-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C62VjjygXbc/EjhZZjAbh+72lyG5IF6JNkGNhrD6oqyH0OlrHEC2rLHkCDr3N/Mp iKfTBhKACEdwdvVu0UJ6Ig== 0000898430-01-001143.txt : 20010409 0000898430-01-001143.hdr.sgml : 20010409 ACCESSION NUMBER: 0000898430-01-001143 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIRTGAME COM CORP CENTRAL INDEX KEY: 0001040022 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 330716247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-29800 FILM NUMBER: 1588808 BUSINESS ADDRESS: STREET 1: 12625 HIGH BLUFF DR STE 205A CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 6192595015 MAIL ADDRESS: STREET 1: 12625 HIGH BLUFF DRIVE STREET 2: SUITE 205A CITY: SAN DIEGO STATE: CA ZIP: 92130 FORMER COMPANY: FORMER CONFORMED NAME: VIRTUAL GAMING TECHNOLOGIES INC DATE OF NAME CHANGE: 19980727 10KSB40 1 0001.txt FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000. [_] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____________ to ______________ COMMISSION FILE NUMBER 000-29800 Virtgame.com Corp. ------------------ (Exact name of registrant as specified in its charter) Delaware 33-0716247 ------------------------------------------ -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5230 Carroll Canyon Drive Suite 318 San Diego, California 92130-2053 ------------------------------------------ -------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 858-373-5001 ------------ Securities registered pursuant to section 12(g) of the Act: (Title of Class) Common Shares Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.[X] Virtgame.com, Corp.'s revenues for the most recent fiscal year were $ 473,499. The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on the OTC Bulletin Board on March 22, 2001 was approximately $ 3,235,523. The number of shares outstanding of the registrant's Common Stock, as of March 22, 2001 was 12,942,092. DOCUMENTS INCORPORATED BY REFERENCE Document of the Registrant Form 10-KSB Reference Location None N/A VIRTGAM.COM CORP. Table of contents for Form 10K-SB Year Ended December 31, 2000 PART I ------ Item 1. Business Business Developments 1 Business of Company 3 Products and Services 3 Customers 4 New Industry and Competition 4 Regulation 4 Employees 4 Research and Development 5 Proprietary Technology 5 Marketing and Sales 5 Item 2. Description of Property 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II ------- Item 5. Market for Common Equity and Related Stockholders Matters 5 Item 6. Management's Discussion and Analysis or Plan of Operation 6 Item 7. Audited Financial Statements 7 Item 8. Changes In and Disagreement With Accountants on Accounting and Financial Disclosure 8 PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons 8 Item 10. Executive Compensation 10 Item 11. Security Ownership of Certain Beneficial Owners and Management 12 Item 12. Certain Relationships and Related Transactions 12 Item 13. Exhibits and Reports on Form 8-K 13
PART I ------ This Report contains forms of forward-looking statements that are based on the Company's beliefs as well as assumptions made by and information currently available to the Company. When used in this Report, the words "believe," "expect," "anticipate," "estimate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions, including without limitations, material risk factors such as inadequate working capital, auditors qualification as to going concern, recent commencement of operations, lack of market acceptance to date for the Company's products and services, nominal revenues to date, continuing losses from operations, future growth of revenue and threat of regulation of company's business. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results will vary materially from those anticipated, estimated, or projected and the variations may be material. The Company cautions potential investors not to place undue reliance on any such forward-looking statements all of which speak only as of the date made. Item 1. Business Business Developments - --------------------- Headquartered in San Diego, California, Virtgame.com is an Application Service Provider (ASP) for the gaming and lottery industries, specializing in e-BorderControl technology that limits e-commerce to one jurisdiction or restricts access of users from a specific jurisdiction. The Company started Internet casino-style gaming operations in September 1997 and discontinued the gaming operation in year 2000. The company developed its own software such as baccarat, blackjack, video poker, and pari-mutuel sports wagering for its own operation. The Company started as an Internet gaming operator in late 1997 until mid 2000 when it discontinued its gaming operation to focus as an ASP. During the gaming operation, the Company was only offering its games in certain international jurisdictions, located in Europe, the Caribbean, Latin America, the Middle East, Australia, Asia and Africa using a server site and hardware located in Antigua. The Company was formed under the laws of the State of Delaware on October 24, 1995 under the name MBA Licensing Corp. The Company's initial operations included the development of CD-ROM and video game cartridges that incorporated certain patented virtual reality technology. In November 1995, the Company conducted a private placement of its $.00001 par value common stock ("Common Stock") at $0.25 per share pursuant to Rule 504 under the Securities Act of 1933 ("1933 Act"). In that offering, the Company sold 1,160,000 shares of Common Stock in consideration of cash proceeds of $60,000, net of $5,000 of offering costs, and the cancellation of $225,000 of licensing and consulting fees due and payable. In May 1996, the Company chose to suspend all operations relating to the development of the virtual reality CD-ROMs and video game cartridges in favour of pursuing the development of casino-style gaming operations over the Internet. On June 20, 1996, the Company changed its corporate name to Internet Gaming Technologies, Inc. On January 22, 1997, the Company changed its corporate name to Virtual Gaming Technologies, Inc. and in August 1999, the Company changed its name to Virtgame.com Corp. Pursuant to a Securities Purchase Agreement dated September 5, 1996, as amended, eLOT, Inc. ("eLOT") agreed to purchase 233,333 shares of Common Stock at $3.00 per share. In addition, the Company granted eLOT a common stock purchase warrant entitling eLOT to purchase 200,000 shares of Common Stock at an exercise price of $3.45 per share. The warrant is immediately exercisable and expires on March 6, 2002. eLOT was formerly known as eLottery and prior to that as Unistar Entertainment, Inc. Between April 1997 and August 1997, the Company conducted a private placement of shares of Common Stock, at a price of $2.00 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold 1 1,018,250 shares of Common Stock for the gross proceeds of $2,036,500. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. Between January 1998 and December 1998, the Company conducted a private placement of 1,400,000 shares of Common Stock, at a price of $3.00 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold 1,387,238 shares of Common Stock for the gross proceeds of $4,161,703. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. Between February 1999 and June 1999, the Company conducted a private placement of 700,000 shares of Common Stock at an offering price of $3.00 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 181,358 shares of Common Stock for the gross proceeds of $544,074. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. Between August 1999 and January 2000, the Company conducted a private placement of 2,100,000 shares of Common Stock at an offering price of $1.50 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 1,301,600 shares of Common Stock for the gross proceeds of $1,952,400. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. On December 21, 1999, the Company acquired all of the issued and outstanding common shares of Primeline Technologies, Inc. in consideration of Virtgame's issuance of 447,208 shares of its common stock to Primeline stockholders. In January 2000, the Company started a private placement of 1,000,000 shares of common Stock, at a price of $1.50 per share, pursuant to rule 506 under the 1933 Act. In that offering, the Company sold a total of 236,667 shares of Common Stock for the gross proceeds of $355,000. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's software development, Internet gaming operations and working capital. In April 2000, the Company started a private placement of 1,000,000 shares of common stock, at a price of $0.50 per share, pursuant to rule 506 under the 1933 Act. In that offering, the Company sold a total of 1,020,000 shares of Common Stock for the gross proceeds of $510,000. Proceeds from the sale of the shares were applied towards the Company's software development and working capital. There was a finder involved in issuance of these shares and the finder received 1,000,000 shares of Common Stock in payment of finder's fee. The total shares issued with relation to this private placement amounted to 2,020,000 shares. In October 2000, the Company started a private placement of 1,000,000 shares of common Stock, at a price of $1.00 per share, pursuant to rule 506 under the 1933 Act. At the time of this 10KSB report, 78,800 shares of Common Stock have been sold for the gross proceeds of $78,800. Proceeds from the sale of the shares were applied towards the Company's software development and working capital. There was a finder involved in issuance of these shares and the finder received 8,856 shares of Common Stock in payment of finder's fee. The total shares issued with relation to this private placement amounted to 87,656 shares. Unless the context otherwise requires, all references to the Company includes its wholly-owned subsidiaries Internet Gaming Technologies, Inc., a Nevada corporation, Emerald Riviera Ltd., an Irish corporation, Virtual Gaming Technologies Argentina, S.A., an Argentinean corporation and Virtual Gaming Technologies (Antigua) Ltd., an Antiguan corporation. The Company's executive offices are located at 5230 Carroll Canyon Road, Suite 318, San Diego, California 92121; telephone number (858) 373-5001. 2 Business of Company - ------------------- Headquartered in San Diego, California, Virtgame is an Application Service Provider (ASP) for the gaming and lottery industries, specializing in e-BorderControl technology that limits e-commerce to one jurisdiction or restricts access of users from a specific jurisdiction. Virtgame has secured several contracts under its new business as an ASP. The Company in October 2000 received approval from Nevada Gaming Board for a "Nevada only" web based sports wagering system for Coast Resorts, a Nevada licensed casino operator with four casinos in Las Vegas. Throughout most of the Company's history, its primary business focus was operation of casino-style gaming over the Internet in jurisdictions with no ban on Internet gaming. In the third quarter of year 2000, the Company decided to discontinue operation of its Internet casino and focus on three strategies: . e-BorderControl technologies to help the Company's software solutions in offeing e-gaming and e-lottery products within specified geographical boundaries for licensed casinos and state lotteries. . Provide e-gaming software solutions to gaming operators through licensing and leasing programs. . Develop "Virtgame Checkpoint Network" for States such as Nevada to use it as a checkpoint to ensure users are within a jurisdiction, using the same technology Virtgame developed for Coast Resorts and approved by Nevada Gaming Board in October 2000. Virtgame has built comprehensive and scalable Internet lottery, casino and sports wagering software and applications that are customizable for private label use. The Company is leveraging its technology and know-how to develop and provide innovative solutions to licensed land based casinos and lottery operators around the world. From the inception of the new operations as an ASP in the second quarter of year 2000 through December 31, 2000 the Company has generated $473,499 of revenue from software license fees. At the time of this 10K-SB Report, the Company had generated $643,247 in software license fees from inception of operations as an Application Service Provider to the gaming and lottery industries. Products and Services - --------------------- The Company operated an offshore Internet casino and sports book from late 1997 to mid 2000 excluding U.S. players. Virtgame discontinued its gaming operation to focus as an enabler for licensed land based operators to extend their reach to their customers beyond physical visits. The company is now well positioned as a gaming ASP to help brick and mortar gaming operators go online. Virtgame creates customized enterprise-level software and charges customers an initial set up and a monthly account fee based on number of active players, which includes upgrades and maintenance to avoid any conflict of interests with its customers. The Company's corporate web site is at www.virtgame.com, its demo ---------------- sports book software is at www.primelinesports.com, its demo casino is at ----------------------- www.virtfuncasino.com and its demo e-BorderControl tier 1 web site is at - --------------------- www.virtsecure.net identifying jurisdiction of a user. - ------------------ The Company offers an online distribution channel for traditional bricks-and-mortar gaming companies. Utilizing an Internet e-BorderControl technology, Virtgame can design and construct private-label online casinos and sports books available exclusively for online users in Nevada. The Company has developed an over-the-counter solution that integrates conventional Nevada-style casino sports books with the Internet/Intranet. The Company has developed PrimeLine, an over-the-counter sports book that is approved in Nevada and is operational at a Las Vegas casino and is capable of seamless integration with the Company's e-BorderControl to offer sports wagering on the Company's proprietary Nevada Intranet system. 3 Customers - --------- The Company's customers are gaming companies and lottery operators, the Company's list of clients to date include, two U.S. lottery operators, two Nevada and two Latin American gaming companies. New Industry and Competition - ---------------------------- The Company enables land based gaming companies to provide interactive gaming service and virtual casino and sports books. Although the gaming industry is well established and has recently experienced significant growth and profitability, gaming on the Internet is a recent development and an unproven segment of the gaming industry and the Company expects that there will be intense competition in Internet gaming. The barrier to entry in Internet markets is generally low. Regulation - ---------- Gaming activities are stringently regulated in the United States and most developed countries. As an application Service Provider to the gaming industry, the Company's policy is not to participate in net win or loss of its clients. Employees - --------- As of the date of this 10-KSB Report, the Company employs 13 people on a full time basis, 12 of the employees were based in San Diego, California and one was based in Las Vegas, Nevada. 4 Research and Development - ------------------------ The Company spent approximately $511,000 in research and development in 2000 all of which were written off during the year. The Company intends to conduct continuing development and innovation of its products in accordance with changing consumer preferences, demographics, and the evolution of new technologies. The Company's development strategy is to leverage its technology and the technology of other software developers, with the goal of providing applications that are competitive and innovative in the Internet gaming industry. Proprietary Technology - ---------------------- The Company has internally developed proprietary gaming software applications, based on the Java programming language that allows for interactive gaming, including simulated casino motion and sound, on a real-time basis. The Company has developed a proprietary e-BorderControl technology that limits access of players to one jurisdiction or restricts access of players from specific jurisdictions. Marketing and Sales - ------------------- The Company's primary marketing and sales strategy is to sell its software to licensed land based casinos and lottery operators around the world. Item 2. Description of Property The Company's executive offices are located in San Diego, California and consist of approximately 3,000 square feet for a monthly rent of approximately $4,200. Item 3. Legal Proceedings The Company is not a party in any litigation and has no knowledge of any pending legal proceedings in any court or agency of government, or government authorities. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of fiscal 2000 to a vote of security holders, through the solicitation of proxies, or otherwise. PART II ------- Item 5. Market for Common Equity and Related Stockholders Matters The Company's Common Stock is listed on the Over the Counter Bulletin Board under the symbol "VGTI." The following table sets forth the high and low closing prices of the Company's Common Stock for each calendar quarter since commencement of trading. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. High Low ------------ ------------ Mar 31, 1999 4.43 3.38 June 30, 1999 4.87 2.70 September 30, 1999 3.72 1.75 December 31, 1999 4.12 1.50 5 March 31, 2000 3.12 1.38 June 30, 2000 1.63 0.50 September 30, 2000 1.56 0.63 December 31, 2000 1.47 0.38 On December 31, 2000, the closing price for the Company's Common Stock was $ 0.38 per share. As of that date, the Company had 161 stockholders of record and approximately 841 beneficial holders of stock. The Company has not paid any dividends on its Common Stock and currently intends to retain any future earnings for use in its business; therefore, the Company does not anticipate paying cash dividends in the foreseeable future During the year the Company sold unregistered shares of its Common Stock in the following transactions: A. In May 2000, the Company issued to one of its officers 625,000 options to purchase shares of Common Stock at an exercise price of $0.50 per share, which was immediately exercisable upon grant. In May 2000, the Company issued to seven of its employees options to purchase an aggregate of 154,500 shares of Common Stock at an exercise price of $0.50 per share, of which options to purchase 107,500 of the options issued to the employees were immediately exercisable upon grant, option to purchase 5,000 Common Stock vest and become exercisable on December 31, 2000 and 7,500 Common Stock vest and become exercisable on January 2, 2001 and 34,500 shares of Common Stock vests and become exercisable on May 25, 2001. All of the foregoing options have a life of either three or four years. There was no underwriter involved in the issuances. The issuances were conducted pursuant to Section 4(2) of the 1933 Act. B. In March 2000 the Chairman of the Board of Directors exercised option to purchase 100,000 shares of Common Stock at an exercise price of $0.10 a share. C. In October 2000, the Company issued to a consultant warrants to purchase 37,500 shares of Common Stock at exercise price of $0.83 per share. The warrants were issued pursuant to a bonus clause in the Primeline Technologies, Inc. purchase agreement. All the foregoing options are immediately exercisable and expire on October 24, 2005. There was no underwriter involved in the issuances. The issuances were conducted pursuant to Section 4(2) of the 1933 Act. D. Between January 2000 and March 2000, the Company conducted a private placement of 1,000,000 shares of Common Stock at an offering price of $1.50 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 236,667 shares of Common Stock for the gross proceeds of $355,000. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. E. Between April 2000 and September 2000, the Company conducted a private placement of 1,000,000 shares of Common Stock at an offering price of $0.50 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 1,020,000 shares of Common Stock for the gross proceeds of $510,000. Proceeds from the sale of the shares were applied towards the software development and working capital. There was a finder involved in issuance of these shares and the finder received 1,000,000 shares of Common Stock in payment of finder's fee. F. In October 2000, the Company started a private placement of 1,000,000 shares of common Stock, at a price of $1.00 per share, pursuant to Rule 506 under the 1933 Act. At the time of this 10KSB report, 78,800 shares of Common Stock have been sold for the gross proceeds of $78,800. Proceeds from the sale of the shares were applied towards the Company's software development and working capital. There was a finder involved in issuance of these shares and the finder received 8,856 shares of Common Stock in payment of finder's fee. The total shares issued with relation to this private placement amounted to 87,656 shares. Item 6. Management's Discussion and Analysis or Plan of Operation The Company has derived all its revenues from licensing its software to the gaming and lottery industries. Between January 2000 and March 2000, the Company conducted a private placement of 1,000,000 shares of Common Stock at an offering price of $1.50 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 236,667 shares of Common Stock for the gross proceeds of $355,000. Proceeds from the sale of the shares were applied towards the development and implementation of the Company's Internet gaming operations and working capital. 6 Between April 2000 and September 2000, the Company conducted a private placement of 1,000,000 shares of Common Stock at an offering price of $0.50 per share, pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a total of 1,020,000 shares of Common Stock for the gross proceeds of $510,000. Proceeds from the sale of the shares were applied towards the software development and working capital. There was a finder involved in issuance of these shares and the finder received 1,000,000 shares of common Stock in payment of finder's fee. In October 2000, the Company started a private placement of 1,000,000 shares of common Stock, at a price of $1.00 per share, pursuant to rule 506 under the 1933 Act. At the time of this 10KSB report, 78,800 shares of Common Stock have been sold for the gross proceeds of $78,800. Proceeds from the sale of the shares were applied towards the Company's software development and working capital. There was a finder involved in issuance of these shares and the finder received 8,856 shares of Common Stock in payment of finder's fee. The total shares issued with relation to this private placement amounted to 87,656 shares. Results of Operations Year Ended December 31, 2000 Compared to Year Ended December 31, 1999. The Company's net revenues increased from $0 to $473,499 for the year ended December 31, 2000 compared to the prior year period. Operating expenses from continuing operations decreased by 26.1% for the year ended December 31, 2000 to $1,820,822 compared to $2,462,746 in the prior year period. The decrease was due to cost reduction and reduced number of staff. All revenues and expenses related to operating an Internet casino and sportsbook operations are reflected as discontinued operations in the Consolidated Statements of Operations for the year ending December 31, 2000 and December 31, 1999. Interest income increased slightly to $6,411 for the year ended December 31, 2000 compared to $6,387 for the prior year. Interest expense decreased to $27,422 for the year ended December 31, 2000 compared to $32,589 for the prior year, due to lower average notes payable balances outstanding during the year. Net loss from continuing operations for the year ended December 31, 2000 was $1,373,116 compared to $2,491,530 for the year ending December 31, 1999. The total loss from discontinued operations was $256,995 for the year ending December 31, 2000 compared to a loss of $559,189 from discontinued operations in the prior year. Net loss for the year ending December 31, 2000 fell 46.5% to $1,630,111, or $0.14 per share, on 11,920,790 weighted average shares outstanding, compared with a loss in 1999 of $3,050,719, or $0.34 per share, on 9,024,792 weighted average shares outstanding. Liquidity and Capital Resources The Company had a negative working capital of $323,127 at December 31, 2000. In order to obtain the necessary working capital to fund continued operations; the Company has undertaken a new private placement offering. The private placement is for 1,000,000 shares at $1.00 per share with sales commission of approximately 10% to fund the full scale roll out of its Internet gambling operations and to fund the continuing losses from operations as the Company endeavors to build revenues and reach profitable operations. The Shares are being offered on a straight best effort basis by the Company, which means that there is no minimum offering amount and no escrow of proceeds. The Company believes it needs at least the net proceeds of $900,000 from the sale of the 1,000,000 Shares of the Private Placement before it starts generating cash flow from its operations. If the Company is unable to raise this capital, it will endeavor to raise the additional required funds through alternative sources, of which there can be no assurance. Failure to obtain the required funds from any source would severely impact the Company's financial condition and would jeopardize the Company's ability to continue as a going concern. The Company's Independent Auditor's report includes an emphasis of matter as to the Company's ability to continue as a going concern. Inflation The Company believes that inflation does not have a material effect on its business. Item 7. Financial Statements The Independent Auditors' Reports for the years ended December 31, 2000 and 1999 are included in this report commencing on page F-1. 7 Item 8. Changes In and Disagreement With Accountants on Accounting and Financial Disclosure Not applicable. PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons Name Age Position - ---- --- -------- Leo I. George 64 Chairman of the Board Joseph R. Paravia 49 President, Chief Executive Officer and Director Bruce Merati 43 Chief Operating Officer and Chief Financial Officer John Van Rhyn 64 Vice President of Gaming Operations Dick L. Rottman 63 Director Scott A. Walker 42 Director Mr. George has served as Chairman of the Board of the Company since September 1999. Since 1995, Mr. George has served as Vice-President for Regulatory Affairs of WinStar Communications, a provider of wireless communications services. From 1992 to 1995, Mr. George served as Chairman of Avant-Garde Telecommunications Corp., a provider of nationwide wireless bypass services to long distance carriers. From 1989 to 1992, Mr. George served as the general counsel to the Goeken Group, the founder of MCI. During that time, Mr. George and John Goeken collaborated to launch Airfone, the first commercial telephone service with U.S. airline carriers. Mr. Paravia has served as President and a director of the Company since July 1996 and as Chief Executive Officer of the Company since July 1997. Mr. Paravia has over 20 years of experience in the gaming industry. From October 1995 through May 1996, Mr. Paravia served as the Vice President of the Tropicana Hotel in Las Vegas, Nevada, where he was responsible for all casino operations. From 1991 to February 1995, Mr. Paravia served as a member of the Board of Directors and as Senior Director of Casino Operations for Caesars Palace in Las Vegas, Nevada, where he was responsible for all casino operations. Mr. Merati has served as Chief Financial Officer of the Company since July 27, 1998 and as Chief Operating Officer of the Company since April 2000. From July 1997 to July 1998, Mr. Merati served as the Controller of The Weekend Exercise Company, Inc., an apparel manufacturer. From 1995 to 1997, Mr. Merati served as the Controller of Airline Interiors, Inc., an airline seat manufacturer. From 1993 to 1995, Mr. Merati served as the Controller of First Affiliated Securities, a securities broker-dealer and investment banker. Mr. Merati is a Certified Public Accountant and a Chartered Accountant in England & Wales and spent seven years as auditor with the London office of PricewaterhouseCoopers. Mr. Van Rhyn has served as Vice President of Gaming Operations since June 1997. Mr. Van Rhyn has over 20 years of experience in the gaming industry, including positions of primary responsibility in the areas of sports book and racing, finance and accounting, and general casino operations. From 1993 to 1997, Mr. Van Rhyn was a self-employed consultant to the gaming industry. From 1989 to 1992, Mr. Van Rhyn was director of all race, sports book, poker and Keno operations at the Desert Inn Hotel & Casino in Las Vegas, Nevada. From 1988 to 1989, Mr. Van Rhyn was director of all race, sports book, poker and Keno operations at the Sands Hotel & Casino in Las Vegas. Mr. Rottman has served as director of the Company since April 1998. Since 1994, Mr. Rottman has served as Chairman of the Board and Chief Executive Officer of Western Insurance Company. In addition, Mr. Rottman has served as Chief Executive Officer of Bell United Insurance Company since 1986. Mr. Rottman served as the Insurance Commissioner for the State of Nevada from 1971 to 1978. 8 Mr. Walker has served as a director of the Company since October 1998. From January 1996 to the present, Mr. Walker has served as a partner and as General Counsel of MCOM Management Corp. From June 1995 to the present, Mr. Walker served as a principal of Walker Worldwide Ltd., an international trading company. From 1986 to 1995, Mr. Walker practiced law with the firm of Walker & Corsa. Compliance With Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires each director and executive officer of the Company, and each person who owns more than ten percent (10%) of a registered class of the Company's equity securities to file by specific dates with the Securities and Exchange Commission (the "SEC") reports of ownership and reports of change of ownership of equity securities of the Company. Officers, directors, and 10%stockholders are required by the SEC to furnish the Company with copies of all Section 16(a) forms they file. The Company is required to state in this report any failure of its directors and executive officers to file by the relevant due date any of these reports during the Company's fiscal year. To the Company's knowledge, all Section 16(a) filing requirements were complied with during the fiscal years ended December 31, 2000 and 1999. 9 Item 10. Executive Compensation Cash Compensation of Executive Officers. The following table sets forth the cash compensation paid by the Company to its Chief Executive Officer and to all other executive officers for services rendered during the fiscal years ended December 31, 2000, 1999 and 1998.
Annual Compensation Long-Term Compensation ----------------------------------------- ---------------------------- Common Shares Restricted Underlying Other Annual Stock Options Granted All Other Compen- Name and Position Year Salary Bonus Compensation Awards ($) (# Shares) sation - -------------------------------- ---- --------- ------- ------------ ----------- --------------- ----------------- Joseph R. Paravia, President and 2000 $150,000 -0- -0- -0- -0- -0- CEO(1) 1999 $130,577 -0- -0- -0- 500,000 -0- 1998 $133,213 -0- -0- -0- -0- -0- Bruce Merati, 2000 $100,000 -0- -0- -0- 625,000 -0- Chief Operating Officer 1999 $ 90,000 -0- -0- -0- -0- -0- and Chief Financial 1998 $ 31,875 -0- -0- -0- -0- -0- Officer (2) John Van Rhyn, 2000 $ 4,200 -0- -0- -0- -0- -0- Vice President - Gaming 1998 $ 43,750 -0- -0- -0- -0- -0- Operations (3) 1998 $ 46,331 -0- -0- -0- 45,000 -0-
_______________ (1) Commencing June 1, 1996, the Company began paying Mr. Paravia a salary at the rate of $100,000 per annum. Mr. Paravia's salary was reduced to $8,000 per month effective as of November 11, 1997. Mr. Paravia's salary was reinstated to $120,000 per annum effective April 25, 1998 and was increased to $150,000 per annum effective August 1, 1999. (2) Commencing July 27, 1998, the Company began paying Mr. Merati a salary at the rate of $85,000 per annum Effective August 1, 1999, Mr. Merati's salary was increased to $100,000 per annum. (3) Commencing June 6, 1997, the Company began paying Mr. Van Rhyn a salary at the rate of $70,000 per annum. Mr. Van Rhyn's salary was reduced to $3,000 per month effective as of February 9, 1998, and was reinstated to $70,000 per annum effective October 9, 1998. Effective February 15, 2000, Mr. Van Rhyn's salary was reduced to $5,200 per year. 10 Option/SAR Grants in Last Fiscal Year Individual Grants
- ----------------------------------------------------------------------------------------------------------------------- Number of Securities Underlying % of Total Options/SARs Options/SARs Granted Granted to Employees in Exercise or Base Name (#) Fiscal Year Price ($/Sh) Expiration Date - ------------------------- -------------------- ----------------------- ---------------- ----------------- Joseph Paravia, 500,000 0.0% $1.625 July 25, 2004 President 480,000 0.0% $ 0.25 December 31, 2004 Bruce Merati - Chie 625,000 80.2% $ 0.50 May 25, 2004 Operating and Chief Financial Officer
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- ----------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options (SARs Options (SARs at FY-End (#) at FY-End($) Shares Acquired Exercisable/ Exercisable/ Name on Exercise Value Received Unexercisable Unexercisable(1) - ------------------------- -------------------- ----------------------- ---------------- ----------------- Joseph R. Paravia, 980,000/0 $62,400/$0 President & CEO Bruce Merati - Chief 625,000/0 $ 0/$0 Operating and Chief Financial Officer John Van Rhyn 90,000/0 $ 0/$0 Vice President - Gaming Operations
(1) Calculated based upon a last reported sale price of $0.38 per share of Common Stock, as reported on the OTC Bulletin Board on December 31, 2000. Employment Agreements: (a) In September 1999, the Company entered into an employment agreement with its Chairman, Leo I. George, pursuant to which Mr. George received three-year options to purchase up to 100,000 shares of Common Stock at an exercise price of $0.10 per share. These options contain a buy-back provision in favour of the Company, which enables the Company to buy-back these options and the shares underlying the options at a price of $3.50 per share. In addition, Mr. George received three-year options to purchase up to 700,000 shares of Common Stock, of which options to purchase 500,000 shares are fully vested and immediately exercisable and options to purchase 200,000 shares vest and first become exercisable on September 2, 2000. The exercise price for the 500,000 fully vested options is $2.44 per share. The exercise price for the 200,000 options that vest on September 2, 2000 shall be equal to the fair market value of the Common Stock on that date. Finally, in the event the Company obtains debt or equity financing in excess of $10,000,000, Mr. George shall be entitled to three-year options to purchase up to 200,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. (b) In November 1999, the Company entered into a two-year employment agreement with the Chief Executive Officer of the Company, Joseph R. Paravia. The agreement provided for a base salary of $150,000, and an annual cash bonus equal to 2% of the Company's annual gross revenues in excess of $1 million. The agreement also provides for a cash bonus of $100,000 upon the anticipated public offering of the Company and a payment of $250,000 upon the sale or merger of the Company. Compensation of Directors. All non-officer directors of the Company receive an attendance fee of $1,000 per meeting of the Board of Directors. All directors receive reimbursement for out-of-pocket expenses in attending Board of Directors meetings. From time to time the Company may engage certain members of the Board of Directors to perform services on behalf of the Company and will compensate such persons for the services which they perform. 11 Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of the shares of Common Stock as of the date of March 24, 2001 by (i) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of Common Stock, (ii) each of the Company's directors and executive officers and (iii) all directors and executive officers as a group.
Name and Address Number of Shares Percentage Owned - ---------------------------------------------------- ---------------------------------------- ------------------ Leo I. George(1)(2)(3) 2,982,000 23.0% Daniel B. Najor (1)(3) 3,462,500 26.8% Joseph R. Paravia (1)(4) 1,070,000 8.3% John Van Rhyn (1)(5) 104,000 (6) Bruce Merati (1)(7) 615,000 4.7% Dick L. Rottman (1)(8) 100,000 (6) Scott A. Walker (1)(9) 707,336 5.5% All officers and directors 5,578,336 43.1% as a group
(1) Address is 5230 Carroll Canyon Rd., Suite 318, San Diego, California 92121. (2) Includes options granted to Mr. George to purchase 500,000 shares of Common Stock at an exercise price of $2.46 per share. (3) Includes 2,382,000 shares of Common Stock owned by Daniel Najor for which Mr. Najor has granted Mr. George a limited irrevocable proxy to vote these shares in connection with certain matters. See "Certain Relationships and Related Transactions." (4) Includes options granted to Mr. Paravia to purchase 380,000 shares of Common Stock at an exercise price of $.25 per share and options to purchase 500,000 shares of Common Stock at an exercise price of $1.625 per share. (5) Includes options granted to Mr. Van Rhyn to purchase 45,000 shares at $2.00 per share and options to purchase 45,000 shares at $2.875 per share. (6) Less than one percent. (7) Represents options granted to Mr. Merati to purchase 615,000 shares of Common Stock at an exercise price of $0.50 per share. (8) Includes options granted to Mr. Rottman to purchase 20,000 shares of Common Stock at an exercise price of $4.50 per share and options to purchase 50,000 shares of Common Stock at an exercise price of $0.50 per share. Also includes 30,000 shares of Common Stock owned by Western Insurance Company, with which Mr. Rottman is affiliated. (9) Includes 543,836 shares of common stock owned by MCOM Management Corp., with which Mr. Walker is affiliated. Also includes options granted to Mr. Walker to purchase 20,000 shares of Common Stock at an exercise price of $4.50 per share. Does not include options to purchase 10,000 shares of Common Stock at an exercise price of $4.50 per share that are subject to vesting. Item 12. Certain Relationships and Related Transactions In September 1999, the Company, Leo I. George and Daniel B. Najor entered into a Stock Restriction Agreement pursuant to which Mr. Najor agreed to a restriction on 2,382,000 of his shares ("Restricted Shares") of Common Stock. Pursuant to that agreement, Mr. Najor is prohibited from selling, pledging or otherwise transferring or disposing the Restricted Shares without the consent of the Company. In addition, Mr. Najor granted Mr. George a limited irrevocable proxy that enables Mr. George to vote the Restricted Shares on any matter submitted to the stockholders for their approval either at a meeting duly convened or by a written consent. However, Mr. Najor retains the right to vote the Restricted Shares in connection with a request for stockholder approval on any matter concerning the merger or dissolution of the Company or the sale of substantially all of its assets. The Stock Restriction Agreement and the proxy terminate on the earlier of: (i) the termination of George's position as Chairman of the Company, (ii) the sale by Mr. George of any of shares of Common Stock beneficially owned by him, (iii) the sale of the Common Stock in a registered public offering, or (iv) September 2, 2001. 12 Item 13. Exhibits and Reports on Form 8-K a) Exhibits - The following exhibits were filed on December 10, 1998 as exhibits to the Company's 10-SB/A. 3.1 Certificate of Incorporation of the Company; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 3.2 Bylaws of the Company; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 3.3 Certificate of amendment to Certificate of incorporation of the Company; filed on Definitive Information Statement dated July 7, 1999 4.1 Specimen of Common Stock Certificate; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.1 Securities Purchase Agreement dated September 5, 1996 between the Company and Unistar Entertainment, Inc.; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.2 Settlement Agreement and Mutual General Release between the Company and CasinoWorld Holdings, Ltd, dated February 26, 1997; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.3 Settlement Agreement and Mutual General Release between the Company and Unistar Entertainment, Inc. dated March 6, 1997; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.4 Employment Agreement dated September 1, 1997 between the Company and Joseph R. Paravia; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.5 Virtual Gaming Technologies, Inc. 1997 Stock Option Plan; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 10.6 Employment agreement dated September 2 1999, between the Company and Leo I. George; filed as exhibit to 10-KSB dated March 30, 2000. 10.7 Employment agreement dated November 2 1999, between the Company and Joseph R. Paravia; filed as exhibit to 10-KSB dated March 30, 2000. 10.8 Securities Acquisition Agreement dated December 20, 1999 between the Company and Primeline Technologies, Inc.; filed as exhibit to 10-KSB dated March 30, 2000. 10.9 Software development agreement dated January 20, 2000 between the Company and Coast Resort; filed as exhibit to 10-KSB dated March 30, 2000. 21.1 List of Subsidiaries; filed as exhibit to the Company's 10-SB/A dated December 21, 1998 b) Reports on Form 8-K. The Company filed a report of Form 8-K on January 19, 1999 relating to the change of the Registrant's independent auditors for the fiscal year ended December 31, 1998. Reports on From 8-K. The Company filed a report of From 8-K on March 29,2000 relating to acquisition of Primeline Gaming Technologies, Inc. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Virtgame.com Corp. - ------------------ (Registrant) Date: March 27, 2001 By: /s/ Joseph R. Paravia ------------------------------------------------ President, Chief Executive Officer and Director Date: March 27, 2001 By: /s/ Bruce Merati ------------------------------------------------ Chief Operating Officer and Chief Financial Officer In accordance the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 2001 By: /s/ Leo I. George ------------------------------------------------ Chairman of the Board Date: March 27, 2001 By: /s/ Dick L. Rottman ------------------------------------------------ Director Date: March 27, 2001 By: /s/ Scott A. Walker ------------------------------------------------ Director 13 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT For the years ended December 31, 2000 and 1999 VIRTGAME.COM CORP. AND SUBSIDIARIES TABLE OF CONTENTS ----------------- INDEPENDENT AUDITOR'S REPORT................................... F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets................................. F-2 to F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Shareholders' Equity............. F-5 to F-6 Consolidated Statements of Cash Flows....................... F-7 to F-8 Notes to Consolidated Financial Statements.................. F-9 to F-21
INDEPENDENT AUDITOR'S REPORT ---------------------------- To the Board of Directors and Shareholders Virtgame.com Corp. San Diego, California We have audited the consolidated balance sheets of Virtgame.com Corp. and Subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Virtgame.com Corp. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company has suffered recurring losses from operations since inception, has limited operating revenue and limited capital resources. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. San Diego, California PANNELL KERR FORSTER February 5, 2001 Certified Public Accountants A Professional Corporation F-1 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 ASSETS ------ 2000 1999 ---------- ---------- Current assets: Cash and cash equivalents $ 123,053 $ 422,309 Unbilled revenues 27,925 - Prepaid expenses and other current assets 20,964 19,923 Net assets of discontinued operations 11,010 351,361 ---------- ---------- Total current assets 182,952 793,593 ---------- ---------- Noncurrent assets: Deposits 8,466 8,513 Property and equipment, net 155,330 228,898 Capitalized software, net 985,495 951,170 ---------- ---------- Total noncurrent assets 1,149,291 1,188,581 ---------- ---------- Total assets $1,332,243 $1,982,174 ========== ========== The accompanying notes are an integral part of the consolidated financial statements. F-2 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
2000 1999 ------------ ------------ Current liabilities: Accounts payable $ 198,726 $ 126,287 Accrued expenses 100,840 133,847 Current portion of capital lease obligation 5,423 - Notes payable 201,090 198,876 ------------ ------------ Total current liabilities 506,079 459,010 Long-term portion of capital lease obligation 9,643 - ------------ ------------ Total liabilities 515,722 459,010 ------------ ------------ Commitments and contingencies (Notes 4, 5, 6 and 8) Shareholders' equity: Preferred stock, $ .00001 par value, 10,000,000 shares authorized, none issued or outstanding - - Common stock, $ .00001 par value, 30,000,000 shares authorized, 12,832,092 and 10,369,292 shares issued and outstanding in 2000 and 1999, respectively; 125,857 and 144,334 shares issuable in 2000 and 1999, respectively 130 105 Additional paid-in capital 15,649,831 14,726,388 Accumulated deficit (14,833,440) (13,203,329) ------------ ------------ Total shareholders' equity 816,521 1,523,164 ------------ ------------ Total liabilities and shareholders' equity $ 1,332,243 $ 1,982,174 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2000 and 1999
2000 1999 ----------- ----------- Revenue $ 473,499 $ - Operating expenses: Salaries and payroll expenses 938,960 1,313,692 Other operating expenses 881,862 1,149,054 ----------- ----------- Total expenses from continuing operations before income taxes 1,820,822 2,462,746 ----------- ----------- Loss from continuing operations before financial expense (1,347,323) (2,462,746) Financial income (expense): Interest income 6,411 6,387 Interest expense (27,422) (32,589) Other income - 305 ----------- ----------- Total financial expense (21,011) (25,897) ----------- ----------- Loss from continuing operations before income taxes (1,368,334) (2,488,643) Income tax expense (4,782) (2,887) ----------- ----------- Loss from continuing operations (1,373,116) (2,491,530) ----------- ----------- Discontinued Operations Loss from discontinued operations (net of tax provision of $0) (217,000) (559,189) Loss on sale of discontinued operations (39,995) - ----------- ----------- Net loss $(1,630,111) $(3,050,719) =========== =========== Basic and diluted net loss per share $ (0.14) $ (0.34) =========== =========== Shares used to compute basic and diluted net loss per share 11,920,790 9,024,792 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 2000 and 1999
Common Stock --------------------------- Additional Paid-In Accumulated Shares Amount Capital Deficit Total ---------------------------------------------------------------------------- Balance forwarded, December 31, 1998 8,511,959 $ 85 $11,079,550 $(10,152,610) $ 927,025 Issuance of common stock on exercise of employee stock option 1,500 - 4,305 - 4,305 Issuances of common stock for cash, net of issuance costs: January 1999 through June 1999 181,359 2 435,548 - 435,550 Issuance of common stock on conversion of notes payable (Note 5) 100,000 1 299,999 - 300,000 Issuances of common stock for cash, net of issuance costs: August 1999 through December 1999 1,271,600 13 1,752,890 - 1,752,903 Issuance of common stock on acquisition of subsidiary 447,208 4 899,996 - 900,000 Issuance of employee stock options (Note 6) - - 254,100 - 254,100 Net loss for the year ended December 31, 1999 - - - (3,050,719) (3,050,719) ---------------------------------------------------------------------------- Balance, December 31, 1999 10,513,626 $ 105 $14,726,388 $(13,203,329) $ 1,523,164 ============================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-5 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) For the years ended December 31, 2000 and 1999
Common Stock ------------------------ Additional Paid-In Accumulated Shares Amount Capital Deficit Total -------------------------------------------------------------- Balance forwarded, December 31, 1999 10,513,626 $105 $14,726,388 $(13,203,329) $ 1,523,164 Issuance of common stock on exercise of employee stock option 100,000 1 9,999 - 10,000 Issuances of common stock for cash, net of issuance costs: January 2000 through March 2000 (Note 6) 236,667 3 319,497 - 319,500 Issuances of common stock for cash, net of issuance costs: April 2000 through October 2000 (Note 6) 2,020,000 20 476,479 - 476,499 Issuances of common stock for cash, net of issuance costs: October 2000 through December 2000 (Note 6) 87,656 1 75,109 - 75,110 Issuance of stock warrants to consultant for services rendered (Note 6) - - 42,359 - 42,359 Net loss for the year ended December 31, 2000 - - - (1,630,111) (1,630,111) --------------------------------------------------------------- Balance, December 31, 2000 12,957,949 $130 $15,649,831 $(14,833,440) $ 816,521 ===============================================================
The accompanying notes are an integral part of the consolidated financial statements. F-6 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000 and 1999
2000 1999 ----------- ----------- Cash flows from continuing operating activities: Loss from continuing operations $(1,373,116) $(2,491,530) Adjustments to reconcile loss from continuing operations to net cash flows used in continuing operating activities: Depreciation 280,760 80,709 Loss on sale of assets - 38,966 Issuance of common stock options and warrants for licensing and consulting fees and compensation 42,359 254,100 Changes in operating assets and liabilities: Decrease (increase) in: Unbilled revenues (27,925) - Prepaid expenses and other current assets (1,041) 10,078 (Decrease) increase in: Accounts payable and accrued expenses 39,431 (62,060) ----------- ----------- Net cash flows used in continuing operating activities (1,039,532) (2,169,737) ----------- ----------- Cash flows provided by (used in) discontinued operating activities 95,613 (273,771) ----------- ----------- Cash flows from investing activities: Decrease in deposits 47 890 Proceeds from the sale of assets 3,456 - Purchase of equipment (239,552) (82,668) ----------- ----------- Net cash flows used in investing activities (236,049) (81,778) ----------- ----------- Cash flows from financing activities: Net proceeds from the issuance of common stock 881,109 2,192,758 Borrowings on notes payable 10,000 475,000 Payments on notes payable (7,786) (126,124) Principal payments under capital lease (2,611) - ----------- ----------- Net cash flows provided by financing activities 880,712 2,541,632 ----------- ----------- Net (decrease) increase in cash and cash equivalents (299,256) 16,346 Cash and cash equivalents at beginning of year 422,309 405,963 ----------- ----------- Cash and cash equivalents at end of year $ 123,053 $ 422,309 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-7 VIRTGAME.COM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the years ended December 31, 2000 and 1999 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2000 1999 ------- --------- Cash paid during the year for: Interest $ 2,671 $ 38,532 ======= ========= Income taxes $ 4,782 $ 2,887 ======= ========= Supplemental disclosure of noncash investing and financing activities: Foreign exchange loss $(1,584) $ (5,672) ======= ========= Equipment acquired through capital lease $17,677 $ - ======= ========= Notes payable converted into shares of common stock $ - $ 300,000 ======= ========= On December 21, 1999, the Company acquired 100% of the outstanding capital stock of Primeline Gaming Technologies, Inc. in return for the issuance of 447,208 shares of its common stock. The value of the assets and liabilities acquired was approximately $912,000 and $12,000, respectively. The accompanying notes are an integral part of the consolidated financial statements. F-8 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------- Organization and Business Virtgame.com Corp. (the "Company") was incorporated in the State of Delaware on October 24, 1995, under the name MBA Licensing Corp. On June 20, 1996, the Board of Directors approved the change of the Company's name to Internet Gaming Technologies, Inc., on January 22, 1997, to Virtual Gaming Technologies, Inc., and on May 20, 1999, to Virtgame.com Corp. Virtgame.com is an application service provider to the gaming and lottery industries, offering Internet access confined to a specific jurisdiction or restricting access to users from specific jurisdictions through its patent pending eBorder Control technology enabling its customers to comply with established rules and regulations. Virtgame.com has built scalable Internet lottery, casino and sports wagering software and applications that are customizable for private label use. The Company offers its technology to licensed gaming operators. On December 21, 1999, the Company entered into a securities acquisition agreement and plan of reorganization (the "Primeline Acquisition") with Primeline Gaming Technologies, Inc. ("Primeline"). The Primeline Acquisition resulted in the Company acquiring 100% of the outstanding capital stock of Primeline in return for the issuance of 447,208 shares of its common stock. The Primeline Acquisition has been accounted for as a purchase at historical cost. Had the Primeline Acquisition occurred on January 1, 1999, proforma net capitalized software at December 31, 1999 would have been $771,170, a decrease of $180,000, and the proforma net loss and basic and diluted net loss per share for the year ended December 31, 1999 would have been $(3,230,719) and $(0.34), respectively, an increase of $180,000 and no change, respectively. As Primeline was incorporated on October 6, 1999, with limited activity for the period from October 6, 1999 (inception) to December 31, 1999, amortization of the acquired assets is the only proforma adjustment. Principles of Consolidation The accompanying financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries, Emerald Riviera Limited, an Irish Corporation, Virtual Gaming Technologies Argentina S.A., an Argentinean Corporation, Virtual Gaming Technologies (Antigua) Ltd., an Antiguan Corporation, and Primeline Gaming Technologies, Inc., a California Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. F-9 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------- Discontinued Foreign Operations and Concentrations During the year ended December 31, 2000, the Company closed its Antigua office and discontinued marketing its casino and sportsbook operation. The Company's financial statements have been restated to reflect the on-line casino and sportsbook activities as discontinued operation for all periods presented including gaming revenues of approximately $25,000 and $385,000 for the years ended December 31, 2000 and 1999, respectively. As of December 31, 1999, the Company maintained approximately $420,000 in total assets in Antigua, net of inter-company receivables of $840,000. Included in total assets in Antigua as of December 31, 1999,was approximately $230,000 in cash held in foreign banks. As of December 31, 1999, approximately 75% of the Company's customers were located in Asia. The U.S. Dollar is considered the functional currency for Emerald Riviera Limited, Virtual Gaming Technologies Argentina S.A. and Virtual Gaming Technologies (Antigua) Ltd. Accordingly, the monetary assets and liabilities of these entities have been remeasured using the current rates of exchange and nonmonetary assets have been remeasured using the appropriate historical rates of exchange. Foreign exchange loss arises on the transfer of customers' foreign currency credit card deposits into the Company's U.S. Dollar-denominated bank accounts during the year and on the translation of the Company's cash held in foreign banks to U.S. Dollars at year end. Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, prepaid expenses and other current assets, deposits, accounts payable, accrued expenses, and funds held on deposit approximate fair value due to the immediate short-term maturity of these financial instruments. The fair value of the Company's capital lease obligation and notes payable approximate the carrying amount based on the current rates offered to the Company for debt of the same remaining maturities with similar collateral requirements. Cash and Cash Equivalents The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and money market funds purchased with an original maturity of three months or less to be cash equivalents. F-10 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------- The Company maintains its cash accounts at financial institutions located in California. Accounts at the financial institutions located in California are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At December 31, 2000 and 1999, the Company's uninsured cash balances, including cash held in foreign banks and restricted cash, totaled $20,612 and $454,011, respectively. The Company has not experienced any losses in such accounts and management believes it places its cash on deposit with financial institutions which are financially stable. Restricted Cash The Company was considering an arrangement to offer credit card processing services to other Internet-based businesses, and in June 1998, deposited $300,000 with a major foreign bank relative to a contemplated arrangement. The Company decided not to proceed with the above arrangement and during the year ended December 31, 1999, $150,000 of this amount was returned to the Company. The remaining $150,000 is classified as a current asset in the accompanying consolidated balance sheet as of December 31, 1999. The remaining $150,000 was returned to the Company during 2000. Property and Equipment Property and equipment is recorded at cost. Depreciation is calculated on the straight-line basis over the estimated useful life of five years, or related lease life, if shorter. Revenue Recognition The Company recognizes software license fee revenue in accordance with the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Software Revenue Recognition, With Respect to Certain Transactions." Software license fees represent revenues related to licenses for software delivered to customers for in-house applications. Revenues from single-element software license agreements are recognized upon shipment of the software. Revenues from software arrangements involving multiple elements are allocated to the individual elements based on their relative fair values. If services are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized using the percentage of completion method in accordance with the provisions of SOP 81-1, "Accounting for performance of construction type and certain production type contracts." Contract revenues are recognized based on labor hours incurred to date compared to total estimated labor hours for the contract. Contract costs include all direct labor, direct material and indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates. Hosting fees represent revenues from post-contract customer support services where the Company's software is resident on a company server and are recognized ratably over the hosting period. Event fees are recognized as the events take place. F-11 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------- Stock Based Compensation The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments based on a fair-value method of accounting. Companies that do not choose to adopt the expense recognition rules of SFAS No. 123 will continue to apply the existing accounting rules contained in Accounting Principles Board Opinion (APB) No. 25, but will be required to provide proforma disclosures of the compensation expense determined under the fair-value provisions of SFAS No. 123, if material. APB No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad-based employee stock purchase plans and option grants where the exercise price is equal to the market price at the date of the grant. The Company has adopted the disclosure provisions of SFAS No. 123 effective January 1, 1996. The Company has opted to follow the accounting provisions of APB No. 25 for stock-based compensation and to furnish the pro forma disclosures required under SFAS No. 123 (see Note 6). Advertising Costs The Company charges the cost of advertising to expense as incurred. Advertising costs for the year ended December 31, 2000 and 1999, were approximately $9,300 and $161,000, respectively. Capitalized Software Effective January 1, 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, SOP 98-1 requires that entities capitalize certain internal-use software costs once certain criteria are met. Under SOP 98-1, overhead, general and administrative and training costs are not capitalized. In addition, certain computer software costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," and are reported at the lower of unamortized cost or net realizable value. Capitalized software amortization expense for the years ended December 31, 2000 and 1999 was approximately $212,000 and $0, respectively. Research and development costs expensed for the years ended December 31, 2000 and 1999 was approximately $511,000 and $706,000, respectively. F-12 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) - --------------------------------------------------------- Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Net Loss Per Share Basic net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the reported periods. Diluted net loss per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised. During the years ended December 31, 2000 and 1999, options and warrants to purchase 3,722,300 and 3,757,300 common shares, respectively, were anti-dilutive and have been excluded from the weighted average share computation. Comprehensive Income The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components. The Company adopted this statement effective January 1, 1998. For the years ended December 31, 2000 and 1999, the Company had no items that were required to be recognized as components of comprehensive income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform with current year presentation with no effect on results of operations or accumulated deficit. F-13 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 2 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment consists of the following at December 31:
2000 1999 ---------- ---------- Computer hardware $ 332,269 $ 338,302 Office furniture and equipment 70,998 70,998 ---------- ---------- 403,267 409,300 Less: accumulated depreciation 247,937 180,402 ---------- ---------- $ 155,330 $ 228,898 ========== ==========
NOTE 3 - CAPITALIZED SOFTWARE - ----------------------------- Capitalized software consists of the following at December 31:
2000 1999 ---------- ---------- Computer software $1,186,378 $ 955,673 Less: accumulated amortization 200,883 4,503 ---------- ---------- $ 955,495 $ 951,170 ========== ==========
NOTE 4 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- Operating Leases The Company leases its office facilities under a non-cancelable operating lease agreement through April 2001. The lease calls for monthly payments of approximately $4,200. In addition, the Company leases certain office equipment under noncancellable operating lease agreements expiring at various times through December 2002. The leases call for aggregate monthly payments of approximately $2,800. Capital Lease The Company leases computer equipment under capital lease agreements, with imputed interest rates ranging from 13.97% to 27.11%, due in monthly installments of approximately $700 through April 2003. The computer equipment that collateralizes the leases had a net book value of approximately $15,000 at December 31, 2000. F-14 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued) - -------------------------------------- At December 31, 2000, the annual future minimum lease payments under operating and capital leases are as follows:
Operating Capital Leases Lease --------- --------- 2001 $ 42,064 $ 8,372 2002 12,693 8,372 2003 - 2,791 --------- --------- Total minimum lease payments $ 54,757 19,535 ========= Less amount representing interest (4,469) --------- Present value of net minimum lease payments 15,066 Less current maturities (5,423) --------- Long-term lease obligations $ 9,643 =========
Rental expense for office facilities for the years ended December 31, 2000 and 1999 totaled approximately $111,000 and $147,000, respectively. Employment Agreements During September 1999, the Company entered into a two-year employment agreement with the Chairman of the Board of Directors. The agreement provides for the grant of options to purchase: 100,000 shares of common stock at $.10 per share; 500,000 shares of common stock at an exercise price equal to the fair market value on the date of the agreement, 200,000 shares of common stock at an exercise price equal to the fair market value on the one-year anniversary date of the agreement; and 300,000 shares at an exercise price equal to the fair market value on the date of grant if, prior to termination of the agreement, the Company has secured debt or equity financing, or a combination thereof, in the aggregate amount of $10 million, after deducting for all associated costs. Compensation cost in the amount of $236,000 has been recognized on the grant of options to purchase 100,000 shares of common stock at $.10 per share (see Note 6). During March 2000, the 100,000 options were exercised by the Chairman. During November 1999, the Company entered into a two year and nine-month employment agreement with the Chief Executive Officer (the "CEO"). The agreement provides for a base salary of $150,000, and an annual cash bonus equal to 2% of the Company's annual gross revenues in excess of $1 million. In conjunction with this agreement, the CEO has agreed not to solicit any person employed full-time by the Company during the term of his employment and for one year after termination. The agreement also provides for a cash bonus of $100,000 upon the anticipated public offering of the Company and a payment of $250,000 upon the sale or merger of the Company. F-15 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 5 - RELATED PARTY TRANSACTIONS - ----------------------------------- Note Payable to Stockholder and Affiliate During the year ended December 31, 1999, the Company received advances of $475,000 in the form of notes payable from its then Chairman of the Board of Directors and his affiliated company. During the year ended December 31, 1999, $300,000 of this amount was converted into 100,000 shares of common stock. The notes payable are unsecured, due on demand and provide for interest at a fixed rate of 12% per annum. The principal balance outstanding was $85,000 and $75,000 as of December 31, 2000 and 1999, respectively and total interest expense incurred by the Company on these related party notes payable for the years ended December 31, 2000 and 1999 was approximately $10,000 and $17,000, respectively. Note Payable - Licensing Agreement In May 1996, the Company entered into a nonexclusive licensing agreement with CasinoWorld Holdings, Ltd. (CasinoWorld) for the use of certain computer software and hardware (the CasinoWorld Agreement). Under the terms of the CasinoWorld Agreement, the Company agreed to transfer 385,000 shares of its common stock to CasinoWorld as a licensing fee. As additional consideration, the Company agreed to pay a royalty in the amount of 33 1/3% of net gaming revenue derived through Internet operations. The 385,000 shares of common stock had been presented as additional shares of common stock issued in the consolidated financial statements for the year ended December 31, 1996. The shares were actually transferred to CasinoWorld through the Company's majority stockholder. Effective February 1997, the Company and CasinoWorld agreed to terminate the CasinoWorld Agreement. Under the termination agreement, CasinoWorld returned to the Company 385,000 shares of the Company's common stock in exchange for a $150,000 promissory note and all 385,000 shares were retired. The promissory note is unsecured and bears interest at a fixed rate of 10%. Principal and interest are due in quarterly installments equal to 10% of the Company's net gaming revenue, as defined in the promissory note. The Company recorded a charge to operations of $133,711 to reflect the effect of the settlement during 1997. All remaining principal and accrued interest was due in September 1998. The note was not repaid upon maturity and at December 31, 2000, had a balance of $116,090. F-16 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 6 - SHAREHOLDERS' EQUITY - ----------------------------- Stock and Warrants Issued for Services During the year ended December 31, 1999, the Company issued warrants to purchase 223,300 shares of its common stock as consideration for services provided in connection with the Company's stock issuances for cash. All of the warrants are immediately exercisable and expire five years from the date of issuance. The warrants have been valued at $509,635 and have been recorded as an increase and a decrease to additional paid-in capital, with no net effect on shareholders' equity. During the year ended December 31, 2000, the Company issued warrants to purchase 37,500 shares of its common stock as consideration for services provided in connection with execution of a software licensing agreement. All of the warrants are immediately exercisable and expire five years from the date of issuance. The warrants have been valued at $42,359 and have been recorded as an increase to additional paid-in capital and consulting fees. Stock Issued for Cash During the year ended December 31, 1999, the Company issued shares of common stock relative to a 700,000 share private placement offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net proceeds from the offering at December 31, 1999 were $435,550, net of issuance costs of $108,530. During the year ended December 31, 1999, the Company also issued shares of common stock relative to a 1,400,000 share private placement offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net proceeds from the offering at December 31, 1999 were $1,752,903, net of issuance costs of $154,500. In conjunction with this offering, the Company issued warrants to purchase 30,000 shares of its common stock in August 1999. The warrants are immediately exercisable and expire five years from the date of issuance. During the year ended December 31, 2000, the Company issued shares of common stock relative to a 236,667 share private placement offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net proceeds from the offering at December 31, 2000 were $319,500, net of issuance costs of $35,500. During the year ended December 31, 2000, the Company also issued shares of common stock relative to a 1,020,000 share private placement offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net proceeds from the offering at December 31, 2000 were $476,499, net of issuance costs of $33,501 and a finder's fee of 1,000,000 shares of the Company's common stock. F-17 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 6 - SHAREHOLDERS' EQUITY (Continued) - ----------------------------- During the year ended December 31, 2000, the Company also issued shares of common stock relative to a 78,800 share private placement offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Total net proceeds from the offering at December 31, 2000 were $75,110, net of issuance costs of $3,690 and a finder's fee of 8,856 shares of the Company's common stock. Stock Options In 1997, the Company adopted a stock option plan (the "Plan") under which options to purchase up to 500,000 shares of common stock may be granted to officers, employees or directors of the Company, as well as consultants, independent contractors or other service providers of the Company. Both "incentive" and "nonqualified" options may be granted under the Plan. Incentive options may be granted at an exercise price equal to the fair market value of the shares at the date of grant while nonqualified options may be granted at an exercise price determined by the Board of Directors. Individual option agreements will contain such additional terms as may be determined by the Board of Directors at the time of the grant. The Plan provides for grants of options with a term of up to 10 years. Incentive options must be granted with exercise prices equal to the fair market value on the date of grant, except that incentive options granted to persons owning stock possessing more than 10% of the total combined voting power of all classes of stock of the Company may not be granted at less than 110% of the fair market value on the date of grant. During 2000, the Company amended the plan to increase the number of options to purchase 5,000,000 shares of common stock. The Company has elected to account for nonqualified grants and grants under its Plan following APB No. 25 and related interpretations. Accordingly, compensation costs of approximately $42,000 and $254,000 have been recognized for nonqualified options for the years ended December 31, 2000 and 1999, respectively. In November 1999, the Company extended the expiration date on options previously granted to the CEO to purchase 480,000 shares of common stock. The expiration date was extended by five years to December 31, 2005. No additional compensation cost has been recognized on the extension of the expiration date as there was no change in the intrinsic value of the options. F-18 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 6 - SHAREHOLDER'S EQUITY (Continued) - ----------------------------- Stock Options (Continued) Under SFAS No.123, the fair value of each option granted during the years ended December 31, 2000 and 1999 was estimated on the measurement date utilizing the then current fair value of the underlying shares less the exercise price discounted over the average expected life of the options of three to five years, with an average risk-free interest rate of 5.0% to 4.4%, price volatility of 1.0 and no dividends. Had compensation cost for all awards been determined based on the fair value method as prescribed by FASB Statement No.123, reported net (loss) and (loss) per common share would have been as follows: December 31, December 31, 2000 1999 ------------ ------------ Net loss: As reported $(1,630,111) $(3,050,719) Proforma $(1,953,785) $(5,636,127) Basic and diluted net loss per share: As reported $ (0.14) $ (0.34) Proforma $ (0.16) $ (0.63) A summary of the activity of the stock options for the years ended December 31, 2000 and 1999 is as follows: Year ended Year ended December 31, 2000 December 31, 1999 --------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------------------------------------ Outstanding at beginning of period 3,022,000 $ 1.88 932,000 $1.45 Granted 779,500 0.50 2,091,500 2.06 Canceled (465,000) 3.14 - - Exercised (100,000) 0.10 (1,500) 2.87 Expired (825,500) 2.52 - - ------------------------------------------ F-19 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 Outstanding at end of period 2,411,000 $ 1.32 3,022,000 $1.88 =========== ====== =========== ===== Exercisable at end of period 2,369,000 $ 1.24 2,495,000 $1.82 =========== ====== =========== ===== Weighted-average fair value of options granted during the period $ 0.42 $1.54 ====== ===== Weighted-average remaining contractual life of options outstanding at end of period 2.7 years 3.9 years ========= =========
F-20 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 7 - INCOME TAXES - --------------------- Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. The tax effect of temporary differences consisted of the following as of December 31:
2000 1999 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 3,477,000 $ 2,819,000 Compensation element of stock options issued 917,000 948,000 Startup costs capitalized for income tax purposes 197,000 312,000 Other 7,000 83,000 ----------- ----------- Gross deferred tax assets 4,598,000 4,162,000 Less valuation allowance (4,580,000) (4,105,000) ----------- ----------- 18,000 57,000 Deferred tax liabilities, equipment (18,000) (57,000) ----------- ----------- $ - - =========== ===========
Realization of deferred tax assets is dependant upon sufficient future taxable income during the period that deductible temporary differences and carryforward are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance. The valuation allowance increased by $475,000 from 1999. As of December 31, 2000, the Company has net operating loss carryforwards for both federal and state income tax purposes. Federal net operating loss carryforwards totaling approximately $8,533,000 expire as follows: $194,000 in 2011, $322,000 in 2012, $3,609,000 in 2018, $2,953,000 in 2019, and $1,455,000 in 2020. State net operating loss carryforwards totaling approximately $8,529,000 expire as follows: $4,123,000 in 2003, $2,952,000 in 2004, and $1,454,000 in 2005. Due to Internal Revenue Service regulations, the availability of the operating loss carryforwards may be limited upon a substantial change in ownership. F-21 VIRTGAME.COM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE 7 - INCOME TAXES (Continued) - --------------------- A reconciliation of the effective tax rates with the federal statutory rate is as follows as of December 31: 2000 1999 --------- ---------- Income tax benefit at statutory rate $ 569,000 $1,068,000 Change in valuation allowance (475,000) (882,000) Nondeductible expenses (92,000) (214,000) State income taxes, net 95,000 175,113 Other (101,782) (150,000) --------- ---------- $ (4,782) $ (2,887) ========= ========== NOTE 8 - MANAGEMENT'S PLANS FOR FUTURE OPERATIONS AND FINANCING - --------------------------------------------------------------- The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has experienced cumulative losses since its inception of approximately $14,833,000, inclusive of noncash charges for capital stock, options and warrant issuance-related activity of approximately $4,298,000. The cumulative losses have reduced net shareholders' equity to approximately $817,000 as of December 31, 2000. At present, the Company's working capital may not be sufficient to meet the Company's objectives as structured. Although these conditions indicate that the Company may be unable to continue as a going concern, management did anticipate that considerable losses would be incurred before the Company became self- sustaining. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 1, the Company acquired 100% of the outstanding capital stock of Primeline. Primeline has developed software that provides an online closed-loop sportsbook system. The software has gained regulatory approval from the Nevada Gaming Commission and has been installed at a land-based gaming corporation in Nevada. Based on current contract negotiations, management believes the Company will generate sufficient revenues and cash flows from software licensing agreements to meet its current obligations during the year ending December 31, 2001. To the extent such revenues are not realized, management believes it has the ability to raise additional capital to cover its current obligations until sufficient software licensing revenues and cash flows can be achieved by the Company. F-22 -----END PRIVACY-ENHANCED MESSAGE-----