Services
(AVS), a basic fraud detection system offered by the financial
industry, is incorporated into our fraud detection solution for North
American players.
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, 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
16
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. 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.
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 virtual games, and multi-player poker
are being evaluated for integration. During the last fiscal year, casino gaming
contributed approximately 39 percent of royalty revenue, while sports book
wagering accounted for the remaining 61 percent.
CASINO
Our casino games can be categorized into types of platforms: Java and
Windows Download software.
Our Java games utilize the Java language to provide quick access online
games to the licensees' web sites. 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 Java games are optimized for quick
browser loading times.
We currently have 16 Java casino games (Blackjack, Blackjack Super 7s,
Baccarat, Bermuda Poker, Free Ride, Pai Gow Poker, Roulette, Craps, Sic Bo, Red
Dog, Battle Royale, two slot machines, and three video poker machines) and 6
Java Lottery and Pulltab games (Cash Explosion, High Roller, Zodiac, Scratch
Bingo, 3-Pointer Pulltabs and Las Vegas Slots Pulltabs) for players to wager on,
with future games projected to be released.
More than 17 different casino games are available in the Windows
Download 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 Windows Download games are
also offered by most software licensees via compact disc, which is mailed to
players who request this version.
THE SPORTSBOOK
Our Sportsbook product 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, prices, straight
wagers, parlays, teasers, futures, propositions and others. The Sportsbook's
overall commission is typically between 3 to 6% of total wagering dollars.
In February 2003, an updated version of the sportsbook was released
that offered new betting options for customers of our licensees, and new and
enhanced product operation tools. Our licensees can offer their customers `If
Bets' and `Buy Points' betting options. `If Bets' and `Buy points' are two
additional ways to bet. `If Bets' allows a player better wager management by
placing multiple bets by preference that are conditional on the outcome of the
preceding bet within the `If Bet' sequence. The `Buy Points' wagering option
allows you to adjust the point spread or totals in your favor at an adjusted
price (payout). The new and enhanced operation tools include increased risk
management on bet offerings, faster customer bet processing, and quicker bet
payouts to customers.
17
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. Webmasters
will earn their commission based on the players that they send through their
sites. The licensee pays webmaster only after the casino has generated revenues
from 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 is expected to enhance the licensee's ability to
market.
PARI-MUTUEL GAMING
We fully launched our pari-mutuel games on July 31, 2001, and upgraded
the product in December 2002. The product has been delivered to over thirty-one
gaming sites and it is estimated that the number of gaming
sites will increase once more content is added to the product.
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.
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, 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.
WORLD GAMING MANAGEMENT CONSOLE
World Gaming Management Console (WGMC) is an integrated application
that supports operations management for World Gaming and its licensees, with an
initial focus on customer service support. WGMC was launched in March 2003
internally and to licensees who perform their own Customer Service. Over 200
customer service agents, which consists of employees in our call centers and two
of our licensees who offer their own customer service, currently use WGMC to
support licensees' customers' inquiries under a single application model using
one technology and security model. WGMC's expandable framework allows for future
releases that complement other operational areas such as Licensee Relations,
Fraud & Surveillance, Affiliate programs, and product reports.
GAMING PRODUCTS UNDER DEVELOPMENT
POKER
We have identified the positive implications of offering a Multiplayer
Poker product to our product mix. A number of suppliers in the market today
18
offer a variety of advanced multiplayer poker products. We are currently
assessing these products on the basis of our licensees' needs with the goal of
future integration.
HORSE RACING
Development is underway to offer additional content to increase the
current offerings by our licensees. This new content represents additional horse
racing events (as well as dog racing and jai lai events) above what we currently
offer. In addition, a horsebook product has begun in the early stages of
development that will fit our licensees' market needs and add to our product
mix.
SPORTSBOOK
A new version of the Sportsbook software was recently released to
licensees in 2003 and feedback is being acquired from licensees for new features
and upgrades. Following on the feedback, releases will be conducted in rapid
fashion for licensees to enhance their gaming sites.
VIRTUAL GAMES
Research has shown incremental revenues can be earned by offering
virtual games such as virtual horse racing or lotto games. Discussions are
underway on integrating these games for our licensees to offer complementary
games to the current product line.
WGMC
With the success and positive feedback from our licensees on the WGMC
reporting platform, we will continue to integrate administration and management
reporting programs into this easy to use platform. WGMC intends to become a
unified administration solution for all products so that our licensees can
better manage their businesses.
CASINO
Although the launch of the new 3.3 Casino games is underway in 2003, we
will continue to expand, improve and develop our casino product. One example of
this development is the new themed machine (slot and video) and lottery style
games that will increase our licensees' product offering.
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 prospective 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.
Should any licensee become delinquent in payment to us, we have the
technological ability to "shut down" the licensee's interactive casino(s)
remotely.
19
Our largest licensee accounted for 67 percent of our consolidated
revenues in 2002, 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 ending in August 2004.
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
percent to 10 percent 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 our 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.
ORGANIZATIONAL STRUCTURE
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WORLD GAMING PLC
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WG INTERNATIONAL LTD
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STARNET COMMUNICATIONS WORLD GAMING
INTERNATIONAL, INC. EUROPE LIMITED
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STARNET SYSTEMS | | | 602662 BRITISH | STARNET
INTERNATIONAL | EFS USA INC. | EFS ST. KITTS INC. | COLUMBIA LTD. | COMMUNICATIONS
INC. | | | | CANADA INC.
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EFS EFS AUSTRALIA INPHINITY WORLD GAMING
INTERNATIONAL PTY LTD. INTERACTIVE SERVICES INC.
INC. INC.
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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.
20
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 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 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 five subsidiaries dedicated to the electronic transferring of
funds: EFS International Inc. (based in Antigua) ("EFS International"), EFS NV.,
EFS USA Inc. (based in Nevada), EFS Australia Pty Ltd., and EFS St. Kitts Inc.
(collectively, the "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 35
software professionals who provide a variety of products and services to our
Antigua-based licensing subsidiary, Starnet Systems.
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.worldgaming.com), also based in Antigua, was a full-service online gaming
operation which ceased operations in June 2003.
21
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.
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. 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.WORLDGAMING.COM, which the Company operated from January
2003 to June 2003 when it was discontinued, we had a policy not to accept wagers
from the residents of Canada and had implemented procedures that prevent
customers from collecting on winnings from wagers from the residents this
country. While such procedures, as with most precautions, may be able to be
circumvented, we believe that the procedures largely prevented 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.
22
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
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. Specifically the United States federal law (18
U.S.C. ss. 1084), commonly referred to as the Wire Act, is 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.
In response to the events of September 11, 2001 the United States
enacted the Patriot Act, which is intended to address worldwide terrorism.
However, the Patriot Act also contains provisions which could be used against
the Internet gaming industry. The jurisdiction of the United States now extends
to all non-U.S. banks that have correspondent accounts in the United States.
This means that any such non-U.S. bank processing U.S. gaming transactions will
be violating U.S. law, regardless of the fact that they are in full compliance
with the laws of their own country. Pursuant to the USA Patriot Act, the United
States can now obtain a pretrial restraining order freezing assets, including
bank accounts, of defendants in U.S. civil actions, once process has been served
on the non-U.S. party. This means that the U.S. merely has to serve papers on a
non-U.S. bank, and it can freeze the non-U.S. bank's U.S. correspondent account,
if that bank is processing U.S. gaming transactions or holding operating funds
or the profits of an operator accepting U.S. wagers. Thus, if allegedly tainted
funds are deposited in a non-U.S. bank account of a non-U.S. bank, the United
States can seize and forfeit an equal amount of funds on deposit in the non-U.S.
bank's correspondent account.
Currently, the U.S. Justice Department views all offshore gaming funds
as tainted, because it believes that all offshore gaming is illegal. This
creates a serious disincentive for non-U.S. banks to provide banking services to
Internet gaming operators, and thus negatively impacts our market of potential
licensees. MBNA, Bank of America and Chase Manhattan Bank and Citibank have
announced that they will decline authorization to Americans who try to use their
credit cards for online gaming.
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.
23
The Company and the industry as a whole are under threat from certain
factions within the U.S. Congress that seek to ban certain Internet gambling.
Although many of the prior attempts to enact legislation has failed, on June 10,
2003, the Unlawful Internet Gambling Funding Prohibition Act (HR 2143) was
passed by the U.S. House of Representatives. This bill was introduced by Rep.
Spencer Bachus, (R-Ala) with the intent of making it illegal to use credit
cards, wire transfers and other banking instruments to deposit into accounts for
Internet gambling activities. The legislation has now moved to the U.S. Senate
for consideration. IF THIS LEGISLATION PASSES AND BECOMES LAW, IT WOULD HAVE AN
IMMEDIATE DETRIMENTAL EFFECT ON THE INDUSTRY AND WOULD POSE A SERIOUS THREAT TO
THE COMPANY'S CONTINUED OPERATION. (See Item 4. GOVERNMENT LICENSING AND
REGULATION AND RELATED RISKS; and Item 8. LEGAL PROCEEDINGS.)
PROPERTY, PLANTS AND EQUIPMENT
UNITED KINGDOM
The Company's corporate office which was located at Station House,
Station Road, Barnes Common, London, U.K. was closed in May 2003. Corporate
activities are currently being managed from our office in Antigua.
ANTIGUA
The operations of Starnet Systems and EFS International (Antigua) are
located in 6,500 square feet of commercial space at the KF Hadeed building
located at Liat Road, Coolidge, Antigua, at an annual cost of approximately
$112,000 plus utilities. The lease term is for one year expiring on September 1,
2003 with an option to renew at existing terms for an additional two years.
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 have sublet
approximately 75% of the 15,000 square feet available to two tenants. The
sublets offset our annual lease costs in the amount of $123,000.
We are currently in the process of terminating the lease or subleasing
our office space in Toronto. The lease was for a term of five years expiring
September 30, 2006 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 were estimated at $37,000. The Company has vacated the office
and the landlord has sublet a portion of the office space.
EQUIPMENT
During the year ended December 31, 2002, eight months ended December
31, 2001, and fiscal years ended April 30, 2001 and 2000, we made capital
expenditures of approximately $2.0 million, $0.7 million, $2.2 million and $4.4
million, respectively. The expenditures were primarily for computer equipment
and related items in order to increase our capacity to process transactions and
improve overall system reliability.
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. CURRENCY AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
UNLESS OTHERWISE SPECIFIED.
24
CHANGE IN FISCAL YEAR
On May 17, 2001, we changed our fiscal year end from April 30 to
December 31.
RESULTS OF OPERATIONS
On May 25, 2001, pursuant to an agreement and Plan of Reorganization
executed on May 17, 2001, Starnet Communications International Inc. ("Starnet")
became, wholly-owned subsidiary of World Gaming Plc ("World Gaming" or the
"Company"), a company organized in England and Wales for the purpose of
facilitating a new holding company structure.
Starnet Systems International Inc., a subsidiary of Starnet
incorporated and operating out of Antigua, licenses its gaming software to third
parties for an initial licensing fee and monthly royalties. Inphinity
Interactive Inc., a wholly-owned subsidiary of ours develops gaming software and
web pages.
The following tables set out selected consolidated information from the
statements of operations for the years ended December 31, 2002 and 2001
(unaudited), for the eight months ended December 31, 2001 and the years ended
April 30, 2001 and 2000; and, the balance sheets as at December 31, 2002 and
2001 and April 30, 2001 and 2000:
SELECTED STATEMENT OF OPERATIONS INFORMATION
FOR THE YEARS ENDED EIGHT MONTHS FOR THE YEARS ENDED
----------------------------- ENDED -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER APRIL 30, APRIL 30,
2002 2001 * 31, 2001 2001 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Net Sales .............. $ 16,777 $ 18,175 $ 12,107 $ 20,153 $ 17,881
Gross Margin ........... 15,073 13,859 9,831 14,224 12,738
Operating Expenses 20,483 30,324 12,202 31,243 17,624
(Loss) From
Operations .......... (5,410) (16,465) (2,371) (17,019) (4,886)
Net (Loss) ............. (5,318) (16,277) (2,236) (16,756) (3,255)
__________
* ALTHOUGH THE COMPANY HAS INCLUDED FINANCIAL INFORMATION FOR THE YEAR
ENDED APRIL 30, 2001 AND EIGHT MONTHS ENDED DECEMBER 31, 2001, THE COMPANY HAS
ALSO INCLUDED UNAUDITED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31,
2001 FOR COMPARATIVE PURPOSES.
25
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER AT DECEMBER AT APRIL AT APRIL
31, 2002 31, 2001 30, 2001 30, 2000
-------- -------- -------- --------
Working Capital ... $ (5,581) $ (2,426) $ (1,253) $ 6,714
Total Assets ...... 8,377 12,181 20,188 27,983
Long Term Debt .... 3,804 1,083 2,784 979
Accumulated Deficit (26,681) (21,363) (19,127) (2,371)
Total Shareholders'
Equity ........ (3,545) 1,686 2,211 19,376
OPERATING RESULTS FOR FISCAL 2002
Revenues from all components of the gaming business, which include
licensing and financial transaction processing, decreased eight percent or
$1,398 to $16,777 for the year ended December 31, 2002 when compared to $18,175
for the same period last year.
The decrease in total revenue is primarily due to lower transaction
processing revenue as an increasing number of licensees assumed their own
merchant processing responsibilities. For the year, revenue derived from
transaction processing decreased 62 percent or $1,847 to $1,131 when compared to
the same period last year. The Company expects that revenue decline from this
source will continue during the fiscal year ending December 31, 2003.
The decrease in total revenue was partially offset by a four percent or
$545 increase in royalty revenue to $14,950 when compared to the same period
last year. For the year ended December 31, 2002, the continued growth in royalty
growth was driven primarily by the following:
o A 23 percent increase in revenue generated by the Company's licensees
through the utilization of its software offering. Royalty revenue is
calculated as a percentage of gaming revenue generated by our
licensees.
o An increase of 41 percent in wagering activity managed by our gaming
infrastructure when measured as a value of wagers placed to over $3.4
billion. Revenue generated by our licensees is driven by wagering
volumes.
o Specifically, an increase in income from sports betting wagering
activity by our licensees. For the year ended December 31, 2002,
commission rates realized through the utilization of our sportsbook
product remained relatively consistent with prior years' levels. As a
result, the 40 percent increase in sportsbook wagering our licensees
experienced translated into a 33 percent increase in sportsbook
revenue.
It should be noted that royalty revenue from one of our operating
licensees represented approximately 67 percent of our total sales for the year
ended December 31, 2002, compared to 47 percent for the year ended December 31,
2001. Furthermore, even with a 23 percent increase in revenue generated by all
of our licensees, the 46 percent growth in gaming revenue generated by our
largest licensee resulted in a significant increase in royalty revenue
contribution from this licensee. As a result of the increased gaming revenue
contribution from the largest licensee, our average royalty rate decreased
resulting in the Company only realizing a four percent increase in royalty
revenue. Overall, the Company believes that its licensees will continue to
realize additional gains in their revenue from which the Company's royalty
income is derived.
26
Licensing revenue remained relatively unchanged increasing only two
percent to $632. For the year ended December 31, 2002, licensing revenue was
generated primarily from the sale of gaming licenses in Curacao. Since we do not
intend on renewing our gaming license in Curacao, we do not expect any future
gaming licensing revenue from this jurisdiction.
During the year ended December 31, 2002, we cancelled or lost eight
licensees mostly as a result of some smaller, low revenue licensees merging with
larger licensees or ceasing operation, resulting in a net decrease of four for a
total of 24 active licensees as of December 31, 2002. Subsequent to December 31,
2002, the Company's third largest licensee, which contributed only 5% of the
total revenue, was terminated due to a breach of contract resulting from the
non-payment of outstanding fees.
The gross margin increased significantly to 90 percent for the year
ended December 31, 2002 from 76 percent when compared to the same period last
year reflecting a more profitable revenue mix. The reduction of revenues from
transaction processing and reselling of gaming licenses played a role in
improving our gross margins as these revenue sources have historically been low
margin revenue.
As a result of our continuing effort to reduce operating costs,
expenses decreased by 32 percent to $20,483 during the year ended December 31,
2002 compared to $30,324 for the same period last year. The decrease was
primarily due to the following:
o During fiscal 2001, the Company incurred one time charges totaling
$9,045. These charges consists primarily of a provision of $4,341
against funds seized during 1999, restructuring costs of $1,536
completed in 2001 and the write off of amounts due from the sale of our
online entertainment group totaling $1,484. The remaining amounts
relate to the legal costs associated with our U.K. redomiciling
efforts.
o Operation costs in 2002 decreased 23 percent primarily due to
restructuring efforts employed in the year ended 2001.
o The Company terminated its direct sales force in July 2002. As a
result, sales and marketing expenses decreased 35 percent to $1,375
from $2,130 for the year ended December 31, 2001. The Company will
realize the full benefit of the termination of this group during the
year ending December 31, 2003. At present, it is the Company's
intention to focus on expanding the services provided to its existing
licensees.
o The reduced costs in 2002 were partially offset by increased general
and administrative costs primarily resulting from significantly higher
legal costs in connection with our efforts to raise financing in early
2002 and increased occupancy costs associated with the opening of a
corporate office in London, England.
o In 2002, the Company also wrote off $3,514 in provisions, charges,
write-offs, and restructuring costs. This amount consisted primarily of
unrecoverable transaction processing costs of $1,823, provision for
uncollectible royalty fees of $695, unrecoverable casino losses of $515
from unsuccessful licensees, and severance costs resulting from
restructuring efforts of $294.
We expect that operating expenses for the year ending December 31, 2003
to continue its decline as we continue to realize the benefits of our
restructuring efforts in the previous year. As a result of the significantly
lower operating expenses, we incurred a much lower loss from continuing
operations for the year ended December 31, 2002 of $5,218 compared to $16,277
for the same period last year.
27
OPERATING RESULTS FOR FISCAL 2001
The following tables set out selected consolidated information from the
statements of operations for the eight months ended December 31, 2001 and 2000
(unaudited) and the years ended April 30, 2001 and 2000 and the balance sheets
as at December 31, 2001 and 2000 (unaudited) and April 30, 2001:
SELECTED STATEMENT OF OPERATIONS INFORMATION
EIGHT MONTHS ENDED FOR THE YEARS ENDED
-------------------------- -----------------------
DECEMBER 31, DECEMBER 31, APRIL 30, APRIL 30,
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)
Net Sales ............ $ 12,107 $ 14,085 $ 20,153 $ 17,881
Gross Margin ......... 9,831 10,196 14,224 12,738
Operating Expenses ... 12,202 13,121 31,243 17,624
(Loss) from Operations (2,371) (2,925) (17,019) (4,886)
Net (Loss) ........... (2,236) (2,715) (16,756) (3,255)
SELECTED BALANCE SHEET INFORMATION
AT DECEMBER AT DECEMBER AT APRIL AT APRIL
31, 2001 31, 2000 30, 2001 30, 2000
-------- -------- -------- --------
(UNAUDITED)
Working Capital ...... $ (2,426) $12,016 $ (1,253) $ 6,714
Total Assets ......... 12,181 26,099 20,188 27,983
Long Term Debt ....... 1,083 2,975 2,784 979
Accumulated Deficit... (21,363) 5,093 (19,127) (2,371)
Total Shareholders'
Equity ............ 1,686 16,577 2,211 19,376
Revenues from all components of the gaming business, which include
licensing, casino operations and financial transaction processing, decreased 14
percent or $1,978 to $12,107 for the eight months ended December 31, 2001 when
compared to $14,085 for the same period last year.
The revenue decrease is primarily due to a 43 percent decrease in
revenue derived from financial transaction processing for licensees to $1,610 as
an increasing number of licensees assumed their own merchant processing
responsibilities. Licensing revenue decreased 73 percent to $425 primarily
because we are no longer selling gaming licenses.
Despite the decrease in total revenue, royalty revenue for the eight
months ended December 31, 2001, climbed 4 percent to $10,072 compared to the
same period last year. The growth in royalty revenue was as a result of a 27
percent increase in the revenue of our licensees' business. The growth was
dwarfed partially as a result of the terrorist attacks on September 11, 2001 as
this resulted in the cancellation of major sporting events and thus eliminated
betting and wagering opportunities. For the period, the growth in sports betting
activity contributed significantly to the growth in our royalty revenue.
28
During the eight months ended December 31, 2001, we completed software
for 3 new licensees but cancelled or lost 6 licensees as a result of some
smaller, low revenue licensees merging with larger licensees, resulting in a net
decrease of 3 for a total of 32 active licensees as of December 31, 2001.
Royalty revenue from one of the operating licensees represented approximately 47
percent of our total sales for the eight months ended December 31, 2001 compared
to 31 percent for the year ended April 30, 2001.
The gross margin increased significantly to 81.2 percent for the eight
month ended December 31, 2001 from 72.4 percent when compared to the same period
last year reflecting a more profitable revenue mix. The reduction of revenues
from transaction processing and reselling of gaming licenses played a role in
improving our gross margins as these revenue sources have historically been low
margin revenue.
As a result of our continuing effort to reduce operating costs,
expenses decreased by 7 percent to $12,202 during the eight months ended
December 31, 2001 compared to $13,121 for the same period last year. The
decrease was primarily due to the following:
o A reduction in sales and marketing expense resulting from the
cancellation of our marketing consulting arrangement with Wiremix
Media, Inc during the year ended April 30, 2001. This was offset by the
deployment of our direct sales force during the eight months ended
December 31, 2000.
o A reduction in our operations expenses as we began to realize savings
from the rationalization of this department during the early part of
2001.
These savings were partially offset by redomiciling costs of $438
expensed during the fourth quarter. The loss from continuing operations for the
eight months ended December 31, 2001 was $2,236 compared to $2,715 for the same
period last year. Bad debts charges accounted for the increased losses in the
comparable period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had $1,753 in cash and cash equivalents down
from $2,206 at December 31, 2001. The decrease in the period resulted from the
use of cash funds to settle certain legal matters related to various lawsuits
against the Company and its subsidiaries. (See Item 8. Financial Information -
Legal Proceedings). Cash was also used to purchase new capital equipment of
$1,412.
Working capital at December 31, 2002 decreased to $(5,581) from
$(2,426) at December 31, 2001. The significant decrease in working capital is
primarily due to the increase in the provision for accounts receivable as
discussed in our above-noted explanation of one-time charges incurred during the
year ended December 31, 2002. Also included in working capital is the provision
for liabilities and charges of $1,200 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 only $50 relating to the reimbursement
of Plaintiff's legal costs will be paid in cash to cover this matter. The actual
settlement was finalized in March 2003.
We also had reserves held by credit card processors totaling $653. The
funds are held as rolling reserves and are typically released to us after six
months. Accounts receivable increased from $2,591 at December 31, 2001 to $2,772
at December 31, 2002 as a result of a number of licensees assuming their
transaction processing over the past 12 months. Those licensees that have
assumed their transaction processing are now required to submit payment for
royalties on a monthly basis. Previously, the Company would offset royalties due
to the Company against casino profits collected by the Company on behalf of the
29
licensee. The increase in accounts receivable was partially offset by previously
discussed provisions. Accounts receivable is comprised of royalties due from
operating licensees that have their own merchant accounts and from new licensees
that were offered an installment payment plan on the initial licensing fees.
Royalty and transaction fees due from operating licensees are usually collected
prior to the end of the following month. Licensing fees are usually collected in
full prior to recognition of the revenue. At December 31, 2002, accounts
receivable consisted primarily of royalty fees due from operating licensees
which have been fully collected subsequent to December 31, 2002.
Prepaid expenses and deposits decreased by $208 to $230 as at December
31, 2002 compared to $438 at December 31, 2001. Deferred gaming license costs
were fully amortized as at December 31, 2002.
Accounts payable decreased by $713 to $5,198 as at December 31, 2002
compared to $5,911 at December 31, 2001. The reduction in payables is primarily
due to reduced operating costs and assumption of transaction processing by major
licensees. Accounts payable is comprised of trades payable and amounts due to
licensees for deposit reserves and other amounts as a result of the Company
managing the transaction processing activity for a number of licensees. Deferred
revenue which relates to amounts collected from new licensees not yet live at
the end of the month, decreased $133 to $127 at December 31, 2002 from $260 at
December 31, 2001. At December 31, 2002, there were no new licensees waiting to
go live on our system from whom deposits were previously collected.
Net cash provided by investing activities for the year ended December
31, 2002 was $(1,412) compared to $6,879 for the year ended December 31, 2001.
We made significant capital purchases during the year ended December 31, 2002 of
$1,412 in software and equipment purchased to support IT infrastructure and
hosting applications.
Net cash provided by financing activities for the year ended December
31, 2002 was $2,101 compared to $1,529 in the year ended December 31, 2001. The
majority of the cash generated in the current period from financing activities
was generated from two loans obtained from Sportingbet PLC. One of these loans
from Sportingbet PLC in the amount of $1,500 was fully repaid during March 2003.
On August 1, 2002, the Company entered into a loan agreement with
Sportingbet PLC, one of our licensees. Sportingbet PLC loaned the Company
$1,250, which was repaid in full in April 2003. The loan bore interest at a rate
of 2% above LIBOR. Repayments were in the form of amounts due to us from
Sportingbet PLC under our license agreement with them. Sportingbet PLC had a
security interest in our software and the right to access and use the software
and the secure site where the hardware is located in the event of default. (See
Item 10. MATERIAL CONTRACTS).
On April 4, 2003, one of the Company's major licensees, Sportingbet PLC
(through its wholly-owned subsidiary Goodison Park Limited) acquired a
shareholding in the Company for $600. This shareholding, together with shares
held by parties acting in concert with Sportingbet PLC, comprises 29.7% percent
of our issued share capital. Sportingbet PLC (through its wholly-owned
subsidiary Goodison Park Limited) has further loaned to the Company $900 which
is convertible at Sportingbet PLC's sole discretion into shares or is repayable
after a two year term. If the loan is converted into shares, Sportingbet PLC
would then have voting control over of 39.6 percent of the issued share capital
of the Company. (SEE ITEM 7. RELATED PARTY TRANSACTION)
We have historically funded our growth through cash flow from our
operations and the capital markets. Although management believes otherwise,
there may be a need in the future to fund our capital needs through additional
security offerings and borrowings. There is no guaranty that such funds will be
raised. Our independent auditors have noted that as at December 31, 2002, we
have accumulated significant losses, have negative working capital and a deficit
in stockholders' equity, all of which our independent auditors believe raise
doubt about our ability to continue as a going concern.
30
RESEARCH AND PRODUCT DEVELOPMENT
New product development will be our primary focus for 2003. 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 be a leader in this convergence by redefining the 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 further products such as virtual games as well as the
traditional games of chance. Research and development expenses reported for the
year ended December 31, 2002 were $3,169 compared to $3,648 for the year ended
December 31, 2001.
TREND INFORMATION
We have not identified any changes in trends in our operations since
the end of the financial period ended December 31, 2002.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The names, positions and ages of our directors and senior management as
of June 28, 2003 are as follows:
NAME AGE POSITION DATE(S) APPOINTED
---- --- -------- -----------------
Clare Roberts 53 Director October 18, 2000
A. Daniel Moran 35 Director and Chief Executive April 11, 2003
Officer
James H. Grossman 63 Chairman of the Board and Director April 11, 2003
David Fleming 45 Director, Chief Technology Officer April 11, 2003 as Director;
and Managing Director of Inphinity November 1, 2002 as Chief
Interactive, Inc. Technology Officer; January
1, 2002 as Managing Director
of Inphinity
Mark Thompson 34 Operations Director, Managing Director December 1, 2002 as
of Starnet Systems and Acting Chief Operations Director and as
Financial Officer Managing Director; May 9,
2003 as Acting Chief
Financial Officer
David Naismith 29 Director designate and Chief Effective August 1, 2003
Financial Officer designate
See Item 10 - Additional Information - Board Action and Powers for a
discussion on the terms and conditions underlying the appointment to the Board
of Directors.
31
Currently, we are in transition to the new management. Simon Coulthard,
the Company's former Group Finance Director resigned on May 8, 2003. Mark
Thompson, the Company's former Vice President Finance, who had provided his
resignation effective as of September 15, 2002, has returned as the Operations
Director and as a Managing Director of Starnet Systems. As a result of the
resignation of the Group Finance Director, Mr. Thompson is currently the
Company's acting Chief Financial Officer until the appointment of David Naismith
which becomes effective on August 1, 2003.
In accordance with the Goodison Park Stock Acquisition Agreement, dated
April 4, 2003, Goodison Park has the right to appoint and maintain one director
("Investment Director") to the Board of Directors of World Gaming Plc. Goodison
Park nominated Victor Collins as the Investment Director upon the execution of
the agreement. Mr. Collins resigned from the Board effective June 27, 2003. As
at June 28, 2003, Goodison Park has not appointed another Director to the board
although they have the right to do so.
BACKGROUND INFORMATION CONCERNING DIRECTORS
JAMES H. GROSSMAN, CHAIRMAN OF THE BOARD AND DIRECTOR
James H. Grossman is an attorney with experience in the international
business, corporate, and venture capital areas and has an active international
arbitration practice with the law firm of Reed Smith Crosby Heafey in San
Francisco. From 1995 to 1999, he practiced law as a sole practitioner and also
acted as a business consultant. In 1992, Mr. Grossman was appointed by President
George Bush to serve as Chairman of the U.S. Foreign Claims Settlement
Commission where he actively participated in quasi-judicial international
arbitration relating to expropriation of property by foreign governments. Mr.
Grossman has served as a Special Representative for the United Nations
Development Program looking at the implications on certain Balkan nations of
sanctions imposed on the then former Yugoslavia. Mr. Grossman also was the Chief
Negotiator for the U.S. in the tariff reduction acceleration round of the
U.S.-Canada Free Trade Agreement, which was a precursor to the creation of
NAFTA. He obtained his undergraduate degree in International Relations/Political
Science/History in 1960 from the University of California at Berkeley, and a
J.D. from Harvard University in 1963. Mr. Grossman is also a director of
Starnet, Starnet Systems and Champion Communication Services, Inc., a company
publicly traded on the OTC Bulletin Board and the Canadian Venture Exchange.
A. DANIEL MORAN, DIRECTOR AND CHIEF EXECUTIVE OFFICER
Daniel Moran has over 15 years of international business experience,
primarily in the technology and Internet sectors. Most recently, he was the
Managing Director for Sportingbet Australia, where his duties included strategic
planning, automation of the business process, overseeing operations, regulatory
compliance, government relations and the management of a 50-person staff. Prior
to joining Sportingbet in March 2000, Mr. Moran was a consultant in Australia,
providing advice to companies seeking to organize and become licensed to conduct
Internet gaming operations in a regulated market. Mr. Moran received a Ba(Sc) in
Computing Science from Macquarie University, Australia and a PgradDip in
Management from the Macquarie Graduate School of Management, Australia. Mr.
Moran is also a director of Starnet and Starnet Systems.
CLARE KAMAU ROBERTS, DIRECTOR
Mr. Roberts has served as our director since October 18, 2000 and
Chairman of the Board from November 20, 2002 to April 11, 2003. He has also
served as a director of our subsidiary, Starnet, since May of 1999. Mr. Roberts
is a former Attorney General and 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
32
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 L.L.B. from the University of 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.
DAVID FLEMING, DIRECTOR, CHIEF TECHNOLOGY OFFICER, AND MANAGING
DIRECTOR INPHINITY INTERACTIVE
Daniel Fleming has served as a director since April 11, 2003, Chief
Technology Officer since November 1, 2002, and Managing Director of Inphinity
since January 1, 2002. He initially commenced his employment with us as Vice
President of Product Development on September 10, 2001. Mr. Fleming brings more
than 12 years experience in information technology to the World Gaming group of
companies. Prior to joining Inphinity, Mr. Fleming was Chief Technology Officer
and a founding partner of IronLion Management Inc., a wireless incubation
company during 2001. He was also Chief Technology Officer for White Picket
Defense Inc., a wireless security company, from May 1999 to December 2000 where
he worked with such clients as CDS, mBanx, KPMG, CIBC, CEBRA, 724 Solutions and
Internet Secure. Mr. Fleming also worked at e-Commerce Inc., Canada's first
Internet and e-commerce company and held a management team position in LGS
Groupe Inc.'s e-commerce division. Mr. Fleming was a member of Centennial
College E-Commerce Steering Committee and is a regular public speaker. He
currently serves as a director of White Picket Defense, a Canadian Internet
Security Company.
DAVID NAISMITH, DIRECTOR AND CHIEF FINANCIAL OFFICER
The board of directors has selected David Naismith to become a member of the
board and Chief Financial Officer of the Company effective August 1, 2003. Mr.
Naismith is a qualified chartered accountant with several years experience in
Internet gaming, most recently holding a senior finance role with Sportingbet
PLC, a group listed on the Alternative Investment Market of the London Stock
Exchange. Prior to this, Mr. Naismith held regional finance directorships before
becoming responsible for these finance divisions globally. Having qualified as a
chartered accountant in audit with BDO, David progressed to transaction support
predominately for international media groups working in both Australia and
London/Europe including many U.S. based businesses. Along with a financial
control and reporting background, David's experience in the online gaming
industry also includes capital raising, acquisitions and global merchant
processing in several locations including Costa Rica. Mr. Naismith holds a
Bachelor of Commerce in finance from Bond University (Australia) and is a member
of the Institute of Chartered Accountants, where he was ranked in the top 5% of
candidates.
BACKGROUND INFORMATION CONCERNING SENIOR MANAGEMENT AND CERTAIN KEY EMPLOYEES
MARK A. THOMPSON, OPERATION DIRECTOR, MANAGING DIRECTOR OF STARNET
SYSTEMS AND ACTING CHIEF FINANCIAL OFFICER
Mr. Thompson has served as our Operations Director and Managing
Director of Starnet Systems since December 2002 and as our acting Chief
Financial Officer since May 9, 2003. Mr. Thompson has also served as our acting
Chief Financial Officer from July 2002 to August 2002 and our Vice President of
Finance from November 2001 to September 2002. Mr. Thompson has a background in
the areas of accounting, finance, acquisitions, divestitures and financing,
negotiations and execution. Prior to joining the Company, he held the position
of Director of Finance at MGI Software Corporation, a leading global provider of
visual media software and infrastructure solutions distributed in over 40
countries.
At MGI, Mr. Thompson managed a staff of nine accounting and two
information systems employees. Prior to joining MGI, Mr. Thompson qualified as a
chartered accountant with KPMG LLP and spent three years in their Corporate
Finance group providing transaction advise and support on divestiture,
33
acquisitions and financing on transactions ranging up to $200 million. Mr.
Thompson is a member of the Canadian Institute of Chartered Accountants. He
received his Bachelor of Commerce degree from University of Toronto in 1990.
COMPENSATION
COMPENSATION OF NON-EMPLOYEE BOARD MEMBERS
We have entered into agreements with our two independent directors as
follows: Mr. Grossman receives a fee of (pound)50,000 per year and Mr. Roberts a
fee of (pound)18,000 per year. Mr. Grossman's fees inCLUDE compensation for up
to five hours a month of legal services to be provided by Mr. Grossman to the
Company and Mr. Grossman may additionally provide up to five hours per month of
legal services, the fees for which shall not exceed a total of US$1,750.00 per
month. In addition, Mr. Grossman in June 2003 has been granted options to
purchase ordinary shares as follows: options to purchase 150,000 ordinary shares
of the Company which vest on April 11, 2004 and options to purchase 300,000
ordinary shares of the Company which vest on April 11, 2005. Mr. Roberts has
received stock options in the past (see table below). Any directors who are
employees receive no cash compensation for serving on our Board of Directors.
Directors who resigned during the year were paid pro rata up to when they ceased
performing duties for us. All directors are reimbursed for their reasonable
expenses incurred to attend meetings of the Board of Directors. We anticipate
that our Board of Directors will hold regularly scheduled meetings at least
quarterly in person and monthly by telephonic conference.
COMPENSATION OF OUR SENIOR MANAGEMENT
The following table sets forth all compensation, in U.S. dollars, we
paid to our senior management and directors including stock options grants
during the year ended December 31, 2002 and stock options granted as of June 28,
2003. All of the options listed in the table below represent options to purchase
our ordinary shares or ADSs. Options granted to our directors will vest and
become exercisable as to 25% of the original number of option shares on the date
of grant and a further 25% upon the expiration of each of the following three
periods of three months. All new options granted to our employees and officers
will normally vest over a three-year period from the date of the grant. Any
options that were granted in exchange for the former Starnet's options normally
vest over a two-year period. Additional options were granted in 2003 to Messrs.
Grossman, Moran and Fleming as described below. Please see "Item 10. MATERIAL
CONTRACTS" for a description of employment agreements with our senior management
staff.
Option Grants/
Compensation Vested Options
Name and Principal Position ($) as of June 28, 2003
--------------------------- ------------ -------------------
A. Daniel Moran, Chief Executive Officer (1) - 1,500,000/ 0
James H. Grossman, Chairman of the Board (2) - 450,000/ 0
Nicholas Jackson, Former Director and CEO (3) 143,750 352,459/ 352,459
David Craven, former CEO (4) 103,430 400,000/ 400,000
James MacKay, former Interim President and CEO (5) 49,213 100,000/ 0
Michael Aymong, former President and CEO (6) 174,996 2,940,000/ 2,158,175
David Naismith (7) - 650,000/ 0
Mark Thompson, Operations Director, Managing Director Starnet
Systems and acting Chief Financial Officer (8) 125,333 110,000/ 110,000
Simon Coulthard, former Chief Financial Officer (9) 37,669
Rodney Davis, former CFO, COO (10) 169,962 300,000/ 150,000
Christopher Thompson, former CFO (11) 25,000 0/ 0
Liam Gillen, former Managing Director, Starnet Systems (12) 159,860 165,000/ 0
Clare Roberts, Director (13) 32,311 350,000/ 350,000
Frederick Hazell, former Chairman of the Board, (14) 53,448 370,928/ 370,928
Wolf Bergelt, former Director & former Consultant (15) 2,296 426,967/ 426,967
David Fleming, Director and Chief Technology Officer and
Managing Director Inphinity (16) 107,416 600,000/ 50,000
Jason Bolduc, former VP IT and ASP Hosting (17) 129,575 100,000/ 100,000
R. Michael Steele, former VP Strategy and Corporate
Communications, former Managing Director, Inphinity Interactive Inc.(18) 36,783 175,000/ 72,917
34
__________
(1) Daniel Moran's employment with World Gaming plc commenced on April 11,
2003. His annual compensation is (pound)115,000 with an annual housing
allowance of (pound)15,600 and certain other additIONAL benefits. The
Company on June 4, 2003 authorized the issuance of options to purchase
1,000,000 ordinary shares all of which vest only on April 11, 2004 and
options to purchase 500,000 ordinary shares all of which vest only on April
11, 2005. (See Item 10. MATERIAL CONTRACTS).
(2) James H. Grossman has served as a director and Chairman of the Board since
April 11, 2003. His annual compensation for such service and up to five
hours a month of legal services is (pound)50,000, plus up to US$1,750.00
per month for certain additional legal services. In addition, the Company
on June 4, 2003 authorized the issuance of options to purchase 150,000
ordinary shares all of which vest only on April 11, 2004 and options to
purchase 300,000 ordinary shares all of which vest only on April 11, 2005.
Mr. Grossman is of counsel to the law firm of Reed Smith Crosby Heafey
which provides legal services to the Company. (See Item 10. MATERIAL
CONTRACTS).
(3) Nicholas Jackson has served as a director from October 2000 to April 9,
2003 and served as Chief Executive Officer from January 13, 2003 on a
salary of (pound)174,000 per annum plus annual allowances of (pound)12,000
for a vehicle and US$48,000 for housing. On April 9, 2003, Mr. Jackson
resigned as CEO and a director of the Company. Mr. Jackson in June 2003
entered into a settlement agreement with the Company pursuant to which he
received (pound)125,000 in exchange for any monies which may be due to him
from the Company. He was paid director's fees up to January 13, 2003 and
salary and housing from January 13, 2003 until April 9, 2003. He has been
granted stock options, of which 102,459 are exercisable at $2.13, 50,000 at
$1.44, and 200,000 at $0.31. (See Item 10. MATERIAL CONTRACTS).
(4) David Craven served as our CEO from July 15, 2002 to January 11, 2003 on a
salary of (pound)175,000 per annum plus (pound)12,000 per annum vehicle
allowance. As part of an amicable settlement agreement, Mr. Craven received
(pound)25,000 and received earlier agreed upon stock options as follows:
100,000 at $0.20, 250,000 at $0.27 and 50,000 at $0.40 all of which is
fully vested and must be exercised no later than January 11, 2008. Mr.
Craven has agreed to give up any claims against the Company. (See Item 10.
MATERIAL CONTRACTS).
(5) James MacKay became our Interim CEO upon the resignation of Michael Aymong
on June 19, 2002 on a salary of $200,000 per annum. He resigned on July 17,
2002. Mr. MacKay alleges that he had a Consulting Agreement for a period of
one year, paying him $16,667 per month, pursuant to which he was to provide
advisory services. The Company believes that it never entered into a
consulting agreement with James MacKay. All agreements with senior
management are subject to the Board's approval, and the consulting
agreement was not approved by the Board. The Company disputes any rights
under the purported consulting agreement claimed by Mr. MacKay.
35
(6) Michael Aymong's employment with Starnet began April 9, 2001 on a salary
$350,000 and certain other additional benefits. He resigned on June 19,
2002. 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.
Pursuant to his employment agreement, Mr. Aymong received 2,800,000 share
options all of which are vested and exercisable at the following prices:
1,200,000 vested at $0.31, 200,000 at $0.78, 200,000 at $1.25, 200,000 at
$2.25, 400,000 at $4.25, 200,000 at $6.25, 200,000 at $8.25, and 400,000 at
the closing market price of the shares on March 31, 2003. In addition,
pursuant to antidilution provisions of Mr. Aymong's employment agreement,
he was granted 140,000 options at an exercise price of $0.75 in connection
with the issuance of ordinary shares to AIM Investments Ltd. There were no
stock options exercised by Mr. Aymong since his date of resignation.
(7) David Naismith's has been selected by the Board to be a member of the board
of directors and to the position of Chief Financial Officer effective
August 1, 2003 on a salary of $156,000, an annual housing allowance of
$25,000 and certain other additional benefits. In addition, the Company on
June 4, 2003 authorized the issuance of options to purchase 150,000
ordinary shares all of which vest only on June 4, 2004 and options to
purchase 500,000 ordinary shares all of which vest only on August 1, 2005.
(See Item 10. MATERIAL CONTRACTS).
(8) Mark Thompson's consulting arrangement with us began on August 7, 2001, and
he has served as Vice President of Finance from November 1, 2001 to
September 15, 2002 and Acting Chief Financial Officer from July 2002 to
August 31, 2002 respectively on a salary of $100,000 and certain other
additional benefits. On December 1, 2002, Mr. Thompson was appointed to the
position of Operations Director and Managing Director of Starnet Systems on
a salary of $120,000 with an annual housing allowance of $30,000 and
certain other additional benefits. With the resignation of Simon Coulthard
in 2003, our Group Finance Director, Mr. Thompson is currently our acting
Chief Financial Officer. Pursuant to his Consulting Agreement, Mr. Thompson
has been granted options to purchase an aggregate of 110,000 ordinary
shares of which 30,000 were granted on August 7, 2001 with an exercise
price of $1.47 and vesting period of one year; and 80,000 were granted on
November 1, 2001 with an exercise price of $0.47 to vest over a one year
period. Such options are fully vested.
(9) Mr. Simon Coulthard's employment as Group Finance Director with World
Gaming plc began September 1, 2002 on a salary of (pound)75,000 plus car
allowance of (pound)7,200. Effective May 8, 2003, MR. Coulthard's
employment was terminated. Mr. Coulthard received (pound)18,750 or three
months gardening leave as part of his agreed upon severance. (See Item 10.
MATERIAL CONTRACTS).
(10) Rodney Davis' employment with us began on July 7, 2001 on a salary of
$190,000. He resigned on June 20, 2002. His options continued to vest until
November 21, 2002. 100,000 vested options at $1.34; 25,000 vested options
at $2.25; 50,000 vested options at $0.45; 25,000 vested options at $0.90;
25,000 vested options at $0.60. These options have now been cancelled as of
June 1, 2003. As part of his proposed severance package Mr. Davis received
six months salary payable in 12 equal semi-monthly installments; accrued
50% bonus for January to May 2002; severance 50% bonus for the period
June-November, 2002 and accrued vacation pay for 16 days. His total
severance package was $191,598. (See Item 10. MATERIAL CONTRACTS).
36
(11) Christopher Thompson served as our Vice President of Finance until July 31,
2001 on a salary of $130,000 and certain other additional benefits. Mr.
Thompson filed a lawsuit against us during 2001 for severance which was
subsequently settled during November 2002 for $92,500. At May 31, 2003 this
severance amount was paid in full.
(12) Liam Gillen's was Managing Director, Starnet Systems from November 27, 2000
to September 30, 2002 on a salary of $120,000 with a housing allowance of
$36,000 and certain other benefits. Stock options: 50,000 vested at an
exercise price of $.75; 115,000 to vest in three years at an exercise price
of $1.18 and in view of the termination of which 38,333 is vested. Mr.
Gillen entered into a termination agreement whereby his compensation would
be continued from September 30, 2002 until the end of his contract on
November 26, 2002. In total, Mr. Gillen was provided with a severance
payment of $28,311. (See Item 10. MATERIAL CONTRACTS).
(13) Clare Roberts has served as a director from October 18, 2000. His annual
compensation for such service is (pound)18,000. Mr. Roberts has been
granted options, of which 100,000 are exercisable and fully vested at an
exercise price of $2.13; 50,000 are exercisable and fully vested at an
exercise price of $1.44; and 200,000 are exercisable and fully vested at an
exercise price of $0.31.
(14) Frederick Hazell resigned as Chairman and a Director on March 19, 2002 on
an annual compensation of $24,000. His options are fully vested and 110,298
are exercisable at $2.13, 200,000 at $0.31; and 60,000 at $0.31.
(15) Wolf Bergelt served as a consultant pursuant to a consulting agreement with
us, which was terminated on August 31, 2001. The termination agreement
provided for a payment of $84,000 payable through June 30, 2002. He
resigned from the Board of Directors on May 24, 2002. During the fiscal
year ended April 30, 2001 he was paid for his consulting services and for
his services as a Director. Mr. Bergelt's 70,000 options are exercisable
and fully vested at $1.44 per share, 106,967 are exercisable and fully
vested at an exercise price of $2.13 per share, 50,000 are exercisable and
fully vested at an exercise price of $0.62, and 200,000 are exercisable and
fully vested at an exercise price of $0.31 per share.
(16) David Fleming's employment began September 10, 2001 and he has an annual
salary of CDN$180,000. He has been granted options for 100,000 ordinary
shares on September 10, 2001 at an exercise price of $0.88 to vest annually
on the anniversary dates over a three year period of which 33,334 have
vested. In addition, the Board on June 4, 2003 issued options to purchase
500,000 ordinary shares of the Company all of which options will vest only
on April 11, 2005. (SEE ITEM 10. MATERIAL CONTRACTS).
(17) Jason Bolduc resigned as a director on March 27, 2002 on a salary of
$100,000. He resigned as Vice President of IT and Application Hosting
commencing in October 2002. He was originally granted 300,000 options of
which 100,000 on April 30, 2000 are vested and are exercisable at $2.12 and
200,000 on April 30, 2001 at an exercise price of $0.31 to vest over a one
year period. Mr. Bolduc relinquished 200,000 of his options when he
resigned from the Board.
(18) R. Michael Steele's employment began on April 12, 2001 and had an annual
salary of CDN$100,000. Effective January 1, 2002, he assumed the position
of VP of Strategy and Corporate Communications. He resigned effective June
15, 2002.
37
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 ADRs as determined by Board or the Share Option
Committee. The Compensation Committee now consisting of James H. Grossman and
Clare Roberts 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 ADRs) 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 ADR.
ELIGIBILITY
All employees, officers, directors and all other persons who provide
services to 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
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. However, recently granted
options in June 2003 to the new Chairman of the Board require a more onerous one
year and two year vesting schedule as determined by the Board. 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
38
of termination, except as permitted in the sole discretion of 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 ADRS
Ordinary shares or ADRs issued upon the exercise of options will rank
equally with ordinary shares or ADRs, 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.
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. Shareholders holding a
majority of the Company's 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 and a
Compensation Committee.
39
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). Wolf Bergelt
was Chairman of the Audit Committee until his resignation as director on May 24,
2002. The Board on April 11, 2003, appointed James H. Grossman and Clare Roberts
to the Audit Committee.
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 James H. Grossman and Clare Roberts.
EMPLOYEES
The number of employees by location as of the dates set forth below is
as follows:
MAY 31, DECEMBER DECEMBER APRIL 30, APRIL 30,
2003 31, 2002 31, 2001 2001 2000
---- -------- -------- ---- ----
Antigua 48 53 69 79 64
Canada 39 32 55 54 114
London 2 5 8 - -
Total 89 90 132 133 178
Development and administrative functions are in Vancouver, Canada while
the licensing operations take place in our office in Antigua. In June 2002 our
Toronto office was closed and four employees from that office were terminated.
Effective May 31, 2003, our London Office was closed resulting in the
termination of two employees. The total number of our employees as of May 31,
2003 is 89.
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 AND DIRECTORS
The table below sets forth certain information concerning the share
ownership of our directors and senior management as of June 28, 2003.
NUMBER OF
ORDINARY SHARES PERCENTAGE OF
NUMBER OF OR ADSS WHICH ORDINARY
ORDINARY MAY BE ACQUIRED RANGE OF EXERCISE SHARES OR ADSS
SHARES OR UNDER SHARE PRICES OF RANGE OF EXPIRATION BENEFICIALLY
NAME ADSS OWNED OPTION PLAN OPTIONS($) DATES OF OPTIONS OWNED(1)
---- ---------- ----------- ---------- ---------------- --------
A. Daniel Moran - 1,500,000 $0.14 4/2011 0%
James H. Grossman - 450,000 $0.14 4/2011 0%
David Fleming - 600,000 $0.14 - $0.88 9/2006 0%
David Naismith(2) - 650,000 $0.14(2) 6/2013 0%
Mark Thompson - 110,000 $0.47 - $1.47 8/2006 - 11/2006 0%
Clare Roberts - 350,000 $0.31 - $2.13 1/2004 - 4/2006 0%
40
__________
(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 45,781,417 ordinary shares issued and
outstanding as of June 28, 2003. Including shares underlying options which
are exercisable within 60 days of June 28, 2003, none of the identified
persons beneficially owned greater than 1% of the Company's American
Depository Shares or ordinary shares.
(2) Mr. Naismith has been selected to become a director of the Company and
Chief Financial Officer effective August 1, 2003. The exercise price of
certain of Mr. Naismith's options shall be the price of the Company's
shares on the close of business on August 1, 2003.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The following table contains information regarding the beneficial
ownership of our ordinary shares, including our American Depositary Shares, as
of June 28, 2003, for all shareholders known by us to beneficially own 5% or
more of our ordinary shares.
NUMBER OF ORDINARY PERCENTAGE OF OUTSTANDING
SHARES OR ADRS ORDINARY SHARES OR ADRS
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
--------------------------- --------------------- ------------------
Cribbage Limited .......... 6,506,204 14.2%
Goodison Park Limited
(a wholly-owned subsidiary
of Sportingbet, PLC) ...... 5,000,000(2) 10.9%
__________
(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 45,781,417 ordinary shares issued and outstanding as of June 28, 2003.
(SEE ITEM 7. RELATED PARTY TRANSACTIONS).
(2) Excludes up to 7,500,000 ordinary shares which may be acquired by the
beneficial owner upon the conversion of a certain convertible note issued by us
to the beneficial owner in April 2003. (See Item 10. Additional Information -
Material Contracts - Unsecured Convertible Loan Note with Goodison Park
Limited).
41
SIGNIFICANT CHANGES IN OWNERSHIP OF ORDINARY SHARES
Prior to the holding company reorganization in 2001, 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. In 2002, As a result of the issuance of the class
action shares, Cribbage Limited, a wholly-owned subsidiary of Sportingbet PLC,
acquired 6,506,204 American Depositary Shares. With the completion of the
financing on April 7, 2003, Goodison Park Limited, another wholly-owned
subsidiary of Sportingbet PLC, acquired 5,000,000 ordinary shares of the Company
and the right to acquire up to 7,500,000 additional ordinary shares upon the
conversion of a certain convertible loan issued by us to Goodison Park Limited.
(See Item 7. RELATED PARTY TRANSACTIONS).
SECURITIES AND RECORD HOLDERS IN THE UNITED STATES
As of June 27, 2003, 31,843,932 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 81% of our ordinary shares were held by 208 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 our company.
RELATED PARTY TRANSACTIONS
SIMPSON BAY LTD. AND AIM INVESTMENTS LTD.
AIM Investments Ltd, an affiliate of Simpson Bay Ltd., is a 4.4%
shareholder of World Gaming holding 2,000,000 ADRs. It became a shareholder when
Starnet issued 2,000,000 ordinary 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 ADRs in the course of the
holding company reorganization. Additionally, Simpson Bay Ltd. is affiliated
with one of our significant licensees. (See Item 10. MATERIAL CONTRACTS).
INVESTMENT BY GOODISON PARK LIMITED
Goodison Park Limited, a wholly-owned subsidiary of Sportingbet Plc,
acquired an interest in World Gaming Plc by way of share acquisition and a
convertible loan. Goodison Park purchased 5,000,000 ordinary shares of World
Gaming at $0.12 per share or a total of $600,000; and made a convertible loan to
the Company (the "Convertible Loan") in the principal amount of $900,000. The
Convertible Loan is unsecured with principal repayment due in April 2005 and the
unpaid principal thereof is convertible at any time into ordinary shares at a
conversion price of $0.12 per share. Additionally, Sportingbet Plc is the parent
company of one of our significant licensees. (See Item 10. MATERIAL CONTRACTS)
SETTLEMENT OF DISPUTE WITH CHISEL INC.
In March 2000, our subsidiary, Starnet Canada, sold substantially all
of the assets and undertakings comprising its adult entertainment division to
Chisel Media Inc. 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 was released to Starnet Canada on April 30, 2000, and the balance
was to be paid in monthly installments through July 1, 2003. The deferred
42
portion of the purchase price is secured by a general security agreement in
favor of Starnet Canada, and a pledge of the shares of Chisel Media Inc. The
monthly installments referred to above which were to begin July 1, 2000 have not
been paid by Chisel Media Inc. and at December 31, 2001, we reserved for the
potential of not being able to collect the principal amount from the buyer. We
continue to negotiate a settlement with Chisel Media, Inc. From June 19, 2002
until July 17, 2002, James MacKay, the shareholder of Chisel Media Inc., has
served as our interim CEO and a director, of the Company. Any settlement will be
scrutinized by the Board as a related party transaction, and will be subject to
the Board's approval as such.
LOAN AGREEMENT WITH SPORTINGBET PLC
On August 1, 2002, the Company entered into a loan agreement with
Sportingbet Plc, one of our licensees. Pursuant to the loan, Sportingbet loaned
the Company $1,250,000, which was repaid in full in April 2003. Repayments were
in the form of amounts due to us from Sportingbet under our license agreement
with them. Pursuant to the loan, Sportingbet had a security interest in our
software and the right to access and use the software and the secure site where
the hardware is located in the event of default.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Our consolidated financial statements for the year ended December 31,
2002 and 2001, eight months ended December 31, 2001 and 2000 set forth in this
report following Part III, are included herein at Item 17 of the Annual Report.
LEGAL PROCEEDINGS
The following are material existing and pending or recently concluded
legal claims against us and our subsidiaries:
LAS VEGAS CASINO INC. LAWSUIT
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 alleges that the Starnet breached and wrongfully
terminated its license agreement with LVC 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. The Supreme Court of British Colombia has dismissed this
action. LVC has appealed the Court ruling and the Company is awaiting the
determination of the appeal. The Company believes the appeal is without merit.
LAWSUIT BY CASINO ON AIR WORLD ENTERTAINMENT LTD.
In March 2002, Casino on Air World Entertainment Ltd., a former
licensee of the Company, filed a lawsuit against the Company alleging breach of
contract in Antigua. The amount of the claim is U.S. $1.84 million. The Company
successfully obtained a stay of this action in the Antiguan courts. The court
ordered that the dispute be dealt with by way of arbitration. Casino on Air has
failed to file a Notice to Arbitrate. The financial impact of this action, if
any, cannot be determined at this time, although the Company believes that the
claim is without merit.
43
SINSATIONAL INTERTAINMENT LAWSUIT
On April 9, 2003, Starnet Systems served notice to Sinsational
Intertainment ("Sinsational"), a former licensee of the Company regarding its
outstanding account in the amount of $268,207 indicating the Company would
terminate the agreement if the long overdue account was not made current. On
April 15, 2003, Sinsational filed a statement of claim in the courts of Antigua
and Barbuda against the Company for an amount of $6,637,439. The Company
counterclaimed for the outstanding amount due. On April 16, 2003, Sinsational
acknowledged in writing the termination of its agreement with the Company. On
April 16, 2003, Sinsational commenced an action against the Company and obtained
an injunction preventing Starnet Systems from terminating the agreement. On May
12, 2003, at the request of the Company, the court removed the injunction. On
May 15, 2003 Sinsational requested that Starnet Systems cease providing services
to its website. On May 23, 2003 Sinsational filed an amended statement of claim
increasing the amount claimed to $30,869,841 alleging, among other things,
breach of contract and permanent loss of shareholder value. On June 19, 2003,
Sinsational obtained a new injunction preventing the Company from dealing with
Sinsational's customer data. The Company believes that the claim for damages is
without merit but there can be no assurances that the outcome would be in favor
of the Company.
CANADA CUSTOMS AND REVENUE AGENCY ("CCRA")
The CCRA for the past two years have been auditing our subsidiary,
Starnet Communications International, Inc. We provided the auditors with all
relevant information, and cooperated with the agency. The audit was completed
subsequent to December 31, 2002 with the CCRA without any negative finding of
financial penalties for the company.
SUNRISE CORPORATION LAWSUIT
Sunrise Corporation commenced a lawsuit against the Company in the
Superior Court of Ontario on April 16, 2002 . Sunrise Corporation alleges that
Starnet Canada failed to make payments for the equipment leased from Sunrise
Corporation and that World Gaming is responsible for this debt. The amount of
the claim is $465,211 plus interest and costs. The Company has filed an amended
defense to this lawsuit. The Company cannot reliably ascertain at this time the
merits or financial impact of this lawsuit.
U.S. DELAWARE CLASS ACTION CLAIMS
Starnet and certain officers and directors were named as defendants in
ten class action lawsuits filed in 1999 alleging 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 class
alleged in the class action claims consists of all persons who purchased
Starnet's common stock from March 11, 1999 to August 20, 1999 inclusive,
excluding the defendants and persons connected with Starnet. On June 20, 2001,
Starnet entered into a memorandum of understanding with the plaintiffs for the
settlement of the litigation, which at the time was still subject to the court's
approval. The amount of the settlement and related costs totaling $1,200,000
were included in the current year financial statements for the year ended
December 31, 2002. The settlement was approved by the court on September 9,
2002. In March 2003, American Depositary Shares valued at approximately
$1,050,000 pursuant to the terms of the settlement agreement were issued to the
members of the plaintiff's class and $50,000 in related costs was paid in full
settlement of this matter.
44
WIREMIX MEDIA INC.
On August 28, 2001 our subsidiary, Starnet Canada, filed a statement of
claim against Wiremix Media Inc. in the Supreme Court of British Colombia for
approximately CDN$154,645 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 a statement of defense to
Starnet Canada's claim. On October 1, 2001, Wiremix Media filed a statement of
claim against Starnet Canada. Wiremix Media alleged that Starnet Systems
arbitrarily terminated a marketing and consulting agreement with Wiremix and
claims damages of approximately $2 million remaining under the contract. A
negotiated settlement was agreed between the Company and Wiremix Media during
2002 where we are obligated to pay Wiremix Media CDN$30,000. Of such amount,
CDN$30,000 has been as accrued as due but unpaid in our financial statements as
at December 31, 2002.
LAWSUIT BY OUR FORMER FINANCE EMPLOYEE CHRIS THOMPSON
On August 2, 2001, Chris Thompson commenced an action in the Supreme Court of
British Colombia against the Company for the wrongful termination of his
employment agreement. He claimed damages of approximately $196,800. A negotiated
settlement was agreed between the Company and Chris Thompson during 2002 for
$97,000. The accrual for the unsettled balance was made in the financial
statements as at December 31, 2002 with payments made in full subsequent to
December 31, 2002. This matter is now closed.
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
On August 17, 2001, Starnet pled guilty to a single count contrary to
the gaming provisions of the Canadian Criminal Code. Starnet was fined
CDN$100,000 and ordered to forfeit $3,925,000 out of funds theretofore
restrained and held by the Royal Canadian Mounted Police in connection with
their investigation of Starnet. The investigation is now concluded, and during
the hearing before the Court, the Court agreed that there was no legal complaint
with regard to Starnet's operations since August, 1999 and as of the date of the
plea.
DIVIDEND POLICY
Our Articles of Association provide that dividends are declared by the
shareholders upon the recommendation of the Board of Directors which has the
discretion to make any such recommendation. The Company has never paid cash
dividends on our ordinary shares, and it is not anticipated that any cash
dividends on our ordinary shares will be paid in the foreseeable future.
SIGNIFICANT CHANGES
We have experienced no significant changes since the date of the annual
financial statements other than those disclosed in those financial statements.
ITEM 9. THE OFFER AND LISTING
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
June 28, 2003, we had 45,781,417 ordinary shares issued and outstanding,
40,781,415 of which are represented by American Depositary Shares evidenced by
American Depositary Receipts issued by Continental Stock Transfer and Trust
45
Company, as depositary. As of June 28, 2003, 40,781,415 of our ordinary shares
were held of record by Continental Stock Transfer and Trust Company, two
ordinary shares was held by Continental Stock Transfer and Trust Company and Mr.
Steve Nelson jointly, and 5,000,000 ordinary shares were held by Goodison Park
Limited. 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 May 31, 2003 and for Starnet, as our 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.
HIGH LOW
FIVE MOST RECENT FINANCIAL YEARS ---- -----
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
Eight months ended December 31, 2001 ...................... 2.100 0.410
Year ended December 31, 2002............................... 0.975 0.140
YEAR ENDED APRIL 30, 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
YEAR ENDED APRIL 30, 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
EIGHT MONTHS ENDED DECEMBER 31, 2001
May to June 2001........................................... 2.100 0.630
Third Quarter.............................................. 1.630 0.520
Fourth Quarter............................................. 0.700 0.410
YEAR ENDED DECEMBER 31, 2002
First Quarter.............................................. 0.670 0.410
Second Quarter............................................. 0.450 0.192
Third Quarter.............................................. 0.270 0.150
Fourth Quarter............................................. 0.975 0.140
MOST RECENT SIX MONTHS
December 2002.............................................. 0.210 0.160
January 2003............................................... 0.250 0.160
February 2003.............................................. 0.250 0.170
March 2003................................................. 0.200 0.120
April 2003................................................. 0.190 0.126
May 2003................................................... 0.180 0.140
46
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 Act of 1985, 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 former 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. A copy of our present Articles of
Association, adopted by special resolution on June 20, 2002 are filed as an
exhibit to this Form 20-F.
We are incorporated under the name World Gaming plc and our company is
incorporated in England and Wales with the registered number 4094204. Our
Memorandum of Association does not include a stated purpose.
BOARD ACTION AND POWERS
The Articles of Association provide that unless otherwise determined by
ordinary resolution, the Board of Directors shall consist of not less than two
nor more than 10 members. Currently, the number of directors is set at 5.
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. If the
number of directors subject to retirement by rotation is fewer than three, one
of such directors shall retire. 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 Acts of 1985 and 1989 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.
47
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)180,000 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 Act of 1985
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.
No such contract, transaction or arrangement shall be liable to be
avoided on the grounds of any such interest or benefit.
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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 our 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 sub-underwriting 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 (subject to the provisions of the
U.K. Companies Act of 1985 and the U.K. Uncertificated Securities Regulations
1995) every director, secretary or manager of our 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
As of June 28, 2003, 45,781,417 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.
49
There are no rights of pre-emption attaching to the ordinary shares, save as set
out below under "Issuance of Shares". See Item 10 - Additional Information -
Material Contracts - Unsecured Convertible Loan Note with Goodison Park Limited
and - Stock Acquisition Agreement with Goodison Park Limited. Furthermore, they
are not issued as redeemable shares. However, it should be noted that we may
choose to utilize the power conferred upon us by Part V Chapter VII of the
Companies Act 1985 to issue redeemable shares subject to obtaining an
appropriate authority from the shareholders. Neither the Memorandum of
Association, Articles of Association, nor any statutory provision in England and
Wales restrict in any way the ownership of, nor voting rights attaching to, the
ordinary shares held by persons resident outside the United Kingdom. Under the
terms of our Articles of Association, we are obliged to give notice of
shareholder meetings to all ordinary shareholders, 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 the Company 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 allot 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)100,000, 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
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.
50
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 in the discretion of the 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 the Company's liquidation, after satisfaction of
liabilities to creditors, holders of ordinary shares are entitled to share pro
rata in the net assets of our 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 the Company 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, the Articles of Association apply additional restrictions. The
restrictions imposed or applied can potentially include disenfranchisement, loss
of entitlement to dividends and other payments and restrictions on alienability.
51
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 our
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 our issued ordinary shares represented at a shareholders
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 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.
52
TRANSFER OF SHARES
Fully paid ordinary shares are issued in registered form and may be
freely transferred pursuant to the 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, the Company's
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. We are 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 we
filed with the SEC on Form F-6 (SEC File No. 333-13286) on May 24, 2001,
50,000,000 ADSs, where each ADS represented one ordinary share, were registered.
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
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 us with written
evidence of its appointment. At a general meeting, the appointed proxy is
53
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 (if the retiring directors are willing to
continue to act and are approved by the Board and offer themselves for
re-election) only approximately one-third of our directors are eligible for
election each year (in addition to any directors appointed by the Board since
the last annual general meeting).
In addition to the shareholders right not to re-appoint retiring
directors who are willing to continue to act and are approved by the Board and
to re-appoint directors appointed by the Board since the last annual general
meeting, shareholders can remove directors by ordinary resolution of the holders
of 50% of our issued ordinary shares represented at a shareholders meeting.
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.
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 for 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
Starnet's back-end when they launch a European sportsbook.
LOAN AGREEMENT BETWEEN STARNET, WORLD GAMING AND SPORTINGBET PLC;
GENERAL SECURITY AGREEMENT WITH SPORTINGBET PLC; ESCROW AGREEMENT WITH
NCC ESCROW INTERNATIONAL LIMITED.
On August 1, 2002, Starnet, World Gaming and Sportingbet PLC
("Sportingbet") entered into a Loan Agreement (the "Loan Agreement") pursuant to
which Sportingbet agreed to loan to Starnet and
54
World Gaming a maximum principal amount of $1,500,000 (the "Loan"). The Loan
bears interest at a rate of 2% above LIBOR. The Loan provides that payments are
made under the Loan based upon a deduction by Sportingbet of $225,000 per month
from November 2002 to March 2003 and $62,500 per month from April 2003 to
September 2003. The Loan is subject to an Escrow Agreement and a Charge
Agreement, which provides Sportingbet the right to access and use the software
and the secure site where the hardware is located in the event of default.
However, the Loan was fully repaid in April, 2003.
On August 1, 2002, in connection with the Loan Agreement, we entered
into a Security Agreement with Sportingbet. The Security Agreement provides that
we grant Sportingbet a security interest in the hardware used by us to provide
the services to Sportingbet under the License Agreement between the parties. The
grant of the security interest secures our obligation to repay Sportingbet under
the Loan Agreement. If certain trigger events occur under the Loan Agreement,
Sportingbet may take possession of the hardware, subject to any restrictions by
law, or exercise other rights available to it, including selling or leasing the
hardware. Subsequent to December 31, 2002, the Loan was fully repaid in April,
2003.
On August 1, 2002, the Company entered into an escrow agreement with
Internet Opportunity Entertainment Limited (now a subsidiary of Sportingbet) and
NCC Escrow International Limited (the "Escrow Agreement"). The Escrow Agreement
provides that the source code that forms the software that the Company license
to Sportingbet is held in escrow by NCC. Upon a trigger event, subject to
certain restrictions, Sportingbet may require that NCC release the source code
to Sportingbet. Sportingbet required under the Loan Agreement that the Escrow
Agreement be maintained as a continuing security for repayment of the Loan.
UNSECURED CONVERTIBLE LOAN NOTE WITH GOODISON PARK LIMITED
As part of the $1.5 million financing completed in April 2003
(subsequent to the year ended December 31, 2002), the Company entered into an
unsecured convertible loan ("Convertible Loan") for an amount of $900,000 on
April 4, 2003 with Goodison Park Limited, a wholly-owned subsidiary of
Sportingbet PLC ("Goodison Park"). Unless previously repaid or redeemed, the
Convertible Loan must be repaid on April 4, 2005, two years from the issue date.
Goodison Park has the right during the two year period in which the Convertible
Loan remains outstanding to require the Company to redeem the Convertible Loan
for shares of stock in the Company at a per share conversion price of $0.12.
This redemption can be for an amount of at least $50,000 and up to the full
amount outstanding as designated by Goodison Park. Goodison Park has the right
to transfer the entitlement under the Convertible Loan. Additionally, the
Company has agreed that while the Convertible Loan is outstanding, that it will
not, without the consent of Goodison Park, create, issue or redeem and share or
loan capital or grant any options (except for those issued in accordance with
the Company's 2001 Share Option Scheme) or effect any other change in the
Company's share capital.
STOCK ACQUISITION AGREEMENT WITH GOODISON PARK LIMITED
On April 4, 2003, as part of the $1.5 million financing, the Company
entered into a Stock Acquisition Agreement with Goodison Park ("Acquisition
Agreement"). Pursuant to the Acquisition Agreement, the Company was required to
issue 5,000,000 ordinary shares of (pound)0.002 each in the capital of the
Company At A subscription price of $0.12 per share, for a total subscription
price of $600,000. The shares are fully transferable unrestricted shares with
full voting and other rights attaching to the Company's share capital in
accordance with its Articles of Association. The shares shall not be issued as
American Depositary Shares. Subject to the terms of the Acquisition Agreement,
Goodison Park also has the right to require the Company to appoint and maintain
in office one director of the Company's board of directors who will also be a
member of any committee of the Board.
55
World Gaming undertook in the Acquisition Agreement relating to the
purchase of such 5,000,000 ordinary shares to procure that a resolution be
proposed to its shareholders at its 2003 Annual General Meeting which if passed,
would enable the directors to issue shares non-pre-emptively only in respect of
sufficient numbers of shares to meet the exercise of existing share options. In
addition, World Gaming undertook (subject to certain qualifications) not to take
the following actions without the prior written consent of Goodison Park:
o any change to World Gaming's Memorandum and Articles of Association
other than as contemplated by the Acquisition Agreement;
o the presentation of any petition for winding-up or petition for an
administration order;
o any change in the share capital or the creation, allotment or issue of
any shares or of any other subscribe for or to convert any instrument
into such shares or securities other than as contemplated by the
Acquisition Agreement and other than any shares issued pursuant to the
normal operation of World Gaming's 2001 Share Option Plan but excluding
all executive arrangements;
o any reduction of the share capital or variation of the rights attaching
to any class of shares or any redemption, purchase or other acquisition
of any shares or other securities;
o the adoption after the date hereof of any bonus or profit-sharing
scheme, any share option or share incentive scheme or employee share
trust or share ownership plan or retirement benefit scheme;
o capital expenditure of greater than US$200,000;
o the entry into of any contract or commitment under which World Gaming
may incur costs of US$200,000 or more or which may not be fulfilled or
completed within one year or with a director or connected person of a
director;
o the borrowing of amounts (or indebtedness in the nature of borrowings)
other than in the ordinary course of trading or the creation of any
charge or other security over any of the Company's assets or property;
o the giving of any guarantee or indemnity; and
o the commencement or settlement of any litigation arbitration or other
proceedings which are material in the context of the Company's
business.
GUARANTEE FROM NICHOLAS JACKSON IN FAVOR OF GOODISON PARK LIMITED
In connection with the Convertible Note and the Acquisition Agreement,
Nicholas Jackson agreed to enter into a guarantee agreement pursuant to which
Mr. Jackson guaranteed to procure the due and punctual performance of World
Gaming's obligations. Goodison Park has released Mr. Jackson from this guarantee
effective June 4, 2003.
SOFTWARE LICENSE AGREEMENT BETWEEN INTERNET OPPORTUNITY ENTERTAINMENT
LTD. AND SOFTEC SYSTEMS CARIBBEAN INC. DATED MARCH 19, 1998
A Software License Agreement between Internet Opportunity Entertainment
Ltd., the successor to Internet Opportunity Entertainment Ltd., the successor to
Internet Opportunity Antigua, and Starnet Systems' predecessor, Softec Systems
Caribbean Inc., was entered into on March 19, 1998. Starnet Systems licensed its
Internet casino software in order to allow Internet Opportunity to operate an
Internet gaming site. The non-exclusive license provides for a single online
casino which includes such games as blackjack, roulette, pai gow poker, video
poker and slot machines and a sportsbook web site, an HTML version of the
sportsbook and a lottery ticket distribution web site. Starnet Systems was to
provide all
56
necessary computer hardware to run Internet Opportunity's site. The term of the
license was for one year, and renews indefinitely for additional one-year terms.
During such renewal terms, Internet Opportunity 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 eight months notice. In the event of breach by either
party, the other party may terminate this agreement. Starnet Systems can also
terminate this agreement if it becomes the subject of a serious third party
civil or criminal litigation as a result of Internet Opportunity's actions. The
agreement can also be terminated by either party if the other party becomes
insolvent. *CERTAIN TERMS OF THIS AGREEMENT ARE SUBJECT TO A REQUEST FOR
CONFIDENTIAL TREATMENT WITH THE SECURITIES AND EXCHANGE COMMISSION.
SOFTWARE LICENSE AGREEMENT BETWEEN REAL ENTERTAINMENT LTD. AND SOFTEC
SYSTEMS CARIBBEAN INC. DATED MAY 10, 1999
A Software License Agreement between Real Entertainment Ltd. and
Starnet Systems' predecessor, Softec Systems Caribbean Inc. was entered into on
May 10, 1999. Starnet Systems licensed its Internet casino software in order to
allow Real Entertainment to operate an Internet gaming site. The non-exclusive
license permits no more than 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 Real
Entertainment'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 Real
Entertainment 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
Real Entertainment's actions. The agreement can also be terminated by either
party if the other party becomes insolvent. *CERTAIN TERMS OF THIS AGREEMENT ARE
SUBJECT TO A REQUEST FOR CONFIDENTIAL TREATMENT WITH THE SECURITIES AND EXCHANGE
COMMISSION.
INTERNET SERVICE AGREEMENT BETWEEN EFS CARIBBEAN INC. AND CABLE AND
WIRELESS (WEST INDIES) LTD.
The Company hosts its casino, sportsbook and pari-mutuel offerings on
servers in Antigua with access to this software provided to our licensees and
their clientele. As such, internet access to these servers is critical to the
provision of our services. To facilitate these services, EFS Caribbean Ltd.
entered in an agreement with Cable and Wireless (West Indies) Ltd., on April 21,
1999 for the provision of Internet Services. The initial terms of agreement was
for three months but the agreement will continue until either party provides 30
days advance written notice of termination. Cable and Wireless may revise the
charges payable under the agreement upon thirty (30) days advance notice.
EMPLOYMENT AND CONSULTING AGREEMENTS
JAMES H. GROSSMAN, CHAIRMAN
The Company entered into a service agreement dated June 4, 2003 with
James Grossman with an effective date of April 11, 2003, to serve as a
non-executive member of the board of director and specifically as the Chairman
of the Board of Directors. In exchange for these services, Mr. Grossman is
provided with a compensation of (pound)50,000 per annum. Mr. Grossman's fees
include compensation for up to FivE hours a month of legal services to be
provided by Mr. Grossman to the Company and Mr. Grossman may additionally
provide up to five hours per month of legal services, the fees for which shall
not exceed a total of US$1,750.00 per month. Such additional legal services
shall be subject to review by Company management at the end of each calendar
year. During the first month of this agreement, Mr. Grossman received a special
fee of (pound)5,000 in addition to his compensation for performing extraordinary
duties. As part oF hiS compensation package, Mr. Grossman is entitled to an
annual cash bonus to be
57
determined by the Board. Mr. Grossman is also entitled to stock options totaling
450,000, 150,000 of which are to fully vest on April 11, 2004 and 300,000 of
which on April 11, 2005. All options, however, will vest upon a change of
control or if Mr. Grossman is terminated without cause. The stock option
exercise price will be determined based on the closing price on June 4, 2003.
The term of the service agreement is six months and shall remain in force until
terminated by either the Company or Mr. Grossman upon six months prior written
notice.
A. DANIEL MORAN, CHIEF EXECUTIVE OFFICER
Starnet Systems entered into an employment agreement dated June 4, 2003
with Daniel Moran with an effective date of April 11, 2003. Pursuant to such
agreement, Mr. Moran serves as Chief Executive Officer of World Gaming and
Starnet Systems. He has a base salary of (pound)115,000, an annual housing
allowance of (poUNd)15,600, and certain other additional benefits. As part of
his compensation package, Mr. Moran is entitled to a 50% annual cash bonus based
on objectives set by the board of directors. Mr. Moran is also entitled to a
deferred bonus that is payable if he is still employed by the Company in three
years, which bonus is calculated at 75% of all bonuses paid over the three
years. Mr. Moran is also entitled to stock options totaling 1,500,000 shares;
1,000,000 shares which are to fully vest on April 11, 2004 and 500,000 by April
11, 2005. 500,000 of the shares vesting on April 11, 2004 were given in
consideration of Mr. Moran serving as director and 500,000 were an initial
signing bonus. All options immediately vest upon a change of control. The stock
option exercise price is the closing price of the Company's shares on June 4,
2003. If Mr. Moran's employment agreement is terminated without cause, the
Company will be required to pay him a severance payment of six months base
salary and allowances.
DAVID NAISMITH, CHIEF FINANCIAL OFFICER - DESIGNATE
Starnet Systems entered into an employment agreement dated June 4, 2003
with David Naismith effective August 1, 2003 for the position of Chief Financial
Officer. He will have a base salary of $156,000, an annual housing allowance of
$25,000, and certain other additional benefits. As part of his compensation
package, Mr. Naismith is entitled to a 50% annual cash bonus based on objectives
set by the board of directors. Mr. Naismith is also entitled to a deferred bonus
that is payable if he is still employed by the Company in three years, which
bonus is calculated at 75% of all bonuses paid over the three years. Mr.
Naismith is also entitled to stock options totaling 650,000; 150,000 which are
to fully vest on June 4, 2004 and 500,000 on August 1, 2005. The stock option
exercise price for the 150,000 shares will be determined based on the closing
price on June 4, 2003 and the stock option price for the 500,000 shares will be
determined based on the closing price of August 1, 2003. If Mr. Naismith's
employment agreement is terminated without cause, the Company will be required
to give him six months notice or pay him a severance payment of six months base
salary and allowances.
DAVID FLEMING, CHIEF TECHNOLOGY OFFICER AND MANAGING DIRECTOR OF
INPHINITY INTERACTIVE
Inphinity Interactive Inc. extended a written offer of employment to David
Fleming in the position of Vice President Product Development beginning
September 10, 2001. Effective October 2002, Mr. Fleming was appointed to the
position of Chief Technology Officer. Mr. Fleming's base salary is $180,000 CDN
as of October 2002. As part of his compensation package, Mr. Fleming is entitled
to 30% annual cash bonus, up to 50% of which may be used to purchase our stock
options. Mr. Fleming also received stock options to purchase 100,000 shares
vesting over a three year period in equal installments at a strike price to be
set at the price at the close of market on September 10, 2001. If Mr. Fleming's
employment agreement is terminated without cause, Inphinity will be required to
pay him a severance payment of four months base salary.
58
MARK THOMPSON, OPERATIONS DIRECTOR, MANAGING DIRECTOR OF STARNET
SYSTEMS AND ACTING CHIEF FINANCIAL OFFICER
The Company extended a written offer of employment to Mark Thompson in
the position of Operations Director and Managing Director of Starnet Systems
beginning December 1, 2002 with a base salary of $120,000, an annual housing
allowance of $30,000, a company maintained vehicle and certain other benefits.
As part of his compensation package, Mr. Thompson is entitled to up to a 75%
annual cash bonus. Mr. Thompson is also entitled to stock options which are yet
to be defined. If Mr. Thompson employment agreement is terminated without cause,
the Company will be required to pay him a severance payment of four months base
salary and allowances.
Mr. Thompson previously held the position of Vice President Finance
which he was appointed to in November 1, 2001. He had a base salary of $100,000
and certain other benefits. As part of his previous compensation package, Mr.
Thompson was granted options totaling 80,000 with an exercise price of $1.49
which were fully vested by November 1, 2002. Prior to November 1, 2001, Mr.
Thompson was employed as a consultant from August 7, 2001 to October 31, 2001 in
which Mr. Thompson was compensated $80,000 and granted 30,000 options with an
exercise price of $0.49. The stock options have fully vested.
Mr. Thompson briefly resigned from the Company from September 15, 2002
to November 30, 2002, and was awarded as severance six months compensation
payable in 12 equal semi-monthly installments and 22 days of accrued vacation
pay. There were no payments made under this arrangement and subsequently Mr.
Thompson released the company from this obligation as of June 30, 2003.
LIAM GILLEN, FORMER MANAGING DIRECTOR OF OPERATIONS
Starnet entered into an employment agreement with Liam Gillen on
November 27, 2000 to serve as the Managing Director of Operations of Starnet
Systems. Mr. Gillen's employment agreement was for a term of two years, subject
to extension upon the written agreement of the parties. Mr. Gillen's base salary
in the year 2001 was $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 paid Mr. Gillen a vehicle allowance, housing allowance
for housing in Antigua and 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 relocation allowance to move to Antigua.
The employment agreement was terminable by Starnet for cause. If Mr.
Gillen's employment agreement was terminated without cause, or if a change of
control occurred, Starnet would have been required to pay him a severance
payment of six months base salary plus six months benefits and a moving
allowance. Additionally, upon such termination, Mr. Gillen's stock options would
accelerate and become exercisable. The employment agreement contained
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 also contained an
express obligation of confidentiality in respect of its trade secrets and
confidential information.
By letter dated September 6, 2002, Mr. Gillen's employment contract and
services thereunder were terminated effective November 26, 2002. Pursuant to the
letter, the outstanding amount under his employment agreement of US$28,310 were
paid in six equal installments over the last three months of 2002.
SIMON COULTHARD, FORMER CHIEF FINANCIAL OFFICER
The Company extended a written offer of employment to Simon Coulthard
in the position of Group Finance Director beginning September 1, 2002 with a
base salary of (pound)75,000, an annual vehicle
59
allowance of(pound)7,200, and certain other additional benefits. As part of his
compensation package, MR. Coulthard was entitled to up to a 75% annual cash
bonus. Mr. Coulthard was also entitled to stock options which were never
approved by the board of directors. If Mr. Coulthard's employment agreement was
terminated without cause, the Company would have been required to give him three
months notice or pay him a severance payment of three months base salary and
allowances. Effective May 8, 2003, Mr. Coulthard's employment was terminated.
Mr. Coulthard received(pound)18,750 or three months gardening leave as part of
his agreed uPOn severance.
NICHOLAS JACKSON, FORMER CHIEF EXECUTIVE OFFICER
Starnet Systems entered into an employment agreement dated January 29,
2003 with Nicholas Jackson effective January 17, 2003 for the position of Chief
Executive Officer. He had a base salary of (pound)174,000, aN annual vehicle
allowance of (pound)12,000, an annual housing allowance of $48,000 and certain
other additIOnaL benefits. Mr. Jackson also received stock options entitlement
of 50,000 shares to vest 60 days from January 17, 2003. If Mr. Jackson's
employment agreement was terminated without cause, the Company would have been
required to pay him a severance payment of six months base salary and
allowances.
SETTLEMENT AGREEMENT WITH STARNET, NICHOLAS JACKSON, SPORTINGBET AND
GOODISON PARK
On June 4, 2003, the Company entered into a settlement agreement
regarding Nicholas Jackson's employment relationship with the Company. Under the
settlement agreement, Mr. Jackson waived any rights that he had under his
employment agreement. Mr. Jackson was entitled to exercise options for 352,459
shares of the Company at prices ranging from $0.31 to $2.13. The options are
vested and may be executed any time prior to five years after their respective
vesting dates, which ranged from January 1, 1999 to April 30, 2001. Mr. Jackson
was also entitled to a severance payment of (pound)125,000. The Company gave up
any claims that iT haD against Mr. Jackson for his performance as a director or
employee. The agreement had certain restrictions with respect to Mr. Jackson's
soliciting or competing with the Company. In connection with the severance
agreement, Goodison Park released Mr. Jackson from his personal guarantee.
DAVID CRAVEN, FORMER CHIEF EXECUTIVE OFFICER
The Company entered into an employment agreement dated November 20,
2002 with David Craven effective July 15, 2002 for the position of Chief
Executive Officer. He had a base salary of (pound)175,000, an annual vehicle
allowance of (pound)12,000, and certain other additional benefits. As part of
his compensation package, Mr. Craven was entitled to an annual cash bonus of up
to 100% of his base salary. Mr. Craven was entitled to options for 100,000
ordinary shares at exercise prices ranging from $0.27 to $1.00 per share. Mr.
Craven's employment agreement was terminated on January 13, 2003.
On June 28, 2003, the Company entered into a settlement agreement
regarding Mr. Craven's employment agreement with the Company after an unfair
dismissal claim was raised with the UK Employment Tribunal. In exchange for a
full release of the Company by Mr. Craven, Mr. Craven is to receive
(pound)25,000 and, in accordance with his employment contract, options to
purchase 400,000 shares at prices ranging from $0.27 to $0.40.
MICHAEL AYMONG, FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER
Starnet entered into an Agreement of employment with Michael Aymong on
April 6, 2001. Pursuant to the Agreement, Mr. Aymong served as the President and
Chief Executive Officer of World Gaming and Starnet. His initial base salary was
US$300,000 on April 9, 2001 and increased to US$350,000 as of July 9, 2001. Mr.
Aymong was eligible for a bonus of up to 100% of his base salary,
60
as approved by the board of directors. Also as part of his compensation, Mr.
Aymong was awarded 1,200,000 options at April 9, 2001 at an exercise price of
$0.31 vesting within 60 days, another 1,200,000 options to be issued monthly
over a 22 month period commencing June 9, 2001 at stated exercise prices ranging
from the share price on March 29, 2001 and amounts between $1.25 to $8.25, with
the potential issuance of an additional 400,000 options on April 30, 2003. In
addition, if during the term of Mr. Aymong's employment agreement Starnet issued
additional shares from treasury, he would be immediately entitled to options to
acquire 7% of such shares. Mr. Aymong's employment relationship with the Company
ended on June 19, 2002.
RODNEY DAVIS, FORMER CHIEF FINANCIAL OFFICER
The Company entered into an employment agreement on July 5, 2001 with
Rodney Davis providing for his employment with the Company as Vice President and
Chief Financial Officer. Mr. Davis was compensated with an annual salary of
$190,000 and certain additional benefits and was eligible for a bonus of up to
one-half the annual salary. Mr. Davis resigned as of May 20, 2002 and was
provided a severance package comprised of $95,000, accrued bonus of $39,583, a
severance bonus of $47,500 and continued vesting on 225,000 of his then unvested
options.
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:
o a citizen or individual resident of the United States;
o 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;
o an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
o 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 recently revised
U.S.-U.K. income tax treaty, who owns or controls less than ten percent of the
Company's outstanding voting power and who has acquired his American Depositary
61
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
our ordinary shares underlying their American Depository Shares. For the
purposes of this summary it is assumed, and we are of the opinion, that our
business is managed and controlled in the United Kingdom.
On March 31, 2003, the U.S. and the U.K. exchanged instruments of
ratification on a new income tax treaty. This New Tax Treaty has a complex set
of effective dates. The New Tax Treaty will generally be effective for tax years
commencing after March 31, 2003. For many companies resident in the U.K.,
including our company, this means that the New Tax Treaty will become effective
for the tax year commencing on April 1, 2003. For most U.K. individuals, the New
Tax Treaty will become effective for the tax year commencing April 6, 2003. And
for U.S. taxpayers who file their taxes based on the calendar year, the New Tax
Treaty will become effective commencing January 1, 2004. But there are two
exceptions to these general rules. First, certain provisions under the New Tax
Treaty concerning dividends paid by a U.K. company to its U.S. shareholders will
become effective on May 1, 2003. Second, a person who would have been entitled
to greater benefits under the Old Tax Treaty between the U.S. and the U.K. may
elect to have the Old Tax Treaty apply for a period of 12 months following the
date on which the New Tax Treaty was otherwise scheduled to become effective.
The summary set out below will provide brief descriptions of both the Old Tax
Treaty and the New Tax Treaty.
DISTRIBUTIONS ON AMERICAN DEPOSITARY SHARES OR ORDINARY SHARES
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 prior
law, the payment from the U.K. Inland Revenue to a Qualifying U.S. Holder was
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, the U.K. does not, in general, impose a dividend
withholding tax.
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 us, and 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 our 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 our company, or at a time when he is deemed to have made such
62
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 our 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 our 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 World Gaming 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 World Gaming 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 our 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 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 of World Gaming, 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 prima facie is
treated as being resident in the United Kingdom for tax purposes. However, this
treatment will not apply if the effective management and control of the company,
that is, broadly, the exercise by the board of directors of that 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
63
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, under U.K. tax regulations 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 conducted in the territory of its intended
tax residence and if different from the U.K. there is a tax treaty with that
intended territory 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, we 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 involving Starnet, we own 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 World Gaming 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 Old 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 New Tax Treaty, 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 U.S. withholding tax. We believe,
based on the current ownership and trading of our stock, that there is a
significant risk that WG International Limited would not qualify for the
benefits of the New Tax Treaty. Alternatively, if WG International Limited were
to qualify for the benefits of the New Tax Treaty, 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, could 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
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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:
o are broker-dealers;
o have elected mark-to-market accounting;
o are tax-exempt organizations;
o are financial institutions or insurance companies or other entities
that derive financial services income;
o hold American Depositary Shares or ordinary shares as part of a
straddle, "hedge", "conversion transaction" or other risk reduction
strategy with other investments;
o have a functional currency that is not the U.S. dollar; or
o 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.
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.
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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.
On May 28, 2003, the Jobs and Growth Reconciliation Tax Act of 2003 was
enacted. The 2003 Tax Act reduces the rate of federal income tax imposed on
certain kinds of corporate dividends received by individuals. The rate
reductions, where applicable, limit the maximum rate of federal income tax on
such dividends to 15 percent, commencing with dividends paid in tax years
beginning after 2002. The new rules are currently scheduled to expire after the
year 2008. The new rules apply only to "qualified dividend income" and, if not
paid by a U.S. corporation, only to qualified dividend income paid by a
"qualified foreign corporation." It is unclear whether dividends we pay to an
individual U.S. Holder would qualify for the rate reductions introduced by the
2003 Tax Act, primarily due to uncertainty as to whether we satisfy the
requirements to be a "qualified foreign corporation." While we appear to satisfy
certain threshhold tests relating to our eligibility for the benefits of a
comprehensive U.S. tax treaty, the 2003 Tax Act specifically denies qualified
foreign corporation status to any corporation that was a passive foreign
investment company, or PFIC, in either the taxable year of the dividend
distribution or the preceding taxable year. Therefore, if we are a PFIC in
either the year we make a dividend distribution, or were a PFIC in the preceding
year, the dividend would not qualify for the reduced rates introduced by the
2003 Tax Act. See the discussion below in "Taxation - United States Federal
Income Tax Consequences - Tax Consequences for U.S. Holders - Tax Consequences
if We Are a Passive Foreign Investment Company" for a more detailed description
of the PFIC rules and their possible application to our operations.
Under prior law and the Old Tax Treaty, a portfolio U.S. Holder, as
defined above, could elect to be treated as receiving the U.K. tax credit in
respect of certain dividends paid by us. A U.S. Holder who made that election
would 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. U.S. Holders that
were not portfolio U.S. Holders were subject to different rules. Those rules,
and the procedures for making the election described above, are set forth in
Revenue Procedure 2000-13.
The New Tax Treaty and current laws modify these rules. The U.K.
generally does not impose dividend withholding tax under current law, and the
New Tax Treaty generally eliminates the requirement that the U.S. permit U.S.
Holders to claim a credit, based on "grossed-up" dividend income, for integrated
taxes paid by the U.K. company in which they own shares.
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
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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 generally eligible for a maximum 15 percent rate of taxation (20
percent in the case of sales, exchanges or dispositions that take place before
May 6, 2003). 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 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", and at the present time we believe the shares may not so
qualify. 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 a detailed 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 a detailed 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
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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 to one of these elections, the rules set forth in the
preceding paragraph would apply to that gain or income.
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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
69
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 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 2002 or 2003. 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 2002, we will not be a PFIC in 2003 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 our American Depositary Shares and ordinary stock, we believe that
we are not a CFC.
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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 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 World
Gaming 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.
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TAXATION OF THE COMPANY
We are subject to U.S. federal income tax only to the extent that we
derive 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. New Tax Treaty or Old
Tax Treaty. Our indirect U.S. subsidiary will continue to be subject to U.S. tax
on its worldwide income, including dividends, if any, we receive from non-U.S.
subsidiaries, and dividends, if any, we pay 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 Old Tax Treaty, the 30% withholding tax imposed by U.S. Federal income tax
law was reduced to five percent for non-exempt dividends from the U.S.
subsidiary to WG International Limited. Under the New Tax Treaty, 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 U.S. withholding tax. We believe,
based on the current ownership and trading of our stock, that there is a
substantial risk that neither WG International Limited nor World Gaming plc will
qualify for benefits under the New Tax Treaty. Alternatively, if WG
International Limited were to qualify for the benefits of the New Tax Treaty,
U.S. withholding tax on those dividends could be eliminated entirely. In
addition, if WG International Limited were not to qualify for the benefits of
the New Tax 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 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 $408
thousands Canadian or $262 thousands U.S. as of December 31, 2002). 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. Subsequent to December 31, 2002, the Canadian
dollar has appreciated against the U.S. currency.
Exposure arises primarily from the operations of our subsidiaries in
Canada which incur development and certain administrative expenses in Canadian
dollars (approximately $4,977 million CDN or $3,169 million U.S. for the year
ending December 31, 2002) but do not derive any sales directly from customers.
Funding for Inphinity comes from our non-Canadian subsidiaries that derive their
sales in U.S. dollars. Therefore the ultimate cost of our operations in Canada
is dependent on the relative strength of the Canadian dollar to the U.S. dollar.
We have not hedged against this risk.
72
Our net Canadian asset position at December 31, 2002 is summarized as
follows (in thousands of U.S. dollars with previous year comparatives included):
2002 2001
Cash and cash equivalents .................. $ (1) $ 100
Other current assets ....................... 254 1,000
------- -------
Total current assets ................. 253 1,100
Other assets ............................... 1,332 4,900
Current liabilities ........................ (767) (1,300)
Long-term liabilities ...................... (556) (500)
------- -------
Net Canadian dollar denominated assets $ 262 $ 4,200
======= =======
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
We are in arrears on payments under two of our equipment suppliers. The
net present value of the total obligation is approximately $1,159,000 as of May
31, 2003. We are presently in discussions with these suppliers to alter the
terms of the leases. (See Item 8 - Financial Information - Legal Proceedings -
Sunrise Corporation Lawsuit).
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.
ITEM 15. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our
principal executive officer and principal financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 ("Exchange
Act")), as of a date within 90 days of the filing date of this Annual Report on
Form 20-F. Based on such evaluation, they have concluded that as of such date,
our disclosure controls and procedures are effective and designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in applicable SEC rules and forms.
73
(b) CHANGES IN INTERNAL CONTROLS. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of evaluation by our principal
executive officer and principal financial officer.
PART III
ITEM 17. FINANCIAL STATEMENTS
Our consolidated financial statements together with the report of Baker
Tilly with respect to the year ended December 31, 2002, the eight months ended
December 31, 2001 and the fiscal years ended April 30, 2001 and 2000 are filed
as part of this annual report.
CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Reports ...............................................F-3
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-11
Notes to Consolidated Financial Statements..................................F-13
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements have been prepared in accordance
with Item 17 hereof.
ITEM 19. EXHIBITS
1.1 Memorandum of Association of World Gaming plc (incorporated herein by
reference from Exhibit 3.1 to a 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 herein by reference from
Exhibit 4.2 to a Registration Statement on Form S-8 (SEC File No.
333-70056, dated 09/24/01) filed by World Gaming plc)
1.3* Articles of Association of World Gaming plc adopted by special
resolution on June 20, 2002
2.1 Form of ordinary share certificate of World Gaming plc. (incorporated
herein by reference from Exhibit 1 to a 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 herein by reference from Exhibit A to the Form
Deposit Agreement filed as Exhibit (a) to a 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 herein by reference from Exhibit
(a) to a 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 herein by reference
from Exhibit 4.3 to a Registration statement on Form S-8 (SEC File No.
333-70056, dated 09/24/01) filed by World Gaming plc)
74
4.1 Agreement and Plan of Reorganization (incorporated herein 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 of Liam Gillen, dated November 27, 2000
(incorporated herein by reference from Exhibit 10.14 to a quarterly
report on Form 10-Q (File No. 000-29290, filed 03/19/01) filed by
Starnet Communications International, Inc.)
4.3 Loan Agreement between World Gaming plc and Sportingbet Plc, dated
08/01/02 (incorporated herein by reference from Exhibit 4.8 to the
annual report on Form 20-F filed by World Gaming plc on 8/22/02)
4.4 General Security Agreement with Sportingbet Plc, dated 08/01/02
(incorporated herein by reference from Exhibit 4.9 to the annual report
on Form 20-F filed by World Gaming plc on 8/22/02)
4.5 Escrow Agreement with NCC Escrow International Limited, dated 08/01/02
(incorporated herein by reference from Exhibit 4.10 to the annual
report on Form 20-F filed by World Gaming plc on 8/22/02)
4.6 Accord and Satisfaction Agreement with Simpson Bay, Ltd., and AIM
Investments Ltd. (incorporated herein by reference from Exhibit 4.5 to
the Form 20-F filed by World Gaming plc on 11/1/01)
4.7* Unsecured Convertible Note with Goodison Park Limited, dated April 4,
2003
4.8* Stock Acquisition Agreement with Goodison Park Limited, dated April 4,
2003
4.9* Contract for Services with James Grossman, dated June 4, 2003
4.10* Contract of Employment with A. Daniel Moran, dated June 4, 2003
4.11* Employment Agreement with Nicholas Jackson, dated January 29, 2003
4.12* Employment Agreement with David Craven, dated November 20, 2002
4.13* Contract of Employment with David Naismith, dated June 4, 2003
4.14* Offer of Employment with Simon Coulthard, dated August 1, 2002
4.15* Offer of Employment with David Fleming, dated August 27, 2001
4.16* Offer of Employment with Mark Thompson, dated November 21, 2002
4.17* Letter regarding resignation of Mark Thompson dated 6/2/02
4.18* Engagement letter for Mark Thompson as Financial Consultant dated
9/11/02
4.19* Employment Agreement with Michael Aymong, dated 9/6/01
4.20* Employment Offer Letter with Rodney Davis, dated July 5, 2001
4.21* Letter regarding resignation of Rodney Davis, dated May 16, 2002
4.22* Settlement Agreement with Starnet, Nicholas Jackson, Sportingbet and
Goodison Park
4.23* Compromise Agreement by David Craven dated June 27, 2003
75
4.24*+ Software License Agreement between Internet Opportunity Entertainment
Ltd. and Softec Systems Caribbean Inc. dated March 19, 1998
4.25*+ Software License Agreement between Real Entertainment Ltd. and Softec
Systems Caribbean Inc. dated May 10, 1999
4.26* Internet Service Agreement between EFS Caribbean Inc. and Cable and
Wireless (West Indies) Ltd.
4.27* Letter regarding termination of Liam Gillen dated September 6, 2002
4.28* Guarantee from Nicholas Jackson in favor of Goodison Park Limited dated
April 4, 2003
21.1* List of Subsidiaries
23.1* Consent of Baker Tilly
23.2* Consent of HJ & Associates, LLC
99.1* Sarbanes-Oxley Act Certification by A. Daniel Moran, CEO
99.2* Sarbanes-Oxley Act Certification by Mark Thompson, acting CFO
__________
*Filed herewith.
+Certain terms of this agreement are subject to a request for confidential
treatment with the SEC.
76
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.
WORLD GAMING PLC
Date: June 30, 2003 By: /s/ A. Daniel Moran
A. Daniel Moran
Chief Executive Officer and Director
Date: June 30, 2003 By: /s/ Mark Thompson
Mark Thompson
Acting Chief Financial Officer
Date: June 30, 2003 By: /s/ Clare Roberts
Clare Roberts
Director
Date: June 30, 2003 By: /s/ James H. Grossman
James H. Grossman
Director
Date: June 30, 2003 By: /s/ David Fleming
David Fleming
Director and Chief Technology Officer
CERTIFICATIONS
I, A. Daniel Moran, certify that:
1. I have reviewed this annual report on Form 20-F of World Gaming plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 30, 2003 /s/ A. Daniel Moran
-------------------
A. Daniel Moran
Chief Executive Officer
(principal executive officer)
CERTIFICATIONS
I, Mark Thompson, certify that:
1. I have reviewed this annual report on Form 20-F of World Gaming plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 30, 2003 /s/ Mark Thompson
-----------------
Mark Thompson
Acting Chief Financial Officer
(principal financial officer)
WORLD GAMING PLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and December 31, 2001
F-1
C O N T E N T S
Independent Auditors' Reports.............................................. F-3
Consolidated Balance Sheets................................................ F-5
Consolidated Statements of Operations and Other Comprehensive Loss......... F-7
Consolidated Statements of Stockholders' Equity............................ F-9
Consolidated Statements of Cash Flows...................................... F-11
Notes to the Consolidated Financial Statements............................. F-13
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
World Gaming Plc & Subsidiaries
Reading
England
We have audited the accompanying consolidated balance sheet of World Gaming Plc
and Subsidiaries (the Group) as of December 31, 2002 and the related
consolidated statements of operations and other comprehensive income,
stockholders' equity and cash flows for the year ended December 31, 2002. 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 audit.
We conducted our audit 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 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 audit
provides 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 and Subsidiaries as of December 31, 2002 and the consolidated results
of their operations and other comprehensive income, and their cash flows for the
year ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Group will continue as a going concern. As discussed in note 13 to the
consolidated financial statements, the Group has accumulated significant losses,
has negative working capital, a deficit in stockholders equity and significant
litigation, all of which raises significant doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in note 13. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Baker Tilly
Baker Tilly
London, UK
June 30, 2003
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
World Gaming Plc and Subsidiaries
Reading, England
We have audited the accompanying consolidated balance sheet of World Gaming Plc
and Subsidiaries as of December 31, 2001 and the related consolidated statements
of operations and other comprehensive loss, stockholders' equity and cash flows
for the eight months ended December 31, 2001 and for the year ended April 31,
2001. 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.
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 audit provides 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 and Subsidiaries at December 31, 2001 and the consolidated results of
their operations and their cash flows for the eight months ended December 31,
2001 and for the year ended April 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of and for the eight
months ended December 31, 2001 and for the year ended April 30, 2001 have been
prepared assuming that the company will continue as a going concern. As
discussed in Note 13 to the consolidated financial statements, the Company has
accumulated significant losses, has negative working capital and deficit in
stockholders' equity, all of which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these natters are
also described in Note 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
February 25, 2002 and July 31, 2002.
F-4
World Gaming Plc and Subsidiaries
Consolidated Balance Sheets
(In thousands of US$)
December 31, December 31,
2002 2001
________________________________________________________________________________
ASSETS
Current assets
Cash and cash equivalents .................... $ 1,753 $ 2,206
Reserves and deposits with credit card
processors (Note 3) ........................ 653 2,532
Accounts receivable, net (Note 4) ............ 2,772 2,591
Employee loans and advances - current portion. 38 68
Prepaid expenses and deposits ................ 230 438
Deferred gaming license costs (Note 5) ....... - 109
Deferred financing costs ..................... - 100
________________________________________________________________________________
Total Current Assets ..................... 5,446 8,044
CAPITAL ASSETS, Net (Note 6) ................... 2,931 4,133
OTHER ASSETS
Employee advances - long term portion ....... - 4
________________________________________________________________________________
Total Other Assets ....................... - 4
________________________________________________________________________________
TOTAL ASSETS ............................. $ 8,377 $ 12,181
________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
World Gaming Plc and Subsidiaries
Consolidated Balance Sheets (continued)
(In thousands of US$)
December 31, December 31,
2002 2001
________________________________________________________________________________
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities ..... $ 5,198 $ 5,911
Accrual for legal claims (Note 7) ............ 1,200 1,200
Funds held on deposit (Note 8) ............... 1,593 2,041
Deferred revenue ............................. 127 260
Current portion of loans payable (Note 10) ... 1,558 -
Current portion of capital lease obligations
(Note 9) ................................... 1,351 1,058
________________________________________________________________________________
Total Current Liabilities ................ 11,027 10,470
Long-term liabilities
Loans payable (Note 10) ...................... 655 -
Capital lease obligations (Note 9) ........... 240 25
________________________________________________________________________________
Total Liabilities ........................ 11,922 10,495
SHAREHOLDERS' EQUITY
Capital stock (Note 11) ...................... 24,192 24,188
Deferred Compensation ........................ - (168)
Deficit ...................................... (26,681) (21,363)
Accumulated other comprehensive loss ......... (1,056) (971)
________________________________________________________________________________
Total Shareholders' Equity ............... (3,545) 1,686
________________________________________________________________________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,377 $ 12,181
________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
World Gaming Plc and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive Loss
(In thousands of US$)
Year ended Year ended Eight months Year ended
December 31, December 31, ended December April 30,
2002 2001 31, 2001 2001
________________________________________________________________________________________________________________________
(unaudited)
REVENUE
Royalties and fees .......................... $ 16,145 $ 17,547 $ 11,682 $ 18,376
Licensing ................................... 632 628 425 1,777
________________________________________________________________________________________________________________________
16,777 18,175 12,107 20,153
COST OF SALES ...................................... 1,704 4,316 2,276 5,929
________________________________________________________________________________________________________________________
15,073 13,859 9,831 14,224
EXPENSES
Development, selling, general and
administrative ............................ 12,970 18,136 9,448 18,074
Provision for bad debts ..................... 3,400 2,169 267 3,290
Legal ....................................... 798 1,391 745 974
Restructuring of operations ................. - 1,536 - 1,536
Accrued settlement of legal issues (Note 7) . - 4,341 (183) 4,524
Depreciation and amortization ............... 3,168 2,607 1,745 2,610
Interest and bank charges ................... 147 144 180 235
________________________________________________________________________________________________________________________
20,483 30,324 12,202 31,243
________________________________________________________________________________________________________________________
LOSS FROM OPERATIONS ............................... (5,410) (16,465) (2,371) (17,019)
OTHER INCOME ....................................... 92 188 135 263
________________________________________________________________________________________________________________________
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,318) (16,277) (2,236) (16,756)
________________________________________________________________________________________________________________________
INCOME TAX EXPENSE (RECOVERY)
Current (Note 12) ............................. - - - -
Deferred (Note 12) ............................ - - - -
________________________________________________________________________________________________________________________
Total Income Taxes ......................... - - - -
________________________________________________________________________________________________________________________
NET LOSS ........................................... $ (5,318) $ (16,277) $ (2,236) $ (16,756)
________________________________________________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
World Gaming Plc and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive Loss (continued)
(In thousands of US$)
Year ended Year ended Eight months Year ended
December 31, December 31, ended December April 30,
2002 2001 31, 2001 2001
________________________________________________________________________________________________________________________
(unaudited)
NET LOSS ........................................... $ ( 5,318) $ (16,277) $ (2,236) $ (16,756)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation .................. (85) (672) (263) (693)
________________________________________________________________________________________________________________________
Total Other Comprehensive Income (Loss) .. (85) (672) (263) (693)
________________________________________________________________________________________________________________________
NET COMPREHENSIVE LOSS ............................. $ (5,403) $ (16,949) $ (2,499) $ (17,449)
________________________________________________________________________________________________________________________
BASIC LOSS PER SHARE FROM CONTINUING OPERATIONS .... $ (0.16) $ (0.50) $ (0.07) $ (0.52)
________________________________________________________________________________________________________________________
BASIC LOSS PER SHARE ............................... $ (0.16) $ (0.50) $ (0.07) $ (0.52)
________________________________________________________________________________________________________________________
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 34,193,181 33,442,496 33,997,263 32,201,181
________________________________________________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
World Gaming Plc and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the year ended December 31, 2002, the eight months ending December 31, 2001
and the year ended April 30, 2001
Accumulated
Common Stock Other Retained
__________________________ Subscription Deferred Comprehensive Earnings
Shares Amount Receivable Compensation Income (Loss) (Deficit)
________________________________________________________________________________________________________________________
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 subscriptions
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)
________________________________________________________________________________________________________________________
Balance, April 30, 2001 ......... 32,193,181 $ 22,394 $ (310) $ (38) $ (708) $ (19,127)
Shares issued pursuant to
conversion of long-term debt .... 2,000,000 1,500 - - - -
Options issued below market value - 504 - (130) - -
Cash received on subscriptions
receivable ...................... - 15 310 - - -
Share issue costs pursuant to
reorganization .................. (225) - - - -
Movement in other comprehensive
income(loss) - foreign currency
translation adjustments ......... - - - - (263) -
Net loss for the year ended
December 31, 2001 ............... - - - - - (2,236)
________________________________________________________________________________________________________________________
Balance, December 31, 2001 ...... 34,193,181 $ 24,188 $ - $ (168) $ (971) $ (21,363)
________________________________________________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
World Gaming Plc and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
For the year ended December 31, 2002, the eight months ending December 31, 2001
and the year ended April 30, 2001
Accumulated
Common Stock Other Retained
__________________________ Subscription Deferred Comprehensive Earnings
Shares Amount Receivable Compensation Income (Loss) (Deficit)
________________________________________________________________________________________________________________________
Balance, January 1, 2002 ........ 34,193,181 $ 24,188 $- $ (168) $ (971) $ (21,363)
Shares issued pursuant to
conversion of long-term debt .... - - - - - -
Options issued below market value - 4 - 168 - -
Cash received on subscriptions
receivable ...................... - - - - - -
Share issue costs pursuant to
reorganization .................. - - - - - -
Movement in other comprehensive
income (loss) - foreign currency
translation adjustments ......... - - - - (85) -
Net loss for the year ended
December 31, 2002 ............... - - - - - (5,318)
________________________________________________________________________________________________________________________
Balance, December 31, 2002 ...... 34,193,181 $ 24,192 $- $ - (1,056) $ (26,681)
________________________________________________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
World Gaming Plc and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands of US$)
Year ended Year ended Eight months Year ended
December 31, December 31, ended December April 30,
2002 2001 31, 2001 2001
________________________________________________________________________________________________________________________
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period ............................. $ (5,318) $ (16,277) $ (2,236) $ (16,756)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ................ 3,168 2,607 1,745 2,610
(Loss)/Gain on disposal of fixed assets ...... 74 14 14 -
Deferred compensation ........................ 168 168 374 -
Option based compensation expense ............ - - - 22
Write-off of long-term receivable ............ - - - 1,512
Change in current assets and liabilities-
Decrease (increase) in reserves with credit
card processors ............................. 1,879 514 1,231 94
Decrease (increase) in accounts receivable and
employee loans and advances ................. (151) 1,481 (1,047) 515
Decrease (increase) in prepaid expenses and
Deposits .................................... 208 206 202 (39)
Decrease (increase) in other assets .......... 209 407 53 1,049
Increase (decrease) in accounts payable and
accrued liabilities .......................... (713) 3,410 (4,395) 6,368
Increase (decrease) in income taxes payable .. - - - -
Increase (decrease)in funds held on deposit .. (448) (552) (1,411) 1,334
Increase (decrease) in deferred revenue ...... (133) 8 110 (137)
________________________________________________________________________________________________________________________
Net Cash Used in Operating Activities ..... (1,057) (8,014) (5,360) (3,428)
________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTMENT ACTIVITIES
Purchase of capital assets, net ................. (1,412) (751) (653) (2,205)
Transfer from (to) restricted cash .............. - 7,630 3,925 3,040
________________________________________________________________________________________________________________________
Net Cash Provided by (Used in) Investing
Activities .............................. $ (1,412) $ 6,879 $ 3,272 $ 835
________________________________________________________________________________________________________________________
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
World Gaming Plc and Subsidiaries
Consolidated Statement of Cash Flows (continued)
(In thousands of US$)
Year ended Year ended Eight months Year ended
December 31, December 31, ended December April 30,
2002 2001 31, 2001 2001
_______________________________________________________________________________________________________________________
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on subscription receivable ............. $ - $ 366 $ 325 $ -
Payments received on long-term receivable ....... 4 1,555 - 493
Proceed from issuance of shares ................. - - - 192
Proceeds from note payable ...................... 2,213 - - 1,500
Principal repayment under capital lease
obligations .................................... (116) (392) (286) (625)
________________________________________________________________________________________________________________________
Net Cash Provided by Financing Activities .... 2,101 1,529 39 1,560
________________________________________________________________________________________________________________________
EFFECT OF EXCHANGE RATES ON CASH ................... (85) (672) (263) (433)
________________________________________________________________________________________________________________________
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT
DURING THE PERIOD ................................ (453) (278) (2,312) (1,466)
________________________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .... 2,206 2,484 4,518 5,984
________________________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 1,753 $ 2,206 $ 2,206 $ 4,518
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
Supplementary cash flow information:
Other non-cash transactions:
Leased assets acquired .......................... $ 452 $ - $ - $ 1,001
Loan converted to Shares ........................ $ - $ 1,500 $ - $ -
Compensation from options issued below market
Value .......................................... $ - $ - $ - $ 59
Cash paid for:
Interest paid ................................... $ 147 $ - $ - $ 158
Income taxes paid ............................... $ - $ - $ - $ -
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
On May 25, 2001, pursuant to an Agreement and Plan of Reorganization executed on
May 17, 2001, 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 a new holding
company structure. As part of the reorganization, World Gaming established
December 31 as its year end.
Starnet Systems International Inc., a subsidiary of the Company incorporated and
operating out of Antigua, licenses its gaming software to third parties for an
initial licensing fee and monthly royalties. Inphinity Interactive Inc., a
wholly-owned subsidiary of the Company develops gaming software and web pages.
The Company's Internet casino, which targets only customers outside North
America, is operated by its subsidiary, World Gaming Services, Inc., also
incorporated and operating out of Antigua.
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 World Gaming and
all its wholly-owned subsidiaries (collectively the "Company"). All significant
inter-company balances and transactions have been eliminated. Unless otherwise
stated, all amounts are in thousands of US Dollars. The Company has 12
subsidiaries which have been listed below:
WG International Limited (incorporated in UK)
World Gaming Europe Limited (incorporated in UK)
Starnet Communications International, Inc. (incorporated in Delaware, USA)
Starnet Systems International Inc. (incorporated in Antigua)
EFS International Inc. (incorporated in Antigua)
EFS USA Inc. (incorporated in Nevada, USA)
EFS Australia Pty Ltd. (incorporated in Australia)
EFS St. Kitts Inc. (incorporated in St. Kitts)
Inphinity Interactive Inc. (incorporated in Canada)
602662 British Columbia Ltd. (incorporated in Canada)
World Gaming Services Inc. (incorporated in Antigua)
Starnet Communications Canada Inc. (incorporated in Canada).
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.
F-13
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 2 - ACCOUNTING POLICIES (continued)
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:
Furniture and fixtures .............................. 3 years
Computer hardware and equipment ..................... 3 years
Computer software ................................... 3 years
Automobiles ......................................... 4 years
Domain name ......................................... 5 years
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 capital assets. If an asset is disposed off before
expiration of its estimated useful life, one-half of the normal depreciation
rate is charged for that year.
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 operations and other comprehensive income (loss).
The financial statements of all subsidiaries expressed in currencies other than
the United States dollar are translated into US dollars. 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.
In accordance with SFAS No. 95, "Statement of Cash Flows," the cash flows of the
Company's foreign subsidiaries are translated using the weighted average
exchange rates during the respective period. As a result, amounts in the
statement of cash flows related to changes in asset and liabilities will not
necessarily agree with the changes in the corresponding balances on the balance
sheet which was translated at the exchange rate at the end of the period. The
effect of exchange rate changes on foreign cash and cash equivalents is reported
as a separate element of the statement of cash flows, if significant
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.
F-14
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 2 - ACCOUNTING POLICIES (continued)
g. Advertising
The Company expenses the costs of advertising as incurred. During the year ended
December 31, 2002, the eight months ended December 31, 2001 and the year ended
April 30, 2001, the Company expensed $ 54, $234, and $1,521 respectively of
advertising costs.
h. Net Earnings (Loss) Per Common Share
The Company has adopted Statement of Financial Accounting Standards No. 128
("FAS 128") regarding the determination and disclosure of earnings (loss) per
share for the purpose of preparing its financial statements. The calculations of
net earnings (loss) 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. Diluted earnings
(loss) per share is not presented because of the anti-dilutive nature of the net
loss for each period presented.
i. Stock Options
As permitted by FASB Statement 123 "Accounting for Stock Based Compensation"
(SFAS No. 123), the Company elected to measure and record compensation cost
relative to employee stock option costs in accordance with Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and
related interpretations and make proforma disclosures of net income and earnings
per share as if the fair value method of valuing stock options had been applied.
Under APB Opinion 25, compensation cost is recognized for stock options granted
to employees when the option price is less than the market price of the
underlying common stock on the date of grant.
j. Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 and newly issued Accounting Pronouncements
On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4
(SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the
amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145
eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses
from the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, an entity is
not prohibited from classifying such gains and losses as extraordinary items, so
long as it meets the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of
FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency
between the accounting for sale-leaseback transactions and certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The amendment requires that a lease modification (1) results in
recognition of the gain or loss in the 9 financial statements, (2) is subject to
FASB Statement No. 66, "Accounting for
F-15
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 2 - ACCOUNTING POLICIES (continued)
Sales of Real Estate," if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of
FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions
Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease
Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145
is effective for transactions occurring after May 15, 2002. The Company does not
expect that the adoption of SFAS 145 will have a material effect on its
financial performance or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002 and early
application is encouraged. The provisions of EITF No. 94-3 shall continue to
apply for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS
146 will change on a prospective basis the timing of when the restructuring
charges are recorded from a commitment date approach to when the liability is
incurred. The Company does not expect that the adoption of SFAS 146 will have a
material effect on its financial performance or results of operations.
SFAS No. 147 relates to financial institutions and we have excluded reference to
that pronouncement since it does not apply. Some firms include that
pronouncement and say it does not apply.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure"(SFAS 148"). SFAS 148 amends SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS 148 is effective for fiscal years beginning after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The Company is currently evaluating the effect that the
adoption of SFAS 148 will have on its results of operations and financial
condition. The Company does not expect the adoption of this statement to have a
material impact on their consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities", to provide clarification on the meaning of an underlying,
the characteristics of a derivative that contains financing components and the
meaning of an initial net investment that is smaller than would be required for
other types of contracts that would be expected to have a similar response to
changes in market factors. This statement will be applied prospectively and is
effective for contracts entered into or modified after June 30, 2003. The
statement will be applicable to existing contracts and new contracts relate to
forward purchases or sales of when-issued securities or other securities that do
not yet exist. The Company does not expect that the adoption of SFAS 149 will
have a material effect on the Company's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SFAS 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity."
F-16
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 2 - ACCOUNTING POLICIES (continued)
This statement establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The statement will be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the period of adoption. The
Company does not expect that the adoption of SFAS 150 will have a material
effect on the Company's financial statements.
m. Software Development Costs
The Company applies the provisions of SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". During the year ended
December 31, 2002, the Company was completing the development of the following
products:
Horse Racing
Development is underway to offer additional content to increase the current
offerings by our licensees. In addition, a horsebook product has begun in the
early stages of development that will fit our licensees' market needs and add to
our product mix.
Sportsbook
In addition to maintenance of the current turnkey Sportsbook product, Inphinity
is developing new proprietary sports betting software. This sports betting
software encapsulates the Company's current Sportsbook features, provides
additional Sportsbook betting options that are geographically specific and new
products such as pools and pari-mutuels. In addition, the new product will allow
for a variety of operational flexibility for licensees. The Company was nearing
completion of this new version of the Sportsbook software at the end of the
year. The development was completed and recently released during 2003 to
licensees. Feedback is being acquired from licensees for new features and
upgrades in order to enhance our licensees gaming sites.
Casino
Development of the 3.3 Casino games was nearing completion by the end of the
year. The 3.3 Casino games offers enhanced customization capabilities and allows
licensees to differentiate themselves from competitors and offer strong
branding. Also the addition of progressive jackpots is one of the new features
which give licensees the opportunity to network with gaming sites and offer an
exciting global jackpot experience. Launching of the 3.3 Casino games is
underway in the first half of 2003.
n. Long-lived assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, long-lived assets, including
goodwill associated with other long-lived assets, are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Any changes in estimated useful life are
recorded prospectively and any impairment adjustments are recorded as expense in
the period the impairment occurs. The amount of any impairment considered
necessary would be determined by comparing the book value of the net assets in
the applicable line of business to fair value using methods such as the
present-value of estimated future cash flows, sale value or other valuation
methodologies available at the time, depending on the stage of development of
the line of business and the Company's intentions at the time an impairment
adjustment was considered necessary.
F-17
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 2 - ACCOUNTING POLICIES (continued)
o. Unaudited Information
The consolidated financial statements for the year ended December 31, 2001 and
the eight months ended December 2000 have been prepared by management without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present the information have been made.
NOTE 3 - RESERVES WITH CREDIT CARD PROCESSORS
Reserves with credit card processors consist of rolling reserves held by
merchant banks awaiting transfer to the Company's bank accounts. At December 31,
2002 and December 31, 2001, the balance of these reserves was $653 and $2,532
respectively.
NOTE 4 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31, 2002 December 31, 2001
----------------- -----------------
Amounts due from licensees ......... $ 2,796 $ 3,074
Income tax receivable (Note 13) .... 120 123
Other .............................. 66 284
Less: allowance for bad debts ...... (210) (890)
----------------- -----------------
$ 2,772 $ 2,591
----------------- -----------------
NOTE 5 - DEFERRED GAMING LICENSE COSTS
December 31, 2002 December 31, 2001
----------------- -----------------
Antigua ............................ $ - $ -
Curacao ............................ - 109
----------------- -----------------
$ - $ 109
----------------- -----------------
Deferred gaming license costs related to amounts paid to the Antiguan government
for the purchase of casino licenses. These licenses had been held for sale to
prospective licensees. During the fiscal period ended December 31, 2002, the
remaining deferred license costs were expensed or written off against cost of
sales.
NOTE 6 - CAPITAL ASSETS
Capital assets are recorded at cost less accumulated depreciation and consist of
the following:
ACCUMULATED NET BOOK
DECEMBER 31, 2002 COST DEPRECIATION VALUE
------- ------------ --------
Computer hardware and equipment ...... $ 6,916 $5,218 $1,698
Computer hardware under capital leases 1,729 1,395 334
Automobiles under capital leases ..... 114 86 28
Leasehold improvements ............... 469 246 223
Furniture and fixtures ............... 385 302 83
Computer software .................... 2,827 2,274 553
Domain name .......................... 45 33 12
------- ------------ --------
$12,485 $9,554 $2,931
------- ------------ --------
F-18
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 6 - CAPITAL ASSETS (continued)
ACCUMULATED NET BOOK
DECEMBER 31, 2001 COST DEPRECIATION VALUE
------- ------------ --------
Computer hardware and equipment ...... $ 5,382 $3,637 $ 1,745
Computer hardware under capital leases 1,729 792 937
Automobiles under capital leases ..... 114 61 53
Leasehold improvements ............... 522 169 353
Furniture and fixtures ............... 385 218 167
Computer software .................... 2,386 1,529 857
Domain name .......................... 45 24 21
------- ------------ --------
$10,563 $6,430 $ 4,133
------- ------------ --------
During the year ended December 31, 2002, and the year ended December 31, 2001
the Company recorded depreciation expense of $3,168 and $2,607 respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Commitments
At December 31, 2002, the Company has entered into commitments for leases for
premises. The future committed payments as at December 31, 2002 are:
2003 ...................................... $328
2004 ...................................... 274
2005 ...................................... 169
2006 ...................................... 63
----
$834
----
At December 31, 2002, the Company had employment contracts with its four
principal officers. The salary and bonus compensation resulting from these
contracts are as follows:
Potential Bonus
Name and Term of the (as a percentage
Principle Position Contract Base Salary of Base Salary)
________________________________________________________________________________
Nicholas Jackson,
President & CEO 1 year (pound)174 N/A
________________________________________________________________________________
Simon Coulthard,
CFO ongoing (pound)75 Up to 75%
________________________________________________________________________________
David Fleming,
CTO ongoing CDN$180 Up to 30%
________________________________________________________________________________
Mark Thompson,
Operations Director ongoing $120 Up to 75%
________________________________________________________________________________
F-19
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Nicholas Jackson served as a director from October 2000 to April 9, 2003 and
served as Chief Executive Officer from January 17, 2003 with a salary of
(pound)174 per annum plus annual allowances of (pound)12 for a vehicle and US$48
for housing. On April 9, 2003, Mr. Jackson resigned as CEO and a director of the
Company. Mr. Jackson in June 2003 entered into a settlement agreement with the
Company pursuant to which he received (pound)125 in exchange for any monies
which may be due to him from the Company. He was paid director's fees up to
January 13, 2003 and salary and housing allowances from January 13, 2003 until
April 9, 2003. He has been granted stock options, of which 102,459 are
exercisable at $2.13, 50,000 at $1.44, and 200,000 at $0.31.
Simon Coulthard's employment as Group Finance Director with World Gaming plc
began September 1, 2002 on a salary of (pound)75 plus car allowance of (pound)7.
Effective May 8, 2003, Mr. Coulthard's employment was terminated. Mr. Coulthard
received (pound)19 or three months gardening leave as part of his agreed upon
severance.
David Fleming's employment began September 10, 2001 and he has an annual salary
of CDN$180. He has been granted options of 100,000 which have an exercise price
of $0.88 of which 58,333 have vested. In addition, the Board on June 4, 2003
issued options to purchase 500,000 ordinary shares of the Company all of which
options will vest only on April 11, 2005.
Mr. Thompson was appointed to the position of Operations Director and Managing
Director of Starnet Systems on December 1, 2002 on a salary of $120 with an
annual housing allowance of $30 and certain other additional benefits. With the
resignation of Simon Coulthard in May 2003, our Group Finance Director, Mr.
Thompson is currently our acting Chief Financial Officer. He has been granted
options of 110,000 of which 30,000 have an exercise price of $1.47 and 80,000 at
$0.47. These options have been fully vested.
The Company signed an employment agreement with a new group CEO, Mr. Daniel
Moran, in April 2003, providing for annual base compensation of (pound)115
(approximately $184 US) with an annual housing allowance of (pound)15 in
addition to other normal executive employment benefits.
Contingencies
Starnet Communications International ("Starnet") and certain officers and
directors were named as defendants in ten class action lawsuits filed in 1999
alleging 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 class alleged in the class action claims consists of all persons
who purchased Starnet's common stock from March 11, 1999 to August 20, 1999
inclusive, excluding the defendants and persons connected with Starnet. On June
20, 2001, Starnet entered into a memorandum of understanding with the plaintiffs
for the settlement of the litigation, which at the time was still subject to the
court's approval. The amount of the settlement and related costs totaling
$1,200,000 were included in the current year financial statements for the year
ended December 31, 2002. The settlement was approved by the court on September
9, 2002. In March 2003, American Depositary Shares valued at approximately
$1,050,000 pursuant to the terms of the settlement agreement were issued to the
members of the plaintiff's class and $50,000 in related costs was paid in full
settlement of this matter.
F-20
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
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 alleges that the Starnet breached and wrongfully terminated
its license agreement with LVC 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. The Supreme Court of British Colombia has dismissed this action.
LVC has appealed the Court ruling and the Company is awaiting the determination
of the appeal. The Company believes the appeal is without merit.
The CCRA for the past two years have been auditing our subsidiary, Starnet
Communications International, Inc. We provided the auditors with all relevant
information, and cooperated with the agency. The audit was completed subsequent
to December 31, 2002 with the CCRA without any negative finding of financial
penalties for the company.
On August 2, 2001, Chris Thompson commenced an action in the Supreme Court of
British Colombia against the Company for the wrongful termination of his
employment agreement. He claimed damages of approximately $196,800. A negotiated
settlement was agreed between the Company and Chris Thompson during 2002 for
$97,000. The accrual for the unsettled balance was made in the financial
statements as at December 31, 2002 with payments made in full subsequent to
December 31, 2002. This matter is now closed.
On August 17, 2001, Starnet pled guilty to a single count contrary to the gaming
provisions of the Canadian Criminal Code. Starnet was fined CDN$100,000 and
ordered to forfeit $3,925,000 out of funds theretofore restrained and held by
the Royal Canadian Mounted Police in connection with their investigation of
Starnet. The investigation is now concluded, and during the hearing before the
Court, the Court agreed that there was no legal complaint with regard to
Starnet's operations since August, 1999 and as of the date of the plea.
On August 28, 2001 our subsidiary, Starnet Canada, filed a statement of claim
against Wiremix Media Inc. in the Supreme Court of British Colombia for
approximately CDN$154,645 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 a statement of defense to
Starnet Canada's claim. On October 1, 2001, Wiremix Media filed a statement of
claim against Starnet Canada. Wiremix Media alleged that Starnet Systems
arbitrarily terminated a marketing and consulting agreement with Wiremix and
claims damages of approximately $2 million remaining under the contract. A
negotiated settlement was agreed between the Company and Wiremix Media during
2002 where we are obligated to pay Wiremix Media CDN$30,000. Of such amount,
CDN$30,000 has been as accrued as due but unpaid in our financial statements as
at December 31, 2002.
In March 2002, Casino on Air World Entertainment Ltd., a former licensee of the
Company, filed a lawsuit against the Company alleging breach of contract in
Antigua. The amount of the claim is U.S. $1.84 million. The Company successfully
obtained a stay of this action in the Antiguan courts. The court ordered that
the dispute be dealt with by way of arbitration. Casino on Air has failed to
file a Notice to Arbitrate. The financial impact of this action, if any, cannot
be determined at this time, although the Company believes that the claim is
without merit.
F-21
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
Sunrise Corporation commenced a lawsuit against the Company in the Superior
Court of Ontario on April 16, 2002. Sunrise Corporation alleges that Starnet
Canada failed to make payments for the equipment leased from Sunrise Corporation
and that World Gaming is responsible for this debt. The amount of the claim is
$465,211 plus interest and cost. The Company has filed an amended defense to
this lawsuit. The Company cannot reliably ascertain at this time the merits or
financial impact of this lawsuit.
On April 9, 2003, Starnet Systems served notice to Sinsational Intertainment
("Sinsational"), a former licensee of the Company regarding its outstanding
account in the amount of $268,207 indicating the Company would terminate the
agreement if the long overdue account was not made current. On April 15, 2003,
Sinsational filed a statement of claim in the courts of Antigua and Barbuda
against the Company for an amount of $6.6 million. The Company counterclaimed
for the outstanding amount due. On April 16, 2003, Sinsational acknowledged in
writing the termination of its agreement with the Company. On April 16, 2003,
Sinsational commenced an action against the Company and obtained an injunction
preventing Starnet Systems from terminating the agreement. On May 12, 2003, at
the request of the Company, the court removed the injunction. On May 15, 2003
Sinsational requested that Starnet Systems cease providing services to its
website. On May 23, 2003 Sinsational filed an amended statement of claim
increasing the amount claimed to $30.9 million. Sinsational alleges that the
Company was in breach of the terms of the contract and as such, negatively
impacting Sinsational's financial performance. On June 19, 2003, Sinsational
obtained a new injunction preventing the Company from dealing with Sinsational's
customer data. The Company believes that the claim for damages is without merit
but there can be no assurances that the outcome would be in favor of the
Company.
NOTE 8 - FUNDS HELD ON DEPOSIT
As of December 31, 2002, the Company held $1,593 (December 31, 2001 - $2,041) in
cash representing funds held on deposit in the form of e-cash balances
representing cash funds deposited by customers and players of the Company's
licensees. These deposits are non-interest bearing and are repayable on demand.
NOTE 9 - CAPITAL LEASE OBLIGATIONS
At December 31, 2002, the Company had entered into capital leases for equipment
and automobiles. The future payments for the 12 months ended December 31 are:
2003 ............................................... $ 1,475
2004 ............................................... 246
-------
Total minimum lease payments ................. 1,721
Less amounts representing interest at rates
varying from 6.0% to18.0% ........................ (130)
-------
Present value of minimum lease payments ............ 1,591
-------
Less: Current portion of capital lease obligations
1,351
-------
Long-term portion of capital lease obligations ..... $ 240
-------
F-22
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 9 - CAPITAL LEASE OBLIGATIONS (continued)
The capital leases are collateralized by equipment with a net book value of $362
at December 31, 2002. Depreciation expense for the capitalized equipment was
$628 and $534 for the years ended December 31, 2002 and 2001 respectively. At
December 31, 2002, the Company was delinquent in the payments for a majority of
the capital leases, accordingly the entire portion of those capital leases are
being presented as current liabilities.
NOTE 10 - NOTES PAYABLE
At December 31, 2002, the Company had two loans from a related company,
SportingBet Plc with balances payable of $2,113. These loan balances from
SportingBet Plc are secured by a floating charge on some intellectual property
of the company and on certain identified equipment. One of the two loan balances
of $800 at December 31, 2002 was fully repaid as at March 31, 2003.
The Aztec loan balance of $100 is unsecured and repayable in 10 monthly
instalments of $11.
NOTE 11 - CAPITAL STOCK
Authorized
500,000,000 Ordinary shares, par value STG 0.002
(a) The Company had the following shares issued and outstanding:
Year ended Year ended
December 31, 2002 December 31, 2001
--------------------- ----------------------
Outstanding Class A shares,
beginning of year ....................... 34,193,181 $24,188 32,193,181 $ 22,335
Options issued below market value ....... - - - 563
Shares issued pursuant to conversion
of long-term debt ....................... - - 2,000,000 1,500
Share issue costs pursuant to the
Company's Reorganization (Note 15) ...... - - - (225)
Cash received on subscriptions receivable - 4 - 15
---------- ------- ---------- --------
Outstanding Class A shares, end of year . 34,193,181 $24,192 34,193,181 $ 24,188
========== ======= ========== ========
F-23
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 11 - CAPITAL STOCK (continued)
(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.
A summary of the Company's stock option activity and related information
follows:
Year ended Eight months ended
December 31, 2002 December 31, 2001
--------------------- ---------------------
Beginning of period ......... 11,794,862 $1.98 7,799,457 $2.64
Granted ..................... 675,000 0.89 4,261,408 0.98
Exercised ................... - - - -
Forfeited and adjusted ...... (5,527,643) (2.46) (266,003) 1.24
----------- ----- ----------- -----
End of period ............... 6,942,219 $1.49 11,794,862 $1.98
----------- ----- ----------- -----
At December 31, 2002, options outstanding were as follows:
Options Outstanding Options Exercisable
----------------------------------- -----------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Number of Contractual Exercise Number of Contractual Exercise
Range of Exercise Prices Options Life (Years) Price Options Life (Years) Price
------------------------ --------- ------------ -------- --------- ------------ --------
$0.31 - $1.00 3,281,372 1.4 $ 0.43 1,784,537 1.2 $ 0.44
$1.01 - $1.50 985,637 2.7 $ 1.32 722,553 3.04 $ 1.35
$1.51 - $2.50 1,188,386 2.2 $ 2.22 927,819 2.59 $ 2.22
$2.51 - $5.99 1,447,649 3.4 $ 3.30 1,271,041 3.69 $ 3.25
$6.00 - $11.00 39,175 7.7 $ 6.40 120,498 7.55 $ 6.53
$11.01 - $23.06 - - - - - -
------------------------ --------- ------------ -------- --------- ------------ --------
$0.31 - $23.06 6,942,219 2.2 $ 1.49 4,826,448 2.6 $ 1.81
------------------------ --------- ------------ -------- --------- ------------ --------
F-24
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 11 - CAPITAL STOCK (continued)
(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:
Year ended December Year ended December
31, 2002 31, 2001
------------------- -------------------
Net loss as reported .................................... $ (5,318) $ (16,277)
Pro forma net loss under FAS 123 ........................ $ (5,389) $ (18,361)
Net loss per share - basic, as reported ................. $ (0.16) $ (0.50)
Pro forma net loss per share -
basic, under FAS 123 ................................. $ (0.16) $ (0.55)
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 with the following weighted-average assumptions.
December 31, 2002 December 31, 2001
------------------- -------------------
Dividend yield .......................................... 0% 0%
Expected volatility ..................................... 157% 164%
Risk-free interest rate ................................. 2.18% 6.43%
Expected lives .......................................... 3 years 2 years
NOTE 12 - INCOME TAXES
The Company's operations located in Canada are subject to tax to the extent that
income is generated in the country. For the eight months ended December 31, 2001
and the year ended April 30, 2001, the losses related to development activities
allow a recovery of tax previously paid:
December 31, 2002 December 31, 2001
------------------- -------------------
Tax payable (receivable) -
beginning of year .................................... $ (123) $ (123)
Provision for (recover of)
current income tax ................................... - -
Payments of tax ......................................... - -
Difference due to exchange rate ......................... - -
------------------- -------------------
Tax receivable - end of year (Note 4) ................... $ (123) $ (123)
------------------- -------------------
F-25
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 12 - INCOME TAXES (continued)
At December 31, 2002, the Company had net operating loss carryforwards in its
Canadian companies of approximately $13,800 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
will 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:
For the eight
For the year months ended For the year
ended December December 31, ended April 30,
31, 2002 2001 2001
-------------- ------------- ---------------
Income tax benefit at statutory rate $ 2,579 $ 1,400 $1,465
Change in valuation allowance (2,579) (1,400) (1,465)
-------------- ------------- ---------------
$ - $ - $ -
-------------- ------------- ---------------
Deferred tax assets (liabilities) are comprised of the following:
December 31, 2002 December 31, 2001
------------------- -------------------
Income tax benefit at statutory rate .................... $6,204 $ 3,625
Change in valuation allowance ........................... (6,204) (3,625)
------------------- -------------------
$ - $ -
------------------- -------------------
NOTE 13 - GOING CONCERN
The Company's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. However, the Company has accumulated significant loses, has negative
working capital, a deficit in stockholders' equity and significant litigation.
All of these items raise significant doubt about its ability to continue as a
going concern.
Subsequent to the balance sheet date the Group has taken significant steps to
deal with these concerns as follows:
1. It has implemented measures to greatly reduce operation costs. Among these
measure are efforts to eliminate non-value-added expenses through the
consolidation of operations at one primary location and a significant
reduction in the company's work force.
2. It is now focused primarily on supporting its existing client base with
improved services and product offerings currently being developed.
3. Further financing has been received and the Company may seek additional
funding for appropriate new investment projects.
The management are of the view that sufficient resources and appropriate
controls are now in place to allow the business strategies to be developed with
a view to returning the Group to profitability and that there is a reasonable
expectation that the Group will be able to continue in business for the
foreseeable future.
F-26
WORLD GAMING PLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and December 31, 2001
NOTE 14 - MAJOR CUSTOMERS
Pertinent details of the gross sales to major customers during the year ended
December 31, 2002 are as follows:
PERCENT GROSS
CUSTOMERS GROSS SALES SALES
------------------------------- ----------- -------------
Customer A .................... $11,236 67%
Customer B .................... 1,756 10%
Customer C .................... 910 5%
------- --
$13,902 82%
------- --
NOTE 15 - SUBSEQUENT EVENTS
On April 4, 2003, one of the Company's major licensees, Sportingbet acquired a
shareholding in World Gaming Plc ("World Gaming"). This shareholding, together
with shares held by parties acting in concert with Sportingbet, comprises 29.7%
of World Gaming's issued share capital. Sportingbet has further invested in
World Gaming Plc via a $900,000 convertible bond which is convertible at
Sportingbet's sole discretion into shares or is repayable after a two year term.
If the convertible bond is converted into shares, Sportingbet would then have
voting control over 40% of the issued share capital of World Gaming.
Sportingbet's investment has been made with the specific intention of helping to
secure the future of World Gaming Plc as an independent company. As well as the
initial investment of some $1.5m further funding is available in order to
facilitate increased creativity and an accelerated product development programme
to ensure that World Gaming delivers the leading package of software to the
online gaming industry.
As a consequence of Sportingbet's investment, Nicholas Jackson, the current
Chief Executive and Managing Director resigned with immediate effect.
Sportingbet are presently in discussions with other Board members regarding the
appointment of a new Chief Executive and new Board members. On April 9, 2003,
David Fleming, the current Chief Technology Officer of the Company was appointed
to the new Board of Directors.
F-27
EXHIBIT INDEX
1.3 Articles of Association of World Gaming plc adopted by special
resolution on June 20, 2002
4.7 Unsecured Convertible Note with Goodison Park Limited, dated April 4,
2003
4.8 Stock Acquisition Agreement with Goodison Park Limited, dated April 4,
2003
4.9 Contract for Services with James Grossman, dated June 4, 2003
4.10 Contract of Employment with A. Daniel Moran, dated June 4, 2003
4.11 Employment Agreement with Nicholas Jackson, dated January 29, 2003
4.12 Employment Agreement with David Craven, dated November 20, 2002
4.13 Contract of Employment with David Naismith, dated June 4, 2003
4.14 Offer of Employment with Simon Coulthard, dated August 1, 2002
4.15 Offer of Employment with David Fleming, dated August 27, 2001
4.16 Offer of Employment with Mark Thompson, dated November 21, 2002
4.17 Letter regarding resignation of Mark Thompson dated 6/2/02
4.18 Engagement letter for Mark Thompson as Financial Consultant dated
9/11/02
4.19 Employment Agreement with Michael Aymong, dated 9/6/01
4.20 Employment Offer Letter with Rodney Davis, dated July 5, 2001
4.21 Letter regarding resignation of Rodney Davis, dated May 16, 2002
4.22 Settlement Agreement with Starnet, Nicholas Jackson, Sportingbet and
Goodison Park
4.23 Compromise Agreement by David Craven dated June 27, 2003
4.24 Software License Agreement between Internet Opportunity Entertainment
Ltd. and Softec Systems Caribbean Inc. dated March 19, 1998
4.25 Software License Agreement between Real Entertainment Ltd. and Softec
Systems Caribbean Inc. dated May 10, 1999
4.26 Internet Service Agreement between EFS Caribbean Inc. and Cable and
Wireless (West Indies) Ltd.
4.27 Letter regarding termination of Liam Gillen dated September 6, 2002
4.28 Guarantee from Nicholas Jackson in Favor of Goodison Park Limited dated
April 4, 2003
21.1 List of Subsidiaries
23.1 Consent of Baker Tilly
23.2 Consent of HJ & Associates
99.1 Sarbanes-Oxley Act Certification by A. Daniel Moran, CEO
99.2 Sarbanes-Oxley Act Certification by Mark Thompson, acting CFO