<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1998
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary proxy statement
[ ] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN REGISTRANT)
Payment of filing fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $4,274
(2) Form, Schedule or Registration Statement No.: Schedule 14A
(3) Filing Party: International Lottery & Totalizator Systems, Inc.
(4) Date Filed: September 18, 1998
<PAGE> 2
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
------------------------
To the Shareholders of International Lottery & Totalizator Systems, Inc.:
YOU ARE HEREBY NOTIFIED that a special meeting of shareholders of
International Lottery & Totalizator Systems, Inc., a California corporation (the
"Company"), will be held on , 1998 at 2131 Faraday Avenue,
Carlsbad, California, at 3:00 p.m. local time (the "Special Meeting"), for the
following purposes:
(1) to consider and vote on a proposal to approve the acquisition (the
"Acquisition") by the Company of 52.0 million common shares of Prime Gaming
Philippines Inc. ("Prime"), representing a 52.25% equity interest in Prime,
from Berjaya Lottery Management (H.K.) Ltd. ("Berjaya") and certain other
holders of Prime common shares (the "Other Sellers") in exchange for the
issuance of 9,479,167 common shares, no par value, of the Company to
Berjaya and, if applicable, the Other Sellers, the terms and conditions of
which are set forth in the Stock Purchase Agreement dated as of June 19,
1998; and
(2) to consider and vote upon such other matters which may properly
come before the Special Meeting and any adjournments or postponements
thereof.
THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD"), BASED UPON THE
UNANIMOUS RECOMMENDATION OF ITS AFFILIATIONS COMMITTEE, HAS DETERMINED THAT THE
ACQUISITION IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT YOU VOTE FOR
THE ACQUISITION AT THE SPECIAL MEETING.
The Acquisition is described in the accompanying Proxy Statement (the
"Proxy Statement"), which you are urged to read carefully and in its entirety. A
copy of the Stock Purchase Agreement is attached as Annex A to the Proxy
Statement.
We welcome your attendance at the Special Meeting. Whether or not you
expect to attend the Special Meeting in person, we urge you to complete, sign,
date and promptly return the enclosed proxy card in the accompanying return
envelope. Your proxy is revocable and will not affect your right to vote in
person if you decide to attend the Special Meeting. Simply attending the Special
Meeting, however, will not revoke your proxy. For an explanation of the
procedures for revoking your proxy, see the section of the Proxy Statement
captioned "The Special Meeting -- Voting, Revocation and Solicitation of
Proxies." Returning your proxy card without indicating how you want to vote will
have the same effect as a vote FOR the Acquisition. Failure to return a properly
executed proxy card or vote in person at the Special Meeting will have the same
effect as a vote AGAINST the Acquisition.
By:
/s/ M. MICHALKO
M. Mark Michalko
President
Carlsbad, California
, 1998
YOUR VOTE IS IMPORTANT.
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN, DATE THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
------------------------
PROXY STATEMENT
Proxies in the form enclosed with this Proxy Statement are solicited by the
Board of Directors (the "Board") of International Lottery & Totalizator Systems,
Inc. (the "Company" or "ILTS") for use at the Special Meeting of Shareholders to
be held at 2131 Faraday Avenue, Carlsbad, California, on , 1998 (the
"Special Meeting"), including any adjournments or postponements thereof. This
Proxy Statement and the enclosed form of proxy are first being mailed to the
shareholders of the Company on or about , 1998.
THE SPECIAL MEETING
GENERAL
The purpose of the Special Meeting is: (1) to consider and vote on a
proposal to approve the acquisition (the "Acquisition") by the Company of 52.0
million common shares ("Prime Shares") of Prime Gaming Philippines Inc.
("Prime"), representing a 52.25% equity interest in Prime, from Berjaya Lottery
Management (H.K.) Ltd. ("Berjaya") and certain other holders of Prime Shares
(the "Other Sellers" and, together with Berjaya, the "Sellers") in exchange for
the issuance of 9,479,167 common shares, no par value, of the Company ("Company
Common Shares") to Berjaya and, if applicable, to the Other Sellers, the terms
and conditions of which are set forth in the Stock Purchase Agreement dated as
of June 19, 1998, (the "Stock Purchase Agreement") and (2) to consider and vote
upon such other matters which may properly come before the Special Meeting and
any adjournments or postponements thereof. See "The Acquisition -- The Sellers"
for a more complete description of the Sellers.
Each copy of this Proxy Statement mailed to shareholders of the Company is
accompanied by a form of proxy for use at the Special Meeting.
THE BOARD, BASED UPON THE UNANIMOUS RECOMMENDATION OF ITS AFFILIATIONS
COMMITTEE, HAS UNANIMOUSLY APPROVED THE ACQUISITION AND RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE ACQUISITION.
RECORD DATE AND VOTING
The Board has set , 1998 as the Record Date. Only
holders of record of Company Common Shares, as of the close of business on the
Record Date will be entitled to notice of and to vote at the Special Meeting.
The class of the Company voting securities is Company Common Shares. As of the
Record Date, there were outstanding and entitled to vote [6,009,183] Company
Common Shares, which shares were held by [884] holders of record. Each Company
Common Share entitles the holder thereof to one vote, which may be cast either
in person or by properly executed proxy at the Special Meeting.
The approval and adoption of the Acquisition will require the affirmative
vote of at least a majority of the Company Common Shares outstanding on the
Record Date.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding Company Common Shares entitled to vote at the
Special Meeting is necessary to constitute a quorum at the Special Meeting.
Company Common Shares that are entitled to vote but that are not voted at the
direction of the beneficial owner ("abstentions") and votes withheld by brokers
in the absence of instruction from beneficial holders ("broker non-votes") will
be counted for the purpose of determining whether there is a quorum for the
transaction of business at the Special Meeting. Abstentions and broker non-votes
will have the same effect as a vote AGAINST the Acquisition. Failure either to
return a properly executed proxy card or to vote in person at the Special
Meeting will have the same effect as a vote AGAINST the Acquisition.
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The Stock Purchase Agreement provides that Berjaya will vote all Company
Common Shares that it owns in the same proportions "for" and "against" as the
votes cast by all other holders of Company Common Shares at the Special Meeting.
As of the Record Date, Berjaya directly owned, in the aggregate, [2,304,500]
Company Common Shares, representing approximately [38.34]% of the total number
of Company Common Shares outstanding as of such date.
In addition, as of the Record Date, directors and executive officers of the
Company owned, in the aggregate, [282,874] Company Common Shares, representing
less than [5%] of the Company Common Shares outstanding as of such date. Such
directors and officers have expressed their present intent to vote their Company
Common Shares in favor of the Acquisition.
VOTING, REVOCATION AND SOLICITATION OF PROXIES
The Board does not know of any matters to be presented at the Special
Meeting other than those described in the Notice of the Special Meeting of
Shareholders.
If any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn such meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies or allowing
additional time for the satisfaction of conditions to the Acquisition), the
persons named in the enclosed forms of proxy and acting thereunder generally
will have discretion to vote on such matters in accordance with their best
judgment. Notwithstanding the foregoing, proxies voting against the Acquisition
may not be used by the persons named in the proxies to vote for adjournment of
the meeting for the purpose of giving management additional time to solicit
votes to approve the Acquisition.
The grant of a proxy on the enclosed form does not preclude a shareholder
from attending the Special Meeting and voting in person. Shareholders may revoke
a proxy at any time before it is voted. Proxies may be revoked by (1) delivering
to the Secretary of the Company, before the vote is taken at the Special
Meeting, a written notice of revocation bearing a later date than the proxy, (2)
duly executing a later dated proxy relating to the same Company Common Shares
and delivering it to the Secretary of the Company before the vote is taken at
the Special Meeting or (3) attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy
should be sent to International Lottery & Totalizator Systems, Inc., 2131
Faraday Avenue, Carlsbad, CA 92008, Attention: Secretary, or hand delivered to
the Secretary of the Company before the vote is taken at the Special Meeting.
All expenses of the Company's solicitation of proxies for the Special
Meeting will be borne by the Company. In addition to solicitation by use of the
mails, proxies may be solicited from the shareholders by directors, officers and
employees of the Company in person or by telephone, facsimile or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. The Company has retained ChaseMellon
Shareholder Services, L.L.C., a proxy solicitation firm, for assistance in
connection with the solicitation of proxies for the Special Meeting at a cost of
approximately $10,000 plus reimbursement of reasonable out-of-pocket expenses.
Arrangements may be made with brokerage houses, custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of Company Common Shares held of record by such brokerage houses, custodians,
nominees and fiduciaries, and the Company will reimburse such brokerage houses,
custodians, nominees and fiduciaries for their reasonable expenses incurred in
connection therewith.
DISSENTERS' RIGHTS
Under California law, shareholders are not entitled to any appraisal rights
or dissenters' rights with respect to the Acquisition.
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<PAGE> 5
THE ACQUISITION
GENERAL
Upon consummation of the Acquisition, the Company will acquire 52.0 million
Prime Shares from the Sellers, representing a 52.25% equity interest in Prime,
in exchange for the issuance by the Company of 9,479,167 Company Common Shares
to Berjaya, and if applicable, the Other Sellers. In the event that any of the
Other Sellers, in its sole discretion, does not wish to retain the Company
Common Shares, Berjaya has secured an option to purchase each of the Other
Seller's portion of the Company Common Shares. After the Acquisition, Prime will
be operated as a majority owned subsidiary of the Company and the Company will
have issued, in the aggregate, Company Common Shares representing approximately
61.2% of the increased capital stock of the Company. Presently, the Company has
no commitments or intentions to sell or transfer the Prime Shares subsequent to
the consummation of the Acquisition.
Company Common Shares are currently listed on the Nasdaq SmallCap Market.
Prime is a publicly listed holding company quoted on the Philippine Stock
Exchange. The principal activity of Prime is through its wholly-owned
subsidiary, Philippine Gaming Management Corporation ("PGMC"), which is the
primary lessor of lottery equipment and accessories to the Philippine Charity
Sweepstakes Office ("PCSO") in the Luzon region of the Philippines. As used
herein, PGMC is used in lieu of Prime to distinguish the operating entity from
the parent entity.
BACKGROUND OF THE ACQUISITION
In order to strengthen the Company's financial resources and capabilities
so that the Company could (1) more favorably respond to lottery customers'
requests for proposal, (2) meet its operational needs in the near future to
complete research and development projects, (3) show financial strength to
potential customers, and (4) maintain the capability to purchase materials and
services necessary to fulfill new contracts the Company decided in the Fall of
1997 to seek financing proposals. The Company projected that it needed
approximately $5.0 million to meet these needs in the near future. The Company
contacted three financial institutions regarding lines of credit and four other
financial firms regarding the issuance of convertible securities. Proposals for
financing from the banks and other financial institutions were presented to the
Board, but all proposals involved high interest or dividend rates, significant
conversion discounts and required substantial placement or commitment fees.
Therefore, the Board determined not to pursue any financing from the sources
presented.
As a result, the Company began discussions with representatives of Berjaya
about Berjaya providing the Company with financing and other related matters. On
December 31, 1997, the Company held a special meeting of shareholders to
authorize the issuance of a class of preferred stock, designated as Series A
Preferred Stock. The proxy statement for that special meeting also described a
potential transaction in which Berjaya would purchase $5.0 million of the newly
authorized class of preferred stock. Both the authorization of the issuance of
Series A Preferred Stock and the transaction relating to the purchase by Berjaya
of Series A Preferred Stock were approved by the shareholders of the Company at
the special meeting of the shareholders. However, Berjaya chose not to purchase
any Series A Preferred Stock immediately after authorization of the transaction.
As a result of currency devaluations in Southeast Asian countries, many of
Berjaya's markets have been adversely affected and remains a reason for
Berjaya's decision not to purchase any Series A Preferred Stock.
Since early April 1998 the Company has been in danger of non-compliance
with the Nasdaq requirement relating to the $1.00 minimum bid stock price. The
Company proposed to its shareholders in its proxy statement dated April 30, 1998
for the Annual Meeting of Shareholders to be held on June 1, 1998, a three for
one reverse stock split in order to address the Nasdaq $1.00 minimum bid stock
price requirement. On June 1, 1998 the shareholders approved the proposed
reverse split and on June 2 the Board ratified the shareholder action. As of
June 26, 1998 the Company Common Shares closing bid price remained over $1.00
for a period of ten consecutive business days, resulting in the Company
achieving compliance with the Nasdaq $1.00 minimum bid stock price requirement.
Since that time, however, the Company Common Shares bid price has
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<PAGE> 6
fallen below $1.00 and, accordingly, the Company continues to be in danger of
non-compliance with this Nasdaq requirement going forward. In addition, Nasdaq
has recently required that as a condition of its continued listing on Nasdaq,
the Company Common Shares must evidence a minimum bid price of $1.00 on or
before December 15, 1998, and thereafter, the Company Common Shares must meet or
exceed $1.00 per share minimum bid price for a minimum of ten consecutive
trading days.
As of April 1, 1998, the Company's cash situation had declined and the
Company's year to date operating results placed it in danger of non-compliance
with Nasdaq's $4.0 million net tangible asset standard for continued listing on
the Nasdaq National Market. In an effort to address the Company's cash situation
and improve its net tangible assets, Chan Kien Sing, Company director and a
Group Executive Director of Berjaya Group following telephone conversations with
Mark Michalko, President of the Company, mailed on April 10, 1998 a broad
outline of a transaction in which the Company would exchange Company Common
Shares valued at $0.80 ($2.40 post-split) in exchange for substantially all of
the capital stock of Prime. At that time, Prime was in the process of acquiring
PGMC, which was then 40% owned by Berjaya and operated by a Berjaya subsidiary.
Under that proposed transaction, Prime would transfer 96% of its shares
valued at Philippine Pesos ("Php") 17.50 (equivalent to US $0.4375 at an
exchange rate of Php 40.0 to US $1.00) for approximately $42.0 million of
Company Common Shares.
During the next week, in discussions between the Company executives and
Chan Kien Sing, it was mutually determined that an exchange of $42.0 million of
Company Common Shares for 96% of Prime was a larger Company investment than
feasible. Therefore, after further discussion Berjaya made a revised proposal in
which the Company would acquire approximately 55% of Prime for approximately
$22.0 million of the Company Common Shares and Berjaya would remain a
substantial minority shareholder of Prime. At a telephonic Board meeting on
April 17, 1998, Mr. Michalko and Mr. Theodore Johnson, the Company Chairman,
discussed with Board members Frederick Brunn, Martin O'Meara and Andrew Ng and
other Company executives, the revised proposal. The Board directed management to
begin the due diligence process with Prime and PGMC, but took no formal action
at that time. The Board also instructed Company management to seek other
potential strategic partners in the gaming industry unrelated to Berjaya. Mark
Michalko, Leonard "Pete" Morrissey, consultant to the Company, and Robert
McPhail, then senior vice president of International Marketing of the Company,
began contacting select lottery and gaming companies concerning strategic
transactions. Although two companies expressed an interest in a strategic
transaction with the Company, no substantive discussions resulted.
In late April 1998, the Company received the financial statements of Prime
and PGMC for their years ended June 30, 1997 and April 30, 1997, respectively.
On May 5, 1998, Berjaya delivered to the Company a revised proposal for an
exchange of 52.25% of Prime for $22,750,000 of Company Common Shares valued at
$.80 per share ($2.40 post-split).
On May 11, 1998 the Company executed an engagement letter with the New York
office of Translink International, Inc. ("Translink") to provide investment
banking services to the Company and to render a fairness opinion on the proposed
transaction.
On May 12, 1998 Berjaya sent to the Company a draft Board proposal relating
to the proposed transaction.
On May 15, 1998 the Company announced its 1998 first quarter financial
results reflecting a net loss of $1.5 million and filed a Form 10-Q reflecting
net tangible assets of $2.8 million. On May 20, 1998 the Company received a
letter from Nasdaq informing the Company that it must present to Nasdaq a plan
to correct its deficiency in net tangible assets by June 1, 1998 or Nasdaq would
initiate formal delisting action of the Company from the Nasdaq National Market.
On May 26, 1998 the Company received the completed Board proposal from
Berjaya setting forth the terms of the proposed transaction, which was sent to
all Board members not designated by Berjaya (which
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includes Frederick A. Brunn, Theodore A. Johnson, Martin J. O'Meara and The Lord
Sandberg of Passfield) and M. Mark Michalko for their review in preparation for
the Board meeting on June 2, 1998.
On May 28, 1998 a special telephonic meeting of the Affiliations Committee
(a committee of the Board comprised of directors not designated by Berjaya and
Mr. Michalko, a non-voting member) was held to review material related to the
proposed transaction and to discuss other issues in connection with the proposed
transaction in order to further prepare for the Board meeting on June 2, 1998.
At that meeting, Mr. Michalko reported on the continuing due diligence by Robert
McPhail and Translink in Manila. It was decided that Messrs. Johnson and
Michalko would meet with Chan Kien Sing on Monday, June 1, 1998 after the
shareholders meeting, to discuss open policy issues in connection with the
proposed transaction, prior to the Board meeting.
On June 1, 1998, the Company shareholders approved the three for one
reverse stock split subject to the approval of the Board. On the evening of June
1, a meeting was held between Company management and Chan Kien Sing focusing on
a letter of intent for the proposed transaction and other principal deal terms.
Chan Kien Sing and Company management further discussed due diligence issues
relating to Prime and PGMC, the number of shares of Prime and ILTS which would
be exchanged in the proposed transaction and the conditions of consummating the
proposed transaction.
On June 2, 1998, the Board approved the reverse stock split to be effective
June 12, 1998 and the Affiliations Committee approved a letter of intent for the
Acquisition, after receiving an oral presentation from Translink and extensive
questioning of Chan Kien Sing regarding due diligence issues relating to the
business of Prime and PGMC, together with a discussion of the principal issues
anticipated in the Stock Purchase Agreement. The oral presentation of Translink
consisted of a status report on the due diligence conducted by Translink as well
as the status of its fairness opinion. Translink reported to the Board that it
was highly confident that it would be prepared to opine as to the fairness of
the Acquisition (with respect to the non-Berjaya shareholders) at the time of
the next scheduled meeting of the Board, pending further due diligence and
review.
Pursuant to an extension granted by Nasdaq, on Friday, June 5, 1998 the
Company submitted its plan for correction of its net tangible asset deficiency
to Nasdaq. The submittal consisted of a copy of a letter of intent between the
Company and Berjaya relating to the Acquisition, a draft of a press release
announcing the terms of the Acquisition, which was released on June 8, 1998, the
engagement letter with Translink, and the completed Board proposal prepared by
Berjaya.
On June 11, 1998 a telephonic meeting of the Affiliations Committee was
held to review the letter of intent, a draft of the Stock Purchase Agreement and
the accompanying press release relating to the terms of the Acquisition. The
Affiliations Committee members engaged in a general discussion with counsel
regarding the draft of the Stock Purchase Agreement and related matters. At that
meeting, the Affiliations Committee unanimously approved the Stock Purchase
Agreement and determined that the Acquisition is in the best interests of the
Company and its shareholders and recommended that the Board approve the Stock
Purchase Agreement and the Acquisition and recommend to the shareholders of the
Company that they vote in favor of the Acquisition.
On Monday, June 15, 1998 the Company received a decision from Nasdaq dated
June 12, 1998 informing the Company that Nasdaq had determined to delist the
Company from the Nasdaq National Market effective June 19, 1998. On June 16,
1998 the Company filed its Notice of Appeal to Nasdaq of the adverse decision of
June 12, 1998.
On June 17, 1998 the Board approved the Stock Purchase Agreement between
Berjaya and the Company and the Acquisition following a discussion on major
issues concerning the Stock Purchase Agreement and the Acquisition. Also, at
that meeting, a representative of Translink delivered its opinion that the
Acquisition was fair, from a financial perspective, to the non-Berjaya
shareholders of the Company. The Company received the written Translink opinion,
dated June 19, 1998.
On Monday June 22, 1998 the Company issued a press release announcing the
execution of the Stock Purchase Agreement by the Company and Berjaya on Friday
June 19, 1998.
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On August 7, 1998, the Company had a Nasdaq qualifications hearing before
the Nasdaq Listing Qualifications Panel (the "Panel") to determine whether the
Company should retain a listing on the Nasdaq National Market. On October 22,
1998, the Company received a decision from the Panel relating to its listing on
the Nasdaq National Market. Pursuant to the decision of the Panel, the Company
was moved to the Nasdaq SmallCap Market effective October 23, 1998. The Panel
was of the opinion that the Company did not provide a plan satisfactory to the
Panel to regain and sustain compliance with the listing requirements of the
Nasdaq National Market within a reasonable period of time. Specifically, the
Panel expressed in its decision that it lacked confidence in the Company's
ability to sustain long term compliance with the $4.0 million net tangible
assets and $5.0 million market value of public float requirements for continued
listing on the Nasdaq National Market. The Panel determined to grant the
Company's securities a listing on the Nasdaq SmallCap Market since the Company
satisfied the requirements for continued listing on the Nasdaq SmallCap Market.
However, the Company's maintenance of its listing on the Nasdaq SmallCap Market
is subject to the following conditions: (1) the Company must complete and file a
listing application for the SmallCap Market (the Company completed and filed
such application), (2) the Company must make a public filing evidencing a
minimum of $6.0 million in net tangible assets by December 15, 1998, and (3) the
Company Common Shares must evidence a minimum bid price of $1.00 for a minimum
of ten consecutive trading days beginning on or before December 15. In the event
the Company fails to meet any of the terms of Panel's decision, the Company
Common Shares will be delisted from the Nasdaq Stock Market. Continued listing
on Nasdaq is a closing condition to Berjaya consummating the Acquisition, and
Berjaya has not expressed to the Company whether it intends to waive this
condition in the event the Company is delisted from Nasdaq.
RECOMMENDATION OF THE BOARD -- REASONS FOR THE ACQUISITION
Affiliations Committee
The Affiliations Committee, in approving the Stock Purchase Agreement and
the Acquisition on June 11, 1998, considered a number of factors, including the
following:
(1) The potentially significant cash distributions that the Company
could receive as a majority shareholder of Prime, although the Affiliations
Committee recognized Prime's significant reliance on revenues generated
under the Equipment Lease Agreement with PCSO.
(2) The terms of the Stock Purchase Agreement and the Registration
Rights Agreement, including: the exchange ratio of Company Common Shares
for Prime Shares; the conditions to consummation of the Acquisition; the
provisions that the representations and warranties of the Company would
generally survive the consummation of the Acquisition (the "Closing"); the
provisions of the Registration Rights Agreement pursuant to which Sellers
under certain circumstances would be entitled to have the Company register
the Company Common Shares under the Securities Act of 1933, as amended (the
"Securities Act") at the Company's expense; and the non-solicitation
provision and termination provisions.
(3) The Acquisition would increase the Company's net tangible assets
by approximately $5.4 million, which would give the Company the opportunity
to achieve compliance with the Nasdaq National Market net tangible asset
standard (which requires a minimum $4.0 million of net tangible assets) and
remain listed on the Nasdaq National Market, although the Affiliations
Committee recognized that there was no assurance that the Company would
remain so listed.
(4) The acquisition of Prime will provide the Company with a more
stable, diversified, and profitable revenue base and provide the Company
the opportunity to diversify its earnings base into a related business,
which has a strong steady stream of income, although the Affiliations
Committee recognized that current economic conditions in the Philippines
and Asia could potentially have an adverse effect on the level of income
generated by Prime.
(5) The opinion of Translink as to the fairness of the Acquisition,
from a financial point of view, to the non-Berjaya shareholders of the
Company.
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(6) The financial condition, business and prospects of Prime,
including, but not limited to, information with respect to the recent and
historical stock and earnings performance. The Affiliations Committee
considered the detailed financial analysis, pro forma and other
information, discussed by Translink, as well as its own knowledge of Prime.
In making its determination, the Affiliations Committee took into account
the results of the Company's due diligence review process of Prime's
business.
(7) The Affiliations Committee was fully aware of and considered the
possible conflicts of interest of certain directors and members of
management of the Company. See "-- Background of the Acquisition," and
"-- Interests of Certain Persons." However, no voting members of the
Affiliations Committee stood to directly benefit from this proposed
transaction. The Affiliations Committee considered in this regard that its
composition, consisting of members of the Board with no direct relationship
with the Sellers, permitted it to represent effectively the interests of
the Company shareholders.
The Affiliations Committee also considered certain potentially negative
factors and risks that could arise or do arise from the proposed Acquisition.
These included, among others: (1) the significant costs involved in connection
with consummating the Acquisition and the substantial management time and effort
required to effectuate the Acquisition; (2) the potential difficulties of
acquiring a company, particularly in light of such company's operations being
located in the Philippines; (3) the significant amount of the Company's capital
stock that would be issued to the Sellers as consideration for the Prime Shares;
(4) the continued effect of certain lock-up agreements with respect to the Prime
Shares and (5) the risk that the anticipated benefits of the Acquisition might
not be fully realized. In the view of the Affiliations Committee, the negative
factors were not sufficient, either individually or collectively, to outweigh
the advantages of the Acquisition.
In view of the variety of factors considered in connection with its
evaluation of the Acquisition, the Affiliations Committee found it impracticable
to, and did not, quantify, rank or otherwise assign relative weights to the
factors considered or determine that any factor was of particular importance in
reaching its determination that the Acquisition is in the best interests of the
Company and its shareholders. Rather, the Affiliations Committee viewed its
recommendation as being based upon its judgment, in light of the totality of the
information presented and considered, of the overall effect of the Acquisition
on the shareholders of the Company compared to the likely effect of rejecting
the Acquisition.
The Affiliations Committee did not consider the book value of Company
Common Shares because a significant portion of the Company's value is comprised
of intangibles. Thus, the Affiliations Committee does not believe that book
value is an appropriate measure of the Company's value. Further, the
Affiliations Committee did not consider the liquidation value of the Company in
making a fairness determination because it believed that the liquidation of the
Company would not maximize shareholder value.
The foregoing discussion of the information and factors considered and
given weight by the Affiliations Committee is not intended to be exhaustive but
is believed to include the factors given primary consideration by the
Affiliations Committee.
Board of Directors
The Board, based on the unanimous recommendation of the Affiliations
Committee, unanimously approved on June 17, 1998, the Stock Purchase Agreement
and the Acquisition and unanimously recommends that shareholders vote "FOR" the
Acquisition.
The Board, in approving the Stock Purchase Agreement and the Acquisition,
considered a number of factors, including those factors considered by the
Affiliations Committee described above.
In view of the variety of factors considered in connection with its
evaluation of the Acquisition, the Board found it impracticable to, and did not,
quantify, rank or otherwise assign relative weights to the factors considered or
determine that any factor was of particular importance in reaching its
determination that the Acquisition is in the best interests of the Company and
its shareholders. Rather, the Board viewed its recommendation as being based
upon its judgment, in light of the totality of the information presented and
7
<PAGE> 10
considered, of the overall effect of the Acquisition on the shareholders of the
Company compared to the likely effect of rejecting all of the proposed
transactions.
The Board did not consider the book value of Company Common Shares because
a significant portion of the Company's value is comprised of intangibles. Thus,
the Board does not believe that book value is an appropriate measure of the
Company's value. Further, the Board did not consider the liquidation value of
the Company in making a fairness determination because it believed that the
liquidation of the Company would not maximize shareholder value.
The foregoing discussion of the information and factors considered and
given weight by the Board is not intended to be exhaustive but is believed to
include the factors given primary consideration by the Board.
OPINION OF TRANSLINK
The following description by Translink contains forward-looking
information. Without limiting the generality of the foregoing, the projections
and forecasts furnished to Translink were prepared by the respective managements
of the Company and Prime. The Company does not publicly disclose internal
management projections of the type provided to Translink in connection with its
analyses of the Acquisition, and such projections were not prepared with a view
toward public disclosure. These projections were based on numerous variables and
assumptions that are inherently uncertain and may be beyond the control of
Company management, including, without limitation, factors related to general
economic and competitive conditions and prevailing interest rates. Accordingly,
actual results could vary significantly from those set forth in the opinion.
The Affiliations Committee of the Board of Directors of ILTS retained
Translink International, Inc. ("Translink") to provide an opinion to the Company
Board of Directors (the "Board") as to the fairness of the Acquisition, from a
financial point of view, to the non-Berjaya shareholders of the Company (the
"Fairness Opinion"). On June 19, 1998, based upon and subject to the full text
of the Fairness Opinion contained in Annex B of this Proxy Statement, Translink
issued its opinion that, as of June 19, 1998, the Acquisition is fair, from a
financial point of view, to the non-Berjaya shareholders of ILTS. The Fairness
Opinion is for the benefit and use of the Board in its consideration of the
Acquisition. The Fairness Opinion does not constitute a recommendation of the
Acquisition over any alternative transactions that may be available to the
Company and does not address the underlying business decision of the Board to
proceed with or effect the Acquisition. Furthermore, the Fairness Opinion is not
to be construed as a recommendation to any holder of Company Common Shares as to
whether to vote in favor of the Acquisition. Translink has consented to the use
of the Fairness Opinion in this Proxy Statement.
The following is a summary of the financial analyses undertaken by
Translink in rendering the Fairness Opinion. The full text of the Fairness
Opinion, which sets forth assumptions made, matters considered, and the scope
and limitations of the review undertaken is contained in Annex B.
In connection with the Opinion, Translink received and relied upon or
carried out, among other things, the following: (1) reviewed the Stock Purchase
Agreement dated June 19, 1998, between the Company and Berjaya; (2) reviewed the
Board Paper Draft No. 3 prepared by Berjaya for the Board of Directors of ILTS
dated May 26, 1998; (3) reviewed the Annual Report to Shareholders of ILTS and
its Annual Reports on Form 10-K for the fiscal years ended December 31, 1995,
1996, and 1997; and the ILTS Quarterly Reports on Form 10-Q for the periods
ended March 31, June 30, and September 30 for the years 1995, 1996, and 1997;
and the ILTS Quarterly Report on Form 10-Q for the period ended March 31, 1998;
(4) reviewed the ILTS Notice of Annual Meeting dated April 17, 1996, April 8,
1997, and April 30, 1998; and the ILTS Notice of Special Meeting dated December
2, 1997; (5) reviewed the ILTS Current Report on Form 8-K dated December 3,
1997, and the ILTS Current Report on Form 8-K/A dated December 19, 1997; (6)
reviewed ILTS operating and financial information, including projections,
provided to Translink by Company management; (7) met with certain senior Company
management members to discuss ILTS operations, historical financial statements,
and future prospects; (8) visited the ILTS facilities in Carlsbad, California;
(9) reviewed factors relating to the U.S. securities market and U.S. mergers and
acquisitions; (10) reviewed historical stock prices and trading volumes of the
common shares of ILTS; (11) reviewed publicly available financial data and
8
<PAGE> 11
relative stock market data of other companies which Translink deemed generally
comparable to ILTS; (12) reviewed the economics of the U.S., Philippine,
Malaysian, and Southeast Asian lottery equipment manufacturing and lottery
management industries from a financial and operating perspective; (13) reviewed
the audited financial statements of Central Azucarera de Pilar, a Philippine
Stock Exchange-traded company without operations since 1991 which undertook a
change in name to Prime Gaming Philippines Inc. in March 1998 and a merger with
Philippine Gaming Management Corporation ("PGMC") in May 1998, for the fiscal
years ended June 30, 1995, 1996, and 1997; (14) reviewed the audited financial
statements of PGMC for the fiscal years ended April 30, 1996 and 1997; and the
unaudited financial statements of PGMC for April 30, 1998; (15) reviewed Prime
and PGMC operating and financial information, including projections, provided by
Prime and PGMC management; (16) met with certain senior Berjaya, Prime and PGMC
management members to discuss Prime and PGMC operations, historical financial
statements, and future prospects; (17) reviewed the Equipment Lease Agreement
dated January 25, 1995 between PGMC and the Philippine Charity Sweepstakes
Office; (18) visited the Prime and PGMC administrative and warehouse facilities
in Manila, Philippines; (19) reviewed factors relating to the Philippine,
Malaysian, and other Southeast Asian securities market; (20) reviewed historical
stock prices and trading volumes of the common shares of Central Azucarera de
Pilar (which had negligible share activity since 1991); (21) reviewed publicly
available financial data and relative stock market data of other companies which
Translink deemed generally comparable to Prime and PGMC, including Berjaya
Sports Toto Berhad, Magnum Corporation Berhad, and Tanjong PLC; (22) reviewed
the pro-forma consolidated balance sheet of ILTS, as prepared by Berjaya and as
represented to Translink as reasonable by ILTS, including the accretion to net
assets resulting from the Acquisition; and the projected combined income
statement of ILTS and Prime through fiscal year 2000, as prepared by the
Company, including the accretion to net earnings resulting from the Acquisition;
and, (23) conducted such other studies, analyses, inquiries and investigations
as Translink deemed appropriate.
Translink has assessed the fairness, from a financial point of view, of the
Acquisition to the non-Berjaya shareholders of ILTS based upon a number of
factors. These factors include (1) a net present value/discounted cash flow
analysis of three-year forecasted ILTS operating results, as provided by ILTS
management; (2) a comparison of the ascribed value of the Company Common Shares
under the Acquisition to recent trading levels for the Company's Common Shares
based on prior quarter, prior six-month, prior year, and prior three-year data;
(3) a review of the relative values of publicly-traded U.S. lottery management
and equipment manufacturing firms, from the perspective of whether public market
values might exceed the Acquisition values through an evaluation of the
historical market capitalization of Powerhouse Technologies, Inc., AutoTote
Corporation, and GTECH Holdings Corporation relative to ILTS; (4) an analysis of
relative values paid in recent comparable transactions in the U.S. lottery
management and equipment manufacturing industries, of which, as of the date of
the Fairness Opinion, there were no recent comparable industry transactions;
and, (5) an analysis of the accretion or dilution to post-Acquisition ILTS net
assets and forecasted earnings, as prepared by Berjaya and PGMC and represented
by the Company as reasonable.
The value assigned to the Prime Shares offered in the Acquisition was
evaluated based upon a net present value/discounted cash flow analysis of the
PGMC operating forecast over the life of the contract between the Philippine
Charity Sweepstakes Office and PGMC, as prepared by Berjaya and PGMC and
represented by the Company as reasonable. A set of discount rates was derived
based on various economic and financial criteria. Additionally, Translink
analyzed the relative values of publicly-traded Malaysian lottery management
firms, adjusted for the relative difference in the overall Philippine and
Malaysian equity markets.
Translink believes that its analysis must be considered as a whole and that
selecting portions of the analysis or the factors considered by it, without
considering all factors and analysis together, could create a misleading view of
the process underlying the Fairness Opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Any attempt to do so could lead to undue
emphasis on any particular factor or analysis.
Translink is a Paris-based merger and acquisition advisor with offices in
London, Paris, Amsterdam, Dusseldorf, Zurich, Barcelona, Milan, and New York. In
the course of its business, Translink renders opinions and valuations relating
to mergers, acquisitions, restructurings, privatizations, bankruptcies, and
other similar transactions.
9
<PAGE> 12
Pursuant to the terms of a letter of engagement between the Company and
Translink, the Company agreed to pay Translink a fee of $100,000 for services
provided to the Company in connection with the Acquisition, of which the total
represents the remuneration for Translink rendering its opinion. The Company
also agreed to reimburse Translink for its reasonable out-of-pocket expenses,
including fees and expenses for its legal counsel, and to indemnify Translink
and certain related parties against certain liabilities arising out of or in
connection with the services rendered by Translink under its engagement with the
Company. The terms of the letter of engagement between Translink and the Company
were negotiated at arm's length between the parties.
PRICE RANGE OF COMPANY COMMON SHARES
Company Common Shares (Nasdaq symbol "ITSI") are traded in the over the
counter market on the Nasdaq SmallCap Market. These prices do not include retail
mark-ups or commissions. The following prices give retroactive effect to the
three for one reverse stock split completed by the Company on June 12, 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Calendar Year 1996
First Quarter............................................. 5 11/32 3 3/16
Second Quarter............................................ 9 9/16 3 3/16
Third Quarter............................................. 7 1/2 3 3/8
Fourth Quarter............................................ 3 15/16 2 11/32
Calendar Year 1997
First Quarter............................................. 4 50/64 1 7/8
Second Quarter............................................ 6 15/16 2 11/32
Third Quarter............................................. 6 3/4 3 9/16
Fourth Quarter............................................ 5 13/16 2 7/16
Calendar Year 1998
First Quarter............................................. 3 3/4 2 1/16
Second Quarter............................................ 2 3/8 1 1/8
Third Quarter............................................. 1 3/16 1/2
-- --
Fourth Quarter (through December , 1998)................ [1 1/4] [26/64]
== ==
</TABLE>
As of [December ] 1998, there were [884] holders of record of Company
Common Shares. On , 1998, the last sale price reported on
the Nasdaq SmallCap Market for Company Common Shares was $ .
DIVIDEND POLICY
The Company retains earnings, if any, to support operations.
EFFECT ON EXISTING SHAREHOLDERS
The Acquisition treats all existing holders of Company Common Shares
identically. Under the Stock Purchase Agreement, the Company will issue Company
Common Shares to Berjaya and, if applicable, the Other Sellers from the Company
and not from any existing shareholder. As a result, all existing shareholders of
the Company will be diluted proportionally. If the Acquisition is approved and
consummated, Berjaya and, if applicable, the Other Sellers will receive in the
aggregate approximately 61.2% of the outstanding Company Common Shares as
consideration for their Prime Shares. Therefore, all existing shareholders
(other than Berjaya) will have their ownership interest in the Company diluted,
in the aggregate, by 61.2% as a result of the issuance of Company Common Shares
to Berjaya and, if applicable, the Other Sellers pursuant to the Stock Purchase
Agreement. Existing shareholders (other than Berjaya) who own as a group
approximately 61.66% of the Company Common Shares prior to the Acquisition will
own as a group approximately 24.2% of the Company Common Shares following the
completion of the Acquisition. Currently Berjaya holds
10
<PAGE> 13
approximately [38.34]% of the Company Common Shares and if the Acquisition is
consummated, Berjaya will hold approximately [75.8]% of the Company Common
Shares; provided, however, that if as part of the Acquisition, the Other Sellers
determine to retain a portion of Company Common Shares, Berjaya's commitment to
sell Prime Shares in exchange for Company Common Shares shall be reduced
accordingly. Assuming all the Other Sellers determine to retain the Company
Common Shares as part of the Acquisition, Berjaya's holdings of Company Common
Shares would increase from approximately [38.3]% to approximately [39.1]%. One
effect of any substantial increase in the ownership interest of Berjaya would be
to make it more difficult or impossible for a third party to acquire control of
the Company without reaching an agreement with Berjaya to do so. Accordingly,
one of the effects of the potential increase in the ownership interest of
Berjaya may be to discourage a future attempt to acquire control of the Company,
which a substantial number of the Company's shareholders might believe to be in
their best interests or in which shareholders of the Company might receive a
premium for their Company Common Shares over the current market price. As a
result, shareholders of the Company who might desire to participate in such a
transaction may not have the opportunity to do so.
PRIME SHARES
As of December , 1998, there were approximately [454] holders of record
of Prime Shares and 99,530,872 Prime Shares outstanding. On June 22, 1998, the
date on which the Acquisition was announced, the last sale reported on the
Philippine Stock Exchange for Prime Shares was $ . On
, 1998, the last sale price reported on the Philippine Stock
Exchange for Prime Shares was $ .
As of December , 1998, Prime's shareholders were as follows:
<TABLE>
<CAPTION>
SUBSTANTIAL SHAREHOLDERS NO. OF PRIME SHARES PERCENT OF PRIME SHARES (%)
------------------------ ------------------- ---------------------------
<S> <C> <C>
Berjaya Lottery Management (H.K.) Ltd.............. 68,176,306 68.49
Alfredo C. Ramos(1)................................ 15,600,000 15.67
George T. Yang(2).................................. 8,840,000 8.88
Rodolfo M. De Leon................................. 3,120,000 3.14
First Abacus Financial Holdings, Inc............... 1,872,000 1.88
Raul S. Manglapus(3)............................... 1,560,000 1.57
Jerry C. Angping................................... 208,000 0.21
Other Individual Shareholders...................... 154,566 0.16
Total.............................................. 99,530,872 100.0
</TABLE>
- ---------------
(1) Mr. Ramos is a Director of Prime.
(2) Mr. Yang is a Director of Prime.
(3) Mr. Manglapus is Chairman of the Board of Prime.
11
<PAGE> 14
THE SELLERS
The following table sets forth certain information relating to (1) the
Sellers, (2) the number of Prime Shares to be acquired by ILTS in connection
with the Acquisition from each of the Sellers and (3) the number of Company
Common Shares to be issued to the Sellers in connection with the Acquisition
(assuming each of the Other Sellers determines to retain the Company Common
Shares):
<TABLE>
<CAPTION>
NO. OF PRIME PERCENT OF PRIME NO. OF COMPANY PERCENT OF THE
SHARES TO BE SHARES TO BE COMMON SHARES COMPANY
SHAREHOLDER OF PRIME ACQUIRED ACQUIRED % TO BE ISSUED TO BE ISSUED %
-------------------- ------------ ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Berjaya Lottery Management (H.K.)
Ltd................................. 20,800,000 20.90 3,791,667 24.48
Alfredo C. Ramos...................... 15,600,000 15.67 2,843,750 18.36
George T. Yang........................ 8,840,000 8.88 1,611,458 10.41
Rodolfo M. De Leon.................... 3,120,000 3.14 568,750 3.67
First Abacus Financial Holdings,
Inc................................. 1,872,000 1.88 341,250 2.20
Raul S. Manglapus..................... 1,560,000 1.58 284,375 1.84
Jerry C. Angping...................... 208,000 0.21 37,917 0.24
Total................................. 52,000,000 52.25 9,479,167 61.20
</TABLE>
Pursuant to the Stock Purchase Agreement Berjaya has agreed to sell, in
conjunction with six other Prime shareholders, a 52.25% equity interest in
Prime. Upon consummation of the Acquisition, Berjaya and, if applicable, the
Other Sellers will be substantial shareholders of ILTS holding a combined equity
interest of approximately 76% of the increased capital stock of ILTS. Upon
consummation of the Acquisition Berjaya's interest in ILTS will increase from
approximately [38.3]% to approximately [39.1]% and the Other Sellers will hold a
combined equity interest of approximately 36.7%. However, if any of the Other
Sellers elects, in its sole discretion, not to retain the Company Common Shares,
Berjaya has secured an option with each of the Other Sellers to purchase its
portion of the Company Common Shares at $2.40 per share. Assuming each of the
Other Sellers elects not to retain the Company Common Shares, Berjaya's equity
interest in ILTS would increase to approximately 76%. Further, Berjaya will
continue to own approximately 47.38% of Prime subsequent to the Acquisition.
Berjaya. Berjaya is currently a significant minority shareholder of the
Company. Berjaya is engaged in the business of operating lottery management
contracts and service agreements in Asian markets and is a subsidiary of Berjaya
Group Berhad, a diversified Malaysian company listed on the Kuala Lumpur
Exchange. Berjaya's business address is Level 28, Meaner Shahzan Insas, Jalan
Sultan Ismail, 5020 Kuala Lumpur, Malaysia.
Berjaya Transactions. During 1997 and 1998 the Company has received
$1,154,103 and $3,703,000, respectively, as payment from three different
affiliates of Berjaya which are lottery customers of the Company and as of
September 30, 1998, there was a balance outstanding owed to the Company by these
customers of $83,152. Payments were primarily from PGMC in an amount of $161,840
related to a October, 1996 lottery terminal contract and $462,787 for spare
parts delivered in 1997. The Company has software support agreements with Sports
Toto Malaysia Sdn Bhd and Natural Avenue Sdn Bhd of Malaysia ("Natural Avenue")
each of which pays approximately $7,000 per month to the Company. In addition,
during 1997 and 1998 Natural Avenue paid the Company $82,600 and $4,813,
respectively, for software upgrades and modifications to its lottery system.
On December 2, 1997, the Company issued a Notice of Special Meeting and
Proxy Statement in connection with a shareholders special meeting held on
December 30, 1997 to approve a proposed amendment to the Company's Articles of
Incorporation to provide for the issuance of up to 20.0 million shares of
preferred stock. The Proxy Statement described a proposed purchase by Berjaya of
$5.0 million of Series A Preferred Stock and described the proposed terms of the
Series A Preferred Stock to be finally approved by the Affiliations Committee.
The shareholders of the Company approved the issuance of the Series A Preferred
Stock and the acquisition of Berjaya of $5.0 million of such Series A Preferred
Stock, however, Berjaya has not yet purchased any of such Series A Preferred
Stock.
12
<PAGE> 15
The Other Sellers
Alfredo C. Ramos, an individual, has served as a member of the Board of
Prime since November 12, 1996. Mr. Ramos is also a Director of PGMC. Mr. Ramos
is also Chairman of the Board of Directors and President of The Philodrill
Corporation. He is Chairman of the Board of Directors of Anglo-Philippine
Holdings Corporation, Penta Capital Finance Corporation and United Paragon
Mining Corporation. He is the Vice Chairman of Penta Capital Investment
Corporation. He is also the President of National Bookstore, Inc. and Vulcan
Industrial and Mining Corporation. He is also a Director of Atlas Consolidated
Mining Development Corporation, Kuok Philippine Properties, Inc. and Philippine
Seven Corporation. Mr. Ramos is currently the Chairman of the Petroleum
Association of the Philippines and a member of the council of advisers on energy
affairs to the President of the Philippines. Mr. Ramos' business address is 9/F
Quad Alpha Centrum, 125 Pioneer Street, Mandaluyong City, Philippines.
George T. Yang, an individual, has served as a member of the Board of Prime
since November 12, 1996. Mr. Yang is also a Director of PGMC. Mr. Yang is the
President and Managing Director of Golden Arches Development Corporation, the
franchise holder of McDonald's restaurants in the Philippines and McGeorge Food
Industries Inc. He is the Chairman of the Board of United Life Assurance
Corporation, Construction Strategies & Marketing Corporation, International
Marketing Corporation and Trojan Computer Forms, Inc. and the President of
Kristing Management & Development Corporation and Fun Characters Inc. and a
Director of Kristing Jewelry, Inc.
Rodolfo M. De Leon, an individual, is the founder and a partner of DeLeon
Law Office in Makati, Philippines.
First Abacus Financial Holdings, Inc. ("First Abacus") is a non-bank
financial service institution listed on the Philippine Stock Exchange. First
Abacus has recently been involved in a significant number of underwriting
activities in the Philippines. First Abacus' business also includes the related
fields of stock brokering and investment banking. The business address of First
Abacus is Unit E-3001 PSE Centre, Exchange Road, Ortigas Center, Pasig City,
Philippines
Raul S. Manglapus has served as the Chairman of the Board of Prime since
November 12, 1996. Mr. Manglapus is also the Chairman of the Board of PGMC. Mr.
Manglapus is currently Chairman of the College Assurance Plan Family of
Companies and a member of the Advisory Board of the Metropolitan Bank and Trust
Company. Mr. Manglapus has numerous international and political affiliations.
Mr. Manglapus was twice Secretary of Foreign Affairs (under Presidents Ramon
Magsaysay and Corazon C. Aquino) and twice elected a Senator.
Jerry C. Angping, an individual, is President of Angping & Associates
Securities Inc. Mr. Angping is also Vice Chairman of Peaksan Enterprises &
Export Corporation, Philippine Savings Bank and Inglenook Food Corporation.
Further, Mr. Angping serves as a director of Asian Alliance Holdings
Corporation, Crown Equities, Inc., PhilEquity Fund, Inc. and First Dominion
Prime Holdings. Mr. Angping's business address is 107 Alfaro Street, The Peak
Tower, Suite 2003, Salcedo Village, Makati City, Philippines, Philippines.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
Existing shareholders of the Company will not recognize any gain or loss
for federal income tax purposes in connection with the Acquisition.
RISK THAT THE ACQUISITION WILL NOT BE CONSUMMATED
Consummation of the Acquisition is subject to various conditions, including
approval by the holders of a majority of the outstanding Company Common Shares,
approval of the sale of Prime Shares by the Philippine Securities and Exchange
Commission, approval of the sale of Prime Shares by the shareholders of Berjaya
Group Berhad (the parent of Berjaya) and the continued listing of the Company on
Nasdaq (the Philippine Securities and Exchange Commission has approved the sale
of the Prime Shares in connection with the Acquisition). As a result of the
various conditions to the completion of the Acquisition, even if the requisite
shareholder approval is obtained, there can be no assurance that the Acquisition
will be consummated.
13
<PAGE> 16
It is expected that if the Stock Purchase Agreement is not approved and
adopted by the Company's shareholders, or if the Acquisition is not consummated
for any other reason, the Company's current management, under the direction of
the Board, will continue to manage the Company as an on-going business. If the
Acquisition is not consummated, there can be no assurance that the Company's
operations will not be adversely impacted.
RISKS IF THE ACQUISITION IS CONSUMMATED
Upon consummation of the Acquisition, the Company will acquire 52.0 million
Prime Shares in exchange for the issuance of 9,479,167 Company Common Shares.
The exchange ratio is a fixed number and will not be adjusted in the event of
any increase or decrease, prior to the consummation of the Acquisition, in the
price of either Prime Shares or Company Common Shares. As a result, the value of
the Prime Shares received by the Company and the Company Common Shares received
by the Sellers could vary depending on fluctuations in value, prior to the
consummation of the Acquisition. Accordingly, there can be no assurance that the
value of the Prime Shares or its relative value relationship to the Company
Common Shares will be the same as of the date of the Special Meeting or upon the
consummation of the Acquisition. Neither Berjaya nor the Company has the right
to terminate the Stock Purchase Agreement solely because of any change in
prevailing market price of Prime Shares or Company Common Shares.
PGMC, the wholly-owned subsidiary of Prime, is the primary lessor of
lottery equipment and accessories to the PCSO, a government agency, in the Luzon
region of the Philippines. PGMC and the PCSO entered into an Equipment Lease
Agreement on January 25, 1995 (the "Equipment Lease Agreement") relating to
PGMC's lease of on-line lottery equipment to PCSO for a period of eight years.
The continuation of the Equipment Lease Agreement is in part dependent on the
Philippine government's continued operation of the Philippine lottery. Although
no formal actions have been initiated, certain representatives of the Philippine
government have made general public statements relating to the potential
cancellation of the Philippine lottery. The Equipment Lease Agreement is deemed
by PGMC to be integral to its business. There can be no assurance that the
Philippine government will continue operation of the Philippine lottery. The
loss of the right to lease on-line lottery equipment to the PCSO under the
Equipment Lease Agreement could have a materially adverse effect upon the
Company subsequent to the consummation of the Acquisition.
ASSIGNMENT OF CERTAIN AGREEMENTS
In connection with the Acquisition, Sports Toto Malaysia SDN BHD, a company
incorporated in Malaysia and an affiliate of Berjaya ("Sports Toto"), has agreed
to assign to the Company all rights and obligations under: (1) a Software
Support Agreement dated as of May 1, 1997 between Sports Toto and PGMC (the
"Software Support Agreement") pursuant to which Sports Toto provides certain
software and technical support to PGMC in connection with the operation of the
Philippine Lottery and (2) a Reimbursement of Expenses Letter Agreement dated as
of May 1, 1997 between Sports Toto and PGMC (the "Reimbursement Agreement")
pursuant to which PGMC agrees to reimburse Sports Toto for all costs and
expenses incurred in connection with Sport Toto providing management services to
PGMC in connection with the operation of the Philippine Lottery. See "Business
of Prime -- PGMC -- Software Support Agreement" and "-- Reimbursement
Agreement." However, these agreements are not expected to result in a material
increase in the Company's revenues or net profits.
INTERESTS OF CERTAIN PERSONS
In considering the recommendations of the Board, shareholders should be
aware that certain members of the Company's management, certain shareholders of
the Company and the Board have interests that are different from, or in addition
to, the interests of the Company's shareholders generally. Each of the Board and
the Affiliations Committee was aware of such interests and considered them,
among other matters, in approving the Stock Purchase Agreement and the
Acquisition.
Certain current directors of the Company may be deemed to be affiliates or
associates of Berjaya or its affiliates or shareholders who have an interest in
the Acquisition different from, or in addition to, the interests
14
<PAGE> 17
of the Company's shareholders generally. Chan Kien Sing, the Group Executive
Director of Berjaya Group Berhad (the parent entity of Berjaya), is a member of
the Board and has served as such since 1993. In addition, Ng Foo Leong,
Executive Director of Berjaya Sports Toto Berhad, a subsidiary of Berjaya Group
Berhad, is a member of the Board and has served as such since 1994. Tan Sri Dato
Seri, the chief executive officer and shareholder of Berjaya Group Berhad was
elected as a member of the Board on June 1, 1998. Tan Sri Dato Seri previously
served as a director of the Company from 1993 to 1994. M. Mark Michalko,
President of the Company and a member of the Board, was a former board member of
PGMC and, through an informal arrangement with Berjaya, is the holder of an
indirect beneficial interest in PGMC valued at approximately [$14,000] based on
current ILTS stock prices and assuming the Acquisition is completed.
ACCOUNTING TREATMENT OF THE ACQUISITION
It is contemplated that the Acquisition will be accounted for either as a
purchase of 52.25% of Prime by ILTS or as a reverse acquisition depending upon
whether or not Berjaya obtains control of ILTS in accordance with APB16
"Business Combinations" and related interpretations.
CERTAIN FEDERAL REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder do not require that the
Company, the Sellers and certain affiliates of Sellers to file with the
Antitrust Division of the Department of Justice and the Federal Trade Commission
Notification and Report Forms with respect to the Acquisition.
15
<PAGE> 18
THE STOCK PURCHASE AGREEMENT
The following is a summary of the material terms of the Stock Purchase
Agreement, a copy of which is attached as Annex A to this Proxy Statement and is
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the Stock Purchase Agreement. Shareholders are urged to read the
Stock Purchase Agreement in its entirety for a more complete description of the
terms and conditions of the Acquisition.
THE ACQUISITION
The Stock Purchase Agreement provides that, following the approval of the
Acquisition by the shareholders of the Company and the satisfaction or waiver of
the other conditions to the Stock Purchase Agreement, the Company will purchase
52.0 million Prime Shares from the Sellers in exchange for the issuance of
9,479,167 Company Common Shares to Berjaya and, if applicable, the Other
Sellers. In the event that the Other Sellers do not wish to retain the Company
Common Shares, Berjaya has secured an option to purchase their portion of the
Company Common Shares for $2.40 per share. Upon completion of the Acquisition,
the Company will own approximately 52.25% of the outstanding Prime Shares and
Berjaya and, if applicable, the Other Sellers will have received as
consideration for the Prime Shares 61.2% of the increased capital stock of the
Company.
REPRESENTATIONS AND WARRANTIES
The Stock Purchase Agreement contains various customary representations and
warranties of Berjaya relating to, among other things, (a) the due organization
of Prime and its subsidiaries and similar corporate matters, (b) the capital
structure of Prime, (c) the financial statements of Prime, (d) the books and
records of Prime and its subsidiaries, (e) the properties and assets of Prime
and its subsidiaries, (f) the inventory of Prime and its subsidiaries, (g) the
absence of undisclosed liabilities, (h) the proper filing and payment of taxes,
(i) the absence of any material adverse changes in the business, operations,
properties, prospects, assets, or condition of Prime since the date of Prime's
balance sheet, (j) certain employee benefit matters, (k) certain labor matters,
(l) compliance with law by Prime and its subsidiaries, (m) the absence of
undisclosed legal proceedings, (n) the absence of certain changes and events
since the date of Prime's interim balance sheet, (o) the proper disclosure of
material contracts of Prime and its subsidiaries, (p) insurance matters, (q) the
absence of certain conflicts, breaches, violations, encumbrances, or defaults as
a result of the Stock Purchase Agreement, (r) the procurement of necessary
consents and approvals, (s) the acknowledgment of Berjaya that the Company
Common Shares to be issued in connection with the Acquisition have not been
registered with the SEC, and (t) the acknowledgment of Berjaya that the
acquisition of the Company Common Shares by Berjaya is for investment purposes
only.
In addition, the Stock Purchase Agreement contains various customary
representations and warranties of the Company, relating to among other things,
(a) the due organization of the Company and its subsidiaries and similar
corporate matters, (b) the capital structure of the Company, (c) the due
authorization and reservation for issuance of the Company Common Shares, (d) the
Company's financial statements, (e) filings with the SEC, (f) the acknowledgment
of the Company that the Prime Shares have not been registered with the
Philippine Securities and Exchange Commission.
CERTAIN COVENANTS
The Company has agreed that it will make all filings required by law in
order to consummate the Acquisition. Berjaya has agreed that prior to the
Closing, it will afford and will cause Prime to afford the Company full access
to Prime's and its subsidiaries' personnel, property, contracts, books and
records and other documents and data, including, but not limited to, financial
and operating data. Berjaya also agreed to cause Prime and its subsidiaries to
carry on their businesses in an ordinary manner, to make all filings required by
law in order to consummate the Acquisition, and to notify or cause each of Prime
and its subsidiaries to notify the Company if any condition arises that causes
or constitutes a breach of Berjaya's representations and
16
<PAGE> 19
warranties. In addition, Berjaya has agreed to vote all Company Common Shares
that it owns in the same proportions as the votes cast by all other holders of
the Company Common Shares at the Special Meeting.
NO SOLICITATION
The Stock Purchase Agreement provides that, prior to the Closing, neither
the Company nor any of its affiliates, directors, officers, employees,
representatives or agents, will directly or indirectly solicit or initiate any
discussions, submissions of proposals or offers or negotiations with, or,
subject to any fiduciary obligations under applicable law after taking into
account the advice of counsel with respect thereto, participate in any
negotiation or discussions with, or provide any information or data of any
nature whatsoever to, or otherwise cooperate in any other way with, or assist or
participate in, facilitate or encourage any effort or attempt by, any
corporation, partnership, person or other entity or group, other than Berjaya
and its representatives, agents and affiliates, concerning any merger,
consolidation, sale of substantial assets, sale of shares of capital stock or
other equity securities, recapitalization, debt restructuring or similar
transaction involving the Company or any subsidiary of the Company, but
specifically excluding any discussion regarding lines of credit or other debt
financings (all such transactions being referred to herein as "Alternative
Transactions"). The Company has agreed to notify Berjaya immediately if any
proposal, offer, inquiry or other contact is received by, any information is
requested by, any information is requested from, or any discussion or
negotiations are sought to be initiated or continued with, the Company in
respect to the Alternative Transaction, and, in any such notice to Berjaya, to
indicate the identity of the offeror and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
to keep Berjaya informed, on a current basis, of the status and the terms of any
such proposals or offers and the status of any such discussions or negotiations.
The Company has also agreed not to release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which the Company
is a party.
CONDITIONS
The Company's obligations to consummate the transactions contemplated by
the Stock Purchase Agreement are subject to the fulfillment of the following
conditions: (1) the accuracy, as of the Closing, in all material respects the
representations and warranties of Berjaya set forth in the Stock Purchase
Agreement, (2) the performance by Berjaya in all material respects of all
agreements and covenants required by the Stock Purchase Agreement to be
performed by it prior to or at the Closing, (3) all required consents will have
been obtained and be in full force and effect, (4) the absence of any claim
asserting stock ownership of the Prime Shares or a right to participate in the
acquisition of the Company Common Shares pursuant to the Acquisition, (5) the
absence of any injunction or court order restraining consummation of the
Acquisition and no law or regulation will have been adopted making all or any
portion of the Acquisition illegal, (6) the absence of any change of the facts
or circumstances that would prevent the Company from receiving an update to the
Translink Opinion on the date this Proxy Statement is mailed to the Company
shareholders or on the Closing, (7) the absence of any material change with
respect to the business, financial condition, results of operations or prospects
of Prime or its subsidiaries, and (8) the shareholders of the Company shall have
approved the Acquisition.
Berjaya's obligations to consummate the transactions contemplated by the
Stock Purchase Agreement are subject to the fulfillment of the following
conditions: (1) the accuracy, as of the Closing, in all material respects the
representations and warranties of the Company set forth in the Stock Purchase
Agreement, (2) the performance by the Company in all material respects of all
agreements and covenants required by the Stock Purchase Agreement to be
performed by it prior to or at the Closing, (3) the Company and Berjaya shall
have entered into the Registration Rights Agreement in the form attached to the
Stock Purchase Agreement as Exhibit "A," (4) the absence of any injunction or
court order restraining consummation of the Acquisition, (5) the Philippine
Securities and Exchange Commission shall have approved the sale of Prime Shares,
(6) the shareholders of Berjaya Group Berhad (the parent entity of Berjaya)
shall have approved the sale of the Prime Shares, (7) as of the Closing, the
Company Common Shares must remain listed on Nasdaq (Berjaya has not expressed to
the Company whether it intends to waive this condition).
17
<PAGE> 20
TERMINATION
The Stock Purchase Agreement may be terminated upon the occurrence of any
of the following events:
(1) The Stock Purchase Agreement may be terminated by either the
Company or Berjaya if a material breach of any provision of the Stock
Purchase Agreement has been committed by the other party and such breach
has not been waived.
(2) The Stock Purchase Agreement may be terminated by either the
Company or Berjaya if any of the conditions of the other party have not
been satisfied or if the satisfaction of such condition becomes impossible
and has not been waived.
(3) The Stock Purchase Agreement may be terminated by either the
Company and Berjaya upon mutual written consent.
(4) The Stock Purchase Agreement may be terminated by the Company if
prior to the Closing any person has made a bona fide offer with respect to
an Alternative Transaction that the Board determines in its good faith
judgment to be more favorable to its shareholders (other than Berjaya) than
the Acquisition.
Termination of the Stock Purchase Agreement will not affect the rights any
party may have by reason of a breach of the Stock Purchase Agreement by the
other party prior to termination. In addition, certain specified sections of the
Stock Purchase Agreement will survive termination.
INDEMNIFICATION
All representations, warranties, covenants and obligations in the Stock
Purchase Agreement and any other document delivered pursuant thereto, will
survive the Closing. The right to indemnification, payment of damages or other
remedy based on such representations, warranties, covenants and obligations will
not be affected by any investigation conducted with respect to, or any knowledge
acquired or capable of being acquired at any time, whether before or after the
execution of the Stock Purchase Agreement or the Closing, with respect to the
accuracy or inaccuracy of or compliance with, any such representation or
warranty, or on the performance of or compliance with any covenant or
obligation, will not affect the right to indemnification, payment of damages or
other remedy based on such representations, warranties, covenants and
obligations.
FEES
Except as otherwise expressly provided in the Stock Purchase Agreement, all
parties to the Stock Purchase Agreement will bear their respective expenses
incurred in connection with the preparation, execution, and performance of the
Stock Purchase Agreement and the Acquisition, including fees and expenses of
agents, representatives, counsels and accountants. In the event of termination
of the Stock Purchase Agreement, the obligation of each party to pay its own
expenses will be subject to any rights of such party arising from a breach of
the Stock Purchase Agreement by another party.
AMENDMENTS AND WAIVERS
The Stock Purchase Agreement may be amended at any time by the parties and
the parties may extend the time for performance of the obligations under the
Stock Purchase Agreement and waive compliance with any agreements or conditions
for their respective benefit contained in the Stock Purchase Agreement.
THE REGISTRATION RIGHTS AGREEMENT
The Company Common Shares to be issued to the Sellers as consideration for
the acquisition of Prime Shares constitute restricted stock under the Securities
Act and may only be sold or transferred if registered under the Securities Act
or if the sale or transfer is exempt from registration. Concurrently with the
Closing, the Company and the Sellers will enter into the Registration Rights
Agreement. The following is a summary of certain provisions of the Registration
Rights Agreement. A copy of the Registration Rights Agreement is attached as
Exhibit "A" to the Stock Purchase Agreement.
18
<PAGE> 21
The Registration Rights Agreement provides that the Sellers may make an
unlimited number of written requests to the Company for registration of all or
part of the Company Common Shares acquired pursuant to the Stock Purchase
Agreement (the "Registrable Securities") under the Securities Act. The Sellers
also have certain "piggyback" registration rights to include its securities,
subject to certain limitations, in any other registration statement filed by the
Company. Whenever the Company effects a registration statement pursuant to the
Registration Rights Agreement, the Company (1) has agreed not to effect any
public sale or distribution of securities similar to those being registered, or
any securities convertible into or exchangeable or execrable for such
securities, for a period of time prior to and after such registration statement
becomes effective, and (2) will be required to pay the costs of such
registration of securities, except that (A) the costs of more than one demand
registration in any calendar year will be at the expense of the holder of the
securities thereby and (B) each selling shareholder will bear its pro rata share
of the customary underwriting discounts and commissions, the customary fees and
expenses of its counsel and applicable transfer taxes. The Registration Rights
Agreement contains customary indemnification and contribution provisions
relating to the exercise by the holders of Registrable Securities of their
registration rights thereunder.
19
<PAGE> 22
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At the Record Date, there were [884] holders of record of the Company
Common Shares, which is the only class of outstanding capital stock of the
Company. At the Record Date, there were [6,009,183] Company Common Shares
outstanding.
The following table sets forth, to the knowledge of the Company, based upon
information provided by the shareholders set forth below or publicly available
filings, certain information regarding the beneficial ownership of Company
Common Shares as of , 1998 by (1) each director of the Company, (2)
executive officers, (3) executive officers and directors of the Company as a
group and (4) each person or entity who is a beneficial owner of more than 5% of
the Company's outstanding Company Common Shares. For purposes of this proxy
statement, beneficial ownership of securities is defined in accordance with the
rules of the Securities and Exchange Commission and means generally the power to
vote or exercise investment discretion with respect to securities, regardless of
any economic interests therein. Except as otherwise indicated, the Company
believes that the beneficial owners of the securities listed below have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY OWNED
---------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER AMOUNT CLASS
------------------------ --------- ----------
<S> <C> <C>
Directors
Frederick A. Brunn......................................... 46,234(A) *
Chan Kien Sing............................................. 11,667(B) *
Theodore A. Johnson........................................ 20,265(B) *
M. Mark Michalko........................................... 26,490(A) *
Ng Aik Chin................................................ 1,653(A) *
Ng Foo Leong............................................... 11,667(B) *
Tan Sri Dato Seri (Vincent) Tan Chee Yioun................. 0 *
Martin J. O'Meara, Jr...................................... 110,992(B) *
Lord Michael G.R. Sandberg................................. 38,334(B) *
Executive Officers (excluding those listed above)
Timothy R. Groth........................................... 7,877(A) *
Dennis D. Klahn............................................ 4,756(A) *
Lawrence E. Logue.......................................... 2,939(A) *
All directors and executive officers as a group (12
persons)................................................. 282,874(A)(B) 5%
Significant Shareholder
Berjaya Lottery Management (H.K.) Limited
Level 28, Menara Shahzan Insas
Jalan Sultan Ismail
50250 Kuala Lumpur, Malaysia............................... 2,304,500(C) 38%
</TABLE>
- ---------------
(A) Includes the number of shares of Company Common Shares subject to
unexercised stock options which were exercisable within 60 days under the
Company's 1986, 1988, and 1990 Employee Stock Option Plans as follows:
34,000 for Mr. Brunn; 7,028 for Mr. Groth; 3,500 for Mr. Klahn; 1,584 for
Mr. Logue; 22,778 for Mr. Michalko; and 69,950 for all executive officers as
a group.
(B) Includes the number of shares of Company Common Shares subject to
unexercised stock options which were exercisable within 60 days under the
Company's 1993 and 1997 Directors' Stock Option Plans which for each such
outside director is 11,667 (except for Mr. Brunn which is 1,667 and Mr. Tan
which is zero 60,002 for all such directors as a group.
(C) Mr. Vincent Tan is Chief Executive and Mr. Chan Kien Sing and Mr. Ng Foo
Leong are employees of the parent company of Berjaya. All three individuals
disclaims beneficial ownership of such shares.
* Represents less than one percent of the outstanding shares.
20
<PAGE> 23
DESCRIPTION OF COMPANY CAPITAL STOCK
The Company is authorized to issue two classes of shares designated
respectively "Common Shares" and "Preferred Shares." The authorized number of
shares of Company Common Shares is 50,000,000. As a result of the three for one
reverse stock split effective June 12, 1998, there are issued and outstanding
[6,009,183] Company Common Shares.
Each holder of Company Common Shares is entitled to one vote per share on
all matters submitted to a vote of the Company's shareholders. None of the
Company Common Shares are entitled to preference over any other share and each
share is equal to any other share in all respects. There are no preemptive
rights to purchase additional shares by virtue of the fact that a person is a
shareholder. Shareholders have the right to cumulate their votes for the
election of directors. Company Common Shares do not have conversion rights and
are not subject to any redemptive provisions. The outstanding shares are fully
paid and nonassessable.
Dividends may be paid on Company Common Shares out of any funds legally
available for that purpose when declared by the Board of Directors. The Company
has not, however, paid cash dividends on its Company Common Shares since
inception and management does not anticipate that the Company will do so in the
foreseeable future. The present policy of the Board of Directors is to retain
any earnings to provide funds for use in the Company's business.
The authorized number of shares of Preferred Shares is 20,000,000. The
Preferred Shares may be issued from time to time in one or more series. The
Board of Directors is authorized to fix the number of shares of any series of
Preferred Shares and to determine the designation of any such series. The Board
is also authorized to determine or alter the rights, privileges, designations,
preferences and restrictions granted to or imposed upon any unissued series of
Preferred Shares and to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series. No Preferred Shares are
outstanding.
21
<PAGE> 24
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(SCENARIO I)
The following unaudited pro forma combined financial information assumes
the acquisition by ILTS of 52.25% of Prime and that ILTS issues 9,479,167 shares
of stock in exchange for the interest in Prime. In connection with the
transaction, ILTS shares are assumed to be issued to Berjaya and the other Prime
shareholders resulting in Berjaya owning approximately 39% of the post
Acquisition shares of ILTS. The financial information presented below is based
on the respective historical consolidated financial statements and the notes
thereto, which are included in this Proxy Statement. The following pro forma
information assumes that the Acquisition results in Berjaya not acquiring a
controlling interest in ILTS and the transaction is accounted for as an
acquisition of Prime by ILTS. The unaudited pro forma combined balance sheet
combines ILTS' September 30, 1998 consolidated balance sheet with Prime's
September 30, 1998 consolidated balance sheet. The pro forma statements of
operations combine ILTS's, Prime's and PGMC's historical results for the
twelve-month period ended December 31, 1997 and the nine-month period ended
September 30, 1998.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Acquisition had occurred during the periods
presented, nor is it necessarily indicative of future operating results or
financial position.
These pro forma financial statements are based on, and should be read in
conjunction with the historical consolidated financial statements, and the
related notes thereto, of ILTS, Prime and PGMC included in this Proxy Statement.
22
<PAGE> 25
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AFTER GIVING EFFECT TO THE ACQUISITION (SCENARIO I)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ILTS PRIME ADJUSTMENTS COMBINED
------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 9,079 $4,227 $ (623)(B) $12,683
Cost of Revenues.................................. 5,764 1,160 (340)(B) 6,584
------- ------ ------- -------
Gross Profit...................................... 3,315 3,067 (283) 6,099
Research, engineering & development............... 1,234 -- -- 1,234
Selling, general & administrative................. 4,253 1,363 1,616(F) 7,232
------- ------ ------- -------
Net income(loss) from operations.................. (2,172) 1,704 (1,899) (2,367)
Other income:
Interest income................................. 75 360 -- 435
Gain on sale of subsidiary & lottery service
agreement.................................... 80 -- -- 80
------- ------ ------- -------
Income (loss) before provision for income taxes... (2,017) 2,064 (1,899) (1,852)
Taxes............................................. -- 722 -- 722
------- ------ ------- -------
Net income (loss) before minority interest........ (2,017) 1,342 (1,899) (2,574)
Less minority interest............................ -- -- 641 641
------- ------ ------- -------
Net income (loss)................................. $(2,017) $1,342 $(2,540) $(3,215)
======= ====== ======= =======
Net income (loss) per share basic(G).............. $ (0.34) $ 0.01 $ (0.21)
Shares used in basic per share computation........ 6,009 99,531 15,488
Net income (loss) per share diluted(G)............ $ (0.34) $ 0.01 $ (0.21)
Shares used in diluted per share computation...... 6,009 99,531 15,488
</TABLE>
23
<PAGE> 26
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AFTER GIVING EFFECT TO THE ACQUISITION (SCENARIO I)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ILTS PRIME ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................................... $10,826 $ 7,318 $ (431)(B) $17,713
Cost of Revenues................................. 9,647 1,952 (259)(B) 11,340
------- ------- ------- -------
Gross Profit..................................... 1,179 5,366 (172) 6,373
Research, engineering & development.............. 1,684 -- -- 1,684
Selling, general & administrative................ 6,195 1,774 2,155(F) 10,124
------- ------- ------- -------
Net income(loss) from operations................. (6,700) 3,592 (2,327) (5,435)
Other income:
Interest income................................ 135 422 -- 557
Exchange rate loss............................. (150) -- -- (150)
Gain on sale of subsidiary & lottery service
agreement................................... 857 -- -- 857
------- ------- ------- -------
Income (loss) before provision for income
taxes.......................................... (5,858) 4,014 (2,327) (4,171)
Taxes............................................ 80 1,405 -- 1,485
------- ------- ------- -------
Net income (loss) before minority interest....... (5,938) 2,609 (2,327) (5,656)
Less minority interest........................... -- -- 1,246 1,246
------- ------- ------- -------
Net income (loss)................................ $(5,938) $ 2,609 $(3,573) $(6,902)
======= ======= ======= =======
Net income (loss) per share basic(G)............. $ (0.99) $ 0.03 $ (0.45)
Shares used in basic per share computation....... 6,009 99,531 15,488
Net income (loss) per share diluted(G)........... $ (0.99) $ 0.03 $ (0.45)
Shares used in diluted per share computation..... 6,009 99,531 15,488
</TABLE>
24
<PAGE> 27
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(SCENARIO I)
SEPTEMBER 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA ILTS
ILTS PRIME ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash & equivalents......................... $ 1,358 $ 3,210 $ 4,568
Accounts receivable........................ 2,630 2,254 $ (1,352)(D) 3,532
Costs and estimated earnings in excess of
billings on uncompleted contracts........ 366 -- 366
Inventories................................ 2,539 -- 2,539
Other current assets....................... 80 457 537
-------- -------- -------- --------
Total current assets............. 6,973 5,921 (1,352) 11,542
Property and equipment, net................ 662 4,919 5,581
Goodwill................................... 17,240 (A),(C) 17,240
Other non-current assets................... 90 122 212
-------- -------- -------- --------
Total assets..................... $ 7,725 $ 10,962 $ 15,888 $ 34,575
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...... $ 696 $ 345 $ 1,041
Billings in excess of costs and estimated
earnings on uncompleted contracts........ 1,742 -- $ (1,352)(D) 390
Accrued payroll and related taxes.......... 719 -- 719
Related party liability.................... 225 -- 225
Other current liabilities.................. 2,006 71 2,077
-------- -------- -------- --------
Total current liabilities........ 5,388 416 (1,352) 4,452
Minority interest.......................... 5,036 (C),(E) 5,036
Shareholders' Equity:
Common stock............................... 51,103 37,975 (15,225)(A),(C) 73,853
Additional paid-in capital................. -- (10,090) 10,090 (A) --
Retained deficit........................... (48,676) (3,681) 3,681 (A) (48,676)
Accumulated translation adjustment......... (90) (13,658) 13,658 (A) (90)
-------- -------- -------- --------
Total shareholders' equity....... 2,337 10,546 12,204 25,087
-------- -------- -------- --------
Total liabilities and
shareholders' equity........... $ 7,725 $ 10,962 $ 15,888 $ 34,575
======== ======== ======== ========
</TABLE>
25
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(SCENARIO I)
1. BASIS OF PRESENTATION
The unaudited pro forma combined financial statements of International
Lottery & Totalizator Systems, Inc. (ILTS) have been prepared based on the
historical financial statements of ILTS for the year ended December 31, 1997 and
nine months ended September 30, 1998, and for Prime Gaming Philippines Inc.
("Prime") for the year ended December 31, 1997 and nine months ended September
30, 1998 after considering the effects of the acquisition by Prime of the
Philippine Gaming Management Corporation ("PGMC") acquired on May 12, 1998 and
assuming that the acquisition of Prime by ILTS occurred on January 1, 1997.
The unaudited pro forma statement of operations of ILTS and Prime for the
nine-month period ended September 30, 1998, has been based on the historical
financial statements of ILTS and Prime for the nine months ended September 30,
1998. The unaudited pro forma statement of operations of ILTS and Prime for the
year ended December 31, 1997, has been based on the historical financial
statements of ILTS and Prime for the year ended December 31, 1997. The unaudited
pro forma statement of operations of ILTS for the year ended December 31, 1997
and the nine months ended September 30, 1998, have been prepared as if the
Acquisition had been consummated on January 1, 1997. The unaudited pro forma
balance sheet of ILTS at September 30, 1998 has been prepared as if the
Acquisition had been consummated at September 30, 1998.
In management's opinion, all material adjustments necessary to reflect the
effects of the Acquisition have been made. The unaudited pro forma financial
statements are not necessarily indicative of the actual financial position at
September 30, 1998, or what the actual results of operations would have been
assuming the acquisition had been completed as of January 1, 1997, nor are they
indicative of the financial position or results of operations for future
periods. The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of ILTS,
Prime and PGMC included elsewhere herein.
2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(A) Elimination of Prime stockholder equity amounts.
(B) Reflects the elimination of sales and related cost of sales between
ILTS and PGMC/Prime in the indicated period:
<TABLE>
<CAPTION>
YEAR REVENUE COST OF SALES
---- ------- -------------
<S> <C> <C>
1997..................................... $431 $259
1998..................................... 623 340
</TABLE>
26
<PAGE> 29
(C) Reflects issuance of 9,479,167 shares of ILTS common stock at a value
of $2.40 per share (total value is $22,750,000) ILTS shares for 52.25% ownership
of Prime and the resultant minority interest. The purchase price for the
completion of the Prime acquisition is summarized below:
<TABLE>
<S> <C>
Cash & equivalents................................. $ 3,210
Accounts receivable................................ 2,254
Prepaid expenses & Other current assets............ 457
Property and equipment, net........................ 4,919
Other assets....................................... 122
-------
Total assets............................. 10,962
Less:
Accounts payable/accrued expenses.................. 345
Other current liabilities.......................... 71
-------
Net assets......................................... 10,546
Less minority interest............................. 5,036
-------
Net assets acquired................................ 5,510
Value of ILTS shares issued........................ 22,750
-------
Goodwill........................................... $17,240
=======
</TABLE>
(D) Reflects adjustment to eliminate a cash advance to ILTS by Prime in the
amount of $1,352 for future delivery of terminals.
(E) Represents Prime minority shareholder interests in Prime's net assets.
(F) Reflects the amortization of goodwill associated with ILTS' acquisition
of Prime beginning January 1, 1997.
(G) Earnings per share for pro forma combined assumes issuance of 9,479,167
ILTS common shares for the acquisition of a 52.25% equity interest in Prime in
addition, to the 6,009,183 ILTS common shares outstanding at September 30, 1998.
(H) Due to ILTS' tax loss carryforwards no tax effect has been reflected
for the pro forma adjustments.
27
<PAGE> 30
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(SCENARIO II)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following unaudited pro forma combined financial information assumes
the acquisition by ILTS of 52.25% of Prime and that ILTS issues 9,479,167 shares
of Company common shares in exchange for the interest in Prime. In connection
with the Acquisition, Berjaya (who currently owns 38% of ILTS) will acquire
additional Company common shares from ILTS and potentially the other Prime
shareholders resulting in Berjaya owning up to 76% of the capital stock of ILTS
subsequent to the Acquisition. The financial information presented below is
based on the respective historical financial statements and the notes thereto,
which are included in this Proxy Statement. The following pro forma information
assumes that the Acquisition results in Berjaya acquiring a controlling interest
in ILTS and the Acquisition is accounted for as a reverse acquisition. The
unaudited pro forma consolidated combined balance sheet as of September 30, 1998
combines ILTS' September 30, 1998 consolidated balance sheet and Prime's
consolidated balance sheet assuming the acquisition occurred on September 30,
1998. The unaudited pro forma consolidated statements of operations for the nine
months ended September 30, 1998 and for the year ended December 31, 1997 assume
the Acquisition occurred on January 1, 1997.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Acquisition had occurred during the periods
presented, nor is it necessarily indicative of future operating results or
financial position.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical consolidated financial statements and the
related notes thereto of ILTS, Prime and PGMC included in this Proxy Statement.
28
<PAGE> 31
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AFTER GIVING EFFECT TO THE ACQUISITION (SCENARIO II)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ILTS PRIME ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................................... $ 9,079 $ 4,227 $ (623)(B) $12,683
Cost of Revenues................................. 5,764 1,160 (340)(B) 6,584
------- ------- ------- -------
Gross Profit..................................... 3,315 3,067 (283) 6,099
Research, engineering & development.............. 1,234 -- -- 1,234
Selling, general & administrative................ 4,253 1,363 2,835 (H) 8,451
------- ------- ------- -------
Net income(loss) from operations................. (2,172) 1,704 (3,118) (3,586)
Other income:
Interest income................................ 75 360 -- 435
Gain on sale of subsidiary & lottery service
agreement................................... 80 -- -- 80
------- ------- ------- -------
Income (loss) before provision for income
taxes.......................................... (2,017) 2,064 (3,118) (3,071)
Taxes............................................ -- 722 -- 722
------- ------- ------- -------
Net income (loss) before minority interest....... (2,017) 1,342 (3,118) (3,793)
Less minority interest........................... -- -- 641 641
------- ------- ------- -------
Net income (loss)................................ $(2,017) $ 1,342 $(3,759) $(4,434)
======= ======= ======= =======
Net income (loss) per share basic(I)............. $ (0.34) $ 0.01 $ (0.29)
Shares used in basic per share computation....... 6,009 99,531 15,488
Net income (loss) per share diluted(I)........... $ (0.34) $ 0.01 $ (0.29)
Shares used in diluted per share computation..... 6,009 99,531 15,488
</TABLE>
29
<PAGE> 32
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AFTER GIVING EFFECT TO THE ACQUISITION (SCENARIO II)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ILTS PRIME ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................................... $10,826 $ 7,318 $ (431)(B) $17,713
Cost of Revenues................................. 9,647 1,952 (259)(B) 11,340
------- ------- ------- -------
Gross Profit..................................... 1,179 5,366 (172) 6,373
Research, engineering & development.............. 1,684 -- -- 1,684
Selling, general & administrative................ 6,195 1,774 3,780 (H) 11,749
------- ------- ------- -------
Net income(loss) from operations................. (6,700) 3,592 (3,952) (7,060)
Other income:
Interest income................................ 135 422 -- 557
Exchange rate loss............................. (150) -- -- (150)
Gain on sale of subsidiary & lottery service
agreement................................... 857 -- -- 857
------- ------- ------- -------
Income (loss) before provision for income
taxes.......................................... (5,858) 4,014 (3,952) (5,796)
Taxes............................................ 80 1,405 -- 1,485
------- ------- ------- -------
Net income (loss) before minority interest....... (5,938) 2,609 (3,952) (7,281)
Less minority interest........................... -- -- 1,246 1,246
------- ------- ------- -------
Net income (loss)................................ $(5,938) $ 2,609 $(5,198) $(8,527)
======= ======= ======= =======
Net income (loss) per share basic(I)............. $ (0.99) $ 0.03 $ (0.55)
Shares used in basic per share computation....... 6,009 99,531 15,488
Net income (loss) per share diluted(I)........... $ (0.99) $ 0.03 $ (0.55)
Shares used in diluted per share computation..... 6,009 99,531 15,488
</TABLE>
30
<PAGE> 33
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(SCENARIO II)
SEPTEMBER 30, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA ILTS
ILTS PRIME ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash & equivalents....................... $ 1,358 $ 3,210 $ 4,568
Accounts receivable...................... 2,630 2,254 $ (1,352)(E) 3,532
Costs and estimated earnings in excess of
billings on uncompleted contracts...... 366 -- 366
Inventories.............................. 2,539 -- 2,539
Other current assets..................... 80 457 537
-------- -------- -------- --------
Total current assets........... 6,973 5,921 (1,352) 11,542
Property and equipment, net.............. 662 4,919 5,581
Goodwill................................. 30,243 (C),(D) 30,243
Other non-current assets................. 90 122 212
-------- -------- -------- --------
Total assets................... $ 7,725 $ 10,962 $ 28,891 $ 47,578
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.... $ 696 $ 345 $ 1,041
Billings in excess of costs and estimated
earnings on uncompleted contracts...... 1,742 -- $ (1,352)(E) 390
Accrued payroll and related taxes........ 719 -- 719
Related party liability.................. 225 -- 225
Other current liabilities................ 2,006 71 2,077
-------- -------- -------- --------
Total current liabilities...... 5,388 416 (1,352) 4,452
Minority interest........................ 5,036 (F) 5,036
Shareholders' Equity:
Common stock............................. 51,103 -- 35,753 (G) 86,856
-- 37,975 (37,975)(A) --
Additional paid-in capital............... -- (10,090) 10,090 (A) --
Retained deficit......................... (48,676) (3,681) 3,681 (A) (48,676)
Accumulated translation adjustment....... (90) (13,658) 13,658 (A) (90)
-------- -------- -------- --------
Total shareholders' equity..... 2,337 10,546 25,207 38,090
-------- -------- -------- --------
Total liabilities and
shareholders' equity......... $ 7,725 $ 10,962 $ 28,891 $ 47,578
======== ======== ======== ========
</TABLE>
31
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SCENARIO II
Pro Forma Adjustments and Assumptions:
(A) Elimination of Prime stockholder equity amounts.
(B) Reflects the elimination of sales and related cost of sales between ILTS
and PGMC/Prime in the indicated period:
<TABLE>
<CAPTION>
YEAR REVENUE COST OF SALES
---- ------- -------------
<S> <C> <C>
1997........................................... $431 $259
1998........................................... 623 340
</TABLE>
(C) Record goodwill of $21,862 generated in connection with the issuance of
9,479,167 shares of ILTS stock to Prime for a total purchase price of
$22,750 for 38% of the net assets of ILTS. Net assets of ILTS of $2,337 as
of September 30, 1998 were used in the allocation of purchase price to the
net assets acquired.
(D) Record goodwill of $8,381 related to the step up of the 24% non-Berjaya
ownership of ILTS in connection with the accounting for the Acquisition as
a reverse acquisition.
<TABLE>
<S> <C>
Value of post Acquisition non-Berjaya shares (3,725,693 *
$2.40).................................................... $8,942
Less: Non-Berjaya shareholder net asset value of ILTS at
9/30/98................................................... 561
------
Goodwill -- non-Berjaya shareholders........................ $8,381
</TABLE>
(E) Eliminate cash advance of $1,352 to ILTS from Prime for future delivery of
terminals.
(F) Record minority interest of 47.75% of Prime based on Prime's net assets at
September 30, 1998 of $10,546.
(G) Record incremental increase in equity related to the Acquisition assuming
it is accounted for as a reverse acquisition as follows:
<TABLE>
<S> <C>
Issuance of 9,479,167 shares of ILTS stock................. $22,750
Step up of 24% of ILTS..................................... 8,942
Prime equity acquired by ILTS (52.25%)..................... 5,510
Carryover basis of Berjaya's original investment in ILTS
(38%).................................................... 888
-------
38,090
Less: Net assets of ILTS at Sept. 30, 1998................. 2,337
-------
Pro forma adjustment....................................... $35,753
=======
</TABLE>
(H) Reflects the amortization of goodwill associated with ILTS' acquisition of
Prime beginning January 1, 1997. Goodwill of $30,243 results in annual
amortization expense of $3,780 for 8 years.
(I) Earnings per share for pro forma combined assumes issuance of 9,479,167
Company common shares for the acquisition of a 52.25% equity in interest in
Prime in addition, to the 6,009,183 Company common shares outstanding at
September 30, 1998.
(J) Due to ILTS' tax loss carryforwards no tax effect has been reflected for
the pro forma adjustments.
32
<PAGE> 35
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------------
----------------------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995 1994 1993 1998 1997
------- ------- -------- -------- ------- ------------- -------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS AND NON-MONETARY ITEMS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data
Revenue....................... $10,826 $16,594 $ 18,641 $ 24,089 $25,017 $ 9,079 $ 8,164
Gross Profit(1)............... 1,179 648 (1622) (12,917) 9,038 3,315 2,243
Operating income (loss)....... (6,700) (6,894) (14,221) (22,943) 302 (2,172) (3,545)
Net income (loss)............. (5,938) (5,498) (13,869) (22,620) 605 (2,017) (3,072)
Earnings (loss) per share --
basic(3).................... (0.33) (0.31) (0.83) (1.35) 0.05 (0.34) (0.51)
Earnings (loss) per share --
diluted(3).................. (0.33) (0.31) (0.83) (1.35) 0.04 (0.34) (0.51)
Balance sheet data
Total assets.......... 8,662 13,883 21,352 31,888 54,924 7,725 11,089
Shareholders' equity.......... 4,092 8,519 13,412 27,145 48,855 2,337 6,917
Key ratios and statistics
Gross margin(1)............... 10.9% 3.9% (8.7)% (53.6)% 36.1% 36.5% 27.5%
Working capital............... 3,212 6,614 8,679 22,236 31,670 1,585 5,414
Book value per share(3)....... 0.23(2) 0.47 0.80 1.62 2.94 0.26 1.15
Current ratio................. 1.70 2.23 2.12 5.69 6.22 1.29 2.30
Backlog....................... 4,988 1,709 9,214 11,168 15,250 6,010 6,191
Employees..................... 116 144 176 277 249 103 118
Shares outstanding(3)......... 18,028(2) 18,016 16,816 16,804 16,574 6,009 6,009
</TABLE>
- ---------------
(1) Amounts are before lottery service agreement write-offs and write downs of
$2,793, $2,807 and $17,444 for 1996, 1995 and 1994, respectively.
(2) Includes 840,000 shares issued in 1997 to the shareholder class in
settlement of a class action lawsuit. See note 11 to the consolidated
financial statements.
(3) September 1998 and 1997 shares outstanding reflect three for one reverse
stock split effective June 12, 1998. The shares outstanding for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993 do not reflect the 1998
three for one reverse stock split.
33
<PAGE> 36
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THOUSANDS OF DOLLARS
RESULTS OF OPERATIONS
Product sales in the third quarter of fiscal 1998 increased by 242% or
$2,864, versus the third quarter of fiscal 1997. This is primarily the result of
the shipment of 399 terminals in the 1998 third quarter compared to 115
terminals in the 1997 third quarter. Service revenues decreased 54%, or $332 in
the quarter ended September 30, 1997. This decrease is the result of fewer
customer support projects and the impact of lower Australian exchange rates in
1998.
The gross profit on third quarter product sales was 41% in 1998, compared
with a loss of 7% in 1997. The increased gross profit percentage was due to the
manufacturing efficiencies achieved with the increased level of production,
lower production related expenses and sales of earlier model terminals which
previously had been reserved. The gross profit on third quarter service revenues
was a loss of 9% in 1998 compared to 32% in 1997. The decrease in services gross
profit is a result of the recording of reserves for excess inventory pertaining
to the Australian terminal maintenance contract.
Engineering, research and development expenses in the third quarter of 1998
decreased 47% to $236 compared to $445 in the third quarter of 1997. The
reduction is primarily the result of efforts being directed more to specific
customer projects rather than generic DataTrak software development. Selling,
general and administrative expenses decreased by 9%, or $122, for the third
quarter of 1998 compared to the third quarter of 1997. 1997 costs included
higher costs related to the New South Wales Lottery proposal.
Product sales in the first nine months of fiscal 1998 increased 22% or
$1,387 from the same period in 1997. This increase is the result of the shipment
of 998 terminals in 1998 compared to 715 terminals in 1997. Service revenues
decreased by 25%, or $472, to $1,380 from $1,852 which is the result of a lower
level of customer support projects in 1998 and the impact of lower Australian
exchange rates.
The gross profit on product sales was 40% for the nine months ended
September 30, 1998, compared to 26% in 1997. The increase in 1998 gross profit
was due to the efficiencies achieved from the higher level of manufacturing
volume and the sale of earlier model terminals as discussed above. The gross
profit on services was 34% in 1998, compared to 33% for the same period in 1997.
Engineering, research and development expenses for the first nine months of
1998 increases $151, or 14%, to $1,234 as compared to $1,083 for the same period
in 1997. Costs for 1998 were primarily related to expanding the functionality of
the DataTrak lottery software. Selling, general and administrative costs
decreased by $452, or 10%, for the nine month period ended September 30, 1998
compared to the same period in 1997. This decrease is the result of cost
reduction actions taken in 1997 and lower 1998 marketing expenses. Other income
and expense, net, decreased $318, or 67%. The decrease primarily relates to the
one time 1997 gain recognized from the sale of the McKinnie & Associates
subsidiary.
As part of its strategic plan, the Company intends to pursue long-term
service contracts as a source of revenue. Service contracts pose capital
investment risks for the Company that do not exist in its product sale business.
Service contracts require up-front investments of capital which is repaid only
after a system becomes operational, based upon a percentage of the customer's
gross receipts from the system. The Company, therefore, bears the risk that
scheduling delays may occur, a system may not become operational or that the
customer's gross receipts from the system may be less than projected. If the
Company enters into a long-term service contract, the Company must seek the
funds necessary to implement the project from Berjaya or other sources.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31, 1997 TO THE FISCAL YEAR
ENDED DECEMBER 31, 1996.
Revenues: Revenue from the sale of products decreased by 40% to $8,400 in
1997 from $1,400 in 1996. The decrease was primarily the result of the low
backlog of contracts at the end of 1996 and the level of new contracts which
were delivered in 1997. Service related revenues, which include terminal
maintenance and
34
<PAGE> 37
software service agreements, decreased 8% to $2,400 in 1997 from $2,600 in 1996.
This decrease was due to a lower level of customer support contract
requirements. New orders received in 1997 were $8,000 compared to $3,000 in
1996.
Gross Profit: During 1997 the Company recognized a gross profit of 7% on
sales of products compared to a gross profit of 21% (before write-offs and
write-downs of lottery service agreements) in 1996. The decrease in gross profit
is due to unfavorable manufacturing variances related to the decrease in sales,
charges of approximately $1,300 taken to recognize impairment in the value of
software capitalized in previous years, for which sales orders have not yet been
received, additional reserves for inventory obsolescence, to record provisions
for certain development contracts and costs related to the closing of the
Company's United Kingdom subsidiary. The Company recognized a gross profit of
24% on services in 1997 compared to 31% (before write-offs of lottery service
agreements) in 1996. This decrease was the result of the mix of services
provided and the increase in the foreign exchange rate of the U.S. dollar versus
the Australian dollar in 1997.
Engineering, Research & Development: Engineering, research and development
expenses of $1,700 in 1997 were equal to those of 1996. Of the $1,700 expended
in 1997, $1,300 was for additional development of DataTrak lottery software and
the related instant ticket validation and player registration modules.
Additional funds were expended to reduce the manufactured cost of the Company's
terminals. The 1996 expenditures related primarily to development of the
DataTrak software.
Selling, General and Administrative: Selling, general and administrative
expenses increased $300 in 1997 compared to 1996. The 1997 selling, general and
administrative costs would have been less than 1996 costs if the 1996 benefit
from the $1,200 reduction to the June 1996 judgment to settle the shareholders
class action lawsuit was omitted.
Gain On Sales Of Subsidiary And Lottery Service Agreement: In 1993 the
Company sold its subsidiary McKinnie & Associates. In the fourth quarter of
1997, the Company negotiated and received a final settlement on this agreement.
The Company recognized a gain on the sale of $438 and $691 in 1997 and 1996
respectively. In 1995, the Company sold its Papua New Guinea lottery service
agreement. The Company recognized a gain on the sale of $419 and $624 in 1997
and 1996, respectively. Both of these sales have been recorded under the cost
recovery method and, as such, no income was recognized until 1996, when the
basis of these investments had been recovered.
Provision for Income Taxes: The provision of income taxes in 1997 and 1996
relates to income earned in the Company's Australian subsidiary.
COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31, 1996 TO THE FISCAL YEAR
ENDED DECEMBER 31, 1995.
Revenues: Revenue decreased by 11% to $16,600 in 1996 from $18,600 in 1995.
The decrease is a result of lower levels of contract revenues caused by the
booking by the Company of $3,000 in new orders in 1996 compared to $12,600 of
new orders in 1995. Spares sales in 1996 increased 103% or $1,087 over 1995
sales. This increase in spares was due to the increased number of ILTS terminals
in service and the timing of customer orders.
Gross Profit: During 1996 the Company had gross profits of 21% (before
write-offs and write-downs of Lottery Service Agreements) compared to a gross
profit of 6% (before write-offs and write-downs of Lottery Service Agreements)
in 1995. The increase in gross profit is due to more favorable sales mix in
1996, the accrual of $660 as a loss on a contract in 1995, costs related to the
winding down of the Russian lottery project in 1995 and the effect of
cost-saving measures which were implemented in late 1995.
Write-Offs And Write-Downs Of Lottery Service Agreements: During 1996, the
charge of $2,800 relates entirely to the U.K. lottery. The reserve was
established after an affiliate of the customer was unable to obtain the
additional funding necessary for the project start-up and ongoing operations. At
this time, the customer has not indicated when a start-up may occur. The amount
of the charge approximates the Company's tangible investment, previously carried
on the balance sheet as "Investment in Lottery Service Contracts." In 1997 the
Company was able to recover $2,600 of its investment through the sale of the
system and terminals. The 1995
35
<PAGE> 38
charge relates to the withdrawal by the Company from its Russian Lottery
project. At December 31, 1996, the Company's net book value of its investment in
Lottery Service agreements was zero.
Engineering, Research & Development: Engineering, research and development
expenses in 1996 increased $302 or 22%, compared to 1995. Of the $1,700 expended
in 1996, $1,000 went toward development of DataTrak lottery software. The
DataTrak software was completed for release in October 1996 and future research
and development costs will be expended to provide additional features. The 1995
expenditures related to development of the Flipper terminal and the DataTrak
software.
Selling, General And Administrative: Selling, general and administrative
expenses decreased $5,400 in 1996 compared to 1995. The decrease was due to a
$4,200 accrual in 1995 for the estimated cost to settle the shareholders class
action litigation. The June 1996 judgment fixed the cost at an amount
approximately $1,200 less than the 1995 estimate. This $1,200 was recorded as a
reduction to the 1996 second quarter selling, general and administrative costs.
Gain On Sales Of Subsidiary And Lottery Service Agreement: During 1996, the
Company recognized gains of $691 and $624 on the sales of its subsidiary
McKinnie & Associates, and the Papua New Guinea lottery service agreement,
respectively. These sales which occurred in 1993 and 1995, respectively, have
been recorded under the cost recovery method and, as such, no income was
recognized until the basis of these investments had been recovered. This
occurred in 1996. No related gains were recognized prior to 1996.
Provision For Income Taxes: The provision for income taxes in 1996 relates
to income earned in the Company's Australia subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended September 30, 1998, the Company's working capital
increased by $170 primarily as a result of the net income for the quarter. The
Company's consolidated financial statements for the year ended December 31, 1997
and the nine months ended September 30, 1998 have been prepared on a continuing
operations basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. At September
30, 1998, the Company had working capital of $1,585.
During 1997, the Company's working capital decreased approximately $3,400
primarily due to the Company's net loss of $5,900. The accrued litigation
settlement of $1,700 was extinguished through the issuance in 1997 of 840
thousand shares of common stock of the Company. During 1997 the Company
generated cashflows of $857 primarily as a result of proceeds of $438 and $419
relating to the sale, in previous years, of McKinnie & Associates and of the
Papua New Guinea lottery, respectively. During 1997 the Company invested $150 in
additional equipment.
The Company's consolidated financial statements have been prepared on a
continuing operations basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
Management recognizes that the Company must generate additional contract sales
to maintain its current level of operations. Additionally, management is
currently seeking additional sources of funding through debt or equity financing
and consideration of other business transactions which would generate sufficient
resources to assure continuation of the Company's operations.
Management recognizes that the Company must generate additional contract
sales to maintain its current level of operations. Additionally, management is
currently seeking additional sources of funding through debt or equity financing
and consideration of other business transactions which would generate sufficient
resources to assure continuation of the Company's operations.
As part of its strategic plan, the Company intends to pursue long-term
service contracts as a source of revenue. Service contracts pose new capital
investment risks for the Company that do not exist in its product sale business.
Payments are received only after a system becomes operational, based upon a
percentage of the customer's gross receipts from the system. The Company
therefore bears the risk that scheduling delays may occur and that a system may
not become operational.
36
<PAGE> 39
Management anticipates that it will be successful in obtaining sufficient
contracts to enable the Company to continue normal operations; however, no
assurances can be given that the Company will be successful in realizing
sufficient contract revenue or obtaining additional funding. If the Company is
unable to obtain sufficient contract revenue or funding, management will be
required to reduce the Company's operations.
On February 27, 1998, the Company's largest shareholder, Berjaya, agreed to
provide financial support if and when necessary to ensure that the Company's
operations continue to December 31, 1998. The Company's ability to continue its
on-going operations on a long-term basis is dependent upon its ability to
recover its investment in existing contracts, obtain additional financing,
secure additional new contracts, and ultimately achieve a sustainable level of
profit from operations.
The Company's reporting currency is the U.S. dollar. Historically, a
majority of the Company's sales have been denominated in U.S. dollars, with the
balance denominated in foreign currencies. These foreign currency sales have
been effected principally by the Company's international subsidiaries. In
accordance with U.S. accounting requirements, sales denominated in foreign
currencies are translated into the local functional currency and then into U.S.
dollars, at an average exchange rate in effect during the period. In addition,
the Company incurs operating and technical support related expenses in
Australian dollars in connection with its Australian operations and also
incurred operating expenses in local currency at its United Kingdom location.
Thus, changes from reporting period to reporting period in the exchange rates
between various foreign currencies and the U.S. dollar have had, and will in the
future continue to have, an impact on revenues and expenses reported by the
Company, and such effect may be material in any individual reporting period. To
the extent that the Company incurs operating expenses in local currencies at its
foreign subsidiaries, the Company has a natural hedge against a portion of the
possible fluctuation in foreign currency exchange rates of revenues in such
currencies. As the contracts are predominantly denominated in the functional
currency of the subsidiary performing under the contract, the Company has
historically incurred immaterial amounts of transaction gains or losses.
The majority of the Company's sales are denominated in U.S. dollars and
thus not subject to foreign currency fluctuations. However, the ultimate cost of
the Company's products to its customers have increased due to recent
fluctuations in the foreign exchange rates of many southeast Asian countries. At
this point the Company does not believe that these fluctuations in exchange
rates has had an impact on any potential sales. However, any further significant
decline in the economy of such Asian countries or in the value of their
currencies could have a material adverse impact on the Company.
Additionally, the balance sheet of the Company's Australian subsidiary is
translated into U.S. dollars and consolidated with the balance sheet of the
Company's domestic subsidiary in accordance with U.S. accounting requirements.
Changes in the U.S. dollar value of the foreign currency denominated assets are
accounted for as an adjustment to shareholders' equity. Therefore, changes from
reporting period to reporting period in the exchange rates between various
foreign currencies and the U.S. dollar have had, and will continue to have an
impact on the foreign currency translation component of shareholders' equity
reported by the Company, and such effect may be material in any individual
reporting period.
As of September 30, 1998 there were no material commitments for capital
expenditures.
YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the Year 2000. The Company
expects to incur internal staff costs as well as other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the Year 2000. The Company is still evaluating the effort required, and the
related costs will be expenses as incurred.
FORWARD LOOKING STATEMENTS
The statements in this filing which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth or implied
by forward-looking statements. These risks and uncertainties include the absence
of significant contract backlog,
37
<PAGE> 40
the dependence on business from foreign customers sometimes in politically
unstable regions, political and governmental decisions as to the establishment
of lotteries and other wagering industries in which the Company's products are
marketed, fluctuations in quarter-by-quarter operating results and other factors
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
LEGAL PROCEEDINGS
Walters v ILTS -- On November 3, 1995, Mr. James T. Walters, the former
chairman and president of the Company, who retired in 1994, filed a defamation
and invasion of privacy action in the San Diego County Superior Court against
the Company, its former president, Frederick A. Brunn and other parties,
relating to statements in a magazine article. The other parties previously
settled with Mr. Walters. Mr. Walters sought general and special damages of $9
million and punitive damages. On November 1, 1996, a summary judgment was
entered in favor of the Company and Mr. Brunn. The summary judgement in favor of
the Company and Mr. Brunn was substantially reversed on appeal on November 30,
1998, in an unpublished opinion, by a three judge panel of the Fourth Appellate
District of California. A trial date has not been set.
NASDAQ NOTIFICATION
As a result of the Company's Form 10-Q filed on May 15, 1998, Nasdaq
determined that the Company no longer met the $4 million net tangible asset
requirement for continued listing on the Nasdaq National Market. Subsequent to
the Company's oral hearing on August 7, 1998, Nasdaq determined to grant the
Company's securities a listing on the Nasdaq SmallCap Market effective October
23, 1998, pursuant to the following exception: (1) on or before December 15,
1998, the Company must make a public filing with the Securities and Exchange
Commission and Nasdaq evidencing a minimum of $6 million in net tangible assets,
(2) the filing must contain a balance sheet, no older than 45 days, with pro
forma adjustments for any significant events or transactions occurring on or
before the filing date, and (3) in addition, on or before December 15, the
Company must evidence a minimum bid price of $1.00 per share; thereafter, the
Company must meet or exceed a $1.00 per share bid price for a minimum of ten
consecutive trading days. In order to fully comply with the terms of this
exception, the Company must be able to demonstrate compliance with all
requirements for continued listing on the Nasdaq SmallCap Market. In the event
the Company fails to meet any of the terms of this exception, the Company's
securities will be delisted from the Nasdaq SmallCap Market.
The Company believes that it can meet Nasdaq's conditions assuming
shareholder approval of the Acquisition is received; however, there can be no
assurance that it will do so. If at a future date the Company Common Shares
should cease to be listed on the Nasdaq SmallCap Market, they may continue to be
traded on the OTC-Bulletin Board. For the duration of the exception, the
Company's Nasdaq symbol will be ITSIC.
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<PAGE> 41
BUSINESS OF THE COMPANY
GENERAL
The Company designs, manufactures, sells, manages, supports and services
computerized ticket issuing systems and terminals for the global pari-mutuel and
on-line lottery industries. The Company has also bid for long-term service
contracts under which it intends to operate on-line lottery systems. The
Company's technology can be used in other ticket-processing applications, such
as keno gaming and automated ticket printer/readers for toll turnpike systems.
The principal proprietary component of the Company's systems are the
DATAMARK(R) terminals, a compact, reliable microprocessor-based ticketing
terminal, which can print and process up to approximately 30 tickets per minute.
The Company sells the DATAMARK(R) terminal separately or as part of a turnkey
wagering application system and can modify a terminal's features or
configurations and central system software to meet specific customer
requirements.
The Company's wagering application systems include DATAMARK(R) terminals, a
central computer installation, communication network and display equipment.
System features include real-time central processing of data received from
multiple locations, back-up hardware capability and complete communications
redundancy designed to provide fault tolerant operation.
DATAMARK(R) TERMINALS
The Company has developed several models of DATAMARK(R) terminals for
different wagering applications. All are microprocessor-based and have a
compact, lightweight design for countertop operation. The Company has recently
developed a product called the DMNXT(TM) which allows a simple and inexpensive
means for existing DATAMARK(R) customers to upgrade their older generation
terminals to an Intel PC platform with improved features. The features include
faster processing, higher resolution printing, and the ability to utilize cost
effective, commercial off-the-shelf PC peripherals. Most DATAMARK(R) terminals
are approximately 12" deep, 12" wide, 10" high, weigh approximately 27 pounds,
and are accompanied by a built-in or external display and keyboards.
The latest DATAMARK(R) models utilize a compact ticket path which allows
the terminal to print on either side and read from both sides of the same
ticket. The terminal contains a thermal printer which prints tickets quickly and
quietly without ink, ribbons or impact, thereby improving print quality and
reliability, and reducing maintenance expenses. The terminals use either pre-cut
thermal coated tickets or thermal coated roll stock tickets or both. The
terminals can also be configured to use impact printing on plain paper. Some
models will sequentially read and print up to 50 tickets entered at one time.
The basic functions of the DATAMARK(R) terminal are similar in all its
wagering system applications. Initially, wagering or other selection data is
entered into the terminal either manually by the operator via a keyboard, or by
a ticket marked by the customer. The terminal transmits that information to the
central computer, where a serial number is assigned to the transaction and a
response is sent back to the terminal which then thermally prints the data
either on the back of the customer-marked ticket or on a new ticket. As the data
is being printed, the intelligent terminal verifies the readability of the bar
code prior to ejecting the ticket to the player. When a ticket is cashed or
presented for validation, the terminal optically reads the bar code and accesses
the central computer to verify that payment is to be made with respect to the
ticket. The central computer calculates the payout amount, transmits this data
to the terminal and records the fact that the ticket has been paid, ensuring
that tickets are not paid twice. The terminal prints the payout amount on the
ticket giving visual evidence that the ticket has been paid, and directs the
processed ticket to the operator.
The DATAMARK(R) terminal's basic functions are supplemented by various
features. In the horse racing industry, the DATAMARK(R) terminal is capable of
issuing tickets for win, place or show betting, as well as for any feature pool
currently being used in pari-mutuel wagering. The terminals are designed to
facilitate multiple bets on one ticket and multiple selections for each bet. In
addition, the bettor is able to mark bets on a pre-printed playslip, which is
then read optically by the terminal, the amount wagered is calculated and the
bet details printed on the back of the same ticket. Because the ticket is
prepared away from the pari-mutuel
39
<PAGE> 42
clerk's window, betting transaction time is reduced, efficiency of the operation
is improved and the bettor obtains more privacy in the betting transaction.
Similarly, in the lottery industry, a player marks the numbers selected on
a pre-printed ticket or playslip which is read optically by the DATAMARK(R)
terminal and entered into the central system. The selections and the transaction
total are then either printed on the back of the playslip or on a separate
ticket and delivered to the player.
WAGERING AND OTHER TERMINAL PRODUCTS
The Company historically has derived revenue in the horse racing industry
from sales contracts for DATAMARK(R) terminals and for wagering systems, which
include DATAMARK(R) terminals, a central computer installation and peripheral
and display equipment. The Company's systems are "sell-pay" systems, which means
that each terminal is capable of being used both for selling all types of
wagering tickets and for making payment to the ticket holders after validation
of winning tickets.
The nucleus of each wagering system is the central computer installation
that receives information from ticket-issuing terminals, accumulates wagering
data, calculates odds and payouts, distributes information to the display
systems and terminals, and generates management information reports. In
cooperation with the customer, the Company designs the configuration of the
central computer installation to provide fault-tolerant operation, high
throughput and security. Each central computer installation typically includes a
computer configuration and various peripheral devices, such as magnetic storage
devices, management terminals and hardcopy printers, all of which are
manufactured by others. Although certain of the Company's customers presently
use software in their pari-mutuel systems which is proprietary to the Company,
the software presently offered by the Company in its horse racing system is
software, as enhanced and modified by the Company, acquired by license from The
Hong Kong Jockey Club ("The HKJC") and others.
In addition to sales of terminals and systems, the Company realizes ongoing
revenue from the sale of spare parts for use in the maintenance of its
terminals, of which approximately 30,000 have been delivered to date. The
Company also enters into contracts with its customers to provide software
modifications, upgrades and support for its installed products.
LOTTERY SYSTEMS/SALES AND SERVICE AGREEMENTS
Computerized, or on-line, lotteries are currently operated in many
countries. Existing lottery systems include both manual systems and modern
on-line systems. In an on-line lottery system, betting terminals are connected
to a central computer installation by a communications network and the system
typically utilizes a pari-mutuel pool or fixed payout, or both, in offering
"lotto" and other numbers games.
The Company owns non-exclusive rights to use the central system software
developed by The HKJC for use in its pari-mutuel wagering and lottery systems.
Under the terms of the amended license, the Company pays The HKJC a royalty
equal to a percentage of the revenue it receives in connection with a sale,
lease or providing a service of any lottery system using this software. In
addition, the Company is obligated to provide HKJC with any modifications which
the Company makes to the software, except where ownership to such modifications
vests in the Company's customers.
The Company has made significant modifications to The HKJC software. Chief
among them is the migration of the system to a client-server architecture, the
incorporation of Sybase relational database software, and the utilization of a
Windows operating system for the management information subsystem called
DataTrak. These enhancements allow the system to be scaled to meet each
customer's unique requirements and enables the customer to process data within a
familiar software user interface environment. The Company has also added
numerous new features to the base software, including instant ticket validation
and player registration. In the Company's DataTrak lottery system, tickets are
processed on DATAMARK(R) terminals which are connected to a central computer
installation, usually by telephone lines. The central computer installation
utilizes Digital Equipment Corporation hardware. The system has the following
characteristics: rapid processing, storage and retrieval of transaction data in
high volumes and in multiple applications; the ability to down-line load, i.e.,
to
40
<PAGE> 43
reprogram the wagering terminals from the central computer installation via the
communications network; a high degree of security and redundancy to guard
against unauthorized access and tampering and to ensure fault tolerant operation
without data loss; and a comprehensive management information and control
system.
In July 1995, the Company sold its facilities management and equipment
lease contracts for the lottery in Papua New Guinea to the principal
shareholders of the operating company, The Lotto Pty. Ltd. ("Lotto Pty."). The
Company has recognized revenues in 1996 and 1997 from this sale and will
continue to receive a percentage of Lotto sales over the next three years.
REVENUE SOURCES
The following table sets forth the revenue for the periods indicated
attributable to different applications of the Company's technology:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Racing Products and Services............. $ 2,443 $11,183 $10,448 $13,932 $14,680
Lottery Products and Services............ 7,729 5,105 7,680 9,231 10,322
Other.................................... 654 305 513 926 15
------- ------- ------- ------- -------
Total.......................... $10,826 $16,594 $18,641 $24,089 $25,017
======= ======= ======= ======= =======
</TABLE>
PRODUCT DEVELOPMENT
The Company's ability to compete successfully depends in part upon its
ability to meet the current and anticipated needs of its customers. To that end,
the Company devotes a significant portion of its research and development
activity to refining and enhancing the features of existing products, systems
and software. In 1997 the Company spent approximately $1.7 million on
engineering, research and development, as compared to $1.7 million and $1.4
million in 1996 and 1995, respectively.
The Company developed the single roller DATAMARK Flipper(R) terminal
(Flipper(TM)) with a unique reader/printer mechanism that meets the needs of
many different applications by combining into one unit all of the functional
capabilities of previous DATAMARK(R) reader/printer mechanisms in a modular
fashion. Also, the Company has developed a terminal specifically aimed at
lottery applications called the DATAMARK(R) XClaim(TM). This terminal can be
configured to print tickets using thermal or impact printing.
The Company over the last decade has developed and refined the DataTrak
on-line gaming system. DataTrak integrates the entire spectrum of lottery
operation and management into a single application that the operator controls.
DataTrak consolidates game and draw management, hotline functions, agent and
terminal administration, asset management and communications management into one
dynamic system. The DataTrak system was designed to support a large terminal
base and to handle virtually any transaction volume. In addition. DataTrak was
developed to retain all the speed, security and reliability of a proven
transaction processing system and extensive game library, while providing the
increased flexibility of interfacing with a variety of information management
solutions and standard software development tools in one fully integrated
system.
The Company has recently developed a product called the DMNXT(TM) which
allows for a simple and inexpensive means for existing DATAMARK(R) customers to
upgrade their older generation terminals to an Intel PC platform with improved
features which include faster processing, higher resolution printing, and the
ability to utilize cost effective, commercial off-the-shelf PC peripherals.
The Company has been certified since February 1996 under ISO 9001
registration. This certification demonstrates quality in design development and
manufacturing under ISO standards.
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<PAGE> 44
BACKLOG
The backlog of orders for its products and services believed by the Company
to be firm, amounted to approximately $5.0 million as of December 31, 1997, as
compared to a backlog of approximately $1.7 million as of December 31, 1996. Of
such backlog at December 31, 1997, approximately $3.3 million is expected to be
filled during 1998. See "-- Dependence Upon A Few Customers".
MARKETING AND BUSINESS DEVELOPMENT
Management believes that the Company's continuing ability to obtain and
retain contracts for its wagering systems and terminals is directly related to
its reputation in its various fields of expertise. Because of its reputation,
the Company often receives unsolicited inquiries from potential customers. The
Company also learns of new business opportunities through the close contacts
which its personnel maintain with key officials in the international horse
racing and lottery industries.
Contracts to provide products to the horse racing and lottery industries
often are awarded through a competitive bidding process which can begin years
before a contract is awarded and involves substantial expenditures by the
Company. Through its contacts with existing customers and others in these
industries, the Company often becomes aware of prospective projects before the
customer circulates a request for proposal. If the Company is interested in the
project it typically submits a proposal, either before or after the customer
circulates a formal request for proposal, outlining the products it would
provide and the services it would perform. If the proposal is accepted, the
Company and its customer negotiate and enter into a contract on agreed terms.
The Company's marketing efforts are carried out by the Company's
professional marketing and engineering staff and frequently involve other
executive officers of the Company. Marketing of the Company's products and
services throughout the world is often performed in conjunction with consultants
with whom the Company contracts, from time to time, for representation in
specific market areas.
The Company's success depends in large part on its ability to obtain new
contracts to replace its existing contracts. The Company currently has proposals
outstanding to supply systems, terminals or components for use in the
pari-mutuel wagering industry and for lotteries in various foreign countries. In
addition to contract sales for terminals and systems, the Company has had
discussions with both new and existing customers regarding supplying products
for their operations and expects to bid for additional contracts in the future.
Because the realization of revenue from these prospects is dependent upon a
number of factors, including the bidding process and product development, there
can be no assurance that the Company will be successful in realizing revenue
from any of these activities.
Olympic Gold Holdings Limited, of the British Virgin Islands, a new
customer of the Company placed a $2.6 million order for DATAMARK(R) lottery
terminals and a computer operations system in May 1997. Olympic Gold operates an
on-line lottery in the Ukraine, which began operations in December 1997.
MANUFACTURING AND MATERIALS
Manufacture of the Company's systems and terminals is performed at its
facilities in Carlsbad, California, and consists principally of the assembly of
parts, components and subassemblies (most of which are designed by the Company)
into finished products. The Company purchases many parts, components and
subassemblies (some of which are designed by the Company) necessary for its
terminals and the systems manufactured by the Company from outside sources and
assembles them into finished products. These products and purchased computers
are then integrated with standard peripherals purchased by the Company to
construct racing and lottery systems. The Company generally has multiple sources
for the various items purchased from vendors, but some of these items are
state-of-the-art and could, from time to time, be in short supply. Certain other
items are available only from a single supplier. For the twelve months ended
December 31, 1997 no vendor accounted for 10% or more of the Company's raw
material purchases.
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<PAGE> 45
COMPETITION
The Company competes primarily in the horse racing industry and the on-line
lottery industry. The Company competes by providing high-quality wagering
systems and terminals that are reliable, secure and fast. In addition,
management believes that the Company offers its customers more flexibility in
design and custom options than do most of its competitors.
Management believes that the Company's main competitors in the sale of
horse racing systems and on-line lottery systems in the domestic and
international marketplace are: AWA Limited, an Australian company, Essnet, a
Swedish company, International Des Jeux, the French national lottery company,
and four United States companies: GTECH Holdings Corporation, Autotote Limited,
Video Lottery Technologies, and Scientific Games Holding Corporation. Management
believes that the Company has been a substantial factor in the international
marketplace. The Company's sales or leases in the United States have been
insignificant. In general the Company's competitors have significantly greater
resources than the Company. Competition for on-line lottery system contracts is
intense.
EMPLOYEES
As of December , 1998, the Company employs people worldwide on a
full-time equivalent basis. Of this total, were engaged in manufacturing
and operations support, in engineering and software development and in
marketing and administrative positions. None of the Company's employees is
represented by a union, and the Company believes its relations with its
employees are good.
PATENTS, TRADEMARKS AND LICENSES
The Company has five U.S. patents issued on its products. The Company
believes that its technical expertise, trade secrets and the creative skills of
its personnel are of substantially greater importance to the success of the
Company than the benefits of patent protection. The Company typically requires
customers, employees, licensees, subcontractors and joint venturers who have
access to proprietary information concerning the Company's products to sign
nondisclosure agreements, and the Company relies on such agreements, other
security measures and trade secret law to protect such proprietary information.
Central system software used in the Company's lottery system has been obtained
under a non-exclusive license with The HKJC.
REGULATION
The countries in which the Company markets its products generally have
regulations governing horse racing or lottery operations, and the appropriate
governing body could restrict or eliminate these operations in these countries.
Any such action could have a material adverse effect on the Company. Foreign
countries also often impose restrictions on corporations seeking to do business
within their borders, including foreign exchange controls and requirements for
domestic manufacturing content. In addition, laws and legal procedures in these
countries may differ from those generally existing in the United States and
conducting business in these countries may involve additional risk for the
Company in protecting its business and assets, including proprietary
information. Changes in foreign business restrictions or laws could have a
significant impact on the Company's operations.
DEPENDENCE UPON A FEW CUSTOMERS
The Company's business to date has been dependent on major contracts and
the loss of one or failure to replace completed contracts with new contracts
would have a materially adverse effect on the Company's business. During 1997,
the Company's revenues were derived primarily from contracts with Olympic Gold
Holding ($2.56 million), New South Wales Lotteries Corporation ($1.7 million);
Leisure Management Berhad ($1.67 million); AB Travoch Galopp (ATG) of Sweden
($0.76 million) and The Revenue Markets, Inc. ($0.64 million).
YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the Year 2000. The Company
expects to incur internal staff costs as well as other expenses
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<PAGE> 46
related to infrastructure and facilities enhancements necessary to prepare the
systems for the Year 2000. The Company is still evaluating the effort required
and the related costs will be expensed as incurred.
SEASONALITY
In general, the Company's business is not subject to seasonal effects.
WORKING CAPITAL PRACTICES
The Company's sales contracts typically provide for deposits and progress
payments which have provided sufficient working capital for operations. With the
Company entering into long-term lottery service agreements, a substantial
portion of its working capital has been expended in previous years in attempting
to establish viable operations in these investments. See "Company Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference herein.
ENVIRONMENT EFFECTS
There are no significant capital expenditures required of the Company in
order to comply with laws relating to protection of the environment.
EXPORT SALES
The majority of the Company's revenues are derived from contracts with
foreign companies. As of December 31, 1997 the Company's equipment has been
delivered and installed in Sweden, Norway, Hong Kong, Singapore, Ukraine,
Australia, Finland, England, the Netherlands, Malaysia, Macau, China, Papua New
Guinea, Belgium and the Philippines. The companies with which the Company
contracts are normally sizeable organizations with substantial assets and are
capable of meeting the financial obligations undertaken. The Company has entered
into a few contracts specifying payment in currencies other than the U.S.
dollar, thereby assuming the risk associated with fluctuations in value of
foreign currencies. The majority of the Company's sales are denominated in U.S.
dollars and thus not subject to foreign currency fluctuations. However, the
ultimate cost of the Company's products to its customers have increased due to
recent fluctuations in the foreign exchange rates of many southeast Asian
countries. At this point the Company does not believe that these fluctuations in
exchange rates have had a material impact on any potential sales. However, any
further significant decline in the economies of such Asian countries or in the
value of their currencies could have a material adverse impact on the Company.
The Company operates a wholly-owned subsidiary in Australia.
PROPERTIES
The Company's U.S. facilities consist of approximately 41,500 square feet
of leased office, warehouse and manufacturing space in Carlsbad, California. The
lease on this facility expires in June 2000. The Company's Australian subsidiary
leases approximately 13,000 square feet consisting of a manufacturing and
administrative facility. The lease on this property expires in October 2001.
44
<PAGE> 47
BUSINESS OF PRIME
GENERAL
Prime was incorporated under the laws of the Philippines on October 31,
1924 as Central Azuzcarera de Pilar. Prime became officially listed on the
Philippines Stock Exchange in 1971 under its former name of Central Azucarera de
Pilar. Until recently Prime had been operating as a manufacturer of sugar and
molasses. On October 16, 1998, Prime's Board of Directors and shareholders each
approved amendments to the Articles of Incorporation of Prime regarding the
change in its corporate name to Prime Gaming Philippines, Inc., and the
amendment of its primary purpose from sugar refining to that of an investment
holding company. Prime's business address is 29/F Rufino Pacific Tower, 6784
Ayala Avenue cor. Herrera Street, Makati City, Philippines.
As of September 30, 1998, the Company had no commercial operations. The
principal activity of Prime is that of an investment holding company. Prime's
subsidiary, PGMC, is the primary lessor of lottery equipment and accessories to
the PCSO in the Luzon Island. Luzon Island is one of the biggest islands in the
Philippines and is comprised of a high density population of approximately 25
million people.
DESCRIPTION OF PRIME SHARES
General. The authorized capital stock of Prime consists of 100,000,000
shares with a par value Php 10.00 per share, each with similar voting, dividend
and preemptive rights. There are no existing provisions in the articles of
incorporation of Prime and by-laws of the Prime which will cause a delay,
deferment or in any manner prevent a change in the control of Prime. As of
September 30, 1998, there were 99,530,872 issued and outstanding Prime shares.
Common Stock. The holders of the Prime Shares are entitled to such
dividends as may be declared by the Board of Directors of Prime (and the Prime
shareholders in case of stock dividends) from time to time out of funds legally
available. Each Prime Share entitles the holder thereof to one vote per share on
all matters submitted to the Prime shareholders for vote thereon. The Prime
Shares are not convertible or subject to redemption or further calls or
assessments by Prime. Subject to the rights holders of preferred stock that may
be issued in the future, the holders of Prime Shares are entitled to share
ratably in the assets of Prime available for distribution to shareholders in the
event of its dissolution or liquidation. All the outstanding Prime Shares are
fully paid, non-assessable and all stamp taxes thereon have been paid.
Dissenters' Right of Appraisal. Pursuant to Section 81 of the Corporation
Code of the Philippines, any shareholder of Prime shall have the right to
dissent and demand payment of the fair value of his or her shares in the
following instances:
1. In case of any amendment to the articles of incorporation which has
the effect of changing or restricting the rights of any shareholder or
class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of a sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property and
assets; and
3. In case of a merger or consolidation.
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<PAGE> 48
Market Price of Prime Shares. The Prime Shares are traded on the Philippine
Stock Exchange. The high and low prices of the Prime Shares for each quarter
within the last two fiscal years cannot be determined because the price did not
fluctuate. However, the market prices of the Prime Shares on certain dates are
as follows:
<TABLE>
<CAPTION>
DATE PRICE(PHP)
- ---- ----------
<S> <C>
December 12, 1996................................. 6.00
September 29, 1997................................ 8.80
September 30, 1997................................ 13.00
May 29, 1998...................................... 30.00
June 29, 1998..................................... 20.00
July 30, 1998..................................... 18.00
</TABLE>
Dividends. There were no dividends declared by Prime in the last two fiscal
years.
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the current Directors and executive officers
of Prime:
<TABLE>
<CAPTION>
DIRECTORS/EXECUTIVE OFFICERS POSITION TERM
---------------------------- -------- ----
<S> <C> <C>
Raul S. Manglapus............... Chairman of the Board 1997-Present
Ng Foo Leong(1)................. Director and President 1997-Present
Alfredo C. Ramos................ Director 1997-Present
George T. Yang.................. Director 1997-Present
Paulino S. Soo.................. Director 1997-Present
Vincente C. Atilano............. Director 1997-Present
Wilfrido O. Gamboa.............. Director 1997-Present
Jose A. Bernas.................. Director and Secretary 1997-Present
Lim Meng Kwong.................. Director 1997-Present
Seow Swee Pin................... Director 1997-Present
Low Siaw Pend................... Treasurer May 4, 1998-Present
</TABLE>
- ---------------
(1) Mr. Leong is a Director of ILTS and also a Director of PGMC.
There is no person that is not an executive officer of Prime who is
expected by Prime to make a significant contribution to the business of Prime.
During the 1997 fiscal year, Mr. George T. Yang, a Director of Prime, made
certain interest bearing advances to Prime. These advances have been repaid by
Prime and therefor such advances do not appear in the audited financial
statements of Prime as of April 30, 1998. There are no service contracts in
existence between Prime and any of its Directors.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors of Prime are entitled to reasonable
per diem for actual attendance of any regular or special meeting of the Board of
Directors of Prime. However, the present members of the Board of Directors of
Prime have not received any per diem since the assumption of each of their
positions.
Since Prime does not currently have any operations, the executive officers
of Prime do not receive any compensation. In addition, there are no warrants or
options to purchase Prime Shares outstanding. Further Prime has not entered into
any employment contracts or change of control arrangements with its executive
officers.
COMPENSATION PLANS
Prime does not currently have any compensation plans.
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<PAGE> 49
LITIGATION
Prime is not engaged in any litigation or arbitration of material
importance and no litigation or claim or material importance is known to the
Directors to be pending or threatened against Prime.
PRIME CORPORATE RESTRUCTURING
Prior to Prime's restructuring in October 1996, Prime's operations had been
inactive. On October 16, 1996 the shareholders of Prime approved a number of
changes in Prime's corporate structure as part of a strategic restructuring
scheme. These changes, as summarized below, were approved by the Philippine SEC
on December 2, 1997:
(1) the change of Prime's primary purpose to that of an investment
holding company;
(2) a decrease in the authorized capital stock of Prime from 60
million Philippine Pesos to 47 million Philippine Pesos through the
elimination of preferred shares of stock;
(3) an increase in the authorized capital stock of Prime from 47
million Philippine Pesos to 1.0 billion Philippine Pesos; and
(4) the denial of preemptive rights of shareholders.
ACQUISITION OF PGMC
The changes in the primary structure of Prime were also the result of
Prime's acquisition of the entire outstanding capital stock of PGMC, a company
that leases systems and technology for the on-line lottery operation of the
PCSO. The acquisition involved the issuance of Prime's shares in exchange for
PGMC shares.
Under certain share exchange agreements executed among Prime, Berjaya, and
other individuals and entities, Prime agreed to issue an aggregate of 52.0
million shares in exchange for the assignment by the parties to such share
exchange agreements an aggregate of 250,000 shares PGMC shares in favor of
Prime. The transfer value assigned to each share of stock of PGMC was Php 2,080
or an aggregate transfer value of Php 250.0 million. The transfer value was
based on the financial forecast of PGMC as reviewed by Punongbayan & Araullo (an
affiliate of Ernst & Young) on October 1, 1996.
The valuation of the PGMC shares that was agreed upon by the Prime and the
PGMC shareholders was Php 520.0 million, derived from a net price-earnings (P/E)
multiple of 8.0 times net income after tax based on estimated average earnings
Php 65.0 million. The professional valuation computation covers a range of Php
487.5 million to Php 552.5 million.
On December 2, 1997, the Philippine SEC approved the valuation of PGMC
shares on the condition that the 52.0 million shares that would be issued by
Prime in exchange for 250,000 shares of PGMC would be locked-up for a period of
two years from the date of the issuance and that the present majority
shareholder of PGMC, Berjaya would execute a written undertaking that it would
continue participating in the management of PGMC until April 30, 2001. On
January 14, 1998 Berjaya submitted to the SEC the required undertaking. On April
15, 1998, all the parties to the Prime and PGMC share exchange executed lock-up
agreements.
PGMC
PGMC was incorporated in the Philippines on April 14, 1993 and is engaged
in the leasing of on-line lottery equipment and accessories. PGMC has an
authorized capital of Php 100.0 million divided into 1.0 million shares with a
par value of Php 100 per share, of which 250,000 shares are issued and
outstanding. Prime is the sole shareholder of PGMC. PGMC's business address is
29/F, Rufino Pacific Tower, 6784 Ayala Avenue, cor. Herrera Street, Makati City,
Philippines (telephone no.: (632)811-06-68 and facsimile: (632)811-05-38).
Equipment Lease Agreement. On January 25, 1995, PGMC entered into an
Equipment Lease Agreement ("Equipment Lease Agreement") as amended on November
14, 1997, with the PCSO covering the
47
<PAGE> 50
lease of PGMC's on-line lottery equipment to PCSO for a period of eight (8)
years, commencing on the date of commercial operation of 1,250 terminals in
connection with the Philippine Lottery. As of November 1998, there were
approximately 1070 PGMC terminals operational in connection with the Philippine
Lottery, thus, the eight year period with respect to the Equipment Lease
Agreement has not yet commenced. Under the terms of the Equipment Lease
Agreement PCSO may terminate the lease prior to its expiration; provided that
PCSO pays to PGMC compensatory damages equal to the projected income and market
value of the equipment provided in connection with the Equipment Lease
Agreement, with an additional penalty charge of two percent per month for the
term of the Agreement. At the expiration of the term of the Equipment Lease
Agreement PCSO has the option to purchase all of the equipment provided by PGMC
in connection with the Equipment Lease Agreement for the sum of Php 25.0
million.
Under the Equipment Lease Agreement, PGMC is entitled to a rental fee
equivalent to 4.3% of the gross amount of ticket sales from all the PCSO's
on-line lottery operations in Metro Manila and other parts of the Island of
Luzon. The Equipment Lease Agreement also provides that the minimum aggregate
rentals per year paid to PGMC shall in no event be less than Php 35,000 per
terminal per year. In the event the gross ticket sales are less than Php 35,000
Pesos per terminal per year, PCSO is obligated under the Equipment Lease
Agreement to pay PGMC any such shortfall out of the proceeds of the then current
ticket sales from the operation of the Philippine Lottery.
On February 16, 1995, Lotto went on sale at on-line agencies throughout
Metropolitan Manila. On December 1, 1995, PGMC also entered into an agreement
with the PCSO for the repair and maintenance service of the equipment covered by
the Equipment Lease Agreement. Under this agreement, PGMC is entitled to a
repair and maintenance service fee equivalent to .15% of the gross sales from
PCSO's on-line lottery operations.
The revenues from lease of lottery equipment comprise approximately 97% of
the total revenues of PGMC while the revenues from repair and maintenance
services comprise approximately 3%. The contributions of the revenues from lease
of lottery equipment and the revenues from repair and maintenance services to
the total net income of PGMC are not substantially different from their
contributions to the total net income of PGMC. PGMC's business to date has been
dependent on the Equipment Lease Agreement and the loss of such contract would
have a materially adverse effect on PGMC's business.
On February 1995, PGMC commenced initial operations with PCSO with
approximately 100 terminal units. As of September 30, 1998, PGMC has installed
over 1,000 terminal units on the Luzon Island.
The On-line Lottery System. The Philippine on-line lottery system consists
of on-line wagering terminals strategically located in areas where population
traffic is high. The on-line wagering terminals are connected to a central
computer system. The locations of the on-line wagering terminals include
commercial establishments such as malls, retail stores, supermarkets and
convenience stores. The wagering terminals are connected, via a
telecommunications network, to a central location where computer hardware
processes data for real-time and simultaneous transaction execution and
production of reports. The software or programs required for the lottery
application have been designed taking into account existing informal games
played in the Philippines, but are primarily based on existing on-line lottery
systems in the United States and in Malaysia, which are currently being used by
Berjaya in its gaming operations. This software includes the DATAMARK(R)
Terminal Applications Software and DATAMARK(R) Stand-Alone Training Mode
Software developed by ILTS.
Games Development. PCSO has implemented, at the recommendation of PGMC, a
games development plan for the on-line lottery system in the Philippines. The
purpose of the phased implementation plan was to gradually educate the
Philippine public as to the mechanics of the lottery system and the specific
games available. Each game developed has unique characteristics and prize
structure in order to appeal to a different segment of the playing public which
may enable PCSO to capture a progressively larger market.
Lotto 6/42. The initial lottery game introduced by PCSO is the game known
as "Lotto 6/42." In this game, players chose six numbers from one to 42. Six
numbers are drawn at random per draw. The jackpot prize is given to the player
and/or players who chose all six numbers correctly. Prizes are also given to the
players who correctly chose five, four or three out the six winning numbers.
Lotto 6/42 remains one of the
48
<PAGE> 51
more popular games in the Philippines due to the relatively easy mechanics of
the game and the prize structure. The appeal of a "growing jackpot" also
contributes to the popularity of the game. If the jackpot prize is not won in a
particular draw, the prize is added to the next draw's jackpot, thereby
increasing the jackpot for the next draw. The highest jackpot for this game was
recorded at Php 120 million and was won by a single player.
4-Digit. The 4-Digit game is similar to an informal game currently played
in the Philippines known as "Jueteng." It is meant to attract the informal
players into the formal, legal betting system, thereby also capturing for the
Philippine government revenues which were previously lost to the informal
system. The 4-Digit game provides players with better odds of winning with
relatively smaller prizes.
Lotto 6/45 + Bonus. The Lotto 6/45 + Bonus game allows players to choose
six numbers from one to 45 and an additional number also from the same range.
This game offers additional prize tiers for players who select five, four or
three of the winning numbers as well as the correct additional number.
6-Digit. The 6-Digit game is played by picking a six digit number from a
field of 000000 to 999999. The players who match the last two digits of the
winning number can win a prize.
2-Digit. The 2-Digit game is almost identical to the informal Philippine
game "Jueteng." Players choose two numbers from one to 37. Once this game is
introduced it will have daily draws with three sets of two numbers chosen.
Winners must match the exact sequence drawn, e.g. 25, 26 is different than 26,
25. This legalized version of Jueteng will offer better odds of winning and
higher prize amounts than the informal version because money will not have been
paid out to the informal operators.
Competition. Although PGMC is not the operator of the on-line lottery
system in Metro Manila and the rest of Luzon, its revenues as the exclusive
lessor to the PCSO for on-line facilities for Metro Manila and the rest of
Luzon, are dependent on the success and revenue potential of the system. In this
regard, the PGMC on-line lottery system faces competition mainly from existing
legal and illegal gambling in the Philippines.
Gaming in the Philippines. The Philippines, like most Asian countries, is a
gaming-oriented society. Many types of gaming currently exist, ranging from
formal games such as PCSO's traditional Sweepstakes and on-line lottery games,
horse racing and casinos, to the informal "Jueteng" and "Last Two."
The other game currently being operated by PCSO in the Philippines is the
traditional passive Sweepstakes game. The game is one in which the player can
purchase a full ticket or a fraction thereof. Currently there are 26 draws
annually for the Sweepstakes with a top prize of approximately Php 3.0 million.
The PCSO also holds four "extraordinary" Sweepstakes per year with top prizes up
to Php 50.0 million.
There are many forms of illegal gambling in the Philippines. These include
certain numbers games, some forms of mahjong, Hi-Lo, cara y cruz, sakla, card
games and cockfighting. The most popular illegal games are the numbers games,
including Jueteng, Last Two and Masiao.
Software Support Agreement. Sports Toto, an affiliate of Berjaya, and PGMC
entered into the Software Support Agreement, pursuant to which Sports Toto
provides the following software support services to PGMC for the maintenance of
the on-line lottery system in the Philippines: (1) operation by experienced
personnel of a 24-hour "Hotline" for reporting problems (2) 24-hour support from
technical specialists who can examine problems relating to PGMC's software or
any other related operational problems, (3) the assignment of experienced system
software personnel to provide dedicated on site support, (4) the assignment of
experienced personnel to investigate and research problems reported by PGMC, (5)
prompt response in resolving reported problems, (6) the provision of software
modifications and/or upgrades necessary to resolve reported problems, (7) the
dispatch of qualified engineers to implement the solution for a reported
problem, (8) the provision of sufficient operational documentation relating to
the solutions carried out, (9) the provision of documentation and manuals for
all enhancements, amendments and additions to software and (10) the provision of
software bug fixing and software changes which do not require substantial
changes to the central and/or terminal applications.
The Software Support Agreement provides that PGMC will pay Sports Toto
$15,000 per month during the term of such agreement. The Software Support
Agreement commenced on May 1, 1997 with an initial
49
<PAGE> 52
term of two years. Thereafter the Software Support Agreement continues
automatically for additional one year periods unless terminated by either party
three months prior to such automatic renewal.
In connection with the Acquisition, Sports Toto has agreed to assign all
rights and obligations under the Software Support Agreement to the Company.
Reimbursement Agreement. Sports Toto and PGMC also entered into the
Reimbursement Agreement, pursuant to which PGMC agrees to reimburse Sports Toto
for all costs and expenses incurred in connection with Sport Toto's provision of
certain management services to PGMC in connection with the operation of the
Philippine Lottery. The reimbursement of expenses includes the salaries and
allowances of the number of Sports Toto personnel required to be based in PGMC;
medical and dental expenditures for such personnel; automobile expenses;
telephone, facsimile and other telecommunication charges; office rental
expenses; and expenses for airfares. The Reimbursement Agreement does not
provide for a specified term and therefore could be cancelled at any time at the
discretion of either party.
In connection with the Acquisition, Sports Toto has agreed to assign all
rights and obligations under the Reimbursement Agreement to the Company.
Directors of PGMC. The following table sets forth certain summary
information for the Directors and President of PGMC.
<TABLE>
<CAPTION>
NUMBER OF SHARES HELD
-------------------------------
NAME DIRECT INDIRECT PERCENT POSITION NATIONALITY
---- ------ ---------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Raul S. Manglapus...................... -- 1,560,000 1.57(1) Chairman Filipino
Ng Foo Lee............................. -- -- -- President Malaysian
Alfredo C. Ramos....................... -- 15,600,000 15.67(1) Director Filipino
George T. Yang......................... -- 8,840,000 8.88(1) Director Filipino
Paulino S. Soo......................... -- -- -- Director Filipino
</TABLE>
- ---------------
(1) Deemed interested by their holding of Prime Shares. Prime owns 100% of PGMC.
Related Party Transactions. In the normal course of business, PGMC grants
cash advances to affiliated companies. These advances are both interest and
non-interest bearing, and are due on demand. The interest bearing advances bear
interest at prevailing market rates. In addition, PGMC has received cash
advances from Berjaya, which were used to finance PGMC's working capital
requirements. These advances bear interest at rates agreed upon by the parties.
Interest on these advances from Berjaya amount to $1,427,359, $1,552,606 and
$2,949,405 in 1998, 1997 and 1996, respectively.
PGMC Lock-Up Agreements. In December 1997, the Philippine Securities and
Exchange Commission approved the acquisition of PGMC by Prime on the condition
that the shares of PGMC be locked up for a period of two years from the date of
the issuance thereof. On April 15, 1998 Berjaya, George T. Yang, Alfredo C.
Ramos, Rodolfo N. De Leon, Raul Manglapus, Jerry Angping and First Abacus
Financial Holdings, Inc. executed two year lock-up agreements. Upon consummation
of the Acquisition and until the expiration of the two year lock-up, the Company
will only be able to sell the Prime Shares in a private transaction with
approval from the Philippine Securities and Exchange Commission.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of ILTS as of December 31, 1997 and
for the year then ended, included in this Proxy Statement, have been audited by
Arthur Andersen LLP, independent public accountants, as stated in their report
appearing herein.
The consolidated financial statements of ILTS as of December 31, 1996 and
1995 and for the years then ended, included in this Proxy Statement, have been
audited by Ernst & Young LLP, independent auditors, as stated in their report
appearing herein.
50
<PAGE> 53
The balance sheets of Prime as of April 30, 1998, June 30, 1997 and 1996
and the related statements of income and deficit and cash flows for the ten
months ended April 30, 1998 and for the years ended June 30,1997 and 1996
included in this Proxy Statement, have been audited by Punongbayan & Araullo,
independent public accountants, as stated in their report appearing herein.
The financial statements of PGMC as of April 30, 1998, and 1997 and for
each of the three years in the period ended April 30, 1998, included in this
Proxy Statement, have been audited by Punongbayan & Araullo, independent public
accountants, as stated in their report appearing herein.
OTHER MATTERS
As of the date of this Proxy Statement, the Board is not aware of any
matters to be presented at the Special Meeting other than those described in
this Proxy Statement. If other matters should properly come before the Special
Meeting or any adjournments or postponements thereof and be voted upon, the
enclosed proxies will be deemed to confer discretionary authority on the
individuals named as proxies therein to vote the shares represented by such
proxies as to any such matters. The persons named as proxies intend to vote or
not to vote in accordance with the recommendations of the management of the
Company.
51
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-3
Report of Ernst & Young, LLP, Independent Auditors.......... F-4
Consolidated Statements of Operations of ILTS
Years Ended December 31, 1997, 1996 and 1995............ F-5
Consolidated Balance Sheets of ILTS
December 31, 1997 and 1996.............................. F-6
Consolidated Statements of Cash Flows of ILTS
Years Ended December 31, 1997, 1996 and 1995............ F-7
Consolidated Statements of Shareholders' Equity of ILTS
Years Ended December 31, 1997, 1996, 1995 and 1994...... F-8
Notes to Consolidated Financial Statements.................. F-9
Consolidated Statements of Operations of ILTS (Unaudited)
Three Months Ended September 30, 1998 and 1997 and Nine
Months Ended
September 30, 1998 and 1997.......................... F-17
Consolidated Balance Sheets of ILTS
September 30, 1998 (Unaudited) and December 31, 1997.... F-18
Consolidated Statements of Cash Flows of ILTS (Unaudited)
Nine Months Ended September 30, 1998 and 1997........... F-19
Notes to Consolidated Financial Statements (Unaudited)...... F-20
Report of Independent Auditors.............................. F-23
Report of Independent Auditors to Accompany the
Supplementary Schedule Filed Separately from the Basic
Financial Statements................................... F-24
Selected Financial Data Table for Philippine Gaming
Management Corporation (PGMC)
Years Ended April 30, 1998, 1997, 1996, 1995* and
1994...................................................... F-25
Statements of Operations and Unappropriated Retained
Earnings for PGMC
Years Ended April 30, 1998, 1997 and 1996............... F-26
Balance Sheets for PGMC
April 30, 1998 and 1997................................. F-27
Statements of Cash Flows for PGMC
Years Ended April 30, 1998, 1997 and 1996............... F-28
Statement of Stockholders' Equity for PGMC
Years Ended April 30, 1998, 1997 and 1996............... F-29
Notes to Financial Statements for PGMC...................... F-30
Report of Independent Auditors.............................. F-35
Report of Independent Auditors to Accompany the
Supplementary Schedule Filed Separately from the Basic
Financial Statements................................... F-36
Selected Financial Data Table for Prime Gaming Philippines,
Inc. (Prime)
Ten Months Ended April 30, 1998
Years Ended June 30, 1997 and 1996
(With Comparative Figures for 1995 and 1994)............ F-37
Statements of Income and Deficit for Prime
Ten Months Ended April 30, 1998 Years Ended June 30,
1997 and 1996............................................. F-38
Balance Sheets for Prime
April 30, 1998 and June 30, 1997........................ F-39
</TABLE>
F-1
<PAGE> 55
<TABLE>
<CAPTION>
PAGE
<S> <C>
Statements of Cash Flows for Prime
Ten Months Ended April 30, 1998
Years Ended June 30, 1997 and 1996........................ F-40
Statements of Capital Deficiency for Prime
April 30, 1998, June 30, 1997 and 1996.................. F-41
Notes to Financial Statements (Prime)....................... F-42
Unaudited Consolidated Statement of Income and
Unappropriated Retained Earnings for Prime
Five Months Ended September 30, 1998.................... F-45
Unaudited Consolidated Balance Sheet for Prime
September 30, 1998...................................... F-46
Unaudited Consolidated Statement of Cash Flows for Prime
Five Months Ended September 30, 1998.................... F-47
Consent of Independent Public Accountants................... F-48
Consent of Independent Auditors............................. F-49
Consent of Independent Auditors............................. F-50
Consent of Independent Auditors............................. F-51
</TABLE>
F-2
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of International Lottery &
Totalizator Systems, Inc.
We have audited the accompanying consolidated balance sheet of
International Lottery & Totalizator Systems, Inc. (a California corporation) and
subsidiaries as of December 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 financial position of
International Lottery & Totalizator Systems, Inc., and subsidiaries as of
December 31, 1997, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
San Diego, California
February 18, 1998
F-3
<PAGE> 57
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
International Lottery & Totalizator Systems, Inc.
We have audited the accompanying consolidated balance sheet of
International Lottery & Totalizator Systems, Inc. as of December 31, 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of International
Lottery & Totalizator Systems, Inc. at December 31, 1996, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
February 21, 1997
F-4
<PAGE> 58
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Revenues:
Sales of products......................................... $ 8,392 $13,954 $ 16,195
Services.................................................. 2,434 2,640 2,446
------- ------- --------
Total revenues.............................................. 10,826 16,594 18,641
------- ------- --------
Costs of revenues:
Cost of sales of products................................. 7,804 11,342 15,705
Cost of services.......................................... 1,843 1,811 1,751
Write-offs and write-downs of lottery service
agreements............................................. -- 2,793 2,807
------- ------- --------
Total costs of revenues..................................... 9,647 15,946 20,263
------- ------- --------
Gross profit................................................ 1,179 648 (1,622)
Engineering, research and development..................... 1,684 1,662 1,360
Selling, general and administrative....................... 6,195 5,880 11,239
------- ------- --------
Loss from operations........................................ (6,700) (6,894) (14,221)
Other income:
Interest income, net...................................... 135 173 352
Exchange rate loss........................................ (150) -- --
Gain on sale of subsidiary and lottery service
agreement.............................................. 857 1,315 --
------- ------- --------
Loss before provision for income taxes...................... (5,858) (5,406) (13,869)
Provision for income taxes.................................. 80 92 --
------- ------- --------
Net loss.................................................... $(5,938) $(5,498) $(13,869)
------- ------- --------
Net loss per share -- Basic and diluted..................... $ (0.33) $ (0.31) $ (0.83)
------- ------- --------
Shares used in determination of net loss per share --
Basic and Diluted...................................... 18,021 17,465 16,812
------- ------- --------
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,371 $ 5,387
Accounts receivable, net of allowance for doubtful
accounts of $173
($111 in 1996)......................................... 1,040 979
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,716 2,452
Inventories, at lower of cost (first-in, first-out method)
or market:
Finished goods......................................... -- --
Work in process........................................ 1,151 283
Raw materials.......................................... 1,393 2,735
-------- --------
Total inventories................................. 2,544 3,018
Other current assets................................... 111 142
-------- --------
Total current assets........................................ 7,782 11,978
-------- --------
Equipment, furniture and fixtures at cost, less accumulated
depreciation of $4,078 ($3,737 in 1996)................... 802 1,128
Computer software costs, less accumulated amortization of
$1,983
($1,420 in 1996).......................................... -- 688
Other....................................................... 78 89
-------- --------
Total assets................................................ $ 8,662 $ 13,883
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 575 $ 491
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 386 161
Accrued payroll and related taxes......................... 839 893
Accrued litigation settlement............................. -- 1,680
Related party liability................................... 146 366
Other current liabilities................................. 2,624 1,773
-------- --------
Total current liabilities................................... 4,570 5,364
-------- --------
Commitments and contingencies
Shareholders' equity:
Common shares; no par value, 50,000,000 shares authorized;
18,027,548 shares issued and outstanding (17,176,211 in
1996).................................................. 51,103 49,407
Retained deficit............................................ (46,659) (40,721)
Foreign currency translation adjustment..................... (352) (167)
-------- --------
Total shareholders' equity.................................. 4,092 8,519
-------- --------
Total liabilities and shareholders' equity.................. $ 8,662 $ 13,883
-------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,938) $(5,498) $(13,869)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization.......................... 1,107 601 1,061
Gain on sale of subsidiaries and lottery service
Operations........................................... 857 (1,315) --
Adjustment in value of stock issued as settlement of
Litigation........................................... -- (1,200) --
Write-offs and write-downs of lottery service
Agreements........................................... -- 2,793 2,807
Changes in operating assets and liabilities:
Accounts receivable.................................. (61) 609 810
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. 736 1,213 (283)
Inventories.......................................... 474 3,802 3,679
Accounts payable..................................... 85 260 (678)
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. 225 46 (853)
Accrued payroll and related taxes.................... (54) (56) 354
Related party liability.............................. -- 366 --
Accrued litigation settlement........................ -- (600) 4,200
Other................................................ (139) (560) 572
------- ------- --------
Net cash provided by (used for) operating
Activities...................................... (2,708) 461 (2,200)
------- ------- --------
Cash flows from investing activities:
Investment in lottery service agreements.................. -- (34) (4,044)
Lottery service agreement sale proceeds and repayment of
advances............................................... -- 962 651
Other non-current assets.................................. 11 (37) --
Additions to equipment.................................... (150) (283) (250)
Additions to computer software costs...................... -- (211) (67)
Proceeds from sale of subsidiary.......................... -- 740 525
------- ------- --------
Net cash provided by (used for) investing
activities...................................... (139) 1,137 (3,185)
------- ------- --------
Cash flows from financing activities:
Payments on notes payable................................. -- -- (300)
Proceeds from issuance of common shares and warrants...... 16 -- 23
------- ------- --------
Net cash provided by (used for) financing
activities...................................... 16 -- (277)
------- ------- --------
Effect of exchange rate changes on cash..................... (185) (115) 99
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (3,016) 1,483 (5,563)
------- ------- --------
Cash and cash equivalents, beginning of year................ 5,387 3,904 9,467
------- ------- --------
Cash and cash equivalents, end of year...................... $ 2,371 $ 5,387 $ 3,904
------- ------- --------
Supplemental cash flow information:
Cash paid during the year for interest.................... $ 9 $ 20 $ 46
------- ------- --------
Cash paid during the year for income taxes................ $ 98 $ 46 $ 7
------- ------- --------
</TABLE>
See accompanying notes.
F-7
<PAGE> 61
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK CURRENCY
----------------- RETAINED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
------ ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 16,804 $48,650 $(21,354) $(151) $27,145
------ ------- -------- ----- -------
Proceeds from exercise of stock
options............................ 12 23 -- -- 23
Accelerated vesting of stock options
for Terminated employees........... -- 14 -- -- 14
Foreign currency translation
adjustment......................... -- -- -- 99 99
Net loss -- 1995...................... -- -- (13,869) -- (13,869)
------ ------- -------- ----- -------
Balance at December 31, 1995............ 16,816 48,687 (35,223) (52) 13,412
------ ------- -------- ----- -------
Issuance of shares in settlement of
shareholders' lawsuit.............. 360 720 -- -- 720
Foreign currency translation
adjustment......................... -- -- -- (115) (115)
Net loss -- 1996...................... -- -- (5,498) -- (5,498)
------ ------- -------- ----- -------
Balance at December 31, 1996............ 17,176 49,407 (40,721) (167) 8,519
------ ------- -------- ----- -------
Proceeds from exercise of stock
options............................ 12 16 -- -- 16
Issuance of shares in settlement of
shareholders' lawsuit.............. 840 1,680 -- -- 1,680
Foreign currency translation
adjustment......................... -- -- -- (185) (185)
Net loss -- 1997...................... -- -- (5,938) -- (5,938)
Balance at December 31, 1997............ 18,028 $51,103 $(46,659) $(352) $ 4,092
------ ------- -------- ----- -------
</TABLE>
See accompanying notes.
F-8
<PAGE> 62
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Lottery & Totalizator Systems, Inc. (the "Company" or "ILTS")
provides computerized, on-line wagering systems including system software,
betting terminals, data communications, consulting, training, facilities
management and maintenance support to the worldwide wagering market. The
principle applications for the Company's products are in the automated
pari-mutuel (horse racing) wagering and on-line government sponsored lotteries.
The Company has developed several models of DATAMARK(R) terminals for
specific wagering applications. All are microprocessor based and have a
lightweight, compact design. The most recent models, the DATAMARK(R) Flipper and
DATAMARK XClaim feature PC compatible architecture which provides greater
flexibility for future enhancements such as smart card readers and POS displays.
Many models offer industry unique features such as reading two-sided bet slips,
printing on the back of a bet slip and batch feeding of up to 50 customer marked
bet slips.
ILTS is recognized as a world leader in providing computerized, on-line
wagering systems to the racing industry. The Company's pari-mutual wagering
system, ILTS InterTote, is designed to run on the Unix operating system, an open
systems architecture which permits the use of virtually any Unix hardware
platform. The system can be scaled to efficiently serve either small tracks with
just a few betting stations, or large installations of more than a thousand
terminals. This open approach provides a system that can be cost configured to
meet specific current needs while providing a built-in expansion path to meet
future requirements.
The ILTS DataTrak on-line gaming system is the product of more than a
decade of development and refinement of on-line lottery transaction processing
experience. It was designed to support a large terminal base and to handle
virtually any required transaction volume with ease. It retains all the speed,
security and reliability of a proven transaction processing system and extensive
game library, while offering the increased flexibility of interfacing with a
variety of information management solutions and standard software development
tools in one fully integrated system.
The Company's consolidated financial statements for the year ended December
31, 1997 have been prepared on a continuing operations basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company has incurred net losses of $13.9
million, $5.5 million and $5.9 million in 1995, 1996 and 1997, respectively,
while revenues have decreased from $18.6 in 1995 to $10.8 million in 1997. The
Company is largely dependent upon significant contracts for its revenue, which
typically include a deposit upon contract signing and up to three months lead-
time before delivery of hardware begins. As of December 31, 1997, the Company
had a backlog (unaudited) of $5.0 million compared to backlogs (unaudited) of
$1.7 million and $9.2 million in 1996 and 1995, respectively.
At December 31, 1997, the Company had working capital of $3.2 million.
Management recognizes that the Company must recover its investment in existing
contracts (see Note 3) and generate additional contract sales to maintain its
current level of operations. Additionally, management is currently seeking
additional sources of funding through debt or equity financing and consideration
of other business transactions which would generate sufficient resources to
assure continuation of the Company's operations.
Management anticipates that it will be successful in recovering its
investment in existing contracts (see Note 3) and obtaining sufficient contracts
to enable the Company to continue normal operations; however, no assurances can
be given that the Company will be successful in realizing sufficient new
contract revenues or obtaining additional financing. If the Company is unable to
recover its investment in existing contracts, obtain sufficient new contract
revenue or financing, management will be required to reduce the Company's
operations. On February 27, 1998, the Company's largest shareholder, Berjaya
Lottery Management (H.K.) Ltd. ("Berjaya"), agreed to provide financial support,
if and when necessary, to ensure the Company's
F-9
<PAGE> 63
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations continue for at least one year from December 31, 1997. The Company's
ability to continue its ongoing operations on a long-term basis is dependent
upon its ability to recover its investment in existing contracts, obtaining
additional financing, securing additional new contracts and ultimately achieving
a sustainable level of profit from operations.
Principles of Consolidation -- The accompanying consolidating financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly-owned. All significant intercompany accounts and transactions
are eliminated in consolidation.
Revenue Recognition -- The Company recognizes long-term contract revenue on
the percentage-of-completion method, based on contract costs incurred to date
compared to total estimated contract costs. The effects of changes in contract
cost estimates are recognized in the period they are determined. Estimated
contract losses are fully charged to operations when identified. Revenues
relating to the sale of certain assets, when the ultimate total collection is
not reasonably assured, are being recorded under the cost recovery method. All
other revenue is recorded on the basis of shipments of products or performance
of services.
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.
Depreciation -- Depreciation of equipment, furniture and fixtures is
provided principally using the straight-line method over estimated useful lives
of three to seven years.
Computer Software Costs -- The Company has capitalized the costs of
computer software incurred in the development of specific products, after
technological feasibility has been established. The capitalized software costs
are amortized using the greater of the amount computed using the ratio of
current product revenue to estimated total product revenue or the straight-line
method over the remaining estimated economic lives of the products (three
years). Amortization expense totaled $688 thousand, $89 thousand and $510
thousand for the years ended December 31, 1997, 1996 and 1995, respectively. In
1997, the Company determined that software which had been capitalized in prior
years had become impaired, and accordingly, took a charge for the remaining
asset value of $457 thousand.
Recent Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 131
requires reporting certain information about operating segments in annual and
interim period financial statements. Both standards were required to be adopted
beginning January 1, 1998. The adoption of these standards is not expected to
have a material effect on the Company's financial position or results of
operations.
Warranty Reserves -- Estimated expenses for warranty obligations are
accrued as income is recognized on related contracts. The reserves are adjusted
periodically to reflect actual experience.
Foreign Currency -- The Company has contracts with certain customers that
are denominated in foreign currencies, and related transaction gains and losses
are recognized as a component of current operations. The consolidated accounts
of the Company's Australian subsidiary have been translated from its functional
currency, the Australian dollar. The effect of the exchange rate fluctuations
between the U.S. dollar and the Australian dollar is recorded as a separate
component of shareholders' equity. The Company's other foreign subsidiary uses
the U.S. dollar as its functional currency and, accordingly, related translation
gains and losses are recognized in current operations.
F-10
<PAGE> 64
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Per Share Information -- Net loss per share is based on the weighted
average number of shares outstanding during the year. The 1996 computation
includes 840 thousand Company Common Shares which were issued in 1997, pursuant
to a class action lawsuit settlement rendered by the court on June 17, 1996. In
1997, the Company adopted SFAS No. 128 "Earnings Per Share," which requires
companies to present basic and diluted earnings per share. There was no impact
to earnings per share from the adoption of SFAS No. 128 due to the Company's net
loss position.
Research and Development -- Engineering, research and development costs are
expensed as incurred. Substantially all engineering, research and development
expenses are related to new product development and designing significant
improvements.
Concentration of Credit Risk -- Accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts are primarily related to
contracts with a few major customers. These amounts are payable in accordance
with the terms of individual contracts and generally collateral is not required.
Estimated credit losses are provided for in the financial statements. The
Company conducts business in the Asia/Pacific region. Certain Asian countries
are currently experiencing severe economic turmoil represented by depressed
business conditions and volatility in local currencies. Any significant further
decline in these economies and in the value of their currencies could have a
material adverse effect on the Company.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Included in cash and cash equivalents at December 31, 1997 and 1996
are investments in commercial paper totaling $1.0 and $2.3 million,
respectively, which mature in January 1998 and January 1997, respectively. The
estimated fair value of these investments approximate the amortized cost;
therefore, there are no unrealized gains or losses as of December 31, 1997 or
1996.
Stock Options -- As permitted, the Company has elected the disclosure only
provisions of SFAS No. 123. Accordingly, the Company continues to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Major Customers -- During 1997 approximately $7.4 million or 69% of the
Company's revenues were derived from five customers. In 1996 and 1995 the
amounts were $11.7 million or 70% from five customers and $13.1 million or 70%
from six customers, respectively.
Reclassifications -- Certain prior year balances have been reclassified to
conform with the 1997 presentation.
2. RELATED PARTY TRANSACTIONS
The Company has entered into sales agreements to supply terminals, spares
and services to entities in which the Company's largest shareholder, Berjaya,
has a significant equity interest. Revenues related to these agreements totaled
$0.8 million, $2.0 million and $3.5 million in 1997, 1996 and 1995,
respectively. Included in accounts receivable and costs and estimated earnings
in excess of billings on uncompleted contracts were $0.2 million and $0.5
million at December 31, 1997 and 1996 respectively, relating to these customers.
During 1996 the Company entered into an agreement with Berjaya to purchase
specific inventory on behalf of Berjaya to enable the Company to satisfy certain
future potential orders in a timely manner. Title to the inventory purchased
resides with Berjaya; therefore, no amounts are reflected in the consolidated
balance sheet for inventory purchased on their behalf. Advances received in
excess of inventory purchased aggregated approximately $146 thousand and $366
thousand and have been reflected as a related party liability in the
accompanying consolidated balance sheet as of December 31, 1997 and 1996,
respectively.
F-11
<PAGE> 65
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CONTRACTS IN PROCESS
The amounts by which total costs and estimated earnings exceeded or were
less than billings on uncompleted contracts are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Costs incurred.............................................. $ 9,696 $ 13,449
Estimated earnings.......................................... 1,666 1,745
-------- --------
11,362 15,194
Less: billings.............................................. (10,032) (12,903)
-------- --------
1,330 2,291
Included in the accompanying consolidated balance sheets as
follows:
Costs and estimated earnings in excess of billings on
Uncompleted contracts..................................... 1,716 2,452
Billings in excess of costs and estimated earnings on
Uncompleted contracts..................................... (386) (161)
-------- --------
1,330 2,291
</TABLE>
4. LOTTERY SERVICE AGREEMENTS
The Company entered into contracts to provide lottery equipment and
management of on-line lottery systems on a long-term basis in Papua New Guinea
in 1992, the Russian Federation in 1993 and entered into a contract to provide
lottery equipment in the United Kingdom in 1995.
The Company committed lottery equipment costing approximately $2.8 million
to its United Kingdom lottery service agreement in 1995. The Company agreed to
provide a complete lottery system for a percentage of lottery revenues. In
September 1996, it became apparent that an affiliate of the customer was unable
to obtain the additional funding necessary for the project start-up and ongoing
operations, and the Company recorded a $2.8 million charge to reflect a reserve
for the project. The amount of the charge approximates the Company's tangible
investment, previously carried on the balance sheet as "Investment in Lottery
Service Contracts." The Company recovered part of its U.K. investment in 1997
through a sale of a system and terminals to Olympic Gold for $2.6 million.
The Papua New Guinea lottery commenced operation in March 1993. In July
1995, the Company sold all interests in the Papua New Guinea lottery operation
to the principal shareholders of the lottery licensee, for $175 thousand in cash
and a note of $1.3 million to be paid in monthly installments of approximately
$79 thousand per month for a period of 17 months commencing in September 1995.
Additionally, the Company will receive a percentage of the annual gross lottery
sales or an annual sum of $260 thousand, whichever is greater, for a period of
five years, provided that the additional sums shall not exceed $3.0 million. The
Company is accounting for the sale under the cost recovery method. The
installment payments and the minimum percentage payments are secured by all
lottery assets and certain personal guarantees. During 1997, the Company
recognized approximately $419 thousand as a gain on the sale of the lottery
service agreement. The amount reflects the aggregate amount of payments received
under the sale agreement in excess of the Company's carrying amount of its
investment in the lottery service agreement on the date of the sale. Under the
cost recovery method, no amount of gain on the sale was recognized until the net
investment in the lottery service agreement on the date of sale was recovered in
1996. At December 31, 1997, the Company has no investment remaining on its
balance sheet as the proceeds from the sale have exceeded the net book value.
Due to uncertainties which arose in November 1994 regarding the Russian
lottery license process and the continued economic, political and legal
instability in Russia, the Company recorded a provision of $7.6 million to write
down the assets to estimated net realizable value with respect to the Russian
lottery investment.
F-12
<PAGE> 66
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Subsequently, the Company terminated its Russian lottery project in November
1995. In 1995, the Company incurred $2.8 million in costs toward its Russian
lottery project, including the write-off of costs related to a reduction in its
Russian work force and future costs to liquidate the operation.
5. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA
The Company operates in one industry segment which includes totalizator and
lottery systems. The Company has an Australian subsidiary, International Lottery
& Totalizator Systems Australia Pty., Ltd., and a United Kingdom subsidiary,
International Lottery & Totalizator Systems (U.K.) Ltd.
Sales between geographic areas are generally priced to recover material
costs plus an appropriate markup. Revenue by major customers is as follows (in
thousands):
<TABLE>
<CAPTION>
CUSTOMER LOCATION 1997 1996 1995
----------------- ------- ------- -------
<S> <C> <C> <C>
Ukraine............................................... $ 2,600 $ -- $ --
Malaysia.............................................. 2,000 -- 2,300
Australia*............................................ 1,700 2,000 4,400
Sweden................................................ 1,400 4,300 2,700
Hong Kong............................................. 400 2,400 600
Philippines........................................... 400 900 2,900
All other............................................. 2,300 7,000 5,700
------- ------- -------
Total....................................... $10,800 $16,600 $18,600
</TABLE>
- ---------------
* Different customer in 1995 as compared to 1997 and 1996.
6. LEASES
The Company leases its facilities under operating lease agreements which
expire at various dates through October 2001. Certain lease agreements provide
for increases in minimum annual rent based on increases in various market
indices. Also, the Company has the option to renew the lease on its U.S.
facility for one additional ten-year term. Rent expense for the years ended
December 31, 1997, 1996, and 1995 was $595 thousand, $605 thousand and $674
thousand, respectively. Minimum future obligations for these leases are as
follows (in thousands): 1998 -- $634; 1999 -- $606; 2000 -- $365; 2001 -- $79.
7. INCOME TAXES
The provision for income taxes of $80 thousand in 1997 and $92 thousand in
1996 primarily relates to income earned by the Company's Australian subsidiary.
The following is a reconciliation of the actual tax provision to the expected
tax benefit computed by applying the statutory federal income tax rate to the
loss before provision for income taxes (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected federal income tax benefit at statutory
rate................................................ $(1,932) $(1,892) $(4,715)
U.S. and foreign net operating losses -- no benefit... 1,932 1,892 4,715
Other, net............................................ 79 92 --
Provision for income taxes............................ 79 92 --
</TABLE>
F-13
<PAGE> 67
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Computer software costs..................................... $ 310 $ 310
-------- --------
Total deferred tax liabilities.................... 310 310
Deferred tax assets:
Installment sale PNG........................................ 1,152 1,209
Reserves against investment in lottery service agreements... 1,203 1,401
Reserves and accruals....................................... 2,151 1,514
Rent expense................................................ 115 177
Employee benefits........................................... 69 88
Patent expense.............................................. 28 31
Net operating loss and credit carryforwards................. 19,120 17,589
Other....................................................... 131 29
-------- --------
Total deferred tax assets......................... 23,969 22,038
Net deferred tax assets..................................... 23,660 21,728
Valuation allowance......................................... (23,660) (21,728)
Net deferred taxes.......................................... $ 0 $ 0
</TABLE>
The Company has federal and California net operating losses of
approximately $51 million and $22 million, respectively, which will begin to
expire in 2008 and 1998, respectively, unless previously utilized. The
difference between the federal and California net operating loss carryforwards
relates primarily to California's statutory 50% annual reduction rule.
The Company also has federal general business credit carryforwards of
approximately of $588 thousand, which begin to expire in 2002.
Pursuant to the Tax Reform Act of 1986, use of the Company's business
credit and net operating loss carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within any three-year period.
8. EMPLOYEE STOCK BONUS PLAN
The Company has an employee stock bonus plan, commonly referred to as a
401(k) plan, qualified under the Internal Revenue Code, in which all eligible
employees, as defined in the Internal Revenue Code, may elect to participate.
Under the Plan, employees may voluntarily make tax-deferred contributions of up
to 15% of their compensation to a trust which provides the participant with
various investment alternatives. In addition, the Company, at the discretion of
the Board of Directors, may contribute an amount of Company stock for each
fiscal year which does not exceed 5% of the annual compensation of all
participants in the Plan. Company contributions charged to operations were $82
thousand, $82 thousand and $198 thousand in 1997, 1996 and 1995, respectively.
9. STOCK OPTION PLANS
The Company has three current employee stock option plans and a directors
option plan whereby options to purchase 2.7 million and 400 thousand shares,
respectively, of the Company's common stock may be
F-14
<PAGE> 68
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
granted. Options granted have five to ten year terms that vest and become fully
exercisable four to five years from the date of grant.
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, and has been determined as if the Company has accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk-free interest rates of
5.3% - 5.9% and 5.4% - 6.0%, respectively; dividend yields of 0% in both 1997
and 1996; volatility factors of the expected market price of the Company's
common stock of 1.2 for both 1997 and 1996; and a weighted-average life of the
option of 7.21 years for both 1997 and 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995. The Company's pro forma information follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of year.......... 1,501 $5.74 1,325 $7.28 1,351 $7.50
Granted................................... 480 1.33 320 1.22 75 2.28
Exercised................................. (11) 1.38 -- -- (12) 1.87
Cancelled................................. (491) 6.09 (144) 9.86 (89) 7.16
Outstanding -- end of year................ 1,479 4.13 1,501 5.74 1,325 7.28
Exercisable at end of year................ 857 6.22 1,007 6.95 931 7.35
Weighted-average fair value of options
granted during the year................. 1.33 1.22 2.28
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$1.03 to $15.75. The weighted-average remaining contractual life of those
options is approximately 6 years.
At December 31, 1997, options for 1,225,332 shares were available for
future grant.
The following table summarizes information about stock options at December
31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
-------------------------- --------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES SHARES REMAINING CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------------------------ ------ -------------------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$1.0310 to $1.2813.......... 398 8.50 years $1.1857 58 $1.0311
$1.2815 to $1.5620.......... 320 6.79 years 1.4218 69 1.4141
$2.2188 to $3.0000.......... 357 3.07 years 2.6591 336 2.6383
$3.6250 to $11.500.......... 249 3.55 years 7.7494 239 7.7076
</TABLE>
F-15
<PAGE> 69
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SALE OF SUBSIDIARY
On March 31, 1993, the Company sold its subsidiary, McKinnie & Associates,
Inc. to Shreveport Acquisition for cash and a note. During 1997, the Company
negotiated and received a final settlement of the remaining balance due on the
note and recorded a gain of $438 thousand from receipts during the year.
11. LITIGATION
In 1994, shareholders of the Company filed class action lawsuits against
the Company and several of its officers and directors. Those actions were
consolidated in the United States District Court for the Southern District of
California. Plaintiffs contended that during the class period (June 22, 1993
through June 21, 1994) the Company and the individual defendants made a series
of public statements that failed to disclose adverse information about the
Company's lottery service contracts, that these purported nondisclosures
artificially inflated the price of the Company's stock, and that those
purchasers who acquired their shares in reliance on the integrity of the market
suffered damages as a result. On June 17, 1996, the court entered a judgment of
a cash payment to the class shareholders and 1.2 million shares of authorized
but unissued common stock of the Company, of which, 360 thousand shares were
issued in September 1996 and 840 thousand shares were issued in 1997. Such
shares were included in the calculation of earnings per share for the year ended
December 31, 1996. The estimated settlement was accrued as of September 30, 1995
and an adjustment of approximately $1.2 million was recorded during the three
months ended June 30, 1996 to reduce the accrual to the actual settlement
amount, valued as of the judgment date.
In November, 1995, Mr. James Walters, the former chairman and president of
the Company, filed an action in the San Diego County Superior Court against the
Company, its current president, Frederick A. Brunn, a publishing company and an
author alleging that certain statements in a magazine article were slander per
se by ILTS and Brunn and libel by the publishing company and the author, and
that Mr. Walters suffered an invasion of privacy by all defendants. In addition,
Walters alleged that erroneous information in the Company's 1995 Proxy Statement
resulted in two other magazine articles publishing allegedly incorrect
information. Mr. Walters seeks general and special damages of $9 million and
punitive damages. On November 1, 1996, the San Diego County Superior Court
entered a summary judgment in favor of the Company. Mr. Walters has filed an
appeal with the California appellate court. The summary judgment in favor of the
Company and Mr. Brunn was substantially reversed on appeal on November 30, 1998,
in an unpublished opinion, by a three judge panel of the Fourth Appellate
District of California. A trial date has not been set. Management, based on the
advice of counsel, believes that the outcome of this case will not result in any
liability to the Company. Accordingly, no provision for any liability that may
result has been included in the consolidated financial statements.
The Company is also subject to other legal proceedings and claims that
arise in the normal course of business. While the outcome of these proceedings
and claims cannot be predicted with certainty, management does not believe that
the outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-16
<PAGE> 70
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Sales of products.................................... $4,049 $ 1,185 $ 7,699 $ 6,312
Services............................................. 287 619 1,380 1,852
------ ------- ------- -------
Total revenues....................................... 4,336 1,804 9,079 8,164
Costs of revenues:
Cost of sales of products............................ 2,406 1,269 4,636 4,683
Cost of services..................................... 313 420 1,128 1,238
------ ------- ------- -------
Total costs of revenues.............................. 2,719 1,689 5,764 5,921
------ ------- ------- -------
Gross profit......................................... 1,617 115 3,315 2,243
Engineering, research and development................ 236 445 1,234 1,083
Selling, general and administrative.................. 1,239 1,361 4,253 4,705
------ ------- ------- -------
Loss from operations................................. 142 (1,691) (2,172) (3,545)
Other income and (expense), net...................... (20) 169 155 473
------ ------- ------- -------
Net income (loss).................................... $ (122) $(1,522) $(2,017) $(3,072)
====== ======= ======= =======
Other comprehensive income:
Foreign currency translation adjustments............. (23) (22) 262 (225)
------ ------- ------- -------
Comprehensive loss................................... $ 99 $(1,544) $(1,755) $(3,297)
====== ======= ======= =======
Net income (loss) per share -- basic and diluted..... $(0.02) $ (0.25) $ (0.34) $ (0.51)
====== ======= ======= =======
Number of shares used in computation of net loss per
share -- basic and diluted......................... 6,009 6,009 6,009 6,009
====== ======= ======= =======
</TABLE>
See accompanying notes.
F-17
<PAGE> 71
INTERNATIONAL LOTTERY AND TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,358 $ 2,371
Accounts receivable, net of allowance....................... 2,630 1,040
Costs and estimated earnings in excess of billings on
uncompleted Contracts..................................... 366 1,716
Inventories, at lower of cost (first-in, first-out method)
or Market................................................. 2,539 2,544
Other current assets........................................ 80 111
-------- --------
Total current assets.............................. 6,973 7,782
Equipment, furniture and fixtures, net...................... 662 802
Other....................................................... 90 78
-------- --------
Total assets...................................... $ 7,725 $ 8,662
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 696 $ 575
Billings in excess of costs and estimated earnings on
uncompleted Contracts..................................... 1,742 386
Accrued payroll and related taxes........................... 719 839
Related party liability..................................... 225 146
Other current liabilities................................... 2,006 2,624
-------- --------
Total current liabilities......................... 5,388 4,570
Shareholders' equity:
Common shares; no par value: authorized shares
50,000,000 -- issued and outstanding shares 6,009,183..... 51,103 51,103
Accumulated deficit......................................... (48,676) (46,659)
Foreign currency translation adjustment..................... (90) (352)
-------- --------
Total shareholders' equity........................ 2,337 4,092
-------- --------
Total liabilities and shareholders' equity........ $ 7,725 $ 8,662
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date, but do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-18
<PAGE> 72
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss).................................................. $(2,017) $(3,072)
Adjustments to reconcile net (loss) to net cash used for
operating activities:
Depreciation and amortization............................... 259 517
Changes in assets and liabilities:
Accounts receivable......................................... (1,590) (68)
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 1,350 1,191
Inventories................................................. 5 (86)
Accounts payable............................................ 121 143
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... 1,356 182
Accrued payroll and related taxes........................... (120) (47)
Other....................................................... (588) (318)
------- -------
Net cash used for operating activities...................... (1,224) (1,558)
------- -------
Cash flows from investing activities:
Lottery service agreement sale proceeds and advance
repayments................................................ 80 339
Additions to equipment...................................... (133) (97)
Proceeds from sale of subsidiary............................ -- 120
Other....................................................... 2 (21)
------- -------
Net cash used for investing activities...................... (51) 341
------- -------
Effect of exchange rate changes on cash..................... 262 (225)
------- -------
Decrease in cash and cash equivalents....................... (1,013) (1,442)
Cash and cash equivalents at beginning of period............ 2,371 5,387
------- -------
Cash and cash equivalents at end of period.................. $ 1,358 $ 3,945
======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 73
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER, 30, 1998
(THOUSANDS OF DOLLARS)
1. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments),
considered necessary for a fair presentation of the financial condition, results
of operations and comprehensive income and cash flows for such periods have been
included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 as included in the
Company's Annual Report to Shareholders for the year ended December 31, 1997.
On June 12, 1998, a 3 for 1 Reverse Stock Split was effected, as approved
by the Company's Shareholders at the Annual Meeting on June 1, 1998. This action
was initiated in order to increase the stock price of the Common Stock to a
level that will make it more likely that the Company will be able to meet the
$1.00 minimum bid price requirement for its NASDAQ listing. The number of
authorized shares of Common Stock remains at 50,000. As a result of the action,
the number of shares issued and outstanding of the Company's stock decrease from
18,027,548 to 6,009,183 and all references in the accompanying financial
statements and footnotes to the number of shares and earnings per share have
been presented to reflected the result of the reverse split.
The Company's consolidated financial statements were prepared on a
continuing operations basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The
Company incurred net losses of $13,869, $5,498 and $5,938 in 1995, 1996 and
1997, respectively, while revenues decreased from $18,641 in 1995 to $10,826 in
1997. During the six nine months ended June September 30, 1998, revenues were
$4,743 and the Company incurred significant net losses and decreased revenues
for the last three fiscal years. During the nine months ended September 30,
1998, revenues were $9,079 and the Company incurred a net loss of $2,017. The
Company is largely dependent upon significant contracts for its revenue, which
typically include a deposit upon contract signing and up to three months
lead-time before delivery of hardware begins. At September 30, 1998, the Company
has a backlog of $6,535 compared to backlog of $4,988 at December 31, 1997.
At September 30, 1998, the Company had working capital of $1,585.
Management recognizes that the Company must recover its investment in existing
contracts and generate additional contract sales to maintain its current level
of operations. Additionally, management is currently seeking additional sources
of funding through debt or equity financing and consideration of other business
transactions, including the proposed acquisition of a controlling interest in
Prime Gaming Philippines Inc., which management believes should generate
sufficient resources to assure continuation of the Company's operations.
Management anticipates that it will be successful in recovering its
investment in existing contracts and obtaining sufficient contracts to enable
the Company to continue normal operations; however, no assurances can be given
that the Company will be successful in realizing sufficient new contract
revenues or obtaining additional financing. If the Company is unable to recover
its investment in existing contracts, obtain sufficient new contract revenue or
financing, management will be required to reduce the Company's operations. On
February 27, 1998, the Company's largest shareholder, Berjaya Lottery Management
H.K. Ltd. ("Berjaya"), agreed to provide financial support if and when necessary
to ensure that the Company's operations continue for at least one year from
December 31, 1997. The Company's ability to continue its on-going operations on
a long-term basis is dependent upon its ability to recover its investment in
existing contracts, obtain additional financing, secure additional new
contracts, and ultimately achieve a sustainable level of profit from operations.
F-20
<PAGE> 74
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER, 30, 1998
(THOUSANDS OF DOLLARS)
2. The results of operations for the interim periods shown in this report
are not necessarily indicative of the results to be expected for the full year.
3. Inventories -- The inventory balance at September 30, 1998 and December
31, 1997 is composed entirely of raw materials and work in process.
4. On June 19, 1998, the Company signed an agreement with Berjaya, pursuant
to which the Company would acquire a controlling interest in Prime Gaming
Philippines Inc. ("Prime") from Berjaya and/or current Prime shareholders in
exchange for the issuance of the Company's common stock. Under the proposed
transaction the Company would issue approximately 9.5 million new Company Common
Shares to Berjaya and/or other current Prime shareholders in exchange for a
52.25% interest in Prime.
The Company's Common Shares to be issued in the transaction would represent
approximately 61% of the Company's outstanding shares upon completion of the
transaction. In the event that the other current Prime shareholders assign their
interest in the transaction to Berjaya, Berjaya's percentage ownership of the
Company would then increase from its present 36.6% to 75.4%. If none of the
current Prime shareholders assign their interest in the transaction to Berjaya,
Berjaya's percentage ownership of the Company would be 39%.
The proposed transaction is subject to satisfaction of customary closing
conditions, including approval of the transaction by the Company's shareholders,
the shareholders of Berjaya Group Berhad (the parent of Berjaya) and completion
of due diligence. Subject to these conditions, the transaction is expected to
close in late September or October immediately following the Company's
shareholder approval at a special shareholders meeting.
5. 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.
6. On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The effect of the implementation was to show the change
in the foreign currency translation adjustment in shareholders' equity as a
component of the statement of operations and comprehensive income. All prior
periods were restated to conform with the implementation of SFAS No. 130.
7. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted for the fiscal quarter beginning after June 15, 1999. At
this time, the Company has not entered into any derivative instruments or
hedging activities.
8. In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal use software and
provides assistance in determining when computer software is for internal use.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company has not yet determined what impact,
if any, the adoption of SOP 98-1 will have on the Company's consolidated
financial statements, results of operations, or related disclosures thereto.
F-21
<PAGE> 75
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER, 30, 1998
(THOUSANDS OF DOLLARS)
9. In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." This statement provides guidance on financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, with earlier application permitted. The
Company has not yet determined what impact, if any, the adoption of SOP 98-5
will have on the Company's consolidated financial statements, results of
operations, or related disclosures thereto.
F-22
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
The Board of Director and Stockholders
Philippine Gaming Management Corporation
We have audited the accompanying balance sheets of Philippine Gaming
Management Corporation as of April 30, 1998, June 30, 1997 and 1996, and the
related statements of operations and unappropriated retained earnings (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Philippine Gaming Management
Corporation as of April 30, 1998, June 30, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles accepted in the United States of America.
Manila, Philippines
July 6, 1998
F-23
<PAGE> 77
REPORT OF INDEPENDENT AUDITORS
TO ACCOMPANY THE SUPPLEMENTARY SCHEDULE FILED
SEPARATELY FROM THE BASIC FINANCIAL STATEMENTS
The Board of Director and Stockholders
Philippine Gaming Management Corporation
We have audited the financial statements of Philippine Gaming Management
Corporation as of April 30, 1998, 1997, 1996, 1995 and 1994, and for the years
then ended on which we have rendered our respective reports thereon on various
dates. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The attached supplementary selected
financial data table and statement of stockholders' equity of the Company as of
April 30, 1998, 1997, 1996, 1995 and 1994, and for the years then ended required
by the International Lottery & Totalizator Systems, Inc., are presented for
purposes of additional analysis and are not required parts of the basic
financial statements. The information in such supplementary schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects, in
conformity with accounting principles generally accepted in the United States of
America, in relation to the basic financial statements as a whole.
Manila, Philippines
July 6, 1998
F-24
<PAGE> 78
PHILIPPINE GAMING MANAGEMENT CORPORATION
SELECTED FINANCIAL DATA TABLE
AS OF AND FOR THE YEARS ENDED APRIL 30, 1998, 1997, 1996, 1995* AND 1994
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT EARNINGS (LOSS) PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 7,065 $ 6,335 $ 7,362 $ 605 $ --
Net income (loss)........................ 1,219 1,158 993 (2,430) --
Earnings (loss) per share................ 4.88 4.63 3.97 (9.72) --
Cash and cash equivalents................ 3,881 3,171 2,405 225 178
Total assets................... 12,059 15,263 15,214 10,433 20,412
Stockholders' equity..................... 1,624 891 (264) (1,257) 916
Depreciation expense..................... 1,147 1,263 871 174 8
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE> 79
PHILIPPINE GAMING MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS AND UNAPPROPRIATED RETAINED EARNINGS
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $ 7,065 $ 6,335 $ 7,362
Cost of Revenues............................................ 1,687 1,837 1,236
------- ------- -------
Gross Profit................................................ 5,378 4,498 6,126
Selling, general and administrative......................... 1,911 1,373 1,655
------- ------- -------
Income from operations...................................... 3,467 3,125 4,471
------- ------- -------
Interest expense.......................................... (1,705) (1,558) (2,973)
Foreign exchange loss..................................... (489) (98) (85)
Interest and other income................................. 515 203 76
------- ------- -------
(1,679) (1,453) (2,982)
------- ------- -------
Income before income tax and cumulative effect of a change
in accounting for preoperating expenses................... 1,788 1,672 1,489
------- ------- -------
Provision for income tax (Note 7)
Current.............................................. 546 392 362
Deferred............................................. (23) (122) 134
------- ------- -------
569 514 496
------- ------- -------
Net income.................................................. 1,219 1,158 993
Deficit at end of year...................................... (106) (1,264) (2,257)
Appropriated for acquisition of lottery equipment (Note
9)........................................................ (1,027) -- --
------- ------- -------
Unappropriated retained earnings (deficit) at end of year... $ 86 $(1,264) $(2,257)
======= ======= =======
Earnings per share (250,000 shares)......................... $ 4.88 $ 4.63 $ 3.97
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE> 80
PHILIPPINE GAMING MANAGEMENT CORPORATION
BALANCE SHEETS
APRIL 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1)........................ $ 3,881 $ 3,171
Receivables:
Trade.................................................. 710 994
Others................................................. 1,178 610
Prepaid expenses and other current assets................. 311 750
Advances to an affiliate (Note 2)......................... 404 108
Deferred income tax asset (Note 7)........................ 47 --
------- -------
Total Current Assets.............................. 6,531 5,633
------- -------
Property and equipment -- Net (Notes 3 and 5)............... 4,933 8,577
Other assets (Note 7)..................................... 595 1,053
------- -------
$12,059 $15,263
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 450 $ 342
Advances from a stockholder (Notes 2 and 8)............... 9,490 13,473
Income tax payable........................................ 418 31
Deferred income tax liability (Note 7).................... -- 76
Loans payable (Note 4).................................... -- 450
------- -------
Total Current Liabilities......................... 10,358 14,372
------- -------
Estimated liability for retirement benefits................. 77 --
------- -------
Stockholders' equity
Capital stock -- $3.71 par value (Note 8)
Authorized -- 1,000,000 shares
Issued and outstanding -- 250,000 shares............... 927 927
Accumulated translation adjustment........................ (416) 70
Retained earnings (deficit) (Note 9)
Appropriated for acquisition of lottery equipment...... 1,027 --
Unappropriated......................................... 86 (106)
------- -------
1,624 891
------- -------
$12,059 $15,263
======= =======
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE> 81
PHILIPPINE GAMING MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 1,219 $1,158 $ 993
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 1,147 1,263 871
Provision for retirement benefits...................... 77 -- --
Provision for deferred income tax...................... 23 122 134
Gain on disposal of property and equipment............. -- -- (3)
Net changes in operating assets and liabilities:
Decrease (increase) in:
Receivables....................................... (976) 56 (1,055)
Prepaid expenses and other current assets......... 127 57 (48)
Increase (decrease) in:
Accounts payable and accrued expenses............. 263 (948) (543)
Income tax payable................................ 468 (238) 272
------- ------ -------
Net Cash Provided by Operating Activities................. 2,348 1,470 621
------- ------ -------
Cash flows from investing activities
Acquisitions of property and equipment.................... (306) (742) (2,675)
Increase (decrease) in refundable deposits................ (53) (73) 13
Proceeds from disposal of property and equipment.......... -- 13 58
------- ------ -------
Net Cash Provided by (Used in) Investing Activities....... (359) (802) (2,604)
------- ------ -------
Cash flows from financing activities
Advances from a stockholder............................... 724 128 3,826
Advances to an affiliate.................................. (391) (108) --
Proceeds from loans payable............................... 1,527 99 356
Payments of loans payable................................. (1,875) -- --
------- ------ -------
Net Cash Provided by (Used in) Financing Activities....... (15) 119 4,182
------- ------ -------
Accumulated translation adjustment........................ (1,254) (21) (18)
------- ------ -------
Net increase in cash and cash equivalents................... 710 766 2,181
Cash and cash equivalents at beginning of year.............. 3,171 2,405 224
------- ------ -------
Cash and cash equivalents at end of year.................... $ 3,881 $3,171 $ 2,405
======= ====== =======
Supplemental Information:
Cash payments for income taxes amounted to US$335 and US$56 in 1997 and 1996,
respectively.
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE> 82
PHILIPPINE GAMING MANAGEMENT CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
APRIL 30, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED EARNINGS ACCUMULATED
---------------------- ----------------------------- TRANSLATION
NO. OF SHARES AMOUNT APPROPRIATED UNAPPROPRIATED ADJUSTMENT TOTAL
------------- ------ ------------ -------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1995...... 250,000 $927 $ -- $(2,257) $ 73 $1,257
Net income -- 1996........... -- -- -- 993 -- 993
------- ---- ------ ------- ----- ------
BALANCE AT APRIL 30, 1996...... 250,000 927 -- (1,264) 73 (264)
Accumulated translation
adjustment................ -- -- -- -- (3) (3)
Net income -- 1997........... -- -- -- 1,158 -- 1,158
------- ---- ------ ------- ----- ------
BALANCE AT APRIL 30, 1997...... 250,000 927 -- (106) 70 891
Accumulated translation
adjustment................ -- -- -- -- (486) (486)
Appropriated for acquisition
of lottery equipment...... -- -- 1,027 (1,027) -- --
Net loss -- 1998............. -- -- -- (1,219) -- 1,219
------- ---- ------ ------- ----- ------
BALANCE AT APRIL 30, 1998...... 250,000 $927 $1,027 $ 86 $(486) $1,624
======= ==== ====== ======= ===== ======
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 83
PHILIPPINE GAMING MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated on April 14, 1993 under the laws of the
Republic of the Philippines as a domestic corporation owned 60% by Filipinos and
40% by foreigners. It started commercial operations February 1995.
Basis of Presentation -- The Company's financial statements are presented
in conformity with accounting principles generally accepted in the United States
of America.
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 disclosures 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.
Translation of Philippine Peso Statements to U.S. Dollar Statements -- The
translation of Philippine peso amounts into U.S. dollar amounts uses approximate
rates of exchange as of April 30, 1998, 1997 and 1996, except for Capital Stock
and Retained Earnings (Deficit) which were translated at historical rates, and
income and expense accounts which were translated at the approximate average
translation rates during the years. The exchange difference resulting from the
translation of the opening balance of the Stockholders' Equity (Capital
Deficiency) at an exchange rate different from that at which it was previously
reported is shown as Accumulated Translation Adjustment in the Stockholders'
Equity (Capital Deficiency) section of the balance sheets. Such translated
financial statements have been prepared solely for the use by a prospective
investor, International Lottery & Totalizator Systems, Inc., in the Company and
should not be considered relevant for any other purpose.
Income Recognition -- Revenue from the lease of lottery equipment is
recognized as this is earned based on a percentage of gross receipts from
lottery ticket sales, net of taxes.
Cash and Cash Equivalents -- All highly liquid instruments purchased with a
maturity of three months or less from the date of acquisition are considered
cash equivalents. This account includes time deposits amounting to $3,698,
$3,102 and $2,306 in 1998, 1997 and 1996, respectively.
Property and Equipment and Depreciation -- Property and equipment are
carried at cost net of accumulated depreciation. Computers and other lottery
equipment for lease are depreciated over eight years of the remaining term of
the contract with the Philippine Charity Sweepstakes Office, whichever is
shorter. Depreciation on all other properties is computed using the
straight-line method over the estimated useful lives of the properties ranging
from two to five years.
Foreign Exchange Transactions -- Foreign currency assets and liabilities
are stated in the accounts at the exchange rate prevailing at the end of the
year. Exchange differences arising from reporting foreign currency items at
rates different from those at which they were previously recorded are charged or
credited to operations.
Retirement Costs -- Starting in 1998, the Company accrues the minimum
retirement benefits required under the provisions of Philippine Republic Act No.
7641 (Retirement Law). The accrued retirement cost includes normal cost and the
estimated past service cost.
Income Taxes -- The Company accounts for income taxes using the asset and
liability method prescribed by Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes."
Recent Accounting Pronouncements -- On January 1, 1998 the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This pronouncement
is effective for fiscal years beginning after December 15, 1997. The effect of
F-30
<PAGE> 84
PHILIPPINE GAMING MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
the future implementation of this accounting pronouncement will be to show the
change in the foreign currency translation adjustment in stockholders' equity as
a component of the statement of operations and comprehensive income. The Company
will adopt SFAS No. 130 for the fiscal year beginning May 1, 1998.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." This statement provides guidance on accounting for the costs of
computer software developed or obtained for internal use and identifies
characteristics of internal use software and provides assistance in determining
when computer software is for internal use. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998, with earlier application permitted. The
Company has not yet determined what impact, if any, the adoption of SOP 98-1
will have on the Company's financial statements, results of operations, or
related disclosures thereto.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted for the
fiscal quarter beginning after June 15, 1999. As of April 30, 1998, the Company
has not entered into any derivative instruments or hedging activities.
Earnings Per Share -- Earnings per share data are determined by dividing
net income by the number of shares of capital stock issued at the end of each
year.
2. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company grants both interest and
noninterest bearing cash advances to an affiliated company which are due on
demand. The interest bearing advances bear interest at prevailing market rates.
Advances from a stockholder represent cash advances in U.S. dollars
(including accrued interest) from Berjaya Lottery Management (HK) Ltd., a
majority stockholder (see Note 8), which were used to finance the Company's
working capital requirements. These advances bear interest at rates agreed upon
by the parties. Interest expense on these advances amounted to $1,427, $1,553
and $2,949 in 1998, 1997 and 1996, respectively.
3. PROPERTY AND EQUIPMENT
Property and Equipment consists of:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Computers and other lottery Equipment for lease............ $6,688 $9,847
Transportation equipment................................... 364 490
Office furniture, fixtures and equipment................... 175 251
Leasehold improvements..................................... 171 251
Communications equipment................................... 17 25
------ ------
7,415 10,864
Less accumulated depreciation.............................. 2,482 2,287
------ ------
$4,933 $8,577
====== ======
</TABLE>
4. LOANS PAYABLE
This account represents short-term loan availments from a credit facility
amounting to about $1,900 (equivalent to P50,000) granted by a local bank. The
loans bear interest at prevailing market rates and are unsecured.
F-31
<PAGE> 85
PHILIPPINE GAMING MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
5. CONTRACT OF LEASE WITH PHILIPPINE CHARITY SWEEPSTAKES OFFICE
On January 25, 1995, the Company entered into an Equipment Lease Agreement
(ELA) with Philippine Charity Sweepstakes Office (PCSO) covering the lease of
the Company's on-line lottery equipment to PCSO for a period of eight years
under certain conditions. Under the agreement, the Company is entitled to a
rental fee equal to a percentage of the gross amount of ticket sales from all of
PCSO's on-line lottery operations in the Luzon groups of islands. Substantially,
all revenues of the Company are derived from the contract of lease with the
PCSO.
On December 1, 1995, the Company also entered into an agreement for a fee
with PCSO whereby the Company agreed to provide maintenance and repair services
on the equipment under the ELA, and for additional equipment for which such
services are ordered by PCSO at the agreed locations. This agreement will run
concurrently with the ELA. Any extension or termination in ELA by the PCSO will
have a similar effect on this agreement.
6. LEASE OF PREMISES
The Company leases its office spaces and warehouse under lease agreements
which expire at various dates between 1995 to 1999. Some of the lease agreements
provide for annual escalation in rental rates. The lease agreements provide for
renewal options upon mutual consent of both parties. Rental expense arising from
these leases amounted to $222 in 1998, $274 in 1997 and $347 in 1996. The
minimum annual rental for 1999 covered under these lease agreements amount to
$218.
7. INCOME TAXES
The significant components of the Company's deferred income tax as of April
30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Included in Current Assets (Liabilities):
Unrealized foreign exchange loss............................ $132 $ 61
Unrealized foreign exchange gain............................ (85) (137)
---- -----
$ 47 $ (76)
==== =====
Included in Other Assets -- Others
Amortization of preoperating expenses..................... $453 $ 905
Estimated liability for retirement costs.................. 25 --
---- -----
$478 $ 905
==== =====
</TABLE>
The reconciliation of income tax on pretax income, computed using the
statutory tax rate of 34% on the last four months and 35% on the first eight
months for the year ended April 30, 1998 and 35% for the year ended April 30,
1997 to income tax expense follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Tax on pretax income........................................ $620 $428
Tax effects of:
Interest income already subjected To final tax.............. (172) (70)
74 --
---- ----
Included in Other Assets -- Others
Retirement costs.......................................... $522 $358
==== ====
</TABLE>
F-32
<PAGE> 86
PHILIPPINE GAMING MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
The reconciliation of income tax on pretax income, computed using the
statutory tax rate of 34% on the last four months and 35% on the first eight
months for the year ended April 30, 1998 and 35% for the years ended April 30,
1997 and 1996, to income tax expense follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Tax on pretax income................................. $ 620 $584 $521
Tax effects of:
Interest income already subjected to final tax..... (172) (70) (25)
Nondeductible expenses............................. 121 -- --
----- ---- ----
$ 569 $514 $496
===== ==== ====
</TABLE>
In the peso financial statements, all expenses incurred prior to the start
of commercial operations were capitalized and are being amortized over a period
of eight years starting February 1995, as allowed under the Philippine generally
accepted accounting principles (GAAP). However, U.S. GAAP does not allow this
practice and therefore preoperating expenses are charged directly to expenses as
incurred.
In the peso financial statements, the Company, effective May 1, 1995,
initially adopted the liability method of accounting for income taxes as
required by SFAS No. 23, "Accounting for Income Taxes," issued by the Philippine
Accounting Standards Council. However, United States generally accepted
accounting principles require the application of the liability method of
accounting for income taxes since 1988. Hence, the adjustment pertaining to the
initial recording of deferred income taxes of US$140 has been reflected
retroactively in the 1995 U.S. dollar financial statements. In the 1996 peso
financial statements, this amount was shown as a cumulative effect of a change
in accounting principle in the statement of operations and unappropriated
retained earnings.
On December 11, 1997, the Tax Reform Act of 1997 (Republic Act No. 8424) an
act amending the National Internal Revenue Code was signed into law. This new
law took effect on January 1, 1998.
a) The corporate income tax was reduced to 34% in 1998, 33% in 1999
and 32% in the year 2000 and thereafter.
b) Fringe benefits tax (same rate as the corporate income tax) will be
imposed on the grossed-up value of the benefits given by employers to their
managerial and supervisory employees.
c) A minimum corporate income tax (MCIT) of 2% based on the
corporation's gross income, as defined under the Act, will be paid at the
end of the year whenever the regular corporate income tax is lower than the
MCIT.
d) Net operating loss carry-over will be universally available to all
taxpayers engaged in trade or business or practice of profession, subject
to certain limitations.
e) Improperly accumulated earnings tax of 10% will be imposed on
improperly accumulated income starting with earnings after December 31,
1997.
8. CORPORATE REORGANIZATION
On October 15, 1996, the Company's Board of Directors and stockholders
approved the following proposals of Prime Gaming Philippines, Inc. (PGPI), a
listed company, formerly known as Central Azucarera de Pilar:
a. The exchange by the stockholders of the Company's shares of stock
with the new shares of stock of PGPI to be issued on the basis of one
Company share at US$3.71 (P100) par value a share for
F-33
<PAGE> 87
PHILIPPINE GAMING MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
208 new PGPI shares at US$0.37 (P10) par value a share resulting in the
Company becoming a subsidiary of PGPI; and
b. The issuance of up to 32,948,558 new shares of PGPI at US$0.37
(P10) par value a share to settle the $12,520 outstanding advances owed by
the Company to Bejaya Lottery Management (HK) Ltd. (Berjaya), a majority
stockholder of the Company, which advances Berjaya will assign in favor of
PGPI.
The Philippine Securities and Exchange Commission (SEC) approved these
share exchanges on December 2, 1997. On April 24, 1998, the Philippine Stock
Exchange (PSE) approved PGPI's application to list the new shares provided that
actual listing and trading of the shares shall take effect only after certain
requirements had been met, including the confirmation by the corporate secretary
that all stock certificates pertaining to the share-for-share swap and
debt-to-equity conversion had been made available to the stockholders.
On May 18, 1998, following the approval by the PSE of PGPI's application to
list a total of 95,530,872 common shares, the certificates for these shares of
stock were made available to the Company's stockholders. These additional common
share of stock of PGPI were listed and quoted on the stock exchange on May 28,
1998. Since these are events subsequent to April 30, 1998, the share-for-share
swap and debt-to-equity conversion, as described above, have not been reflected
in the financial statements as of April 30, 1998.
9. RETAINED EARNINGS
The Company intends to conserve its retained earnings for the current and
future acquisitions of lottery equipment in accordance with its expansion
program. Relative to such expansion program, the board of directors appropriated
$1,027 from the Company's unappropriated retained earnings during the year for
the purchase of lottery equipment.
Subsequent to the balance sheet date, the Company placed an order for
lottery equipment amounting to about $2,000.
F-34
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
The Board of Director and Stockholders
Prime Gaming Philippines, Inc.
(Formerly Central Azucarera de Pilar)
We have audited the accompanying balance sheets of Prime Gaming
Philippines, Inc. as of April 30, 1998, June 30, 1997 and 1996, and the related
statements of income and deficit and cash flows for the ten months ended April
30, 1998 and the years ended June 30, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prime Gaming Philippines,
Inc. as of April 30, 1998, June 30, 1997 and 1996, and the results of its
operations and its cash flows for the periods then ended in conformity with
accounting principles accepted in the United States of America.
Manila, Philippines
July 6, 1998
F-35
<PAGE> 89
REPORT OF INDEPENDENT AUDITORS
TO ACCOMPANY THE SUPPLEMENTARY SCHEDULE FILED
SEPARATELY FROM THE BASIC FINANCIAL STATEMENTS
The Board of Director and Stockholders
Prime Gaming Philippines, Inc.
(Formerly Central Azucarera de Pilar)
We have audited the financial statements of Prime Gaming Philippines, Inc.
as of April 30, 1998, June 30, 1997 and 1996, and for the ten months ended April
30, 1998 and the years ended June 30, 1997 and 1996, on which we have rendered
our report dated July 6, 1998. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The attached
supplementary selected financial data table and statement of capital deficiency
of the Company as of April 30, 1998, June 30, 1997 and 1996, and for the ten
months ended April 30, 1998 and the years ended June 30, 1997 and 1996, required
by the International Lottery & Totalizator Systems, Inc., are presented for
purposes of additional analysis and are not required parts of the basic
financial statements. The information in such supplementary schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects, in
conformity with accounting principles generally accepted in the United States of
America, in relation to the basic financial statements as a whole. The
supplementary selected financial data table and statement of capital deficiency
of the Company as of and for the year ended June 30, 1995 were based on the
financial statements for the year ended June 30, 1995 which were audited by
other auditors whose report dated December 6, 1995 expressed an unqualified
opinion thereon. The supplementary selected financial data table and statement
of capital deficiency of the Company as of and for the year ended June 30, 1994
were based on the financial statements for the year ended June 30, 1994 which
were unaudited.
Manila, Philippines
July 6, 1998
F-36
<PAGE> 90
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
SELECTED FINANCIAL DATA TABLE
AS OF AND FOR THE TEN MONTHS ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
(WITH COMPARATIVE FIGURES FOR 1995 AND 1994)
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT EARNINGS (LOSS) PER SHARE DATA)
<TABLE>
<CAPTION>
1998
(TEN MONTHS-
NOTE 2) 1997 1996 1995 1994
------------ ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 1 $ 1 $ -- $ 1,873 $ --
Net income (loss)..................... (351) (142) (44) 717 (50)
Earnings (loss) per share............. (0.09) (0.04) (0.01) 0.18 (0.01)
Cash and cash equivalents............. 4 25 -- -- 89
Total assets.......................... 5 40 -- 12 575
Capital deficiency.................... (3,092) (4,161) (4,050) (4,029) (4,571)
</TABLE>
See Notes to Financial Statements.
F-37
<PAGE> 91
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
STATEMENTS OF INCOME AND DEFICIT
FOR THE TEN MONTHS ENDED APRIL 30, 1998 AND THE YEARS ENDED JUNE 30, 1997 AND
1996
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
1998
(TEN MONTHS-
NOTE 2) 1997 1996
------------ ------ ------
<S> <C> <C> <C>
Interest income............................................. $ 1 $ 1 $ --
------ ------ ------
Expenses
Taxes and licenses........................................ 243 -- --
Professional fees......................................... 58 50 --
Listing fees.............................................. 30 78 --
Interest.................................................. 15 10 --
Miscellaneous............................................. 6 5 44
------ ------ ------
352 143 44
------ ------ ------
Net loss.................................................... (351) (142) (44)
Deficit at beginning of period.............................. 5,519 5,377 5,333
------ ------ ------
Deficit at end of period.................................... 5,870 5,519 5,377
------ ------ ------
Loss per share (4,000,000 shares)........................... $(0.09) $(0.04) $(0.01)
====== ====== ======
</TABLE>
See Notes to Financial Statements.
F-38
<PAGE> 92
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
BALANCE SHEETS
APRIL 30, 1998 AND JUNE 30, 1997
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, 1998
(NOTE 2) JUNE 30, 1997
-------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 4 $ 25
Other current assets...................................... 1 15
------- -------
$ 5 $ 40
======= =======
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Loans payable (Note 2).................................... $ 2,643 $ 4,012
Accounts payable and accrued expenses..................... 50 1
Advances from related parties (Note 2).................... 404 188
------- -------
Total Current Liabilities......................... 3,097 4,201
------- -------
Capital deficiency:
Capital stock -- $0.37 par value (Note 2)
Authorized -- 4,700,000 shares
Issued and outstanding -- 4,000,000 shares............. 1,537 1,537
Accumulated translation adjustment........................ 1,241 (179)
Deficit................................................... (5,870) (5,519)
------- -------
(3,092) (4,161)
------- -------
$ 5 $ 40
======= =======
</TABLE>
See Notes to Financial Statements.
F-39
<PAGE> 93
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
STATEMENTS OF CASH FLOWS
FOR THE TEN MONTHS ENDED APRIL 30, 1998 AND THE YEARS ENDED JUNE 30, 1997 AND
1996
(AMOUNTS IN THOUSANDS OF U. S. DOLLARS)
<TABLE>
<CAPTION>
1998
(TEN MONTHS-
NOTE 2) 1997 1996
------------ ----- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.................................................. $ (351) $(142) $ (44)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Net changes in operating assets and liabilities:
Decrease (increase) in:
Other current assets.............................. 14 (15) --
Increase (decrease) in:
Accounts payable and accrued expenses............. 49 (6) (1,384)
Advances from related parties..................... 216 188 (2,033)
------- ----- -------
Net Cash Provided by (Used in) Operating Activities....... (72) 25 (3,461)
------- ----- -------
Cash flows from investing activity
Disposal of land.......................................... -- -- 12
------- ----- -------
Cash flows from financing activities
Proceeds from bank loans.................................. -- -- 3,426
Payments of bank loans.................................... (1,369) (31) --
Net Cash Provided by Financing Activities................. (1,369) 31 3,426
------- ----- -------
Accumulated translation adjustment........................ 1,420 31 23
------- ----- -------
Net increase (decrease) in cash and cash equivalents........ (21) 25 --
Cash and cash equivalents at beginning of period............ 25 -- --
------- ----- -------
Cash and cash equivalents at end of period.................. $ 4 $ 25 $ --
======= ===== =======
</TABLE>
See Notes to Financial Statements.
F-40
<PAGE> 94
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
STATEMENT OF CAPITAL DEFICIENCY
APRIL 30, 1998, JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSAND OF U. S. DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
NO. OF TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
---------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995............. $4,000,000 $1,537 $(5,333) $ (233) $(4,029)
Accumulated translation
adjustment...................... -- -- -- 23 23
Net loss -- 1996................... -- -- (44) -- (44)
---------- ------ ------- ------ -------
BALANCE AT JUNE 30, 1996............. 4,000,000 1,537 (5,377) (210) (4,050)
Accumulated translation
adjustment...................... -- -- -- 31 31
Net income -- 1997................... -- -- (142) -- (142)
---------- ------ ------- ------ -------
BALANCE AT JUNE 30, 1997............. 4,000,000 1,537 (5,519) (179) (4,161)
Accumulated translation
adjustment...................... -- -- -- 1,420 1,420
Net income -- 1998................. -- -- (351) -- (351)
---------- ------ ------- ------ -------
BALANCE AT APRIL 30, 1998 (Note 2)... $4,000,000 $1,537 $(5,870) $1,241 $(3,092)
========== ====== ======= ====== =======
</TABLE>
See Notes to Financial Statements.
F-41
<PAGE> 95
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT EXCHANGE RATE AND LOSS PER SHARE
DATA)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During the periods ended April 30, 1998, June 30, 1997 and 1996, the
Company had no commercial operations. Income received pertains to interest
earned on deposits and short-term cash investments already subjected to final
withholding tax.
During these periods, the Company obtained interest-bearing and
noninterest-bearing advances from related parties to defray expenses.
BASIS OF PRESENTATION
The Company's financial statements are presented in conformity with
accounting principles generally accepted in the United States of America.
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.
Translation of Philippine Peso Statements to U.S. Dollar Statements -- The
translation of Philippine peso amounts into U.S. dollar amounts uses approximate
rates of exchange as of April 30, 1998, June 30, 1997 and 1996, except for
Capital Stock which was translated at historical rate of P26.021 to $1. The
exchange difference resulting from the translation of the opening balance of the
Capital Deficiency at an exchange rate different from that at which it was
previously reported is shown as Accumulated Translation Adjustment in the
Capital Deficiency section of the balance sheets. Such translated financial
statements have been prepared solely for the use by a prospective investor,
International Lottery & Totalizator Systems, Inc., in the Company and should not
be considered relevant for any other purpose.
Cash and Cash Equivalents -- All highly liquid instruments purchased with a
maturity of three months or less from the date of acquisition are considered
cash equivalents.
Recent Accounting Pronouncements -- On January 1, 1998 the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This pronouncement
is effective for fiscal years beginning after December 15, 1997. The effect of
the future implementation of this accounting pronouncement will be to show the
change in the foreign currency translation adjustment in stockholders' equity as
a component of the statement of operations and comprehensive income. The Company
will adopt SFAS No. 130 for the fiscal year beginning May 1, 1998.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." This statement provides guidance on accounting for the costs of
computer software developed or obtained for internal use and identifies
characteristics of internal use software and provides assistance in determining
when computer software is for internal use. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998, with earlier application permitted. As
of April 30, 1998, the Company does not have any cost relating to software it
developed or obtained for internal use.
In April 1998, the AcSEC issued AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This statement provides guidance on financial reporting of
start-up costs and organization costs and requires that such costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning
F-42
<PAGE> 96
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT EXCHANGE RATE AND LOSS PER SHARE
DATA)
after December 15, 1998, with earlier application permitted. The Company does
not have any start-up costs reflected in the accompanying financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted for the
fiscal quarter beginning after June 15, 1999. As of April 30, 1998, the Company
has not entered into any derivative instruments or hedging activities.
Loss Per Share -- Loss per share data are determined by dividing net loss
by the weighted average number of shares of stock issued and outstanding during
the year.
2. CORPORATE REORGANIZATION
On October 16, 1996, the board of directors and stockholders approved
amendments to the Articles of Incorporation and By-Laws of the Company regarding
the change in the Company's corporate name to "Prime Gaming Philippines, Inc."
and the change in its fiscal year-end from June 30 to April 30, respectively.
The changes in the corporate name and fiscal year-end were approved by the
Philippine Securities and Exchange Commission (PSEC) on March 19, 1998 and May
12, 1998, respectively.
In order to implement a major restructuring of the Company's
capitalization, the Company's board of directors and stockholders approved, in
resolutions dated September 19, 1996 and October 16, 1996, the following:
1). Increase in the authorized capital stock of the Company from
$1,806 divided into 4,700,000 shares at $0.37 par value per share to
$384,305 divided into 100 million shares at $0.37 par value per share;
2). Listing of the additional shares at the Philippine Stock Exchange
(PSE);
3). Issuance of 10,582,314 unissued common shares of stock of the
Company in full settlement of the Company's $2,643 noninterest-bearing
loans payable to Beckford Trade and Finance Ltd., a major stockholder;
4). Issuance of 32,948,558 unissued common shares of stock of the
Company as settlement of Philippine Gaming Management Corporation's (PGMC)
existing liabilities to Berjaya Lottery Management (H.K.) Ltd., a major
stockholder of PGMC; and
5). Issuance of 52 million unissued common shares of stock of the
Company to the stockholders of PGMC in exchange for shares of stock of PGMC
at a ratio of 208 common shares of the Company for one share of PGMC. These
shares are to be locked up for a period of two years commencing from the
date of issuance.
On December 2, 1997 the SEC approved these share exchanges and issued the
Certificate to Sell Securities on April 22, 1998. On April 24, 1998, the PSE
approved the Company's application to list the new shares provided that actual
listing and trading of the shares shall take effect only after certain
requirements have been met, including the confirmation by the corporate
secretary that all stock certificates pertaining to the debt-to-equity
conversions and share-for-share swap had been made available to the
stockholders.
The Company considered these events as parts of one entire restructuring
process which is to be completed only upon actual listing and trading of the
shares at the PSE. Hence, the recognition of the foregoing developments were
deferred after April 30, 1998.
On May 18, 1998, following the approval by the PSE of the Company's
application to list a total of 95,530,872 common shares, the certificates for
these shares of stock were made available to the stockholders.
F-43
<PAGE> 97
PRIME GAMING PHILIPPINES, INC.
(FORMERLY CENTRAL AZUCARERA DE PILAR)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT EXCHANGE RATE AND LOSS PER SHARE
DATA)
These additional common shares of stock were listed and quoted on the stock
exchange on May 28, 1998. Since these are events subsequent to April 30, 1998,
the increase in authorized capital stock, debt-to-equity conversions and
share-for-share swap, as described above, have not yet been reflected in the
financial statements as of April 30, 1998.
F-44
<PAGE> 98
PRIME GAMING PHILIPPINES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME AND
UNAPPROPRIATED RETAINED EARNINGS
FOR THE FIVE MONTHS ENDED SEPTEMBER 30, 1998
(THOUSANDS OF U. S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenues.................................................... $ 1,705
Cost of revenues............................................ 108
-------
Gross profit................................................ $ 1,597
Selling, general and administrative......................... 666
-------
Income from operations...................................... 931
Interest and other income................................... 145
Exchange rate losses........................................ 86
-------
Income before income tax.................................... 990
Provision for income tax.................................... 347
-------
Net income.................................................. 643
=======
Deficit brought forward..................................... (16,352)
Deficit carried forward..................................... (15,709)
-------
Net income per share........................................ $ 0.01
Shares used in basic per share computation.................. 92,464
</TABLE>
See Notes to Financial Statements.
F-45
<PAGE> 99
PRIME GAMING PHILIPPINES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(THOUSANDS OF U. S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Current assets
Cash and cash equivalents................................... $ 2,373
Receivables:
Trade....................................................... 2,066
Others...................................................... 188
Prepaid expenses and other current assets................... 457
--------
Total Current Assets.............................. 5,084
Property and equipment -- Net............................... 4,919
Other assets................................................ 122
--------
Total Assets...................................... $ 10,125
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses....................... $ 184
Advances from a stockholder................................. 762
Other liabilities........................................... 70
--------
Total Current Liabilities......................... 1,016
Stockholders equity
Capital stock -- $3.71 par value
Authorized -- 1,000,000 shares
Issued and outstanding -- 250,000 shares............. 37,975
Accumulated translation adjustment..................... (13,157)
Deficit................................................ (15,709)
--------
$ 10,125
========
</TABLE>
See Notes to Financial Statements.
F-46
<PAGE> 100
PRIME GAMING PHILIPPINES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FIVE MONTHS ENDED SEPTEMBER 30, 1998
(THOUSANDS OF U. S. DOLLARS)
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Cash flows from operating activities
Net income (loss)......................................... $ 643
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 400
Net changes in operating assets and liabilities:
Decrease (increase) in:
Receivables....................................... (533)
Prepaid expenses and other current assets......... 239
Increase (decrease) in:
Accounts payable and accrued expenses............. (270)
Income tax payable................................ (35)
-------
Net Cash Provided by (Used in) Operating Activities....... 444
-------
Cash flows from investing activities
Acquisitions of property and equipment.................... (821)
Advances from related party............................... 380
Net assets of subsidiary acquired......................... 2,351
-------
Net Cash Used in Investing Activities..................... 1,910
-------
Cash flows from financing activities
Accumulated translation adjustment........................ 15
-------
Net Cash Provided by (Used in) Financing Activities....... 15
-------
Net increase in cash and short-term cash investments........ 2,369
Cash and short-term cash investments at beginning of year... 4
-------
Cash and short-term cash investments at beginning of year... $ 2,373
=======
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE> 101
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated February 18, 1998 included in this proxy
statement, into International Lottery & Totalizator Systems, Inc.'s previously
filed Form S-8, No. 2-99618, No. 33-34121, No. 33-34125, No. 33-79938, No.
33-69008 and Form S-3 No. 33-78194. It should be noted that we have not audited
any financial statements of the Company subsequent to December 31, 1997, or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
San Diego, California
December 14, 1998
F-48
<PAGE> 102
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation in this Proxy Statement Schedule 14A of
International Lottery & Totalizator Systems, Inc. of our reports dated July 6,
1998 on the financial statements and on the Supplementary selected financial
data table of Prime Gaming Philippines, Inc. for the ten months ended April 30,
1998 and the years ended June 30, 1997 and 1996 included in the International
Lottery & Totalizator Systems, Inc. Proxy Statement for the proposed acquisition
of Prime Gaming Philippines, Inc..
PUNONGBAYAN & ARAULLO,
INDEPENDENT AUDITORS
Manila, Philippines
December 12, 1998
F-49
<PAGE> 103
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation in this Proxy Statement Schedule 14A of
International Lottery & Totalizator Systems, Inc. of our report dated July 6,
1998 on the financial statements of Philippine Gaming Management Corporation
("PGMC") for the periods ended April 30, 1998, 1997 and 1996 included in the
International Lottery & Totalizator Systems, Inc. Proxy Statement for the
proposed acquisition of Prime Gaming Philippines, Inc.
PUNONGBAYAN & ARAULLO,
INDEPENDENT AUDITORS
Manila, Philippines
December 12, 1998
F-50
<PAGE> 104
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 21, 1997 (except for Note 1, as to which
the date is March 24, 1997), included in the Proxy Statement (Schedule 14A) of
International Lottery and Totalizator Systems, Inc for the proposed acquisition
of Prime Gaming Philippines Inc.
ERNST & YOUNG LLP
San Diego, California
December 14, 1998
F-51
<PAGE> 105
ANNEX A
DATED THIS 19TH DAY OF JUNE, 1998
BETWEEN
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED
(as Seller)
AND
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(as Buyer)
------------------------
SHARE SALE AGREEMENT
(52,000,000 shares of Common Stock in
Prime Gaming Philippines, Inc.)
------------------------
A-1
<PAGE> 106
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of 19th June, 1998,
by International Lottery & Totalizator Systems, Inc., a California corporation
("Buyer") and Berjaya Lottery Management (H.K.) Limited ("BLM" or "Seller")
Prior to the Closing (as defined low).
RECITALS
BLM is the registered and/or beneficial owner of 54,043,992 shares of
Common Stock, Php. 10 peso par value per share in Prime Gaming Philippines,
Inc., a Philippines corporation ("the Company") representing approximately 54%
of the issued and outstanding shares of Common Stock of the Company.
BLM and the parties whose names are more particularly stated in Schedule 1
hereto ("Other Shareholders") intend to sell that number of shares in the
Company which are set forth opposite their respective names in column 2 of
Schedule 2 hereto, which in the aggregate amount to 52,000,000 shares of Common
Stock, Php. 10 peso par value per share of the Company ("the Shares")
representing approximately 52.25% of the issued and outstanding shares of Common
Stock of the Company.
Subject to the approval of the Securities and Exchange Commission of the
Philippines ("SEC"), BLM agrees to sell 20,800,000 of the Shares to the Buyer
and BLM agrees to procure the Other Shareholders to sell the remaining
31,200,000 of the Shares to the Buyer.
BLM agrees with Buyer that in the event all the Other Shareholders shall
fail or refuse to sell their shares to the Buyer for any reason notwithstanding
that the approval by SEC has been obtained on terms accepted to them, BLM
remains committed to sell the Shares to Buyer. However, Buyer agrees that if any
of the Other Shareholders are also selling their shares in the Company to Buyer,
the commitment of BLM to sell the amount of the Shares shall be reduced
accordingly.
For the purposes of this Agreement and pending execution of a definitive
agreement between the Other Shareholders and Buyer, BLM hereby agrees to sell
and Buyer hereby agrees to buy the Shares for the consideration and on the terms
and conditions set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. Definitions.
For purposes of this Agreement, the following terms have the meanings
specified or referred in this Section 1:
"Acquired Companies" means the Company and its Subsidiaries, collectively
and an "Acquired Company" shall mean any one of them.
"Acquiree Companies" means Buyer and its Subsidiaries, collectively and an
"Acquiree Company" means any one of them.
"Applicable Contract" means any Contract (a) under which any Acquired
Company has or may acquire any rights, (b) under which any Acquired Company has
or may become subject to any obligation or liability, or (c) by which any
Acquired Company or any of the assets owned or used by it is or may become
bound.
A "Breach" of a representation, warranty, covenant, obligation, or other
provision of this Agreement or any instrument delivered pursuant to this
Agreement will be deemed to have occurred if there is or has been (a) any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such inaccuracy, breach, failure,
claim, occurrence, or circumstance.
A-2
<PAGE> 107
"Buyer's Balance Sheet" shall have the meaning ascribed to that term in
Section 5.
"Buyer's Unaudited Balance Sheet" shall have the meaning ascribed to that
term in Section 5.4.
"Closing" shall have the meaning ascribed to the term in Section 2.4.
"Closing Date" shall have the meaning ascribed to the term in Section 2.4.
"Company" is as defined in the Recitals of this Agreement.
"Company's Balance Sheet" means the audited accounts of Acquired Companies
referred to in Section 4.3.
"Company's Unaudited Balance Sheet" means the unaudited management accounts
of Acquired Companies referred to in Section 4.3.
"Consent" means any approval, consent, ratification, waiver or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" means all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares by Seller to Buyer and Buyer's acquisition
and ownership of the Shares, issuance of the New ILTS Shares and exercise
of control over the Acquired Companies; and
(b) the performance by Buyer and Seller of their respective covenants
and obligations under this Agreement.
"Contract" means any agreement, contract, obligation, promise or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"Disclosure Letter" means the disclosure letter delivered by the Company
and Seller to Buyer concurrently with the execution and delivery of this
Agreement.
"$" and "Dollars" means United States dollars.
"Encumbrance" means any lien, security interest or other charge or
encumbrance of any kind.
"GAAP" means:
(a) in the case of the Acquired Companies, generally accepted
Philippines accounting principles, applied on a basis consistent with the
basis on which the Acquired Companies' Balance Sheet and other financial
statements referred to in Section 4.3 were prepared;
(b) in the case of the Acquiree Companies, generally accepted United
States accounting principles, applied on a basis consistent with the basis
on which the Acquiree Companies' Balance Sheet and other financial
statements referred to in Section 5.4 were prepared;
"Governmental Authorization" means any approval, consent, license, permit,
waiver, or other authorization issued, granted, given or otherwise available by
or under the authority of any Governmental Body.
"Governmental Body" means any:
(a) nation, state, county, city, town, village, district or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official or entity
and any court or other tribunal); or
(d) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature.
A-3
<PAGE> 108
"Knowledge" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such
fact or other matter.
any Person who is not an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(c) an individual who is an executive officer, director, managing
partner, managing member or otherwise exercises operational control over
such Person is actually aware of such fact or other matter; or
(d) a prudent individual described in clause (c) above could be
expected to discover or otherwise become aware of such fact or other matter
in the course of conducting a reasonably comprehensive investigation
concerning the existence of such fact or matter.
"Legal Requirement" means any federal, state, local, municipal, foreign,
international, or other administrative order, constitution, law, ordinance,
principle of common law, regulation, statute or treaty.
"New ILTS Shares" shall have the meaning ascribed to the term in Section
2.3.
"Order" means any award, decision, injunction, judgment, order, ruling,
subpoena or verdict entered, issued, made or rendered by any court,
administrative agency or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" shall with respect to an action by a Person
be deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person;
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or
by any Person or group of Persons exercising similar authority), in the
ordinary course of the normal day-to-day operations of other Persons that
are in the same line of business as such Person.
"Organizational Documents" means (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"Php pesos" means Philippines pesos.
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labour union, or other entity
or Governmental Body.
"Proceeding" means any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
A-4
<PAGE> 109
"Related Person' -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest; and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(e) any Person who beneficially owns, directly or indirectly, ten per
cent (10%) of the issued and outstanding equity securities or equity
interests in the specified Person;
(f) any Person who beneficially owns, directly or indirectly, ten per
cent (10%) of voting securities or other voting interests in the specified
Person;
(g) any Person who has the right to designate a director in the
specified Person;
(h) any Person who has the right to appoint the chief executive
officer of the specified Person;
(i) any entity in which a Related Person owns ten per cent (10%) or
more of the issued and outstanding equity securities or equity interests in
such entity;
(j) each Person that serves as a director, officer, partner, executor
or trustee of such specified Person (or in a similar capacity);
(k) any Person in which such specified Person holds a Material
Interest;
(l) any Person with respect to which such specified Person serves as a
general partner or trustee (or in a similar capacity); and
(m) any Related Person of any individual described in (b) or (c)
above.
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual, and
(b) "Material Interest" means direct or indirect beneficial ownership (as
defined in [Rule 13d-3 under the Securities Act of 1934 (the "Exchange Act"))]
of voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5% of the outstanding equity securities or
equity interests in Person.
"Representative" shall with respect to a particular Person, include any
director, officer, employee, agent, consultant, advisor or other representative
of such Person, including legal counsel, accountants and financial advisors.
"Securities Act" means the Securities Act of 1933 of the United States of
America or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"Seller" means Berjaya Lottery Management (H.K.) Limited.
"Shares" means 52,000,000 shares of Common Stock, Php. 10 peso par value
per share of the Company.
"Subsidiary" shall with respect to any Person (the "Owner") mean any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred) are held by the Owner or one or more of its Subsidiaries;
when used without reference to a particular Person, "Subsidiary" means a
Subsidiary of the Company.
A-5
<PAGE> 110
"Tax" or "Taxes" includes any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, custom duties, capital
stock, franchise, profits, withholding, social security, unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto.
"Tax Return" includes any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance of any Legal Requirement relating to any Tax.
"Threatened" shall with respect to any claim, Proceeding, dispute, action
or other matter will be deemed to have occurred if any demand or statement has
been made (orally or in writing) or any notice has been given (orally or in
writing) that would lead a prudent Person to conclude that such a claim,
Proceeding, dispute, action, or other matter is likely to be asserted,
commenced, taken, or otherwise pursued in the future.
2. Sale and Transfer of the Shares; Closing.
2.1 Shares. Subject to the terms and conditions of this Agreement, at the
Closing, Seller will sell and transfer the Shares to Buyer, and Buyer will
purchase the shares from Seller.
2.2 Purchase Price. The aggregate purchase price (the "Purchase Price")
for the Shares will be Php. 910,000,000 peso at Php. 17.50 peso per Share or the
Dollar equivalent of $22,750,000 based on the agreed exchange rate of $1 for
Php. 40 peso.
On or before the Closing, Buyer will deliver to Seller a contract note
issued by a stockbroker to be mutually agreed by Buyer and Seller for the full
amount of Purchase Price. Both parties agree that the transaction shall be
effected through the Philippines Stock Exchange. Seller and Buyer shall bear
their own brokerage fees and related expenses.
2.3 Satisfaction of the Purchase Price. Notwithstanding the contract note
referred to in Section 2.2, it is agreed that the payment of the Purchase Price
shall be fully satisfied by way of an issue of an aggregate of 9,479,167 new
shares of Common Stock of no par value (together, the "New ILTS Shares") of
Buyer at an agreed issue price of $2.40 per New ILTS Share, and will, at the
Closing, be issued to Seller. In consideration of the premises, from the date
hereof through the Closing Date or earlier termination of this Agreement, Buyer
undertakes not to issue any shares of capital stock other than as a result of
the exercise of any of the warrants or options other than those disclosed in
writing to Seller.
2.4 Closing. Subject to and in reliance upon the mutual representations,
warranties, terms and conditions of this Agreement, Seller agrees to sell to
Buyer and Buyer agrees to purchase the Shares and issue the New ILTS Shares in
satisfaction of the Purchase Price. Such purchase and sale shall take place not
later than 31st October, 1998 or such later date as may be mutually agreed
("Closing") to be held at such place as the parties shall mutually agree
whereupon Seller and Buyer shall exchange the documents referred to in Section
2.5 in full satisfaction of the Purchase Price. The date of the Closing shall be
two (2) business days after the date on which all such conditions have been
satisfied or on such other date as Buyer and Seller shall agree ("Closing
Date").
2.5 Closing Obligations. At the Closing:
(a) Seller will deliver to Buyer:
(i) signed and executed stock powers, accompanied by share
certificates representing the Shares; and
(ii) a certificate executed by Seller representing and warranting
to Buyer that the conditions set forth in Section 6 below has been
satisfied.
A-6
<PAGE> 111
(b) Buyer will deliver to Seller:
(i) the contract note;
(ii) New ILTS Shares;
(iii) a certificate executed by Buyer representing and warranting
that the conditions set forth in Section 7 below have been satisfied.
2.6 Sale by Other Shareholders. If the Other Shareholders are also selling
their shares in the Company to Buyer, Seller will apportion such number of the
New ILTS Shares to the Other Shareholders in proportion to the amount of the
Shares which the Other Shareholders are selling to the Buyer at the price of
Php. 17.50 per Share. Buyer agrees that in such event, the commitment of Seller
to sell the amount of the Shares shall be reduced accordingly provided that
Seller shall ensure that Buyer will have the Shares on the Closing Date.
2.7 Underwriting by Seller. In the event that any of the Other
Shareholders are selling their shares to the Buyer but are not desirous of
taking any of the New ILTS Shares, the Seller undertakes to procure an affiliate
or related company in the Berjaya Group of Companies ("Berjaya Group") to take
up the same, thereby increasing the shareholding of Berjaya Group in the Company
up to 75.4% of the enlarged share capital of the Company.
3. Conditions to Obligations.
3.1 Buyer's obligation under this Agreement to purchase the Shares and the
issuance of New ILTS Shares in satisfaction of the Purchase Price in the
foregoing manner shall be subject to the satisfaction or Buyer's waiver of the
following conditions:
(a) The shareholders of Buyer shall have approved the purchase of the
Shares and the issue of the New ILTS Shares in satisfaction of the Purchase
Price by the requisite vote; and
(b) all conditions set forth in Section 8 below.
3.2 Seller's obligation under this Agreement to sell the Shares in the
foregoing manner shall be subject to the satisfaction of each of the following
conditions:
(a) The Securities and Exchange Commission of the Philippines shall
have approved the sale of the Shares;
(b) The shareholders of Berjaya Group Berhad (the parent company of
the Seller) shall have approved the sale by Seller of the Shares in and
under this Agreement, provided, however, that Seller may at its absolute
discretion waive this condition;
(c) On the Closing Date, the shares of Buyer remain quoted and listed
on the NASDAQ; and
(d) The conditions set forth in Section 9 below.
4. Representations and Warranties of Seller on Acquired Companies.
Seller represents and warrants on and as of the date of this Agreement and
the Closing Date that except as set forth in the Disclosure Letter:
4.1 Organization and Good Standing.
(a) Part 1 and Part 2 of the Disclosure Letter contains a complete and
accurate list for each Acquired Company of its name, its jurisdiction of
incorporation and its capitalization (including the identity of substantial
stockholders and the number of shares held by each). Each Acquired Company is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, with full corporate power and
authority to conduct its business as it is now being conducted, to own or use
the properties and assets that it purports to own or use, and to perform all its
obligations under the Applicable Contracts.
A-7
<PAGE> 112
(b) The Company has delivered to Buyer copies of the Organizational
Documents of each Acquired Company, as currently in effect. The documents so
furnished are true, correct and complete copies of the existing original
Organizational Documents, and contain all modifications, amendments, deletions
and revocations.
4.2 Capitalization. The authorized equity securities of the Company
consist of 100,000,000 shares of common stock, par value Php. 10 peso per share,
of which 99,530,872 shares are issued and outstanding. Seller is and will be on
the Closing Date the record and beneficial owner and holder of the Shares, free
and clear of all Encumbrances.
4.3 Financial Statements. The Company has delivered to Buyer (a) its
audited accounts as at June 30, 1997 and its management accounts as at April 30,
1998 and (b) the audited accounts of its subsidiary namely, Philippine Gaming
Management Corporation ("PGMC") as at April 30, 1997 and the management accounts
of PGMC as at April 30, 1998. Such financial statements and notes fairly present
the financial condition and the results of operations, changes in stockholders'
equity, and cash flow of the Acquired Companies as at the respective dates of
and for the periods referred to in such financial statements, all in accordance
with GAAP, subject, in the case of interim financial statements, to normal
year-end adjustments (the effect of which will not, individually or in the
aggregate, be materially adverse) and the absence of notes (that, if presented,
would not differ materially from those included in the Company's Balance Sheet);
and the financial statements referred to in this Section 4.3 reflect the
consistent application of such accounting principles throughout the periods
involved. No financial statements of any Person other than the Acquired
Companies are required by GAAP to be included in the consolidated financial
statements of the Company.
4.4 Books and Records. To the best Knowledge of Seller:
(a) the books of account, minute books, stock record books, and other
records of the Acquired Companies, all of which have been made available to
Buyer, are complete and correct and have been maintained in accordance with
sound business practices, including the maintenance of an adequate system
of internal controls; and
(b) the minute books of the Acquired Companies contain accurate and
complete records of all meetings held of, and corporate action taken by,
the stockholders, the Board of Directors, and committees of the Boards of
Directors of the Acquired Companies, and no meetings of any such
stockholders, Board of Directors, or committee has been held for which
minutes have not been prepared and are not contained in such minute books.
At the Closing, all of those books and records will be in the possession of
the Acquired Companies.
4.5 Title to Properties; Encumbrances. All the assets owned by the
Acquired Companies are computers and lottery equipment ("assets") and the
Acquired Companies do not own any real property. The Acquired Companies own the
assets that they purport to own, located in the facilities owned or operated by
the Acquired Companies or reflected as owned in the books and records of the
Acquired Companies, including all of the assets reflected in the Company's
Balance Sheet and the Company's Unaudited Balance Sheet (except for assets held
under capitalized leases not required to be disclosed in Part 3 of the
Disclosure Letter and personal property sold since the date of the Company's
Balance Sheet and the Company's Unaudited Balance Sheet, as the case may be, in
the Ordinary Course of Business), and all of the assets purchased or otherwise
acquired by the Acquired Companies since the date of the Company's Unaudited
Balance Sheet (except for such assets acquired and/or sold since the date of the
Company's Unaudited Balance Sheet in Ordinary Course of Business are mentioned
in Part 3 of the Disclosure Letter. The assets reflected in the Company's
Balance Sheet and the Company's Unaudited Balance Sheet are free and clear of
all Encumbrances except, with respect to all such assets, (a) mortgages or
security interests shown on the Company's Balance Sheet and the Company's
Unaudited Balance Sheet as securing specified liabilities or obligations, with
respect to which no default (or event that, with notice or lapse of time or
both, would constitute a default) exists, (b) mortgages or security interests
incurred in connection with the purchase of assets after the date of the
Company's Unaudited Balance Sheet (such mortgages and security interests being
limited to the
A-8
<PAGE> 113
assets so acquired), with respect to which no default (or event that, with
notice or lapse of time or both, would constitute a default) exists, and (c)
liens for current taxes not yet due.
4.6 Condition and Sufficiency of Assets. The building, plants, structures,
and equipment of the Acquired Companies are in good operating condition
(ordinary wear and tear excepted) and are sufficient for the continued conduct
of the Acquired Companies' businesses after the Closing in substantially the
same manner as conducted prior to the Closing.
4.7 Accounts Receivable. All accounts receivable of the Acquired Companies
that are reflected on the Company's Unaudited Balance Sheet or on the accounting
records of the Acquired Companies as of the Closing Date (collectively, the
"Accounts Receivable") represent or will represent valid obligations arising
from sales actually made or services actually performed in the Ordinary Course
of Business. Unless paid prior to the Closing Date, the Accounts Receivable are
or will be as of the Closing Date collectible net of the respective reserves
shown on the Company's Unaudited Balance Sheet or on the accounting records of
the Acquired Companies as of the Closing Date (which reserves are adequate and
calculated consistent with past practice and in the case of the reserve as of
the Closing Date, will not represent a materially greater percentage of the
Accounts Receivable as of the Closing Date than the reserve reflected in the
Company's Unaudited Balance Sheet represented of the Accounts Receivable
reflected therein and will not represent a material adverse change in the
composition of such Accounts Receivable in terms of aging). Subject to such
reserves, each of the Accounts Receivable is or will be collectible without any
set-off. There is no contest, claim, or right of set-off, other than returns in
the Ordinary Course of Business, under any Contract with any obligor of an
Accounts Receivable relating to the amount or validity of such Accounts
Receivable. A complete and accurate list of all Accounts Receivable as of the
date of the Company's Unaudited Balance sheet is set forth therein.
4.8 Inventory. All inventory of the Acquired Companies, whether or not
reflected in the Balance Sheet or the Unaudited Balance Sheet, consists of a
quality and quantity usable and saleable in the Ordinary Course of Business,
except for obsolete items and items of below-standard quality, all of which have
been written off or written down to net realizable value in the Company's
Balance Sheet or the Company's Unaudited Balance Sheet or on the accounting
records of the Acquired Companies as of the Closing Date, as the case may be.
The quantities of each item of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable in the
present circumstances of the Acquired Companies.
4.9 No Undisclosed Liabilities. The Acquired Companies have no liabilities
or obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected and reserved against in the Company's Balance Sheet or the Company's
Unaudited Balance Sheet and current liabilities incurred in the Ordinary Course
of Business since the respective dates thereof.
4.10 Taxes.
(a) The Acquired Companies have filed or caused to be filed (on a timely
basis since inception) all Tax Returns that are or were required to be filed by
or with respect to any of them, either separately or as a member of a group of
corporations, pursuant to applicable Legal Requirements. The Company has
delivered or made available to Buyer copies of, and the Company's Balance Sheet
contains a complete and accurate list of, all such Tax Returns relating to
income or other taxes filed since each Acquired Company's inception. The
Acquired Companies have paid, or made provision for the payment of, all taxes
that have or may have become due, pursuant to those Tax Returns (whether or not
shown on such Tax Returns) or otherwise, or pursuant to any assessment received
by any Acquired Company, except such Taxes, if any, as are listed in reserves
(determined in accordance with GAAP) in the Company's Balance Sheet and the
Company's Unaudited Balance Sheet.
(b) The charges, accruals, and reserves with respect to Taxes on the
respective books of each Acquired Company are adequate (determined in accordance
with GAAP) and are at least equal to that Acquired Company's liability for
Taxes. There exists no proposed tax assessment against any Acquired Company
except as disclosed in the Company's Balance Sheet. All Taxes that any Acquired
Company is or was required by
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Legal Requirements to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Body or
other Person.
(c) All Tax Returns filed by (or that include on a combined or consolidated
basis) any Acquired Company are true, correct, and complete. There is no tax
sharing agreement that will require any payment by any Acquired Company after
the date of this Agreement.
4.11 No Material Adverse Change. Since the date of the Company's Balance
Sheet, there has not been any material adverse change in the business,
operations, properties, prospects, assets, or condition of any Acquired Company,
and no event has occurred or circumstance exists that is reasonably likely to
result in such a material adverse change.
4.12 Employment Matters. Each Acquired Company: (i) is in compliance with
all applicable foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to its employees; (ii) has
withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any material payment to any trust or
other fund or to any governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for employees (other than routine payments to be made in the normal
course of business and consistent with past practice). There are no pending,
Threatened or reasonably anticipated claims or actions against any Acquired
Company under any worker's compensation policy or long-term disability policy.
To the Seller's and the Company's Knowledge, no employee of any Acquired Company
has violated any employment contract, non disclosure agreement or non
competition agreement by which such employee is bound due to such employee being
employed by an Acquired Company and disclosing to the Acquired Company or using
trade secrets or proprietary information of any other person or entity.
4.13 Labor. No work stoppage or labor strike against any Acquired Company
is pending, Threatened or reasonably anticipated. Company does not know of any
activities or proceedings of any labor union to organize any employees. There
are no actions, suits, claims, labor disputes or grievances pending, or, to the
Knowledge of the Seller or the Company, Threatened or reasonably anticipated
relating to any labor, safety or discrimination matters involving any employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, result in any material liability to any Acquired Company.
No Acquired Company is presently, nor has it been in the past, a party to, or
bound by, any collective bargaining agreement or union contract with respect to
employees and no collective bargaining agreement is being negotiated by any
Acquired Company.
4.14 Compliance with Legal Requirement; Governmental Authorizations.
(a) With regards to Legal Requirements and Government Authorizations:
(i) each Acquired Company is, and at all times since its inception has
been, in full compliance with each Legal Requirement that is or was
applicable to it or to the conduct or operation of its business or the
ownership or use of any of its assets:
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a
violation by any Acquired Company of, or a failure on the part of any
Acquired Company to comply with, any Legal Requirement, or (B) may give
rise to any obligation on the part of any Acquired Company to undertake, or
to bear all or any portion of the cost of, any remedial action of any
nature; and
(iii) no Acquired Company has received, at any time since its
inception, any notice or other communication (whether oral or written) from
any Governmental Body or any other Person regarding (A) any actual,
alleged, possible, or potential violation of, or failure to comply with,
any Legal Requirement, or (B) any actual, alleged, possible, or potential
obligation on the part of any Acquired Company to undertake, or to bear all
or any portion of the cost of, any remedial action of any nature.
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(b) Part 4 of the Disclosure Letter contains a complete and accurate list
of each Governmental Authorization that is held by any Acquired Company or that
otherwise relates to the business of, or to any of the assets owned or used by,
any Acquired Company. Each Governmental Authorization listed in Part 4 of the
Disclosure Letter is valid and in full force and effect. Seller hereby
represents and warrants that:
(i) each Acquired Company is, and at all times since its inception has
been, in full compliance with all of the terms and requirements of each
Governmental Authorization identified in Part 4 of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with or
without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization listed in Part 4 of the
Disclosure Letter, or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed in Part 4 of the
Disclosure Letter;
(iii) no Acquired Company has received, at any time since its
inception, any notice or other communication (whether oral or written) from
any Governmental Body or any other Person regarding (A) any actual,
alleged, possible, or potential violation of or failure to comply with any
term or requirement of any Governmental Authorization, or (B) any actual,
proposed, possible, or potential revocation, withdrawal, suspension,
cancellation, termination of, or modification to any Governmental
Authorization;
(iv) all applications required to have been filed for the renewal of
the Governmental Authorizations listed in Part 4 of the Disclosure Letter
have been duly filed on a timely basis with the appropriate Governmental
Bodies, and all other filings required to have been made with respect to
such Governmental Authorizations have been duly made on a timely basis with
the appropriate Governmental Bodies; and
(v) save for the approval of the Security Exchange Commission of the
Philippines, no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Body or any
other Person is required in connection with the valid execution, delivery
and performance by the Seller of this Agreement and the consummation of the
transactions contemplated hereby.
The Governmental Authorizations listed in Part 4 of the Disclosure Letter
collectively constitute all of the Governmental Authorizations necessary to
permit the Acquired Companies to lawfully conduct and operate their business in
the manner they currently conduct and operate such businesses and to permit the
Acquired Companies to own and use their assets in the manner in which they
currently own and use such assets.
4.15 Legal Proceeding Orders.
(a) There is no pending Proceeding:
(i) that has been commenced by or against any Acquired Company or that
otherwise relates to the business of, or any of the assets owned or used
by, any Acquired Company; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of Seller and the Acquired Companies, (1) no such
Proceeding has been Threatened, and (2) no event has occurred or circumstance
exists that may give rise to or serve as a basis for the commencement of any
such Proceeding.
(b) There is no Order to which any of the Acquired Companies, or any of the
assets owned or used by any Acquired Company, is subject.
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4.16 Absence of Certain Changes and Events. Since the Company's Unaudited
Balance Sheet Date, the Acquired Companies have conducted their businesses only
in the Ordinary Course of Business and there has not been any:
(a) change in any Acquired Company's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital
stock of any Acquired Company; issuance of any security convertible into
such capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by any Acquired Company of any shares of
any such capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock;
(b) amendment to the Organizational Documents of any Acquired Company;
(c) payment or increase by any Acquired Company of any bonuses,
salaries, or other compensation to any stockholder, director, officer, or
(except in the Ordinary Course of Business) employee or entry into any
employment, severance, or similar contract with any director, officer or
employee;
(d) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement or other employee benefit plan for or with any employees of any
Acquired Company;
(e) damage to or destruction or loss of any asset or property of any
Acquired Company, whether or not covered by insurance, materially and
adversely affecting the properties, assets, business, financial condition,
or prospects of the Acquired Companies, taken as a whole;
(f) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of any
Acquired Company or mortgage, pledge, or imposition of any lien or other
encumbrance on any material asset or property of any Acquired Company;
(g) cancellation or waiver of claims or rights with a value to any
Acquired Company in excess of $100,000;
(h) any change in the accounting methods used by any Acquired Company;
or
(i) agreement, whether oral or written, by any Acquired Company to do
any of the foregoing.
4.17 Contracts; No Defaults.
(a) With regards to Applicable Contracts, the Seller represents and
warrants that:
(i) there is no Applicable Contract that involves performance of
services or delivery of goods or materials by one or more Acquired
Companies of an amount or value in excess of $100,000;
(ii) save as disclosed in Part 5 of the Disclosure Letter, there is no
Applicable Contract that involves performance or services or delivery of
goods or materials to one or more Acquired Companies of an amount or value
in excess of $100,000;
(iii) save for the tenancy agreement referred to in Part 3 of the
Disclosure Letter, there are no lease, rental or occupancy agreement,
license, installment and conditional sale agreement and other Applicable
Contract affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property;
(iv) there is no licensing agreement or other Applicable Contract with
respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants
regarding the appropriation or the non-disclosure of any intellectual
property;
(v) there is no joint venture, partnership and other Applicable
Contract (however named) involving a sharing of profits, losses, costs or
liabilities by any Acquired Company with any other Person;
(vi) there is no Applicable Contract which contain covenants that in
any way purport to restrict the business activity of any Acquired Company
to engage in any line of business or to compete with any Person;
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(vii) there is no Applicable Contract which provide for payments to or
by any Person based on sales, purchases or profits, other than direct
payments of goods;
(viii) there is no power of attorney that is currently effective and
outstanding;
(ix) there is no Applicable Contract entered into other than in
Ordinary Course of Business that contains or provides for any express
undertaking by any Acquired Company to be responsible for consequential
damages;
(x) there is no Applicable Contract for capital expenditures in excess
of $100,000;
(xi) there is no written warranty, guarantee and or other similar
undertakings with respect to contractual performance extended by any
Acquired Company other in the Ordinary Course of Business; and
(xii) there is no amendment, supplement, and modification (whether
oral or written) in respect of any of the foregoing.
(b) Each Contract identified in 5 of the Disclosure Letter is in full force
and effect and is valid and enforceable in accordance with its terms.
(c) The Seller further represents and warrants that:
(i) each Acquired Company is, and at all times since its inception has
been, in compliance with all applicable terms and requirements of each
Contract under which such Acquired Company has or had any obligation or
liability or by which such Acquired Company or any of the assets owned or
used by such Acquired Company is or was bound;
(ii) to the Knowledge of Seller, each other Person that has or had any
obligation or liability under any Contract under which an Acquired Company
has or had any rights is, and at all times since its inception has been, in
compliance with all applicable terms and requirements of such Contracts;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result
in a violation or breach of, or give any Acquired Company or other Person
the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Applicable Contract; and
(iv) no Acquired Company has given to or received from any other
Person, at any time since its inception any notice or other communication
(whether oral or written) regarding any actual, alleged, possible, or
potential violation or breach of, or default under, any Contract.
(d) There are no renegotiations of, attempts to renegotiate, or outstanding
rights to renegotiate any material amounts paid or payable to any Acquired
Company under current or completed Contracts with any Person and no Person has
made written demand to any Acquired Company for such renegotiation.
4.18 Insurance.
(a) The Company has delivered to Buyer:
(i) true and complete copies of all policies of insurance to which any
Acquired Company is a party or under which any Acquired Company, or any
director of any Acquired Company, is or has been covered at any time within
the two years preceding the date of this Agreement; and
(ii) true and complete copies of all pending applications for policies
of insurance.
(b) All policies to which any Acquired Company is a party or that provide
coverage to any Seller, any Acquired Company, or any director or officer of an
Acquired Company:
(i) to the best Knowledge of the Acquired Companies are valid,
outstanding and enforceable;
(ii) are sufficient for compliance with all Legal Requirements and
Contracts to which any Acquired Company is a party or by which any of them
is bound; and
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(iii) will continue in full force and effect following the
consummation of the Contemplated Transactions.
(c) No Acquired Company has received (A) any refusal of coverage or any
notice that a defense will be afforded with reservation of rights, or (B) any
notice of cancellation or any other indication that any insurance policy is no
longer in full force or effect or will not be renewed or that the issuer of any
policy is not willing or able to perform its obligations thereunder.
(d) The Acquired Companies have paid all premiums due, and have otherwise
performed all of their respective obligations, under each policy to which any
Acquired Company is a party or that provides coverage to any Acquired Company or
director thereof.
(e) The Acquired Companies have given notice to the insurer of all claims
that may be insured thereby.
4.19 Disclosure.
(a) No representation or warranty of the Acquired Companies in this
Agreement and no statement in the Disclosure Letter omits to state a material
fact necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 6.5 will contain any untrue
statement or omit to state a material fact necessary to make the statements
therein or in this Agreement, in light of the circumstances in which they were
made, not misleading.
4.20 Relationships with Related Persons. Except as set forth in Part 5 of
the Disclosure Letter, neither Seller nor any Related Person of Seller or of any
Acquired Company has, or since June 30, 1997 has had, any interest in any
property (whether real, personal, or mixed and whether tangible or intangible),
used in or pertaining to the Acquired Companies' businesses. Neither Seller nor
any Related Person of Seller or of any Acquired Company is, or since June 30,
1997 has owned (of record or as a beneficial owner) any equity interest or any
other financial or profit interest in, a Person that has (i) had business
dealings or a material financial interest in any transaction with any Acquired
Company, or (ii) engaged in competition with any Acquired Company (a "Competing
Business") in any market presently served by such Acquired Company. Except as
set forth in Part 5 of the Disclosure Letter, neither Seller nor any Related
Person of Seller or of any Acquired Company is a party to any Contract with, or
has any claim or right against, any Acquired Company.
4.21 No Conflict or Violation. Neither the execution and delivery of this
Agreement nor the consummation of the Contemplated Transactions will result in
(a) violation of or a conflict with any provision of the Organizational
Documents of any Acquired Company, (b) a breach of, or a default under, any term
or provision of any Applicable Contract to which an Acquired Company is a party
or by which its assets or business is bound, (c) a violation by an Acquired
Company of any statute, rule, regulation, ordinance, code, order, judgment,
writ, injunction, decree or award, or (d) an imposition of any material
Encumbrance, restriction or charge on the business of an Acquired Company or on
any of its assets.
4.22 Consents and Approvals. Save for the approval of the Security
Exchange Commission of the Philippines, no Governmental Authorization or any
consent or approval of any other Person or entity, is required to be made or
obtained by an Acquired Company in connection with the execution, delivery and
performance of this Agreement and the consummation of the transaction
contemplated hereby.
4.23 No Brokers. Except as referenced in Section 2.2 hereof, neither the
Seller or the Acquired Companies has entered into or will enter into any
Contract, agreement, arrangement or understanding with any person or firm which
will result in the obligation of Buyer or an Acquired Company to pay any
finder's fee, brokerage commission or similar payment in connection with the
transactions contemplated hereby.
4.24 Payment. The Acquired Companies have not, directly or indirectly,
paid or delivered any fee, commission or other sum of money or item or property,
however characterized, to any finder, agent, government official or other party,
in the United States or any other country, which is in any manner related to the
business or operations of the Acquired Companies, which the Seller or an
Acquired Company knows or
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has reason to believe to have been illegal under any federal, state or local
laws of the United States or any other country having jurisdiction.
4A. Further Representations and Warranties of Seller. In addition to the
representations and warranties set forth in Section 4 hereof, the Seller
represents and warrants to Buyer as follows:
4A.1 Execution and Delivery. This Agreement constitutes the legal, valid,
and binding obligation of such Seller, enforceable against the Seller in
accordance with its terms.
4A.2 Authority. The Seller has the absolute and unrestricted right, power,
authority and capacity to execute and deliver this Agreement and to perform his
or its obligations pursuant to this Agreement and to this Agreement and to
transfer the Shares owned by Seller to Buyer free and clear of all Encumbrances
except that the Shares will be unregistered for a period of two (2) years from
May 28, 1998 (which is the date of its listing thereof) and cannot be sold in
the open market. Except as set forth in this Agreement, neither the execution
and delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time):
(i) contravene, conflict with, or result in a violation of (A) any
provision of its Organizational Documents, or (B) any resolution adopted by
its board of directors or the stockholders;
(ii) contravene, conflict with, or result in a violation of, or give
any Governmental Body or other Person the right to challenge any of the
Contemplated Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which Seller, or any of the
assets owned or used by Seller, may be subject;
(iii) contravene, conflict with, or result in a violation of any of
the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify any Governmental
Authorization that is held by Seller or that otherwise related to any of
the Shares;
(iv) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of,
or cancel, terminate or modify any Applicable Contract.
4A.3 Issue of New ILTS Shares. Seller further represents that:
(a) Seller has been advised that the New ILTS Shares to be issued by
Buyer in full satisfaction of the Purchase Price have not been registered
under the Securities Act nor qualified under any state securities laws on
the ground, among others, that no distribution or public offering of the
New ILTS Shares is to be effected, and that in this connection Buyer is
relying on the representations of Seller set forth herein.
(b) Seller acknowledges that the certificates representing the New
ILTS Shares, when issued, shall contain the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended and may not be
offered, sold, transferred, assigned, pledged, hypothecated or otherwise
disposed of in the absence of registration under said Act and all the
rules and regulations thereunder and all applicable state securities or
"blue sky" laws or an exemption therefrom.
4A.4 Investment. Subject to Section 2.6 and Section 2.7 hereof, Seller is
the sole and true party in interest and is acquiring the New ILTS Shares for its
own account of investment and not with a view to or for the resale or
distribution, thereof, nor with any present intention of distributing,
subdividing or selling the same; and Seller has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof.
4A.5 Experience. Seller has carefully reviewed the Financial Statement,
SEC Reports and other documents and information provided to it by the Buyer in
connection with this Agreement; Seller has had such opportunity as it deems
adequate to obtain from representatives of the Buyer all such information as is
necessary for it to fully evaluate the merits and risks of this investment; the
officers of the Buyer have made
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available to Seller all information which it has requested and have answered to
Seller's satisfaction all inquiries made by Seller; Seller has such knowledge
and experience in financial, business and investment matters that it is capable
of evaluating the merits and risks of this investment, of making an informed
investment decision and of protecting its own interests in connection with this
investment; there has been no representation; guarantee or warranty made,
expressly or by implication, of the percentage of profit and/or amount or type
of consideration, profit or loss, to be realized, if any, as a result of
Seller's investment; the offering of the New ILTS Shares has not been registered
under the Securities Act and has not been registered or qualified under the Blue
Sky laws of any state; any disposition of the New ILTS Shares will be subject to
restrictions imposed by federal and state law; Seller cannot dispose of the
shares of Common Stock absent registration and qualification, or an available
exemption from registration and qualification, the availability of an exemption
in the future will depend in part or circumstances outside Seller's control; no
promise or undertaking has been made with regard to registering or qualifying
the New ILTS Shares in the future; and Seller understands that all certificates
evidencing the New ILTS Shares will bear on their face a legend condition as
provided in section 4A.3(b) above.
4A.6 Accredited Investor. Seller is an "accredited investor" within the
definition set forth in Rule 501(a) under the Securities Act; and all
information supplied by Seller to the Buyer with respect to its acquisition of
the New ILTS Shares is true, complete and accurate.
5. Representations and Warranties of Buyer.
Buyer represents and warrants on and as of the date of this Agreement and
the Closing Date that except as set forth in the Disclosure Letter:
5.1 Organization and Standing. Buyer and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has full corporate power and authority
to conduct its business as presently conducted. Buyer has full corporate power
and authority to enter into and perform this Agreement and to carry out the
transactions contemplated by this Agreement. Buyer has furnished or provided
access to Seller true and complete copies of its Articles of Incorporation and
By-Laws, each as amended to date and presently in effect.
5.2 Capitalization. The authorized capital stock of the Buyer consists of
50,000,000 shares of Common Stock, of which 18,027,548 shares are issued and
outstanding as of 30th May, 1998 (the "Outstanding Shares"), and 20,000,000
shares of Preferred Stock, none of which are issued and outstanding. All of the
Outstanding Shares have been duly authorized and validly issued and are fully
paid and non-assessable. Except as set forth in the SEC Reports and except for
an option to purchase 20,000 shares of Common Stock granted in May, 1998 (i) no
subscription, warrant, option, convertible security or other right to purchase
or acquire from the Buyer any shares of capital stock of the company is
authorized or outstanding, (ii) there is no agreement binding on the Buyer to
issue any subscription, warrant, option, convertible security or other such
right or to issue or distribute to holders of any shares of its capital stock
any evidence of indebtedness or assets of the Buyer, and (iii) there is no
agreement binding on the Buyer to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any dividend or
make any other distribution in respect thereof. The Buyer has not agreed that
any person or entity be entitled to (i) any preemptive or similar right with
respect to the issuance of any capital stock of the Buyer, or (ii) any rights
with respect to the registration of any capital stock of the Buyer under the
Securities Act of 1933, as amended (the "Securities Act") other than pursuant to
the Registration Rights Agreement referenced in Section 9.3 and in the existing
registration rights agreement with Seller.
5.3 Issuance of New ILTS Shares; Binding Obligation; Securities Laws. The
issuance, sale and delivery of the New ILTS Shares to the Seller in accordance
with this Agreement has been duly authorized, and such shares have been reserved
for issuance, by all necessary corporate action on the part of the Buyer
(subject to the approval by the Buyer's shareholders as provided in Section
7.1), and the New ILTS Shares when so issued, sold and delivered in accordance
with the provisions of this Agreement will be duly and validly issued, fully
paid, non-assessable and free from all Encumbrance. This Agreement has been duly
authorized by the Buyer and constitutes the legal, valid and binding obligation
of the Buyer and is enforceable against the Buyer
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in accordance with its terms, except as such enforcement is limited by
bankruptcy, insolvency and other similar laws affecting the enforcement of
creditors' rights generally or by equitable principles of general application
(whether considered in an action at law or in equity) and except as rights to
indemnification may be limited by applicable law.
5.4 Financial Statements. Buyer has provided to the Seller (i) the Buyer's
audited consolidated balance sheet as of December 31, 1997, and the audited
consolidated statements of operations, cash flows and shareholders' equity for
the twelve-month period then ended, together with the related opinion of Arthur
Andersen LLP, independent certified public accountants and (ii) an unaudited
consolidated balance sheet as of March 31, 1998, and unaudited consolidated
statements of operations, cash flows and shareholders' equity for the three
months then ended (collectively the "Financial Statements"). The Financial
Statements (a) are in accordance with the books and records of the Buyer and its
subsidiaries, (b) present fairly the financial condition of the Buyer and its
subsidiaries at the dates therein specified and the results of their operations
for the periods therein specified, and (c) have been prepared in accordance with
generally accepted accounting principles consistently applied.
5.5 SEC Reports. Buyer has provided the Seller with correct and complete
copies of its annual reports on Form 10-K for the years ended December 31, 1996
and 1997, its quarterly report on Form 10-Q for the quarter ended March 31,
1998, and its proxy statement for the 1998 Annual Meeting of Shareholders (the
"SEC Reports"). None of the SEC Reports at the time it was filed with the United
States Securities and Exchange Commission, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
5.6 Acknowledgment Regarding Shares. Buyer acknowledges that it has been
advised by the Seller that the Shares to be acquired by Buyer from the Seller
pursuant to this Agreement have not been registered with the Philippines
Securities and Exchange Commission and may not be resold in the public markets
for a period of two years from May 28, 1998.
5.7 Legal Proceeding Orders.
(a) Except as set forth in the SEC Reports, there is no pending Proceeding:
(i) that has been commenced by or against Buyer or that otherwise
relates to the business of, or any of the assets owned or used by, Buyer;
or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of Buyer, (1) no such Proceeding has been Threatened, and
(2) no event has occurred or circumstances exists that may give rise to or serve
as a basis for the commencement of any such Proceeding. Buyer has delivered to
Seller copies of all pleadings, correspondence, and other documents relating to
each Proceeding listed in the Disclosure Letter. The Proceedings listed in the
Disclosure Letter will not have a material adverse effect on the business,
operation, assets, condition, or prospects of Buyer.
(b) Except as set forth in the Disclosure Letter, there is no Order to
which Buyer, or any of the assets owned or used by Buyer, is subject.
6. Covenants of Seller Prior to Closing Date.
6.1 Access and Investigation. Between the date of this Agreement and the
Closing Date, the Company and Seller will, and will cause each Acquired Company
and its Representatives to, (a) afford Buyer and its Representatives full and
free access to each Acquired Company's personnel, properties, contracts, books
and records, and other documents and data, (b) furnish Buyer and its
Representatives with copies of all such contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (c) furnish to
Buyer and its Representatives with such additional financial, operating and
other data and information as Buyer may reasonably request.
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6.2 Operation of the Businesses of the Acquired Companies. Between the
date of this Agreement and the Closing Date, Seller will cause each Acquired
Company to:
(i) conduct the business of such Acquired Company only in the Ordinary
Course of Business;
(ii) use their best efforts to preserve intact the current business
organization of such Acquired Company, keep available the services of the
current officers, employees, and agents of such Acquired Company, and
maintain the relations and good will with suppliers, customers, landlords,
creditors, employees, agents and others having business relationships with
such Acquired Company;
(iii) confer with Buyer concerning operational matters of a material
nature; and
(iv) otherwise report periodically to Buyer concerning the status of
the business, operations, and finances of such Acquired Company.
6.3 Negative Covenant. Except as otherwise expressly permitted by this
Agreement, between the date of this Agreement and the Closing Date, Seller will
not, and will cause each Acquired Company not to, without the prior consent of
Buyer (which consent shall not be unreasonably withheld by Buyer) take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
4.17 is likely to occur.
6.4 Required Approvals. As promptly as practicable after the date of this
Agreement, Seller will, and will cause each Acquired Company to, make all
filings required by Legal Requirements to be made by them in order to consummate
the Contemplated Transactions. Without limiting the generality of the foregoing,
(a) Seller shall promptly take all actions necessary to obtain the approval of
the Securities and Exchange Commission of the Philippines to the sale of the
Shares and (b) Seller and its parent company Berjaya Group Berhad, shall use
their best efforts to obtain approval of the sale by Seller of the Shares by the
shareholders of Berjaya Group Berhad. Between the date of this Agreement and the
Closing Date, Seller will, and will cause each Acquired Company to (a) cooperate
with Buyer with respect to all filings that Buyer elects to make or is required
by Legal Requirements to make in connection with the Contemplated Transactions,
and (b) cooperate with Buyer in obtaining all consents as may be necessary in
connection with the Contemplated Transactions.
6.5 Notifications. Between the date of this Agreement and the Closing
Date, Seller will cause each Acquired Company to, promptly notify Buyer in
writing if Seller or any Acquired Company becomes aware of any fact or condition
that causes or constitutes a Breach of Seller's representations and warranties
as of the date of this Agreement, or if Seller or any Acquired Company becomes
aware of the occurrence after the date of this Agreement of any fact or
condition that would (except as expressly contemplated by this Agreement) cause
or constitute a Breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Disclosure Letter, if the Disclosure Letter were dated the date of the
occurrence or discovery of any such fact or condition, Seller will promptly
deliver to Buyer a supplement to the Disclosure Letter specifying such change.
During the same period, Seller will, and will cause each Acquired Company to,
promptly notify Buyer of the occurrence of any Breach of any covenant of Seller
in this Section 6 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 8 impossible or unlikely.
6.6 Seller Vote on Contemplated Transactions. At the special meeting of
Buyer's shareholders to vote on the Contemplated Transactions as described in
Section 7.1 below, and at any other vote thereon, Seller agrees to vote all
shares of Buyer's common stock that it owns in the same proportions as the votes
cast by all other shareholders of Buyer.
7. Covenants of Buyer Prior to Closing Date.
7.1 Required Approvals. As promptly as practicable after the date of this
Agreement, Buyer will make all filings required by Legal Requirements to be made
by it in order to consummate the Contemplated Transactions. Without limiting the
generality of the foregoing, Buyer shall promptly prepare and file with the
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United States Securities and Exchange Commission and mail to its shareholders a
proxy statement for a special meeting seeking approval for the Contemplated
Transactions.
7.2 No Solicitation. Prior to the Closing (or the earlier termination of
this Agreement in accordance with its terms), neither the Buyer nor any of its
affiliates, directors, officers, employees, representatives or agents shall
directly or indirectly, solicit or initiate any discussions, submissions of
proposals or offers or negotiations with, or, subject to any fiduciary
obligations under applicable law after taking into account the advice of counsel
with respect thereto, participate in any negotiation or discussions with, or
provide any information or data of any nature whatsoever to, or otherwise
cooperate in any other way with, or assist or participate in, facilitate or
encourage any effort or attempt by, any corporation, partnership, person or
other entity or group, other than Seller and their representatives, agents and
affiliates, concerning any merger, consolidation, sale of substantial assets,
sale of shares of capital stock or other equity securities, recapitalization,
debt restructuring or similar transaction involving the Buyer or any subsidiary,
but specifically excluding any discussion regarding lines of credit or other
debt financings (all such transactions being referred to herein as "Alternative
Transactions"). Buyer shall immediately notify Seller if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with
Seller in respect of any Alternative Transaction, and shall, in any such notice
to Seller, indicate the identity of the offeror and the terms and conditions of
any proposals or offers or the nature of any inquiries or contacts, and
thereafter shall keep Seller informed, on a current basis, of the status and
terms of any such proposals or offers and the status of any such discussions or
negotiations. Buyer shall not release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which the Buyer is
a party.
7.3 Listing Status. Buyer will use its best endeavour to maintain the
Buyer's listing status on the NASDAQ.
8. Conditions to the Obligations of Buyer.
Buyer's obligations to purchase the Shares and to take the other actions to
be taken by Buyer at the Closing are subject to the satisfaction, at or prior to
the Closing, of each of the following conditions (any of which may be waived by
Buyer, in whole or part):
8.1 Accuracy of Representations. All of Seller's representations and
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement and must be
accurate in all material respects as of the Closing Date without giving effect
to any supplement to the Disclosure Letter.
8.2 Performance. Seller shall have performed and complied in all material
respects with all agreements and covenants contained herein required to be
performed or complied with by them or each of them prior to or at the Closing.
8.3 Consents. Each of the consents identified in Section 3.2 (a) and (b)
must have been obtained and in full force and effect.
8.4 No Claim Regarding Stock Ownership. There must not have been made or
Threatened by any Person any claim asserting that such Person is the holder or
the beneficial owner of, or has the right to acquire or to obtain beneficial
ownership of the Shares or has the right to participate in the acquisition of
the New ILTS Shares.
8.5 No Prohibition. Neither the consummation nor the performance of any of
the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), contravene, or conflict with, or result in a violation
of, or cause Buyer to suffer any material adverse consequence under (a) any
applicable Legal Requirement or Order, or (b) any Legal Requirement or order
that has been published introduces or otherwise formally proposed by or before
any Governmental Body.
8.6 No Injunction. There must not be in effect any Legal Requirement or
any injunction or other Order that prohibits the issue of the New ILTS Shares by
Buyer to Seller.
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8.7 Fairness Opinion. Since the date of this Agreement, there shall not
have been any change in the facts or circumstances that would prevent Buyer from
receiving an update to the fairness opinion of Translink International dated on
the date the proxy statement is mailed to Buyer's shareholders (as contemplated
by Section 7.1 hereof) or on the Closing Date to the effect that, as of such
dates, the Contemplated Transactions are fair, from a financial point of view,
to the shareholders of Buyer other than BLM.
8.8 Material Changes. Since the date of this Agreement, there shall not
have been any material adverse change with respect to the business, financial
condition, results of operations or prospects of the Acquired Companies.
9. Conditions to the Obligations of Seller.
Seller's obligation to sell the Shares and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction, at
or prior to Closing, of each of the following conditions (any of which may be
waived by Seller, in whole or in part):
9.1 Accuracy of Representations. All of Buyer's representations and
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement and must be
accurate in all material respects as of the Closing Date without giving effect
to any supplement to the Disclosure Letter.
9.2 Performance. Buyer shall have performed and complied in all material
respects with all agreements and covenants contained herein required to be
performed or complied with by them or each of them prior to or at the Closing.
9.3 Registration Rights Agreement. The Buyer and Seller shall have entered
into the Registration Rights Agreement in the form attached hereto as Exhibit
"A".
9.4 No Injunction. There must not be in effect any Legal Requirement or
any injunction or other Order that (a) prohibits the sale of the Shares by
Seller to Buyer, and (b) has been adopted or issued, or has otherwise become
effective, since the date of this Agreement.
9.5 Quotation and Listing of shares of Buyer. The shares of Buyer remain
quoted and listed on the NASDAQ.
9.6 Material Changes. Since the date of this Agreement, there shall not
have been any material adverse change with respect to the business, financial
condition, results of operations or prospects of Buyer.
10. Termination.
10.1 Pre-Closing Termination Events. This Agreement may, by notice given
prior to or at the Closing, be terminated:
(a) by either Buyer, on the one hand, or Seller, on the other, if a
material Breach of any provision of this Agreement has been committed by
the other party and such Breach has not been waived;
(b)(i) by Buyer if any of the conditions in Section 8 has not been
satisfied as of the Closing Date or if satisfaction of such condition is or
becomes impossible (other than through the failure of Buyer to comply with
its obligations under this Agreement) and Buyer has not waived such
condition on or before the Closing Date, or (ii) by Seller if any of the
conditions in Section 9 has not been satisfied as of the Closing Date or if
satisfaction of such condition is or becomes impossible (other than through
the failure of Seller to comply with its obligations under this Agreement)
and Seller has not waived such condition on or before the Closing Date;
(c) by mutual written consent of Buyer and Seller; or
(d) by Buyer or Seller if the Closing had not occurred on the Closing
Date or such later date as the parties may agree upon; provided, however,
that the right to terminate this Agreement under this Section 10.1(d) shall
not be available to any party whose action or failure to act has been a
principal
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cause of or resulted in the failure of the Contemplated Transactions to
occur on or before such date and such action constitutes a Breach of this
Agreement; or
(e) by Buyer if prior to the Closing any Person shall have made a bona
fide offer with respect to an Alternative Transaction that the Board of
Directors of the Buyer (acting through its Affiliations Committee)
determines in its good faith judgment to be more favorable to the Buyer's
shareholders (other than Seller) than the Contemplated Transactions.
10.2 Effect of Termination. Each party's right of termination under
Section 10.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 10.1, all
further obligations of the parties under this Agreement will terminate except
that obligations in Section 12.1 and 12.2 will survive; provided, however, that
if this Agreement is terminated by a party because of the Breach of this
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
11. Indemnification; Remedies.
11.1 Survival; Right to Indemnification Not Affected by Knowledge. All
representations, warranties, covenants and obligations in this Agreement, the
Disclosure Letter, the supplements to the Disclosure Letter and any other
document delivered pursuant to this Agreement will survive the Closing. The
right to indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants and obligations will not be affected by
any investigation conducted with respect to, or any Knowledge acquired (or
capable of being acquired) at any time, whether before or after the execution
and delivery of this Agreement or the Closing Date, with respect to the accuracy
or inaccuracy of or compliance with, any such representation or warranty, or on
the performance of or compliance with any covenant or obligation, will not
affect the right to indemnification, payment of Damages or other remedy based on
such representations, warranties, covenants and obligations.
12. General Provisions.
12.1 Expenses.
(a) Except as otherwise expressly provided in this Agreement, all parties
to this Agreement will bear their respective expenses incurred in connection
with the preparation, execution, and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsels and accountants.
(b) In the event of termination of this Agreement, the obligation of each
party to pay its own expenses will be subject to any rights of such party
arising from a Breach of this Agreement by another party.
12.2 Public Announcements. Any public announcement or similar publicity
with respect to this Agreement or the Contemplated Transactions will be issued,
if at all, at such time and in such manner as Buyer and Seller jointly
determine, except as required by Legal Requirements. Unless consented by the
parties or required by Legal Requirements, prior to Closing the parties shall
keep this Agreement strictly confidential and may not make any disclosure of
this Agreement to any Person.
12.3 Notices. All notices, consents, waivers, requests, demands and other
communications under this Agreement must be in writing (including facsimile
communication) and mailed, by certified or registered mail, or sent by facsimile
transmission, or delivered to the applicable party at the addresses indicated
below:
(a) If to Seller, at Level 17, Menara Shahzan Insas, No. 30, Jalan
Sultan Ismail, 50250 Kuala Lumpur, Malaysia.
(b) If to Buyer, at 2131 Faraday Avenue, Carlsbad, California
92008-7297, Attention: President, with a copy to Latham & Watkins, 701 "B"
Street, San Diego, California 92101, Attention: David A. Hahn, Esq. or, as
to each of the foregoing, at such other addresses as shall be designated by
such Person
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in a written notice to the other party complying as to delivery with the
terms of this Section. All such notices, consents, waivers, requests,
demands and other communications shall, when mailed, be effective 48 hours
following deposit in the mails, addressed as aforesaid, or when sent
facsimile transmission with confirmation of transmission, or personally
delivered, be effective upon delivery to facsimile transmission or personal
delivery.
12.4 Further Assurances. The parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
12.5 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power or privilege, and no single or partial exercise of any such right, power
or privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power or privilege. To the maximum
extent permissible by applicable law, (a) no claim or right arising out of this
Agreement or the documents referred to in this Agreement can be discharged by
one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
12.6 Entire Agreement and Modification. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
12.7 Disclosure Letter.
(a) The disclosures in the Disclosure Letter, and those in any supplement
thereto, must relate only to the representations and warranties in the Section
of this Agreement to which they expressly relate and not to any other
representation or warranty of this Agreement.
(b) In the event of any inconsistency between the statements in the body of
this Agreement and those in the Disclosure Letter (other than an exception
expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement shall prevail.
12.8 Assignments, Successors and No Third Party Rights. No party may
assign any of its rights under this Agreement without the prior written consent
of the other parties. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any Person other than the parties
to this Agreement any legal or equitable right, remedy or claim under or with
respect to this Agreement or any provisions of this Agreement. This Agreement
and all of its provisions and conditions are for the sole and exclusive benefit
of the parties to this Agreement and their successors and assigns.
12.9 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
12.10 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or
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"Sections" refer to the corresponding Section or Sections of this Agreement. All
words used in this Agreement will be construed to be of such gender or number as
the circumstances require. Unless otherwise expressly provided, the word
"including" does not limit the preceding words or items.
12.11 Time of Essence. With regard to all dates and time periods set forth
or referred to in this Agreement, time is of the essence.
12.12 Governing Law. This agreement:
(a) with respect to the sale and purchase of the Shares will be
governed by the laws of the Republic of Philippines;
(b) with respect to all other matters (including without limitation
the issue of the New ILTS Shares) will be governed by the laws of the State
of California;
without regard to conflict of laws principles.
12.13 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[Remainder of page is intentionally left blank]
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SCHEDULE 1
NAMES OF OTHER SHAREHOLDERS
Alfredo C. Ramos
George T. Yang
Rodolfo N. De Leon
Raul S. Manglapus
First Abacus Financial Holding Corp.,
a Philippines corporation.
Jerry C. Angping
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SCHEDULE 2
PARTICULARS OF THE SHARES
<TABLE>
<CAPTION>
NAMES OF VENDORS NUMBER OF THE SHARES
---------------- --------------------
<S> <C>
Berjaya Lottery Management (HK) Ltd............... 20,800,000
Alfredo C. Ramos.................................. 15,600,000
George T. Yang.................................... 1,560,000
Rodolfo N. De Leon................................ 3,120,000
Raul S. Manglapus................................. 1,560,000
First Abacus Financial Holding Corp............... 1,872,000
Jerry C. Angping.................................. 208,000
Total:.................................. 52,000,000
</TABLE>
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
SELLER:
BERJAYA LOTTERY MANAGEMENT (HK) LTD
/s/ CHAN KIEN SING
--------------------------------------
By: Chan Kien Sing
Title: Director
BUYER:
INTERNATIONAL LOTTERY &
TOTALIZATOR SYSTEMS, INC.
/s/ M. MARK MICHALKO
--------------------------------------
By: M. Mark Michalko
Title: President
This is the execution page of the Stock Purchase Agreement between BERJAYA
LOTTERY MANAGEMENT (H.K.) LIMITED and INTERNATIONAL LOTTERY & TOTALIZATOR
SYSTEMS, INC.
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EXHIBIT "A"
REGISTRATION RIGHTS AGREEMENT
DATED AS OF , 1998
BY AND AMONG
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.,
AND
THE SELLERS LISTED ON THE SIGNATURE PAGES
OF THE PURCHASE AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of , 1998, by and among International Lottery &
Totalizator Systems, Inc., a California corporation (the "Company") and the
purchasers (herein referred to collectively as the "Purchasers") whose names are
set forth on the signature pages of the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Stock Purchase Agreement dated as of
, 1998 as amended through the Closing, between the Company and
the Purchasers (the "Purchase Agreement"). In order to induce the Purchasers to
enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement to the Purchasers. The execution
of this Agreement is a condition to the Closing under the Purchase Agreement.
Capitalized terms not defined herein have the meanings ascribed to them in the
Purchase Agreement.
The parties hereby agree as follows:
1. Demand Registrations.
(a) Demand Rights. At any time and from time to time, the holders of a
majority of the Registrable Securities may make written requests to the Company
for registration under and in accordance with the provisions of the Securities
Act of all or part of the Registrable Securities. "Registrable Securities" shall
include all shares of Common Stock issued pursuant to the Purchase Agreement,
and any securities of the Company which may be issued or distributed with
respect to, or in exchange for, such Common Stock or such other securities
pursuant to a stock dividend, stock split or other distribution, merger,
consolidation, recapitalization or reclassification or otherwise; provided,
however, that any such Registrable Securities shall cease to be Registrable
Securities when (i) a Registration Statement with respect to the sale of such
Registrable Securities shall be effective under the Securities Act and such
Registrable Securities have been disposed of in accordance with the plan of
distribution set forth in such Registration Statement (ii) such Registrable
Securities are distributed pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (iii) such Registrable Securities shall
have been otherwise transferred, new certificates for them not bearing legend
restricting further transfer under the Securities Act shall have been delivered
by the Company and they may be resold without subsequent registration under the
Securities Act.
Any registration requested pursuant to this paragraph (a) shall hereinafter
be referred to as a "Demand Registration." The first Demand Registration deemed
to have been effected (as provided below) in any calendar year shall hereinafter
be referred to as a "Company-Paid Demand Registration" and any additional Demand
Registration deemed to have been effected in any calendar year shall hereinafter
be referred to as an "Additional Demand Registration." Each request for a Demand
Registration shall specify the kind and aggregate amount of Registrable
Securities to be registered and the intended methods of disposition thereof. The
Company shall be deemed to have effected a Demand Registration if (i) the
Registration Statement relating to such Demand Registration is declared
effective by the Securities and Exchange Commission (the "SEC") and remains
effective for at least 30 days; provided, however, that no Demand Registration
shall be deemed to have been effected if (x) such registration, after it has
become effective, is interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental agency or court or (y) the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied or
(ii) at any time after the requisite holders request a Demand Registration and
prior to the effectiveness of the Registration Statement, the preparation of
such
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Registration Statement is discontinued or such Registration Statement is
withdrawn or abandoned at the request of the holders of a majority of the
Registrable Securities sought to be registered in such Registration Statement
pursuant to this Section 1, unless either (x) in the case of a Company-Paid
Demand Registration, the holders of such Registrable Securities have elected to
pay and have paid to the Company in full the Registration Expenses (as
hereinafter defined) in connection with such Registration Statement, or (y) such
discontinuation, withdrawal or abandonment is requested by such holders because
of the occurrence of a significant negative change in market conditions or the
Company's business condition or prospects since the date of the initial request
for a Demand Registration.
(b) The Company's Right to Defer Registration. If the Company is requested
to effect a Demand Registration and the Company furnishes to the holders of
Registrable Securities requesting such Registration a copy of a resolution of
the Board certified by the Secretary of the Company stating that in the good
faith judgment of the Board it would be adverse to the Company and its
shareholders for such Registration Statement to be filed on or before the date
such filing would otherwise be required hereunder because such Registration
would interfere with any financing, acquisition, corporate reorganization or
other material transaction involving the Company or any of its Subsidiaries (as
hereinafter defined) or would require premature disclosure thereof, the Company
shall have the right to defer such filing for a reasonable period not to exceed
90 days, after receipt of the request for such Registration from such holders of
Registrable Securities. If the Company shall so postpone the filing of a
Registration Statement and if any holder of Registrable Securities requesting
such Demand Registration pursuant to Section 1 within 30 days after receipt of
the notice of postponement advises the Company in writing that it has determined
to withdraw its request for Registration, then such Demand Registration shall be
deemed to be withdrawn by it and such request shall be deemed not to have been
exercised for purposes of determining whether a Demand Registration has been
effected pursuant to this Section 1. In addition, if any holder of Registrable
Securities so notifies the Company of its determination to withdraw its request
for Registration and, within the 60 days immediately following the deferral
period, any holders of Registrable Securities make a written request to the
Company for Registration of the same class of Registrable Securities that were
subject to the Registration withdrawn pursuant to the preceding sentence, the
Company shall have no right to defer such Registration pursuant to this
paragraph (b).
(c) Registration Statement Form. Registrations under this Section 1 shall
be on such appropriate registration form of the SEC (i) as shall be selected by
the Company and as shall be reasonably acceptable to the holders of a majority
of the Registrable Securities requesting a Demand Registration and (ii) as shall
permit the disposition of such Registrable Securities in accordance with the
intended method or methods of disposition specified in such holders' requests
for such Registration. If, in connection with any Registration under this
Section 1 which is proposed by the Company to be on Form S-3 or any successor
form to such form, the managing underwriter, if any, shall advise the Company in
writing that in its opinion the use of another permitted form is of material
importance to the success of the offering, then such Registration shall be on
such other permitted form.
(d) Selection of Underwriters. If any offering pursuant to a Demand
Registration involves an underwritten offering, the holders of a majority of the
Registrable Securities included in such Demand Registration pursuant to Section
l(a) shall have the right to select the managing underwriter or underwriters to
administer the offering.
2. Piggyback Registrations.
(a) Participation. Subject to Section 2(b) hereof, if at any time and from
time to time, the Company files a Registration Statement under the Securities
Act with respect to any offering of any equity securities by the Company for its
own account or for the account of any of its equity holders (other than a
registration on Form S-4 or S-8 or any successor form to such forms) then, as
soon as practicable (but in no event less than ten (10) days prior to the
proposed date of filing such Registration Statement), the Company shall give
written notice of such proposed filing to all holders of Registrable Securities,
and such notice shall offer the holders of Registrable Securities the
opportunity to register such number of Registrable Securities as each such
holder may request (a "Piggyback Registration"). Subject to Section 2(b) the
Company shall include in
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such Registration Statement all Registrable Securities requested within thirty
(30) days after the receipt of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such holder) to be included
in the Registration for such offering pursuant to Piggyback Registration;
provided, however, that if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
Registration Statement filed in connection with such Registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company may, at its election, give written notice of such
determination to each holder of Registrable Securities and, thereupon, (i) in
the case of a determination not to register, shall be relieved of its obligation
to register any Registrable Securities in connection with such Registration (but
not from its obligation to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any holders of
Registrable Securities entitled to do so request that such Registration be
effected as a Registration under Section 1, and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Registrable Securities, for the same period as the delay in registering such
other securities. If the offering pursuant to such Registration Statement is to
be underwritten, then each holder making a request for a Piggyback Registration
pursuant to this Section 2(a) must participate in such underwritten offering and
shall not be permitted to make any other offering in connection with such
Registration. If the offering pursuant to such Registration Statement is to be
on any other basis, then each holder making a request for a Piggyback
Registration pursuant to this Section 2(a) must participate in such offering on
such basis and shall not be permitted to make an underwritten offering in
connection with such Registration. Each holder of Registrable Securities shall
be permitted to withdraw all or part of such holder's Registrable Securities
from a Piggyback Registration at any time prior to the effective date thereof.
(b) Underwriter's Cutback. The Company shall use its best efforts to cause
the managing underwriter or underwriters of a proposed underwritten offering to
permit the Registrable Securities requested to be included in the Registration
for such offering under Section 2(a) or pursuant to other piggyback registration
rights granted by the Company, if any ("Piggyback Securities"), to be included
on the same terms and conditions as any similar securities included therein.
Notwithstanding the foregoing, if the managing underwriter or underwriters of
any such proposed underwritten offerings informs the Company and the holders of
such Registrable Securities in writing that the total amount or kind of
securities, including Piggyback Securities, which such holders and any other
persons or entities intend to include in such offering would be reasonably
likely to adversely affect the price or distribution of the securities offered
in such offering or the timing thereof, then the securities to be included in
such Registration shall be (i) first, 100% of the securities that the Company,
the holder or holders making such request for a Demand Registration pursuant to
Section 1 or any other holder exercising demand registration rights, as the case
may be, proposes to sell, and (ii) second, the number of securities that, in the
opinion of such underwriter or underwriters, can be sold without an adverse
effect on the price, timing or distribution of the securities to be included,
selected pro rata among the holders which have requested pursuant to Section
2(a) to be included in such Piggyback Registration and any other holders of
Piggyback Registration rights who have requested to be included therein.
(c) No Effect on Demand Registrations. No Registration of Registrable
Securities effected pursuant to a request under this Section 2 shall be deemed
to have been effected pursuant to Section 1 hereof or shall relieve the Company
of its obligation to effect any Registration upon request under Section I
hereof.
3. Hold-Back Agreements.
(a) Restrictions on Public Sale by Holder of Registrable Securities. Each
holder of Registrable Securities whose Registrable Securities are covered by a
Registration Statement filed pursuant to Section 1 or Section 2 hereof agrees,
if requested by (i) the managing underwriters in an underwritten offering or
(ii) the holders of a majority of the Registrable Securities included pursuant
to Section 1 hereof in a Demand Registration not being underwritten, not to
effect any public sale or distribution of securities of the Company the same as
or similar to those being registered, or any securities convertible into or
exchangeable or exercisable for such securities, in such Registration Statement,
including a sale pursuant to Rule 144 under the Securities Act (except as part
of such underwritten registration), during the 14-day period prior to, and
during the 90-day period (or, with respect to a Piggyback Registration, such
longer period of up to 180 days as may be required by such underwriter)
beginning on, the effective date of any Registration Statement in which
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holders of Registrable Securities are participating (except as part of such
registration) or the commencement of the public distribution of securities, to
the extent timely notified in writing by the Company or the managing
underwriters (or the holders, as the case may be).
(b) Restrictions on Public Sale by the Company and Others. The Company
agrees not to effect any public sale or distribution of any securities the same
as or similar to those being registered by the Company, or any securities
convertible into or exchangeable or exercisable for such securities, during the
14-day period prior to, and during the 90-day period (or, with respect to a
Piggyback Registration, such longer period of up to 180 days as may be required
by the underwriter) beginning on, the effective date of a Registration Statement
filed under Section 1 or Section 2 hereof or the commencement of the public
distribution of securities to the extent timely notified in writing by a holder
of Registrable Securities covered by such Registration Statement or the managing
underwriters (except as part of such registration, if permitted, or pursuant to
registrations on Forms S-4 or S-8 or any successor form to such Forms). The
Company agrees to use reasonable efforts to obtain from each holder of
restricted securities of the Company the same as or similar to those being
registered by the Company, or any restricted securities convertible into or
exchangeable or exercisable for any of its securities, an agreement not to
effect any public sale or distribution of such securities (other than securities
purchased in a public offering) during such period, except as part of any such
registration if permitted.
(c) No Inconsistent Agreements. The Company will not hereafter enter into,
and is not presently a party to, any agreement with respect to its securities
which is inconsistent with the rights granted to the holders of Registrable
Securities by this Agreement or otherwise conflicts with the provisions hereof.
The parties acknowledge that the Company has entered into a prior Registration
Rights agreement dated June 16, 1993, with Berjaya Lottery Management (H.K.)
Limited.
4. Registration Procedures. In connection with the Company's Registration
obligations pursuant to Section 1 and 2 hereof the Company will use its best
efforts to effect such registration to permit the sale of such Registrable
Securities in accordance with the intended method or methods of distribution
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC, in any event not exceeding 30 days from
the date of receipt of the written request for registration, a Registration
Statement or Registration Statements relating to the applicable Demand
Registration or Piggyback Registration including all exhibits and financial
statements required by the SEC to be filed therewith, and use its best efforts
to cause such Registration Statement to become effective under the Securities
Act; provided, however, that the Company may discontinue any Registration of its
securities which are not Registrable Securities (and, under the circumstances
specified in Section l(b), may delay and, under the circumstances specified in
Section 2(a), may delay or discontinue Registration of its securities which are
Registrable Securities) at any time prior to the effective date of the
Registration Statement relating thereto;
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be requested by the holders of a
majority of the Registrable Securities or as may be necessary to keep the
Registration Statement effective for a period of not less than 30 days (or such
shorter period which will terminate when all Registrable Securities covered by
such Registration Statement have been sold or withdrawn), or, if such
Registration Statement relates to an underwritten offering, such longer period
as in the opinion of counsel for the underwriters a Prospectus is required by
law to be delivered in connection with sales of Registrable Securities by an
underwriter or dealer; cause the Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 144
under the Securities Act; and comply with the provisions of the Securities Act,
the Exchange Act, and the rules and regulations promulgated thereunder with
respect to the disposition of all securities covered by such Registration
Statement during the applicable period in accordance with the intended method or
methods of distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus.
(c) notify the selling holders of Registrable Securities and the managing
underwriters, if any, and (if requested) confirm such advice in writing, as soon
as practicable after notice thereof is received by the Company (i) when the
Registration Statement or any amendment thereto has been filed or become
effective,
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the Prospectus or any amendment or supplement to, the Prospectus has been filed,
and, to furnish such selling holders and managing underwriters with copies
thereof, (ii) of any request by the SEC or any other federal or state
governmental authority for amendments or supplements to the Registration
Statement or the Prospectus or for additional information, (iii) of the issuance
by the SEC of any stop order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
Prospectus or Prospectus or the initiation or threatening of any proceedings for
such purposes, (iv) if at any time the representations and warranties of the
Company contemplated by paragraph (m) below cease to be true and correct and (v)
of the receipt by the Company of any notification with respect to the suspension
of the qualification of the Registrable Securities for offering or sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purposes;
(d) promptly notify the selling holders of Registrable Securities and the
managing underwriters, if any, when the Company becomes aware of the happening
of any event as a result of which the Registration Statement or the Prospectus
included in such Registration Statement (as then in effect) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements therein (in the case of the Prospectus and any preliminary
Prospectus, in light of the circumstances under which they were made) not
misleading or, if for any other reason it shall be necessary during such time
period to amend or supplement the Registration Statement or the Prospectus in
order to comply with the Securities Act and, in either case as promptly as
practicable thereafter, prepare and file with the SEC, and furnish without
charge to the selling holders and the managing underwriters, if any, a
supplement or amendment to such Registration Statement or Prospectus which will
correct such statement or omission or effect such compliance;
(e) make every reasonable effort to obtain the withdrawal of any stop order
or other order suspending the use of any preliminary Prospectus or Prospectus or
suspending any qualification of the Registrable Securities;
(f) if requested by the managing underwriter or underwriters or a holder of
Registrable Securities being sold in connection with an underwritten offering,
promptly incorporate in a Prospectus supplement or post-effective amendment such
information as the managing underwriters and the holders of a majority of the
Registrable Securities being sold agree should be included therein relating to
the plan of distribution with respect to such Registrable Securities, including,
without limitation, information with respect to the number of Registrable
Securities being sold to such underwriters, the purchase price being paid
therefor by such underwriters and with respect to any other terms of the
underwritten (or best efforts underwritten) offering of the Registrable
Securities to be sold in such offering and make all required filings of such
Prospectus supplement or post-effective amendment as soon as practicable after
being notified of the matters to be incorporated in such Prospectus supplement
or post-effective amendment;
(g) furnish to each selling holder of Registrable Securities and each
managing underwriter, without charge, one executed copy and as many conformed
copies as they may reasonably request, of the Registration Statement and any
amendment or post-effective amendment thereto, including financial statement and
schedules, all documents incorporated therein by reference and all exhibits
(including those incorporated by reference);
(h) deliver to each selling holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request (it being understood that the Company
consents to the use of the Prospectus or any amendment or supplement thereto by
each of the selling holders of Registrable Securities and the underwriters, if
any, in connection with the offering and sale of the Registrable Securities
covered by the Prospectus or any amendment or supplement thereto) and such other
documents as such selling holder may reasonably request in order to facilitate
the disposition of the Registrable Securities by such holder;
(i) on or prior to the date on which the Registration Statement is declared
effective, use its best efforts to register or qualify, and cooperate with the
selling holders of Registrable Securities, the managing underwriter or agent, if
any, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of each state and other jurisdiction of the United
States as any such seller, underwriter or agent reasonably requests in writing
and do
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any and all other acts or things reasonably necessary or advisable to keep such
registration or qualification in effect for so long as such Registration
Statement remains in effect and so as to permit the continuance of sales and
dealings therein for as long as may be necessary to complete the distribution of
the Registrable Securities covered by the Registration Statement; provided that
the Company will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to taxation or general service of process in any such jurisdiction
where it is not then so subject;
(j) cooperate with the selling holders of Registrable Securities and the
managing underwriter or agent, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities to be in
such denomination and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters;
(k) use its best efforts to cause the Registrable Securities covered by the
applicable Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof or the underwriters, if any, to consummate the
disposition of such Registrable Securities;
(1) not later than the effective date of the applicable Registration
Statement, provide a CUSIP number for all Registrable Securities and provide the
applicable transfer agent with printed certificates for the Registrable
Securities which are in a form eligible for deposit with The Depository Trust
Company
(m) make such representations and warranties to the holders of Registrable
Securities being registered, and the underwriters or agents, if any, in form,
substance and scope as are customarily made by issuers in primary underwritten
public offerings;
(n) enter into such customary agreements (including a purchase agreement or
underwriting agreement) and take all such other actions as the holders of at
least a majority of any Registrable Securities being sold or the managing
underwriter or agent, if any, reasonably request in order to expedite or
facilitate the registration and disposition of such Registrable Securities;
(o) use its best efforts to obtain for delivery to the holders of
Registrable Securities being registered and to the underwriter or agent an
opinion or opinions from counsel for the Company, upon consummation of the sale
of such Registrable Securities to the underwriters (the "Closing Date") in
customary form and in form, substance and scope reasonably satisfactory to such
holders, underwriters or agents and their counsel;
(p) use its best efforts to obtain for delivery to the Company and the
underwriter or agent, with copies to the holders of Registrable Securities, a
comfort letter from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by cold comfort
letters as the managing underwriter or the holders of at least a majority of the
Registrable Securities being sold reasonably request, dated the effective date
of the Registration Statement and brought down to the Closing Date;
(q) cooperate with each seller of Registrable Securities and each
underwriter or agent participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings required
to be made with the National Association of Securities Dealers, Inc. (the
"NASD");
(r) use its best efforts to comply with all applicable rules and
regulations of the SEC and make generally available to its security holders, as
soon as reasonably practicable (but not more than fifteen months) after the
effective date of the Registration Statement, an earnings statement satisfying
the provisions of Section 11(a) of the Securities Act and the rules and
regulations promulgated thereunder;
(s) as promptly as practicable after filing with the SEC of any document
which is incorporated by reference into the Registration Statement or the
Prospectus, provide copies of such document to counsel for the selling holders
of Registrable Securities and to the managing underwriters, if any;
(t) provide and cause to be maintained a transfer agent and registrar for
all Registrable Securities covered by such Registration Statement from and after
a date not later than the effective date of such Registration Statement; and
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(u) use its best efforts to cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange on which any of
the Company's securities are then listed or quoted on each inter-dealer
quotation system on which any of the Company's securities are then quoted.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such securities and such other information
relating to such holder and its ownership of Registrable Securities as the
Company may from time to time reasonably request in writing. Each holder of
Registrable Securities agrees to furnish such information to the Company and to
cooperate with the Company as necessary to enable the Company to comply with the
provisions of this Agreement.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4(d) hereof, such holder
will forthwith discontinue disposition of Registrable Securities pursuant to
such Registration Statement until such holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 4(d) hereof, or until
it is advised in writing by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings which
are incorporated by reference in the Prospectus, and, if so directed by the
Company, such holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such holder's possession, of
the Prospectus covering such Registrable Securities current at the time of
receipt of such notice in the event the Company shall give any such notice the
time periods during which such notice, the time periods during which such
Registration Statement shall be maintained effective (including the period
referred to in Section 4(b) hereof) shall be extended by the number of days
during the period from and including the date of the giving of such notice to
and including the date when each seller of Registrable Securities covered by
such Registration Statement either receives the copies of the supplemented or
amended Prospectus contemplated by Section 4(d) thereof or is advised in writing
by the Company that the use of the Prospectus may be resumed.
5. Underwritten Offerings.
(a) Requested Underwritten Offerings. If requested by the underwriters for
any underwritten offering by holders of Registrable Securities pursuant to a
Registration requested under Section 1, the Company will use reasonable efforts
to enter into an underwriting agreement with such underwriters for such
offering, such agreement to be reasonably satisfactory in substance and form to
the Company, each such holder and the underwriters and to contain such
representations and warranties by the Company and such other terms as are
generally prevailing in agreements of that type, including, without limitation,
indemnities to the effect and to the extent provided in Section 8. The holders
of the Registrable Securities proposed to be distributed by such underwriters
will cooperate with the Company in the negotiation of the underwriting agreement
and will give consideration to the reasonable suggestion of the Company
regarding the form thereof. Such holders of Registrable Securities to be
distributed by such underwriters shall be parties to such underwriting agreement
and may, at their option, require that any or all of the representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such holders of Registrable Securities and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of such holders of
Registrable Securities. Any such holder of Registrable Securities shall not be
required to make any representations or warranties or agreements with the
Company or the underwriters other than representations, warranties or agreements
regarding such holder, such holder's Registrable Securities, such holder's
intended method of distribution and any other representations required by law.
(b) Incidental Underwritten Offerings. If the Company proposes to register
any of its securities under the Securities Act as contemplated by Section 2 and
such securities are to be distributed by or through one or more underwriters,
the Company, will, if requested by any holder of Registrable Securities pursuant
to Section 2 and subject to the provisions of Section 2(b), use its best efforts
to arrange for such underwriters to include all the Registrable Securities to be
offered and sold by such holder among the securities of the Company to be
distributed by such underwriters. The holders of Registrable Securities to be
distributed by
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such underwriters shall be parties to the underwriting agreement between the
Company and such underwriters and may, at their option, require that any or all
of the representations and warranties by, and the other agreements on the part
of, the Company to and for the benefit of such underwriters shall also be made
to and for the benefit of such holders of Registrable Securities and that any or
all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such holder of Registrable Securities
shall not be required to make any representations or warranties to or agreements
with the Company or the underwriters other than representations, warranties or
agreements regarding such holder's Registrable Securities and such holder's
intended method of distribution or any other representations required by law.
(c) Participation in Underwritten Registrations. No Person may participate
in any underwritten registration hereunder unless such Person (a) agrees to sell
such Person's securities on the basis provided in any underwriting arrangements
approved by the Persons entitled to approve such arrangements and (b) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
agreements.
6. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each Registration Statement, the Company will give the
holders of Registrable Securities registered under such Registration Statement,
their underwriters, if any, and their respective counsel and accountants the
opportunity to participate in the preparation of such Registration Statement,
each Prospectus included therein or filed with the SEC, and, to the extent
practicable, each amendment thereof or supplement thereto, and give each of them
such access to its books and records (to the extent customarily given to
underwriters of the Company's securities) and such opportunities to discuss the
business of the Company with its officers and the independent public accountants
who have certified its financial statements as shall be necessary, in the
opinion of such holders' and such underwriters' respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act; provided,
however, that any books, records, information or documents that are designated
by the Company in writing as confidential shall be kept confidential by such
Persons unless disclosure thereof is required by law.
7. Registration Expenses. All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
(i) all registration and filing fees, and any other fees and expenses associated
with filings required to be made with the SEC or the NASD (including, if
applicable, the fees and expenses of any "qualified independent underwriter" and
its counsel as may be required by the rules and Regulations of the NASD), (ii)
all fees and expenses of compliance with state securities or blue sky laws
(including fees and disbursements of counsel for the underwriters or selling
holders in connection with blue sky qualification of the Registrable Securities
and determination of their eligibility for investment under the laws of such
jurisdictions as the managing underwriters or holders of a majority of the
Registrable Securities being sold may designate), (iii) all printing and related
messenger and delivery expenses (including expenses of printing certificates for
the Registrable Securities in a form eligible for deposit with The Depository
Trust Company and of printing prospectuses), (iv) all fees and disbursements of
counsel for the Company and of all independent certified public accountants of
the Company (including the expenses of any special audit and cold comfort
letters required by or incident to such performance), (v) Securities Act
liability insurance if the Company so desires or the underwriters so require in
accordance with then customary underwriting practice, (vi) all fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange or quotation of the Registrable Securities on any
inter-dealer quotation system, (vii) all reasonable fees and disbursements of
one counsel selected by the holders of a majority of the Registrable Securities
being registered, or, in the case of a Demand Registration, by the holders of a
majority of the Registrable Securities included pursuant to Section 1, to
represent such holders in connection with such registration, (viii) all fees and
disbursements of underwriters customarily paid by the issuers or sellers of
securities, excluding underwriting discounts and commissions and transfer taxes,
if any, and excluding fees and disbursements of counsel to such underwriters
(other than such fees and disbursements incurred in connection with any
registration or qualification or Registrable Securities under the securities or
blue sky laws of any state), and (ix) fees and expenses of other Persons
retained by the Company (all such expenses being herein called "Registration
Expenses"), will be borne by the Company, regardless of whether the Registration
Statement
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becomes effective (except as provided in Section 1 hereof and except that the
holders of Registrable Securities included in an Additional Demand Registration
shall pay the Company in full the Registration Expenses in connection with such
Additional Demand Registration if such Registration Statement becomes
effective). The Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any audit and
the fees and expenses of any Person, including special experts, retained by the
Company.
8. Indemnification
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, employees and agents and each Person who
controls such holder (within the meaning of the Securities Act or the Exchange
Act) from and against all claims, damages, liabilities and expenses (including
reasonable costs of investigation and legal expenses) arising out of or based
upon any untrue or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary Prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by such holder expressly for use therein; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any such preliminary Prospectus if (i) it is determined that it was the
responsibility of such holder to provide the Person asserting such loss, claim,
damage, liability or expense with a current copy of the Prospectus and such
holder failed to deliver or cause to be delivered a copy of the Prospectus to
such Person after the Company had furnished such holder with a sufficient number
of copies of the same and (ii) the Prospectus completely corrected in a timely
manner such untrue statement or omission; and provided further, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission in
the Prospectus, if such untrue statement or alleged untrue statement, omission
or alleged omission is completely corrected in an amendment or supplement to the
Prospectus and the holder of Registrable Securities thereafter fails to deliver
such Prospectus as so amended or supplemented prior to or concurrently with the
sale of the Registrable Securities to the Person asserting such loss, claim,
damage, liability or expense after the Company had furnished such holder with a
sufficient number of copies of the same. This indemnity shall be in addition to
any liability the Company may otherwise have, shall remain in full force and
effect regardless of any investigation made by or on behalf of such holder or
any such officer, director, employee, agent or controlling Person and shall
survive termination of this Agreement and the transfer of Registrable Securities
by such holder. The Company will also indemnify underwriters, selling brokers,
dealer managers and similar securities industry professionals participating in
the distribution, their officers and directors and each Person who controls such
persons (within the meaning of the Securities Act and the Exchange Act) to the
same extent as provided above (with appropriate modification) with respect to
the indemnification of the holders of Registrable Securities, if requested.
(b) Indemnification by the Selling Holder of Registrable Securities. Each
selling holder of Registrable Securities agrees to indemnify and hold harmless,
to the full extent permitted by law, the Company, its directors and officers and
each Person who controls the Company (within the meaning of the Securities Act
and the Exchange Act) from and against any losses, claims, damages, liabilities
and expenses resulting from any untrue statement of a material fact or any
omission of a material fact required to be stated in the Registration Statement,
Prospectus or preliminary Prospectus or necessary to make the statements therein
not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information furnished in writing by
such selling holder to the Company specifically for inclusion in such
Registration Statement or Prospectus and has not been corrected in a subsequent
writing prior to or concurrently with the sale of the Registrable Securities to
the Person asserting such loss, claim, damage, liability or expense. In no event
shall the liability of any selling holder of Registrable Securities, hereunder
be greater in amount than the dollar amount of the proceeds received by such
holder under the sale of the Registrable Securities giving rise, to such
indemnification obligation. This indemnity shall be in addition to
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any liability such selling holder may otherwise have, shall remain in full force
and effect regardless of any investigation made by or on behalf of the Company
or any such officer, director or controlling Person and shall survive
termination of this Agreement and the transfer of Registrable Securities by such
selling holder. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above (with appropriate modification) with respect to information furnished in
writing by such Persons specifically for inclusion in any Prospectus or
Registration Statement.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (ii) permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party; provided, however,
that any delay or failure to so notify the indemnifying party shall relieve the
indemnifying party of its obligations hereunder only to the extent, if at all,
that it is prejudiced by reason of such delay or failure; provided further,
however, that any Person entitled to indemnification hereunder shall have the
right to select and employ separate counsel and to participate in the defense of
such claim, but the fees and expenses of such counsel shall be at the expense of
such Person unless (a) the indemnifying Party has agreed in writing to pay such
fees or expenses, or (b) the indemnifying party shall have failed to assume the
defense of such claim within a reasonable time after receipt of notice of such
claim from the Person entitled to indemnification hereunder and employ counsel
reasonably satisfactory to such Person, or (c) in the reasonable judgment of any
such Person, based upon advice of its counsel, a conflict of interest may exist
between such Person and the indemnifying party with respect to such claims (in
which case, if the Person notifies the indemnifying party in writing that such
Person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such Person). If such defense is not assumed by the
indemnifying party, the indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld), provided that an indemnifying party shall not be
required to consent to any settlement involving the imposition of equitable
remedies or involving the imposition of any material obligations on such
indemnifying party other than financial obligations for which such indemnified
party will be indemnified hereunder. No indemnifying party shall consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation. Whenever the indemnified party or the indemnifying party receives a
firm offer to settle a claim for which indemnification is sought hereunder, it
shall promptly notify the other of such offer. If the indemnifying party refuses
to accept such offer within 20 business days after receipt of such offer (or of
notice thereof), such claim shall continue to be contested and, if such claim is
within the scope of the indemnifying party's indemnity contained here, the
indemnified party shall be indemnified pursuant to the terms hereof. If the
indemnifying party notifies the indemnified party in writing that the
indemnifying party desires to accept such offer, but the indemnified party
refuses to accept such offer within 20 business days after receipt of such
notice, the indemnified party may continue to contest such claim and, in such
event, the total maximum liability of the indemnifying party to indemnify or
otherwise reimburse the indemnified party hereunder with respect to such claim
shall be limited to and shall not exceed the amount of such offer, plus
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and disbursements) to the date of notice that the indemnifying party
desires to accept such offer, provided that this sentence shall not apply to any
settlement of any claim involving the imposition of equitable remedies or to any
settlement imposing any material obligations on such indemnified party other
than financial obligations for which such indemnified party will be indemnified
hereunder. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel for all parties indemnified by such indemnifying party
with respect to such claim, unless the written opinion of counsel to the
indemnified party reasonably satisfactory to the indemnifying party, use of one
counsel by the underwriters on the one hand, and by the shareholders on the
other, would be expected to give rise to a conflict of interest between such
underwriters, on the one hand and such shareholders on the other with respect to
such claim, in which event the indemnifying party shall be obligated to pay the
fees and expenses of one such additional counsel.
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(d) Contribution. If for any reason the indemnification provided for in the
preceding paragraphs (a) and (b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by the preceding paragraphs (a)
and (b), then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying party, but the
relative fault of the indemnified party and the indemnifying party, as well as
any other relevant equitable consideration, provided that no selling holder of
Registrable Securities shall be required to contribute in an amount greater than
the dollar amount of the proceeds received by such selling holder with respect
to the sale of any such Registrable Securities. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
9. Rules 144 and 144A. The Company covenants that it will file the reports
required to be filed under the Securities Act and the Exchange Act and the rules
and regulations adopted by the SEC thereunder (or, if the Company is not
required to file such reports, it will, upon the request of any holder of
Registrable Securities after the date that is the second anniversary of the date
hereof, make publicly available other information so long as necessary to permit
sales pursuant to Rules 144 or 144A under the Securities Act), and it will take
such further action as any holder of Registrable Securities may reasonably
request, all to the extent required from time to time to enable such holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by (a) Rules 144 or 144A under the
Securities Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC. Upon the request of any
holder of Registrable Securities, the Company will deliver to such holder a
written statement as to whether it has complied with such requirements.
10. Definitions. As used in this Agreement, the following capitalized terms
shall have the following meanings:
(a) Person: An individual, partnership, joint venture, corporation,
trust or unincorporated organization, a government or any department,
agency or political subdivision thereof or other entity.
(b) Prospectus: The prospectus included in any Registration Statement,
as amended or supplemented by any prospectus supplement with respect to the
terms of the offering of any portion of the Registrable Securities covered
by such Registration Statement and by all other amendments and supplements
to the prospectus, including post-effective amendments and all material
incorporated by reference in such prospectus.
(c) Registration: A Demand Registration or a Piggyback Registration.
(d) Registration Statement: Any registration statement of the Company
which covers any of the Registrable Securities pursuant to the provisions
of this Agreement or the Purchase Agreement, including the Prospectus,
amendments and supplements to such Registration Statement, including
post-effective amendments, all exhibits and all material incorporated by
reference in such Registration Statement.
(e) Subsidiaries: All corporations, partnerships, joint ventures or
other entities of which the Company owns, directly or indirectly, a
majority of the capital stock or is a general partner.
(f) Underwritten Registration or Underwritten Offering: A sale of
securities of the Company to an underwriter for reoffering to the public.
11. Miscellaneous.
(a) Endorsement of Stock Certificates. The Purchasers hereby agree that
each outstanding certificate representing shares of Common Stock subject to this
Agreement shall bear an endorsement reading substantially as follows until the
shares of Common Stock have been sold pursuant to an effective registration
statement under the Securities Act:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
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OFFERED, SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND THE RULES AND
REGULATIONS THEREUNDER AND ALL APPLICABLE STATE SECURITIES OR "BLUE SKY"
LAWS OR AN EXEMPTION THEREFROM AND ARE SUBJECT UNDER CERTAIN CIRCUMSTANCES
TO A RIGHT OF FIRST REFUSAL IN FAVOR OF THE COMPANY AS SET FORTH IN A STOCK
PURCHASE AGREEMENT, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE
COMPANY.
(b) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the written consent of holders of at least a
majority of the outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect the rights of other holders of Registrable
Securities may be given by the holders of a majority of the Registrable
Securities being sold.
(c) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(i) if to a holder of Registrable Securities, at the most current
address given by such holder to the Company in accordance with the
provisions of this Section 11(c), which address initially is the address
set forth in the Purchase Agreement, with a copy to; and
(ii) if to the Company, initially at its address set forth in the
Purchase Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 11(c), with a copy
to Latham & Watkins, 701 "B" Street, Suite 2100, San Diego, California
92101, Attention: David A. Hahn, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
holders of Registrable Securities; provided, however, that after the Closing
this Agreement shall not inure to the benefit of or be binding upon a successor
or assign of a holder of Common Stock unless and to the extent such successor or
assign acquired Registrable Securities from such holder.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(h) Severabilily. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(i) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the
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parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the
Company with respect to the securities sold pursuant to the Purchase Agreement.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
(j) Attorney's Fees. In the event of any legal action or other proceeding
arising out of or by reason of this Agreement, the prevailing party shall be
entitled to recover, in addition to other damages, its reasonable attorney's
fees and costs.
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[TRANSLINK LETTERHEAD]
JUNE 18, 1998
The Board of Directors
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 Faraday Avenue
Carlsbad, CA 92008
Re: Fairness Opinion
Dear Sirs:
Translink International, Inc. ("Translink") has been advised that
International Lottery & Totalizator Systems, Inc. ("ILTS" or the "Company") has
received an offer from Berjaya Lottery Management (UK) Ltd. ("Berjaya") to
exchange 52,000,000 common shares of Prime Gaming Philippines Inc. ("Prime") at
17.50 PhPesos per share or $US 0.4375 per share at a stipulated PHPeso/$US
exchange rate of 40.00 PhPeso/$US 1.00, for 9,479,167 new ILTS common shares at
$US 2.40 per share (the "Transaction"). Upon completion of the Transaction, ILTS
will own 52.25% of the outstanding Prime common shares. Berjaya presently owns
2,200,000 ILTS common shares, or 36.61% of the outstanding ILTS common shares,
and 54,043,992 Prime common shares, or 54.30% of the outstanding common shares
of Prime. Upon completion of the Transaction, Berjaya and/or its affiliates will
have a 75.4% interest in the ILTS common shares outstanding.
The Affiliations Committee of the Board of Directors of ILTS (the
"Affiliations Committee") has retained Translink to provide an opinion to the
ILTS Board of Directors (the "Board") as to the fairness of the Transaction,
from a financial point of view, to the non-Berjaya shareholders of ILTS (the
"Fairness Opinion").
ENGAGEMENT
The Affiliations Committee initially contacted Translink regarding a
potential assignment on May 7, 1998 and Translink was formally engaged by the
Affiliations Committee on May 11, 1998, through an agreement between the
Affiliations Committee and Translink dated May 11, 1998 (the "Engagement"). The
terms of the Engagement provide that Translink is to be paid a flat fee for its
services, fifty percent (50%) of which was paid upon the initiation of the
Engagement and the balance payable upon the rendering of the Fairness Opinion to
the Board. In addition, Translink is to be reimbursed for its reasonable
out-of-pocket expenses and to be indemnified by the Company in certain
circumstances. Translink consents to the inclusion of the Fairness Opinion in
its entirety by ILTS in any filings with the exchanges, securities commissions,
or similar regulatory authorities in the United States and The Philippines.
RELATIONSHIP WITH INTERESTED PARTIES
Neither Translink, nor any of its affiliates is an insider, associate or
affiliate (as those terms are defined in the Securities Act of 1933, as amended)
of the Company. Translink has not been engaged to provide any financial advisory
services nor has it participated in any financing involving ILTS other than the
services provided under the Engagement. There are no understandings, agreements
or commitments between Translink and the Company with respect to any future
business dealings. Translink may, in the future, perform financial advisory
services for ILTS.
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SCOPE OF REVIEW
In connection with our Fairness Opinion, we have reviewed and relied upon
or carried out, among other things, the following:
1. reviewed the Stock Purchase Agreement dated June 18, 1998, between the
Company and Berjaya;
2. reviewed the Board Paper Draft No. 3 prepared by Berjaya for the Board
of Directors of ILTS dated May 26, 1998;
3. reviewed the Annual Report to Shareholders of ILTS and its Annual
Reports on Form 10 -K for the fiscal years ended December 31, 1995,
1996, and 1997; and the ILTS Quarterly Reports on Form 10-Q for the
periods ended March 31, June 30, and September 30 for the years 1995,
1996, and 1997; and the ILTS Quarterly Report on Form 10-Q for the
period ended March 31, 1998;
4. reviewed the ILTS Notice of Annual Meeting dated April 17, 1996, April
8, 1997, and April 30, 1998; and the ILTS Notice of Special Meeting
dated December 2, 1997;
5. reviewed the ILTS Current Report on Form 8-K dated December 3, 1997,
and the ILTS Current Report on Form 8-K/A dated December 19, 1997;
6. reviewed ILTS operating and financial information, including
projections, provided to us by Company management;
7. met with certain senior Company management members to discuss ILTS
operations, historical financial statements, and future prospects;
8. visited the ILTS facilities in Carlsbad, California;
9. reviewed factors relating to the US securities market and US mergers
and acquisitions;
10. reviewed historical stock prices and trading volumes of the common
shares of ILTS;
11. reviewed publicly available financial data and relative stock market
data of other companies which we deemed generally comparable to ILTS;
12. reviewed the economics of the US, Philippine, Malaysian, and Southeast
Asian lottery equipment manufacturing and lottery management industries
from a financial and operating perspective;
13. reviewed the audited financial statements of Central Azucarera de
Pilar, a Philippine Stock Exchange-traded company without operations
since 1991 which undertook a change in name to Prime Gaming Philippines
Inc. in March 1998 and a merger with Philippine Gaming Management
Corporation ("PGMC") in May 1998, for the fiscal years ended June 30,
1995, 1996, and 1997;
14. reviewed the audited financial statements of PGMC for the fiscal years
ended April 30, 1996 and 1997; and the unaudited financial statements
of PGMC for April 30, 1998;
15. reviewed Prime and PGMC operating and financial information, including
projections, provided to us by Prime and PGMC management;
16. met with certain senior Berjaya, Prime and PGMC management members to
discuss Prime and PGMC operations, historical financial statements, and
future prospects;
17. reviewed the Equipment Lease Agreement dated January 25, 1996 between
PGMC and the Philippine Charity Sweepstakes Office;
18. visited the Prime and PGMC administrative and warehouse facilities in
Manila, Philippines;
19. reviewed factors relating to the Philippine, Malaysian, and other
Southeast Asian securities market;
20. reviewed historical stock prices and trading volumes of the common
shares of Central Azucarera de Pilar (negligible share activity since
1991);
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21. reviewed publicly available financial data and relative stock market
data of other companies which we deemed generally comparable to Prime
and PGMC;
22. reviewed the pro-forma consolidated balance sheet of ILTS, as prepared
by Berjaya and as represented to us as reasonable by ILTS, including
the accretion to net assets resulting from the Transaction; and the
projected combined income statement of ILTS and Prime through fiscal
year 2000, as prepared by the Company, including the accretion to net
earnings resulting from the Transaction;
23. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
Translink has not, to the best of its knowledge, been denied access by
ILTS, Berjaya, PGMC, or Prime to any information requested by Translink. When
PGMC is used in lieu of Prime herein, it is to distinguish the operating entity
from the parent company, respectively.
ASSUMPTIONS AND LIMITATIONS
With the approval of the Company and as provided for in the Engagement,
Translink has relied upon the completeness, accuracy and fair presentation of
all of the financial and other information, data, advice, opinions or
representations obtained by it from public sources, and the senior managements
of ILTS, Berjaya, Prime, and PGMC (collectively, the "Information"). This
Fairness Opinion is conditional upon such completeness, accuracy and fair
presentation of the Information. Subject to the exercise of professional
judgement and except as expressly described herein, we have not attempted to
verify independently the completeness, accuracy or fair presentation of any of
the Information.
In preparing the Fairness Opinion, Translink has made a number of
assumptions, one of which is that all of the conditions required to implement
the Transaction will be met.
The Fairness Opinion is rendered on the basis of securities markets,
economic markets, economic, financial and general business conditions prevailing
as at the date hereof and the condition and prospects, financial and otherwise,
of ILTS, Prime and PGMC, as they were reflected in the information and as they
have been represented to Translink in discussions with the management of ILTS,
Berjaya, Prime, and PGMC. In its analyses and in preparing the Fairness Opinion,
Translink has made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Translink or any party involved in the Engagement.
The Fairness Opinion has been provided for the use of the Board and may not
be used by any other person or relied upon by any other person other than the
Board without the express prior written consent of Translink. The Fairness
Opinion in given as of the date hereof and Translink disclaims any undertaking
or obligation to advise any person of any change in any fact or matter affecting
its Fairness Opinion which may come or be brought to the attention of Translink
after the date hereof. Without limiting the foregoing, in the event that there
is any material change in any fact or matter affecting the Fairness Opinion
after the date hereof, Translink reserves the right to change, modify or
withdraw its Fairness Opinion.
Translink believes that its analysis must be considered as a whole and that
selecting portions of the analysis or the factors considered by its, without
considering all factors and analysis together, could create a misleading view of
the process underlying the Fairness Opinion. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. Any attempt to do so could lead to undue
emphasis on any particular factor or analysis. The Fairness Opinion is not to be
construed as a recommendation to any holder of the common shares of ILTS as to
whether to vote in favor of the Transaction.
FAIRNESS ANALYSIS
Translink has assessed the fairness, from a financial point of view, of the
Transaction to the non-Berjaya shareholders of ILTS based upon a number of
factors. These factors include (i) a net present value/discounted cash flow
analysis; (ii) a comparison of the ascribed value of the ILTS common shares
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under the Transaction to recent trading levels for the common shares of the
Company; (iii) a review of the relative values of publicly-traded US lottery
management and equipment manufacturing firms, from the perspective of whether
public market values might exceed the Transaction values; (iv) an analysis of
relative values paid in recent comparable transactions in the US lottery
management and equipment manufacturing industries; and, (v) an analysis of the
accretion or dilution to post-Transaction ILTS net assets and forecasted
earnings, as prepared by Berjaya and PGMC and attested to by the Company as
reasonable.
The value assigned to the Prime common shares offered in the Transaction
was evaluated based upon a net present value/discounted cash flow analysis of
the PGMC operating forecast over the life of the contract between the Philippine
Charity Sweepstakes Office and PGMC, as prepared by Berjaya and PGMC and
attested to by the Company as reasonable. A set of discount rates was derived
based on various economic and financial criteria. Additionally, we analyzed the
relative values of publicly-traded Malaysian lottery management firms, adjusted
for the relative difference in the overall Philippine and Malaysian equity
markets.
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FAIRNESS CONCLUSION
Based upon and subject to the foregoing, Translink is of the opinion that,
as of the date hereof, the Transaction is fair, from a financial point of view,
to the non-Berjaya shareholders of ILTS.
Sincerely,
TRANSLINK INTERNATIONAL, INC.
By: /s/ ROBERT S. KING
------------------------------------
Robert S. King
Managing Director
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
PROXY SOLICITED BY
THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________, 1998
The undersigned hereby appoints M. Mark Michalko and Lawrence E. Logue and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of which the undersigned may be
entitled to vote at the Special Meeting of International Lottery & Totalizator
Systems, Inc. to be held at 2131 Faraday Avenue, Carlsbad, California on
__________, 1998 at 3:00 p.m., (local time), and at any and all postponements,
continuations and adjournments thereof, with all powers that the undersigned
would possess if personally present, upon and in respect of the following
matters and in accordance with the following instructions, with discretionary
authority as to any and all other matters that may properly come before the
meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
ACQUISITION, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
THE BOARD OF DIRECTORS, BASED UPON THE UNANIMOUS RECOMMENDATION OF ITS
AFFILIATIONS COMMITTEE, HAS DETERMINED THAT THE ACQUISITION IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND ACCORDINGLY RECOMMENDS A VOTE
FOR THE ACQUISITION.
1. Approval and adoption of the Acquisition as described in the accompanying
Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
DATED___________________________________
________________________________________
________________________________________
SIGNATURE(S)
Please sign exactly as your name appears
hereon. If the stock is registered in
the names of two or more persons, each
should sign. Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If a signer is a corporation,
please give full corporate name and have
a duly authorized officer sign, stating
title. If signer is a partnership,
please sign in partnership name by
authorized person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
