As filed with the Securities and Exchange Commission on _________________, 1998
Registration No. 333- 63523
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------
UNISTAR GAMING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 7999 13-3808625
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
------------
478 Wheelers Farms Road
Milford, CT 06460
203-876-7600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Michael W. Yacenda
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
(203) 876-7600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<CAPTION>
<S> <C> <C>
Barbara C. Anderson Thurston R. Moore, Esq. Michael W. Yacenda
EXECUTONE Information Systems, Inc. Hunton & Williams Unistar Gaming Corp.
478 Wheelers Farms Road Riverfront Plaza, East Tower 478 Wheelers Farms Road
Milford, Connecticut 06460 951 East Byrd Street Milford, Connecticut 06460
(203) 876-7600 Richmond, Virginia 23219 (203) 876-7600
(804) 788-8295
</TABLE>
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities To Be Amount To Offering Price Per Aggregate Offering Registration
Registered Be Registered Unit(1) Price(1) Fee
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 39,647 shares $.25 $9,911.75 $2.76
- ---------------------------------------------------------------------------------------------
Common Stock Purchase
Rights(2) 39,647 shares N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Subscription Rights(3) 198,237 rights N/A N/A N/A
- ---------------------------------------------------------------------------------------------
</TABLE>
(1)Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(2)The Common Stock Purchase Rights issued pursuant to the terms of the
Stockholder Rights Plan will be attached to and trade with the shares
of Common Stock described above.
(3)Evidencing the rights to subscribe for the 39,647 shares of Common
Stock described above.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
S-1 REGISTRATION STATEMENT
CROSS REFERENCE SHEET
Location in Proxy
Part I - Information Required in Prospectus Statement/Prospectus
Item 1 Forepart of Registration Facing Page; Outside Front Cover
Statement and Outside Front Page of Prospectus
Cover Page of Prospectus
Item 2 Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages of Prospectus
Item 3 Summary Information, Risk Factors "PROXY STATEMENT/PROSPECTUS
and Ratio of Earnings to Fixed SUMMARY;" "RISK FACTORS"
Charges
Item 4 Use of Proceeds "USE OF PROCEEDS"
Item 5 Determination of Offering Price "THE OFFERING -- Determination of
Subscription Price"
Item 6 Dilution n/a
Item 7 Selling Security Holders n/a
Item 8 Plan of Distribution "PLAN OF DISTRIBUTION"
Item 9 Description of Securities to be "DESCRIPTION OF UNISTAR CAPITAL
Registered STOCK -- UNISTAR PREFERRED STOCK;"
"DESCRIPTION OF UNISTAR CAPITAL
STOCK -- UNISTAR COMMON STOCK;"
"DESCRIPTION OF THE RIGHTS"
Item 10 Interests of Named Experts and "LEGAL MATTERS"
Counsel
Item 11 Information with Respect to the
Registrant
(a) Description of Business "PROXY STATEMENT/PROSPECTUS
SUMMARY;" "THE COMPANY;"
"MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS;"
"BUSINESS AND PROPERTIES OF
UNISTAR"
(b) Description of Property "BUSINESS AND PROPERTIES OF
UNISTAR"
(c) Legal Proceedings "RISK FACTORS -- Pending Litigation
that Could Have a Material Adverse
Effect on Unistar and the NIL"
<PAGE>
(d) Market Price, Dividends and Inside Front Cover and Outside
Related Stockholder Markets Back Cover Pages of Prospectus;
"SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS OF UNISTAR COMMON
STOCK AND UNISTAR PREFERRED STOCK;"
"DISTRIBUTION POLICY" "RISK
FACTORS -- Competition;" "RISK
FACTORS -- Market Development
Risks;" "RISK FACTORS--No Prior
Market for Unistar Common Stock;"
"RISK FACTORS -- Potential
Volatility of Unistar Stock Price;"
"DESCRIPTION OF UNISTAR CAPITAL
STOCK -- Unistar Common Stock"
(e) Financial Statements FINANCIAL STATEMENTS
(f) Selected Financial Data "SUMMARY OF FINANCIAL INFORMATION;"
"UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION"
(g) Supplementary Financial n/a
Information
(h) Management's Discussion and "MANAGEMENT'S DISCUSSION AND
Analysis of Financial ANALYSIS OF FINANCIAL CONDITION
Condition and Results of AND RESULTS OF OPERATIONS;"
Operations
(i) Changes in and Disagreements n/a
with Accountants
(j) Quantitative and Qualitative n/a
Disclosure About Market Risk
(k) Directors and Executive "MANAGEMENT OF UNISTAR"
Officers
(l) Executive Compensation "EXECUTIVE COMPENSATION"
(m) Security Ownership of "SECURITY OWNERSHIP OF CERTAIN
Certain Beneficial Owners BENEFICIAL OWNERS OF UNISTAR
and Management COMMON STOCK AND UNISTAR
PREFERRED STOCK"
(n) Certain Relationships and "CERTAIN RELATIONSHIPS AND
Related Transactions RELATED TRANSACTIONS"
Item 12 Disclosure of Commission Position "INFORMATION NOT REQUIRED IN
on Indemnification for PROSPECTUS -- Undertakings"
Securities Act Liabilities
<PAGE>
Part II - Information Not Required in Prospectus
Item 13 Other Expenses of Issuance and "INFORMATION NOT REQUIRED IN
Distribution PROSPECTUS -- Other Expenses of
Issuance and Distribution"
Item 14 Indemnification of Officers and "INFORMATION NOT REQUIRED IN
Directors PROSPECTUS -- Indemnification of
Directors and Officers"
Item 15 Recent Sales of Unregistered "INFORMATION NOT REQUIRED IN
Securities PROSPECTUS -- Recent Sales of
Unregistered Securities"
Item 16 Exhibits and Financial Statement "INFORMATION NOT REQUIRED IN
Schedules PROSPECTUS -- Exhibits and Financial
Statement Schedules"
Item 17 Undertakings INFORMATION NOT REQUIRED IN
PROSPECTUS -- Undertakings"
<PAGE>
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
[ ] Definitive Proxy Statement Rule 14a-6(e)(2)
[ ] Definitive Additional Materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
EXECUTONE Information Systems, Inc.,
(Name of Registrant as Specified in Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] 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 transactions applies:
(3) Per unit price of 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:
[ ] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
SCHEDULE 14A
CROSS REFERENCE SHEET
Information Required in Proxy Statement Location in ProxyStatement/Prospectus
Item 1 Date, Time and Place Information "PROXY STATEMENT/PROSPECTUS SUMMARY
-- The Special Meeting;"
"THE COMPANY;" Outside Front
Cover Page of Prospectus;
"SHAREHOLDER PROPOSALS"
Item 2 Revocability of Proxy "EXECUTONE SPECIAL
MEETING--Revocability of Proxies"
Item 3 Dissenters' Rights of Appraisal n/a
Item 4 Persons Making the Solicitation "EXECUTONE SPECIAL MEETING --
Solicitation of Proxies;" "PROXY
STATEMENT/PROSPECTUS SUMMARY --
The Special Meeting--Solicitation
of Proxies;" Outside Front Cover
Page of Prospectus
Item 5 Interest of Certain Persons in "SECURITY OWNERSHIP OF CERTAIN
Matters to be Acted Upon BENEFICIAL OWNERS OF EXECUTONE
COMMON STOCK AND EXECUTONE
PREFERRED STOCK"
Item 6 Voting Securities and Principal "PROXY STATEMENT/PROSPECTUS SUMMARY
Holders Thereof -- The Special Meeting -- Meeting
Record Date;" "EXECUTONE SPECIAL
MEETING -- Voting Rights;"
"SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS OF EXECUTONE
COMMON STOCK AND EXECUTONE
PREFERRED STOCK"
Item 7 Directors and Executive Officers n/a
Item 8 Compensation of Directors and
Executive Officers n/a
Item 9 Independent Public Accountants n/a
Item 10 Compensation Plans n/a
Item 11 Authorization of Issuance of
Securities Otherwise Than
for Exchange n/a
<PAGE>
Item 12 Modification or Exchange "EXECUTONE SPECIAL MEETING --
of Securities Description of Conversion of
Securities Upon Approval of the
Amendments;"
"PROXY STATEMENT/PROSPECTUS SUMMARY
--The Special Meeting" "MANAGEMENT'S
DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS;"
"EXECUTONE SPECIAL MEETING --
Purposes of and Reasons for the
Meeting;"
"DESCRIPTION OF UNISTAR
CAPITAL STOCK;" "DESCRIPTION OF
UNISTAR CAPITAL STOCK --
Stockholder Rights Plan"
Item 13 Financial and Other Information "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE"
Item 14 Mergers, Consolidations, n/a
Acquisitions and Similar
Matters
Item 15 Acquisition or Disposition of
Property n/a
Item 16 Restatement of Accounts n/a
Item 17 Action With Respect to Reports n/a
Item 18 Matters Not Required to be
Submitted n/a
Item 19 Amendment of Charter, Bylaws or "EXECUTONE SPECIAL MEETING --
Other Documents Purposes of and Reasons for
Meeting;"
"PROXY STATEMENT/PROSPECTUS SUMMARY
-- The Special Meeting -- Purposes
of and Reasons for Meeting"
Item 20 Other Proposed Action n/a
Item 21 Voting Procedures "PROXY STATEMENT/PROSPECTUS SUMMARY
-- The Special Meeting -- Voting;"
"EXECUTONE SPECIAL MEETING -- Voting
Rights"
Item 22 Information Required in
Investment Company Prospectus n/a
<PAGE>
EXECUTONE INFORMATION SYSTEMS, INC.
478 Wheelers Farms Road
Milford, Connecticut 06460
_______________, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Meeting") of EXECUTONE Information Systems, Inc. ("Executone"), to be held at
the Holiday Inn Select, 700 Main Street, Stamford, Connecticut, 06901 on
_____________, 1998 at _______.
The primary business of the Meeting will be the approval of certain
amendments (the "Amendments") to Executone's Articles of Incorporation, as
amended (the "Articles of Incorporation"), which are more fully described in the
enclosed Proxy Statement/Prospectus.
Also, I am pleased to inform you that the Board of Directors of Unistar
Gaming Corp. ("Unistar") has approved the offering (the "Offering") to you, as a
holder of common stock of Executone, par value $0.01 per share ("Executone
Common Stock"), of certain transferable rights ("Rights") to purchase shares of
common stock of Unistar, par value $0.01 per share ("Unistar Common Stock"),
subject to the approval of the Amendments by the shareholders of Executone at
the Meeting. If the Amendments are not approved at the Meeting, the Offering
will be terminated automatically. As an Executone shareholder, you are receiving
herewith one Right for every share of Executone Common Stock that you own as of
___________, 1998 (the "Record Date"). If the Amendments are approved by the
Executone shareholders at the Meeting, each five Rights will entitle the holder
thereof (the "Holder") to purchase one share of Unistar Common Stock at a
subscription price of $0.25 per share, or $.05 per Right (the "Subscription
Price"). Up to 9,992,898 shares of Unistar Common Stock will be offered in the
Offering. If shares of Unistar Common Stock remain unsold after the Offering,
and if the Offering is not terminated, Unistar Buying Group, LLC, a limited
liability company owned by certain holders of Executone Cumulative Convertible
Preferred Stock, Series A, and Executone Cumulative Contingently Convertible
Preferred Stock, Series B, will purchase such remaining unsold shares at the
Subscription Price pursuant to a Standby Agreement between Unistar and Unistar
Buying Group, LLC, dated _________, 1998.
As a result of the Offering, subject to approval of the Amendments, you
will have the right to own shares in two separate and very different companies.
Executone will be focused on its core business of developing, marketing and
supporting voice and data communications systems. Unistar will concentrate on
managing telephone and Internet-based national lotteries.
The Board of Directors of Executone believes that the separation of the
lottery management businesses from Executone's other core businesses will
provide investors a sharper focus as to the particular merits of each of those
investments and thereby provide Executone shareholders with a better recognition
of the value of each of those investments.
Following the Offering, your Board of Directors expects that it will
maintain its practice of not declaring regular annual or quarterly dividends on
Executone Common Stock. Unistar is not expected to declare regular annual or
quarterly dividends following the Offering.
We have received advice from our counsel that, for federal income tax
purposes, the Rights are to be treated as a distribution from Executone to
holders of Executone Common Stock. Accordingly, the fair market value of the
Rights, as of the "distribution date" of the Rights, distributed to each Holder
generally will be taxable as a dividend to the extent distributed from
Executone's "earnings and profits," as computed for federal income tax purposes.
To the extent the Rights are not distributed from Executone's earnings and
profits, the distribution will reduce the Holder's basis in the Executone Common
Stock on which Rights are deemed distributed. If the non-dividend portion of the
distribution exceeds the basis of such Executone Common Stock, the excess will
be taxable as gain from the sale of the stock. The distribution date for federal
income tax purposes is not clear. Because exercisability of the Rights is
contingent upon shareholder approval of the Amendments, Executone has been
advised that it is likely that no distribution will be deemed to occur until
(and unless) the shareholders approve the Amendments. It is possible, however,
that the distribution will be deemed to occur on the date of issuance of the
Rights. Thus, the fair market value of the Rights on the distribution date (and
therefore the amount deemed distributed by Executone) likely will not be known
until the Amendments have been approved. In addition, the amount of Executone's
earnings and profits will not be known until 1998 has ended. In early 1999,
Executone is to report to the IRS and to each record holder of Executone Common
Stock except those exempt from information reporting: (i) the total amount
distributed to the shareholder in 1998 and (ii) the portion of such amount that
is taxable as a dividend. For such reporting purposes, Executone intends to
treat the date of shareholder approval of the Amendments as the distribution
date for the Rights.
<PAGE>
The enclosed Proxy Statement/Prospectus explains the proposed Offering in
detail and provides financial and other important information regarding Unistar.
We urge you to read it carefully. Holders of Executone Common Stock are not
required to take any action to participate in the Offering.
The Board has unanimously approved the Amendments to be considered and
voted upon at the Meeting and unanimously recommends that Executone's
shareholders vote "FOR" the approval of the Amendments. If the Amendments are
not approved, then the Offering will be terminated.
The Notice of Meeting and Proxy Statement/Prospectus on the following
pages describe in detail the matters to be presented at the Meeting as well as
the terms of the Offering.
Whether or not you plan to attend the Meeting, we urge you to sign and
return the enclosed proxy so that your shares will be represented at the
Meeting. If you so desire, you can withdraw your proxy and vote in person at the
Meeting.
Sincerely,
Stanley J. Kabala
Chairman, President and Chief Executive Officer
<PAGE>
EXECUTONE Information Systems, Inc.
478 Wheelers Farm Road
Milford, Connecticut 06460
PROXY STATEMENT
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
____________, 1998
To the Shareholders of
EXECUTONE Information Systems, Inc.:
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of EXECUTONE Information Systems, Inc. ("Executone"), will be held
at the Holiday Inn Select, 700 Main Street, Stamford, Connecticut, 06901, on
__________, 1998, at _________, for the following purposes:
1. To approve certain amendments to the Articles of Incorporation of
Executone, as amended, which amendments are more fully described herein; and
2. To transact such other business as may properly come before the Meeting
and any continuation or adjournment thereof.
Only shareholders of record at the close of business on __________, 1998,
are entitled to notice of and to vote at the Meeting or any continuation or
adjournment thereof.
Barbara C. Anderson
Vice President, Law and Administration,
and Secretary
Milford Connecticut
___________, 1998
Whether or not you plan to attend the Meeting, please complete, date and sign
the enclosed proxy, which is solicited by the Executone Board of Directors, and
return it in the self-addressed envelope provided for this purpose. The proxy
may be revoked at any time before it is exercised, by written notice to such
effect received by Executone, by submitting a subsequently dated proxy or by
attending the Meeting and voting in person.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
Subject to Completion, dated ______________, 1998
PROXY STATEMENT PROSPECTUS
EXECUTONE INFORMATION SYSTEMS, INC. UNISTAR GAMING CORP.
9,992,898 Shares
Unistar Gaming Corp. Common Stock
Special Meeting of Shareholders (and 49,964,492 Rights to Acquire Up To
To Be Held on _______, 1998 9,992,898 of Such Shares)
This Proxy Statement/Prospectus is being furnished by EXECUTONE
Information Systems, Inc., a Virginia corporation ("Executone"), to all
shareholders of record as of _____________, 1998 (the "Record Date"), of (i)
Executone common stock, par value $.01 per share (the "Executone Common Stock"),
(ii) Executone Cumulative Convertible Stock, Series A (the "Executone Series A
Preferred Stock"), and (iii) Executone Cumulative Contingently Convertible
Preferred Stock, Series B (the "Executone Series B Preferred Stock" and,
together with the Executone Series A Preferred Stock, the "Executone Preferred
Stock"), and solicits their proxies for a Special Meeting of Shareholders (the
"Meeting") to be held on ______, 1998, at the Holiday Inn Select, 700 Main
Street, Stamford, Connecticut 06901 at ________. This Proxy Statement/Prospectus
and the enclosed form of proxy are being mailed to shareholders on or about
_______, 1998.
At the Meeting, shareholders will be asked: (1) to approve certain
amendments to the Articles of Incorporation of Executone, as amended (the
"Articles of Incorporation"), relating to the conversion rights of the Executone
Preferred Stock (the "Amendments"); and (2) to transact such other business as
may properly come before the Meeting and any continuation or adjournment
thereof.
All proxies duly executed and received will be voted on all matters
presented at the Meeting in accordance with the instructions contained in such
proxies. In the absence of specific instructions, proxies received will be voted
in favor of the Amendments. Management does not know of any other matters that
will be brought before the Meeting. In the event that any other matter should
properly come before the Meeting, the persons designated in the enclosed proxy
will have discretionary authority to vote all proxies not marked to the contrary
with respect to such matters in accordance with their best judgment. Proxies may
be revoked at any time prior to the exercise thereof by written notice to such
effect addressed to and received by Executone at its corporate offices at the
address given above, Attention: Corporate Secretary, by delivery of a
subsequently dated proxy or by a vote cast in person at the Meeting.
As of the Record Date, there were outstanding a total of ______ shares of
Executone Common Stock, ____ shares of Executone Series A Preferred Stock and
____ shares of Executone Series B Stock. The Executone Common Stock, the
Executone Series A Preferred Stock and the Executone Series B Preferred Stock
are the only classes of securities of Executone entitled to vote at the Meeting
and each outstanding share of each class has one vote. A majority of the total
number of shares of Executone Common Stock and Executone Preferred Stock
outstanding and entitled to vote as of ____, 1998, or ____ shares, must be
present at the Meeting in person or by proxy in order to constitute a quorum for
the transaction of business. Only holders of record of Executone Common Stock
and Executone Preferred Stock as of the close of business on the Record Date
will be entitled to vote at the Meeting.
Approval of the Amendments requires the affirmative vote of (i) a majority
of the votes cast of the Executone Common Stock and the Executone Preferred
Stock, voting as a single group (with each shareholder of record being entitled
to one vote for each share of Executone Common Stock and Executone Preferred
Stock held) and (ii) the holders of two-thirds of the shares the Executone
Series A Preferred Stock and the Executone Series B Preferred Stock, each voting
as a separate group (with each shareholder of record being entitled to one vote
for each share of Executone Preferred Stock held). Abstentions and shares held
in street name that are not voted with respect to the Amendments will have the
same effect as a negative vote. Holders of approximately two-thirds of each
class of the Executone Preferred Stock have entered into the Exchange Agreement,
dated August 12, 1998, with Executone and Unistar, pursuant to which they
appointed Robert Berman and Jerry M. Seslowe, directors of Unistar, to vote as
each shareholder's proxy all of his or its shares of Executone Common Stock and
Executone Preferred Stock for the Amendments at any meetings, including the
Meeting. As a result, the requisite vote needed to approve the Amendments is the
affirmative vote of a majority of the votes cast of the Executone Common Stock
and the Executone Preferred Stock, voting as a single group.
<PAGE>
A list of shareholders entitled to vote at the Meeting will be available
for examination by any shareholder at Executone's offices, 478 Wheelers Farms
Road, Milford, Connecticut 06460, for a period of ten days prior to the Meeting
and also will be available at the Meeting.
In addition, this Proxy Statement/Prospectus is being furnished to
shareholders of Executone in connection with the offering (the "Offering") to
the shareholders of Executone of certain transferable rights ("Rights") to
purchase shares of common stock of Unistar Gaming Corp. ("Unistar"), par value
$0.01 per share ("Unistar Common Stock"). The exercisability of the Rights is
contingent upon the approval of the Amendments by the shareholders of Executone
at the Meeting.
Each holder of Executone Common Stock is receiving herewith one Right for
every share of Executone Common Stock owned as of the Record Date. If the
Amendments are approved by the Executone shareholders at the Meeting, each five
Rights will entitle the holder thereof (the "Holder") to purchase one share of
Unistar Common Stock at a subscription price of $0.25 per share, or $.05 per
Right (the "Subscription Price"). Up to 9,992,898 shares of Unistar Common Stock
will be offered in the Offering. If shares of Unistar Common Stock remain unsold
after the Offering, Unistar Buying Group, LLC, a limited liability company owned
by certain holders of Executone Preferred Stock, will purchase such remaining
unsold shares at the Subscription Price pursuant to a Standby Agreement between
Unistar and Unistar Buying Group, LLC, dated _________, 1998 (the "Standby
Agreement").
If amended as contemplated by the Amendments, the Articles of
Incorporation will provide that all of the outstanding shares of Executone
Preferred Stock will be converted automatically into: (i) shares of Unistar
Common Stock, which shares, as of the Closing Date, will represent 15% of the
outstanding shares of Unistar Common Stock, exclusive of any shares acquired
pursuant to the Standby Agreement or through the Offering; and (ii) all shares
of Unistar's Cumulative Convertible Preferred Stock, Series A (the "Unistar
Preferred Stock"). Each share of Unistar Preferred Stock will be convertible,
upon the occurrence of certain events, into that number of shares of Unistar
Common Stock such that, upon conversion, the holders of Executone Preferred
Stock will own 34% of the outstanding Unistar Common Stock, excluding any
additional shares of Unistar Common Stock issued after the date of the closing
of the Offering.
No consideration will be paid by shareholders of Executone for the Rights
to be received by them in the Offering. The holders of Executone Common Stock
will not be required to surrender or exchange shares of Executone stock in order
to receive Rights. If the Amendments are approved, the shares of Executone
Preferred Stock will be converted automatically into shares of Unistar Common
Stock and Unistar Preferred Stock without payment of additional consideration.
Executone has received advice from its counsel that, for federal income
tax purposes, the Rights are to be treated as a distribution from Executone to
holders of Executone Common Stock. Accordingly, the fair market value of the
Rights, as of the "distribution date" of the Rights, distributed to each Holder
generally will be taxable as a dividend to the extent distributed from
Executone's "earnings and profits," as computed for federal income tax purposes.
To the extent the Rights are not distributed from Executone's earnings and
profits, the distribution will reduce the Holder's basis in the Executone Common
Stock on which Rights are deemed distributed. If the non-dividend portion of the
distribution exceeds the basis of such Executone Common Stock, the excess will
be taxable as gain from the sale of the stock. The distribution date for federal
income tax purposes is not clear. Because exercisability of the Rights is
contingent upon shareholder approval of the Amendments, Executone has been
advised that it is likely that no distribution will be deemed to occur until
(and unless) the shareholders approve the Amendments. It is possible, however,
that the distribution will be deemed to occur on the date of issuance of the
Rights. Thus, the fair market value of the Rights on the distribution date (and
therefore the amount deemed distributed by Executone) likely will not be known
until the Amendments have been approved. In addition, the amount of Executone's
earnings and profits will not be known until 1998 has ended. In early 1999,
Executone is to report to the IRS and to each record holder of Executone Common
Stock except those exempt from information reporting: (i) the total amount
distributed to the shareholder in 1998 and (ii) the portion of such amount that
is taxable as a dividend. For such reporting purposes, Executone intends to
treat the date of shareholder approval of the Amendments as the distribution
date for the Rights.
<PAGE>
There is no current public market for Unistar Common Stock. Although it is
anticipated that Unistar Common Stock will trade on the [Nasdaq National
Market], there is no assurance that an active market will develop following the
Offering. Unistar has no plans to register the Unistar Preferred Stock and does
not anticipate that an active market for such stock will develop following the
Offering.
YOU SHOULD CAREFULLY CONSIDER THE RISKS THAT ARE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 9. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------
Exercise
and Offer Proceeds
Price to Unistar
----------------------------
Per Share*...... $.25 $.25
Total........... $2,498,225 $2,498,225
*Five Rights and $.25 entitle the holder to purchase one share of
Unistar Common Stock. It is estimated that a total of 11,756,351
shares of Unistar Common Stock will be issued and outstanding after
completion of the Offering, based on 49,964,492 shares of Executone
Common Stock issued and outstanding as of September 30, 1998.
The exercise period (the "Exercise Period") for the Rights will expire at
5:00 p.m., New York City time, on ________, 1998 (the "Expiration Date"). Once a
Holder exercises a Right and such exercise is accepted by Unistar, such Holder
may not withdraw the exercise. There is no minimum number of shares that must be
subscribed for in the Offering for the Offering to be consummated.
Unistar has filed a Registration Statement with the Securities and
Exchange Commission covering the Rights and the 9,992,898 shares of Unistar
Common Stock. Before the Offering, the Unistar Common Stock has not been listed
on any stock exchange or the [Nasdaq National Market]. The Rights and the
Unistar Common Stock have been approved for quotation on the [Nasdaq National
Market].
The number of Rights that will be granted to the holders of Executone
Common Stock will be calculated based upon the number of shares of Executone
Common Stock that are outstanding on the Record Date. If there are fewer than or
more than 49,964,492 shares of Executone Common Stock outstanding on the Record
Date, Unistar will grant fewer than or more than 49,964,492 Rights in the
Offering. It is estimated that a total of 9,992,898 shares of Unistar Common
Stock will be sold in the Offering. The actual number of shares of Unistar
Common Stock that will be sold in the Offering will depend upon the actual
number of shares of Executone Common Stock outstanding on the Record Date.
After the Offering, and after the completion of its fiscal year, Unistar
intends to send to each of its stockholders an annual report containing
financial statements that have been examined and reported upon, with an opinion
expressed by, Unistar's independent auditors, Arthur Andersen LLP.
PROXIES IN THE FORM ENCLOSED ARE SOLICITED BY THE BOARD OF DIRECTORS OF
EXECUTONE FOR THE SPECIAL MEETING TO BE HELD ON ___________, 1998. ALL PROXIES
DULY EXECUTED AND RECEIVED WILL BE VOTED ON ALL MATTERS PRESENTED AT THE SPECIAL
MEETING IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED IN SUCH PROXIES. IN THE
ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES RECEIVED WILL BE VOTED IN FAVOR OF THE
AMENDMENTS.
The Date of this Proxy Statement/Prospectus is ____________, 1998.
<PAGE>
AVAILABLE INFORMATION
Executone is (and, following the completion of the Offering, Unistar will
be) subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
Unistar will file) reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by Executone (and to be filed by Unistar) may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 73 Tremont Street, Suite 600,
Boston, Massachusetts 02108-3912; 7 World Trade Center, Suite 1300, New York,
New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such information can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a
World-Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.
Executone's Common Stock is listed on the [Nasdaq National Market]. Unistar's
Common Stock will be listed on the [Nasdaq National Market]. Reports and other
information concerning Executone and Unistar can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
Unistar intends to furnish holders of Unistar Common Stock with annual
reports containing consolidated financial statements prepared in accordance with
United States generally accepted accounting principles and quarterly reports for
the first three quarters of each fiscal year. The annual financial statements
will be audited by an independent public accounting firm.
Unistar has filed with the Commission a Registration Statement on Form S-1
(together with any amendments hereto, the "Registration Statement") under the
Exchange Act with respect to Unistar Common Stock to be distributed pursuant to
the Offering. This Proxy Statement/Prospectus does not contain all of the
information in the Registration Statement and the related exhibits and
schedules. Statements in this Proxy Statement/Prospectus as to the contents of
any contract, agreement or other document are summaries only and are not
necessarily complete. For complete information as to these matters, shareholders
should refer to the applicable exhibit or schedule to the Registration
Statement. The Registration Statement and the related exhibits filed by Unistar
with the Commission may be inspected at the public reference facilities of the
Commission listed above.
Following the Offering, Unistar will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Unistar also will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meetings of stockholders.
NO PERSON IS AUTHORIZED BY EXECUTONE OR UNISTAR TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
<PAGE>
TABLE OF CONTENTS
PROXY STATEMENT/PROSPECTUS SUMMARY...........................................1
The Company...............................................................1
The Special Meeting......................................................2
The Offering..............................................................3
Unistar Operations Summary Financial Information..........................6
Summary Financial Data Unistar Gaming Corp. and Subsidiary (Unaudited)....6
National Indian Lottery Summary Financial Information.....................7
Summary Operating Results National Indian Lottery (Unaudited).............7
Unistar Operations Summary of Pro Forma Financial Data (Unaudited)........8
RISK FACTORS..................................................................9
Rights Valueless if Amendments are Not Approved by Executone Shareholders.9
No Prior Market for Unistar Common Stock..................................9
Risk of Delisting from Nasdaq.............................................9
Risk that the Unistar Common Stock May Become Subject to the Penny Stock
Regulations...........................................................9
Potential Volatility of Unistar Stock Price..............................10
No Assurance That Value of Unistar Common Stock at June 30, 1998, Will
Reflect Market Prices Following the Offering.........................10
Pending Litigation That Could Have a Material Adverse Effect on Unistar
and the NIL..........................................................10
No Arm's-Length Negotiation of Related Agreements.......................12
No Assurance of Future Profitability of Unistar..........................12
Unistar Has Never Operated as an Independent Entity......................12
Unavailability of Executone's Financial and Other Resources..............13
Dependence upon Key Personnel............................................13
Certain Antitakeover Effects of Certain Provisions of Unistar's
Certificate of Incorporation and Unistar's Bylaws....................13
Substantial Percentage Ownership of Unistar By Executone
Preferred Holders....................................................13
Competition..............................................................14
Government Regulation and Legislation....................................14
Market Development Risks.................................................14
Concentration in Single Industry.........................................15
No Assurance of Additional Contracts.....................................15
Year 2000 Risks..........................................................15
Approval of the CDA......................................................15
Limited Legal Remedies Available Under the NIL Agreement.................16
EXECUTONE SPECIAL MEETING....................................................16
Date, Time and Place, Record Date........................................16
Purposes of and Reasons for Meeting......................................16
Description of Conversion of Securities Upon Approval of the Amendments..16
Voting Rights............................................................17
Revocability of Proxies..................................................17
Solicitation of Proxies..................................................17
Board of Directors Recommendation........................................17
THE OFFERING.................................................................17
Purposes of and Reasons for the Offering.................................17
Conditions to the Offering...............................................18
Determination of Subscription Price......................................18
Exercise of the Rights...................................................18
Transfer of the Rights...................................................20
Additional Information...................................................20
Unsubscribed Shares of Unistar Common Stock..............................20
FEDERAL INCOME TAX CONSEQUENCES..............................................21
Issuance of Rights to Holders of Executone Common Stock..................21
Exercise of Rights.......................................................22
Sale or Expiration of Rights.............................................22
Consequences to Holders of Executone Preferred Stock.....................22
Effect of Proposed Transactions on Use of Net Operating Losses...........22
USE OF PROCEEDS..............................................................22
THE COMPANY..................................................................23
DISTRIBUTION POLICY..........................................................23
CAPITALIZATION...............................................................24
UNISTAR OPERATIONS UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION....25
UNISTAR OPERATIONS SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION....28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................30
Introduction.............................................................30
Years Ended December 31, 1997, 1996 and 1995.............................30
Six Months Ended June 30, 1998 and 1997..................................33
Forward-Looking Statements...............................................35
ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO THE OFFERING..........36
Reorganization Agreement.................................................36
Services Agreement.......................................................37
Tax Sharing Agreement....................................................37
BUSINESS AND PROPERTIES OF UNISTAR...........................................38
General Development of the Business of Unistar...........................38
Products.................................................................38
Competition..............................................................42
Government Regulation....................................................43
Patents, Trademarks and Copyrights.......................................43
Employees................................................................44
Unistar Properties.......................................................44
The National Indian Lottery..............................................44
MANAGEMENT OF UNISTAR........................................................47
Advisory Board...........................................................47
Directors and Officers...................................................47
Certain Board Committees.................................................48
Compensation Committee Interlocks and Insider Participation..............48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................49
EXECUTIVE COMPENSATION.......................................................50
Compensation of Directors................................................50
Compensation of Executive Officers.......................................51
Option Grants............................................................52
Employment Agreements and Transition Retention Plans.....................52
The Option Plan..........................................................53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF UNISTAR COMMON STOCK
AND UNISTAR PREFERRED STOCK..............................................55
By Management............................................................55
By Others................................................................55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF EXECUTONE COMMON STOCK AND
EXECUTONE PREFERRED STOCK................................................57
By Management............................................................57
By Others................................................................59
DESCRIPTION OF UNISTAR CAPITAL STOCK.........................................60
Unistar Preferred Stock..................................................60
Unistar Common Stock.....................................................61
Stockholder Rights Plan..................................................61
DESCRIPTION OF THE RIGHTS....................................................63
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR
CERTIFICATE, THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN AND THE
GENERAL CORPORATION LAW OF DELAWARE......................................63
General..................................................................63
Classified Board of Directors............................................64
Removal of Directors; Filling Vacancies..................................65
Special Meetings.........................................................65
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors.............................................65
Preferred Stock..........................................................66
Certain Voting Requirements..............................................66
Stockholder Rights Plan..................................................66
Delaware General Corporation Law.........................................66
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS......................67
Limitation of Liability of Directors.....................................67
Indemnification of Directors and Officers................................67
PLAN OF DISTRIBUTION.........................................................67
LEGAL MATTERS................................................................67
EXPERTS......................................................................67
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................67
SHAREHOLDER PROPOSALS........................................................68
INDEX TO FINANCIAL STATEMENTS...............................................F-1
<PAGE>
PROXY STATEMENT/PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto) contained
elsewhere in this Proxy Statement/Prospectus. Unless otherwise indicated, the
information in this Proxy Statement/Prospectus assumes (i) a subscription price
of $.25 per share of the common stock of Unistar Gaming Corp., $.01 par value
per share ("Unistar Common Stock"), (ii) 49,964,492 shares of common stock of
EXECUTONE Information Systems, Inc., par value $.01 per share (the "Executone
Common Stock"), are issued and outstanding and (iii)the exchange of all
outstanding shares of Executone Cumulative Convertible Preferred Stock, Series A
(the "Executone Series A Preferred Stock"), and Executone Cumulative
Contingently Convertible Preferred Stock, Series B (the "Executone Series B
Preferred Stock" and, together with the Executone Series A Preferred Stock, the
"Executone Preferred Stock").
The Company
Unistar Gaming Corp., a Delaware corporation ("Unistar"), is currently a
wholly-owned subsidiary of EXECUTONE Information Systems, Inc., a Virginia
corporation ("Executone"). After the date of the closing (the "Closing Date") of
the Offering (as hereinafter defined), Executone will no longer have any
ownership interest in Unistar. Unistar develops, provides and maintains
telephone, Internet and enterprise communications, accounting, database and
other applications and services for use by the governmental lottery market. Its
principal objective has been to develop a new generation of lottery technology
by anticipating the impact that recent advances in telecommunications and
computers will have on the nature and delivery of lottery products and the
support systems necessary to administer them. Unistar is the first to develop a
secure, integrated telephone and Internet lottery gaming system (the "Internet
System"), which has been successfully placed in operation on behalf of a
governmental unit. The Internet System supports both periodic draw lottery
games, providing pari-mutuel outcomes based on the number of participants in the
pool, and instant games, based on the random distribution of predetermined
outcomes within a pool of certain size.
Unistar has developed client/server-based systems to provide secure
electronic production, delivery , validation, billing and accounting for lottery
games. The Systems are configurable, which allows the addition, deletion and
substitution of games offered. Tickets may be purchased at the lottery
operations center using a telephone connected through the public telephone
network, a personal computer connected via the Internet or a custom designed
kiosk or electronic lottery terminal ("ELT") connected via a local area network
("LAN"). Development has initially focused on the production, delivery and
billing of lottery games using the Internet System and, with modifications, the
production, delivery and billing of lottery games over closed loop networks or
"Intranets" (the "Intranet System" and, together with the Internet System, the
"Systems"). Unistar is pursing the sale or license of various components of the
Systems and related technologies worldwide primarily to domestic and
international state and national lotteries and other potential customers.
The National Indian Lottery (the "NIL") is the first client to install and
operate a configuration of the Systems. The NIL is conducted by the Coeur
d'Alene, a federally recognized Indian tribe (the "CDA"), under a compact with
the State of Idaho. UniStar Entertainment, Inc., Unistar's wholly owned
subsidiary ("UniStar Entertainment"), has entered into an exclusive contract
(the "NIL Agreement"), ending January 2003, to provide services and systems for
the NIL, including development and management of the software, network design
and call center applications for the NIL's operations. In return for providing
these systems and services, the CDA has agreed to pay UniStar Entertainment a
fee equal to 30% of the profits of the NIL. The NIL has been in operation since
January 1998 and is expected to become profitable in 1999. In an attempt to
block the NIL, certain states issued letters under 18 U.S.C. Section 1084
("Section 1084") to prevent the long-distance carriers from providing toll-free
telephone service to the NIL and the States of Missouri and Wisconsin have filed
suit against the NIL. See "RISK FACTORS--Pending Litigation That Could Have a
Material Adverse on Unistar and the NIL."
Unistar is also evaluating and, in certain instances, beginning the
development of, additional applications of its technologies and services for the
lottery and non-gaming market. These include the Intranet System, ticket vending
support systems, telephone and Internet based product promotions, tournament
games and other applications. See "BUSINESS AND PROPERTIES OF
UNISTAR--Products." Unistar has also proposed to the CDA a renegotiation of the
NIL Agreement. See "BUSINESS AND PROPERTIES OF UNISTAR--The National Indian
Lottery--Renegotiation of the NIL Agreement."
<PAGE>
The Special Meeting
Date, Time and Place The Special Meeting of Shareholders (the
of Special Meeting........... "Meeting") of EXECUTONE Information Systems,
Inc. will be held at the Holiday Inn Select, 700
Main Street, Stamford, Connecticut 06901, on
_______, 1998, at ______.
Purposes of and Reasons for At the Meeting, the shareholders of Executone
the Meeting................. will be asked to vote upon proposals: (i) to
approve certain amendments (the "Amendments") to
Executone's Articles of Incorporation, as amended
(the "Articles of Incorporation"), to provide for
the automatic conversion of the Executone
Preferred Stock into shares of Unistar Common
Stock and shares of Unistar's Cumulative
Convertible Preferred Stock, Series A (the
"Unistar Preferred Stock"), upon the occurrence
of certain events, one of which would be the
Offering contemplated herein; and (ii) to
transact such other business as may properly come
before the Meeting and any continuation or
adjournment thereof. The Executone Preferred
Stock was created as part of Executone's
acquisition of Unistar (the "Acquisition") to
ensure that certain stockholders of Unistar would
be able to participate in Unistar's growth, if
any, following the Acquisition. Currently, the
Articles of Incorporation provide for the
automatic conversion of the Executone Preferred
Stock into shares of Executone Common Stock upon
the occurrence of certain events, including the
Offering. Were the current Articles of
Incorporation to be in effect upon occurrence of
the Offering, each share of Executone Series A
Preferred Stock would be converted into 19.17
shares of Executone Common Stock and each share
of Executone Series B Preferred Stock would be
converted into 83.75 shares of Executone Common
Stock (which amounts cumulatively would represent
approximately 21% of the issued and outstanding
capital stock of Executone). Because Unistar will
be an entity independent of Executone following
the closing of the Offering, the Board of
Directors of Executone (the "Executone Board")
believes that the Amendments are in keeping with
the intent of the Executone Preferred Stock and
are in the best interests of the holders of the
Executone Common Stock. There are no arrears in
dividends with respect to the outstanding
Executone Preferred Stock.
Meeting Record Date......... Close of business on __________, 1998 (the
"Record Date").
<PAGE>
Voting...................... Approval of the Amendments requires the
affirmative vote of (i) a majority of the votes
cast of the Executone Common Stock and the
Executone Preferred Stock, voting as a single
group (with each shareholder of record being
entitled to one vote for each share of Executone
Common Stock and Executone Preferred Stock held)
and (ii) the holders of two-thirds of the shares
of the Executone Series A Preferred Stock and
the Executone Series B Preferred Stock, each
voting as a separate group (with each shareholder
of record being entitled to one vote for each
share of Executone Preferred Stock held).
Abstentions and shares held in street name that
are not voted with respect to the Amendments will
have the same effect as a negative vote. Holders
of approximately two-thirds of each class of the
Executone Preferred Stock have entered into the
Exchange Agreement (as defined herein) with
Executone and Unistar, pursuant to which they
appointed Robert Berman and Jerry M. Seslowe,
directors of Unistar, to vote as each
shareholder's proxy all of his or its shares of
Executone Common Stock and Executone Preferred
Stock for the Amendments at any meetings,
including the Meeting. As a result, the requisite
vote needed to approve the Amendments is the
affirmative vote of a majority of the votes cast
of the Executone Common Stock and the Executone
Preferred Stock, voting as a single group.
Solicitation of Proxies..... The cost of solicitation of proxies will be borne
by Executone. In addition to the use of the
mails, proxies may be solicited personally or by
telephone by regular employees of Executone.
_____________ has been engaged to assist in the
solicitation of proxies from brokers, nominees,
fiduciaries and other custodians. Executone will
pay that firm $________ for its services and
reimburse its out-of-pocket expenses.
Board of
Directors Recommendation.... The Executone Board unanimously recommends that
shareholders vote "FOR" the adoption of the
Amendments.
The Offering
Description of the Rights
Offering.................... Each holder of shares of Executone Common Stock
on the Record Date is receiving herewith one
right (each, a "Right") for every share of
Executone Common Stock owned (the "Offering"). If
the Amendments are approved by the Executone
shareholders at the Meeting, each five Rights
entitle the holder thereof (the "Holder") to
purchase one share of Unistar Common Stock at a
subscription price of $.25, or $.05 per Right.
Subscription Price.......... The subscription price per share of Unistar
Common Stock (the "Subscription Price") will be
$.25, or $.05 per Right.
Exercise Period............. The Rights will be exercisable from the period
(the "Exercise Period") beginning on __________,
1998, and ending on __________, 1998 at 5:00
p.m., New York City time (the "Expiration Date"),
provided that the Offering will be terminated
automatically if the Amendments are not approved
by the Executone shareholders at the Meeting.
How Rights Will be Evidenced Each Holder will receive herewith a certificate
representing the Rights.
Purchase of Unsubscribed
Shares ..................... In the event that (i) not all of the Rights are
exercised during the Exercise Period and (ii) the
Offering is not terminated, Unistar Buying Group,
LLC, a limited liability company owned by certain
holders of Executone Preferred Stock, will
purchase the remaining unsold shares of Unistar
Common Stock at the Subscription Price pursuant
to a Standby Agreement between Unistar and
Unistar Buying Group, LLC, dated _______,1998
(the "Standby Agreement").
Number of Shares of Common
Stock Offered in the
Offering.................... 9,992,898 shares of Unistar Common Stock will be
offered in the Offering.
Number of Shares of Common
Stock to be Outstanding After
the Offering................ Approximately 11,756,351 shares of Unistar Common
Stock will be issued and outstanding after the
Offering. In addition to the shares of Unistar
Common Stock offered in the Offering and that may
be purchased pursuant to the Standby Agreement,
if the Amendments are approved as proposed
herein, holders of Executone Preferred Stock, in
exchange for their shares of Executone Preferred
Stock, automatically will receive as of the
Closing Date pursuant to the Exchange Agreement
15% of the outstanding shares of Unistar Common
Stock and all shares of Unistar Preferred Stock
which may be converted, subject to certain
conditions, into that number of shares of Unistar
Common Stock such that, upon conversion, the
holders of Executone Preferred Stock will own 34%
of the outstanding Unistar Common Stock,
excluding any additional shares of Unistar Common
Stock issued after the Closing Date. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Conditions to the Offering.. The Offering is conditioned upon, among other
things, the approval by shareholders of the
Amendments. Any of the conditions to the Offering
may be waived, at any time prior to the Closing
Date, for any reason, in the sole discretion of
the Executone Board. See "THE
OFFERING--Conditions to the Offering."
<PAGE>
Purpose and Reason for the
Offering.................... Although the Offering is essentially an initial
public offering directed to Executone
shareholders, Executone and Unistar believe that
the Offering provides several advantages over a
traditional initial public offering. Executone
and Unistar believe that the Offering gives
Unistar the opportunity to offer Unistar Common
Stock to investors who, as Executone
shareholders, already have some knowledge of the
business of Unistar, to distribute the securities
to a broader shareholder base and to minimize
costly underwriting discounts and commissions. In
addition, Executone and Unistar prefer the
Offering to a traditional initial public offering
because it affords the Executone shareholders the
opportunity to purchase shares of Unistar Common
Stock at a nominal Subscription Price, while
recognizing the initial cash needs of Unistar as
an independent company. The structure of the
Offering will permit those Executone shareholders
who choose to participate to invest in Unistar at
a price that is estimated to represent a
substantial discount from the estimated market
value. Executone and Unistar believe, however,
that the structure of the Offering affords those
Executone shareholders who do not choose to make
a further investment in Unistar an opportunity to
sell their Rights, at a price determined by the
market to represent the value of the
historical investment by the Executone
shareholders in the Unistar business.
Sale of Rights.............. The Rights are transferable until the last
business day prior to the Expiration Date.
Use of Proceeds............. Proceeds of the Offering, together with current
working capital and funds made available under
the Reorganization Agreement, dated _____, 1998,
between Executone and Unistar (the
"Reorganization Agreement"), will be applied for
continuing development and marketing of Unistar's
products, for working capital, as necessary, and
for general corporate purposes. See "BUSINESS AND
PROPERTIES OF UNISTAR--Products."
Risk Factors................ See "RISK FACTORS" beginning on page 9 for a
discussion of factors to be considered in
connection with the Offering and the exercise of
the Rights.
Federal Income Tax
Consequences................ See "FEDERAL INCOME TAX CONSEQUENCES" beginning
on page 21 for a discussion of the material
federal income tax consequences to holders of
Executone Common Stock who receive Rights in the
Offering.
[Nasdaq National Market]
Symbols..................... The Rights are authorized for trading on the
[Nasdaq National Market] under the symbol ______
and the Unistar Common Stock is authorized for
trading on the [Nasdaq National Market] under
the symbol _____.
<PAGE>
Unistar Operations
Summary Financial Information
The following summary financial data of Unistar should be read in
conjunction with, and is qualified in its entirety by reference to, the
Financial Statements and the related notes thereto included on pages F-1 to
F-19.
Executone acquired Unistar on December 19, 1995. Such acquisition was
accounted for using the purchase method. Accordingly, the assets and liabilities
acquired were recorded on the balance sheet at their fair market values,
resulting in the recording of an intangible asset of approximately $15.8 million
as of the acquisition date. During the period prior to its acquisition by
Executone, Unistar was in its early development stages. The expenditures made by
the previous owners were primarily expenses relating to the startup of the
business, including legal, lobbying, consulting and other professional fees,
along with payroll, travel and other related expenses. These were reflected in
the pre-acquisition statement of operations. Subsequent to the acquisition,
Unistar's expenditures comprised primarily development costs for software and
hardware, building costs and reimbursable advances to the NIL (See Notes 3 and 4
on pages F-8 and F-10, and Note 6 on page F-19, all of which were recorded on
the balance sheet. As a result of purchase accounting and the change in the
nature of the business after the acquisition by Executone, financial data for
the periods prior to Executone's purchase of Unistar on December 19, 1995 is not
comparable to periods subsequent to the acquisition.
The capital structure that has existed prior to the Closing Date when
Unistar's business operated as part of Executone is not relevant because it does
not reflect Unistar's expected future capital structure as a separate,
independent company. Accordingly, per share data has not been presented.
The historical financial information presented may not necessarily be
indicative of the results of operations or financial condition that would have
been obtained if Unistar had been a separate, independent company during the
periods shown. Neither should the information be deemed to be indicative of
Unistar's future performance as an independent company.
Summary Financial Data
Unistar Gaming Corp. and Subsidiary
(Unaudited)
<TABLE>
<CAPTION>
Post-acquisition Pre-acquisition
----------------------------------------------- --------------------------------
Six months ended Year ended December 31, Year ended December 31,
June 30, 1998 June 30, 1997 1997 1996 1995 (a) 1994 1993
------------- ------------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $ - $ - $ - $ - $ - $ - $ -
Net Loss (413,000) (474,138) (810,187) (755,582) (2,607,495) (1,162,560) (359,551)
Balance Sheet
Total Assets $30,224,477 $21,079,226 $24,090,424 $18,158,022 $ 84,303 $ 27,708 $ 1,876
Long-Term Debt 372,156 353,917 433,068 - - - -
Divisional
Control/
Equity 26,116,921 19,815,836 22,744,494 17,081,807 (48,941) (578,335) (359,551)
</TABLE>
(a)Executone acquired Unistar on December 19, 1995. Accordingly, the
pre-acquisition balance sheet and income statement data is as of and for the
period ended December 19, 1995.
<PAGE>
National Indian Lottery
Summary Financial Information
Under the NIL Agreement, UniStar Entertainment has agreed to provide,
design, development, financial and management services to the NIL. In return for
these services, the NIL will pay UniStar Entertainment a fee equal to 30% of net
profit during the five-year term ending January 2003. While the NIL has yet to
make any profit distributions to Unistar, the following information represents
the summary operating results for the first four quarters of the NIL's
operations. This summary data should be read in conjunction with, and is
qualified in its entirety by reference to, the Financial Statements of the NIL
and the related notes thereto included on pages F-20 to F-29.
Summary Operating Results
National Indian Lottery
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
June 30, 1998 March 31, 1998 December 31, 1997 September 30, 1997
<S> <C> <C> <C> <C>
Revenues $ 3,570,368 $ 2,922,666 $ 1,253,975 $ 537,645
Cost of Revenues
(prizes awarded) 3,267,346 2,487,331 1,158,839 455,915
Gross Profit 303,022 435,335 95,136 81,730
Net Profit (Loss) $(1,965,262) $(1,218,798) $(1,238,233) $ (772,270)
</TABLE>
<PAGE>
Unistar Operations
Summary of Pro Forma Financial Data
(Unaudited)
The following unaudited summary pro forma financial data make adjustments
to the historical balance sheet as if the Offering had occurred on June 30,
1998. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION" for a
discussion of the principal adjustments involved in the preparation of the pro
forma financial information. The pro forma financial statements of Unistar may
not reflect the future results of operations or financial condition of Unistar
or the results of operations had Unistar been a separate independent company
during such period.
June 30, 1998
---------------
Balance Sheet Data
Cash................................................ $ 5,500,000
Current Assets...................................... 5,501,625
Total Assets........................................ 35,724,477
Current Liabilities................................. -
Long-term debt...................................... 372,156
Stockholders' equity................................ 33,179,106
<PAGE>
RISK FACTORS
Readers should be aware of the following risk factors to which Unistar has
been subject in the past, is currently and may in the future be subject, and
that could materially adversely affect the performance of Unistar. Unistar also
cautions readers that, in addition to the historical information included
herein, this Proxy Statement/Prospectus includes certain forward-looking
statements and information that are based on management's beliefs as well as on
assumptions made by and information currently available to management. When used
in this Proxy Statement/Prospectus, the words "anticipate," "intend," "plan,"
"believe," "estimate," "future," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
including, but not limited to, the following factors that could cause Unistar's
future results and stockholder values to differ materially from those expressed
in any forward-looking statements made by or on behalf of Unistar.
Rights Valueless if Amendments are Not Approved by Executone Shareholders
The exercisability of the Rights is contingent upon the approval of the
Amendments by the shareholders of Executone. If the Amendments are not approved
by the Executone shareholders, then the Offering will be terminated and the
Rights will be valueless.
No Prior Market for Unistar Common Stock
There is no current public market for Unistar Common Stock. Although it is
anticipated that Unistar Common Stock will be listed with the [Nasdaq National
Market], there can be no assurance that an active trading market for Unistar
Common Stock will develop or be sustained following the Offering nor can there
be any assurance as to the prices at which Unistar Common Stock will trade
following the Offering.
Risk of Delisting from Nasdaq
There can be no assurance that the Unistar Common Stock will continue to
be included on the [Nasdaq National Market]. Failure to meet the listing
requirements for the [Nasdaq National Market] or the Nasdaq SmallCap Market
could result in the Unistar Common Stock being delisted from the Nasdaq Stock
Market. If the Unistar Common Stock is delisted from trading on Nasdaq, trading,
if any, would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. and consequently, an investor may find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of, Unistar Common Stock.
Risk that the Unistar Common Stock May Become Subject to the Penny Stock
Regulations
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock regulations adopted by the Securities and
Exchange Commission (the "Commission"). A penny stock generally is any equity
security with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the Nasdaq system, provided
that current price and volume information with respect to transactions in such
security is provided by the exchange or system). In addition, a security will be
exempt from the penny stock regulations if the issuer of such security has (i)
net tangible assets in excess of $2,000,000, if the issuer has been in
continuous operation for at least three years, or $5,000,000 if the issuer has
been in continuous operation for less than three years; or (ii) average revenue
of at least $6,000,000 for the last three years. The penny stock regulations
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the regulations, to deliver a standardized risk disclosure document
that provides information about penny stocks and the risks in the penny stock
market. The broker-dealer must also provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock regulations generally require that prior to a transaction in a
penny stock the broker-dealer make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock regulations. If the
Unistar Common Stock becomes subject to the penny stock regulations, investors
in the Offering may find it more difficult to sell their securities.
<PAGE>
Potential Volatility of Unistar Stock Price
Until the Unistar Common Stock is fully distributed and an orderly market
develops, the prices at which the Unistar Common Stock trades may fluctuate
significantly. The Executone Board has estimated that Unistar will have an
aggregate market value of $15 million to $20 million based on the recommendation
of the Special Committee of the Executone Board, consisting of directors Stanley
M. Blau, Thurston R. Moore and Richard Rosenbloom (the "Special Committee").
This estimate of the aggregate market value would result in a market value per
share of Unistar Common Stock ranging from $1.28 to $1.70 based on 11,756,351
shares of Unistar Common Stock estimated to be outstanding after the Offering.
In estimating the market value of Unistar's shares, the Special Committee took
into account the value of Unistar's various assets, the potential market for its
products, the prices of other publicly-traded companies having similarities with
Unistar and general market conditions. All of such factors are subject to
change. In addition, the share prices of publicly-traded companies in the
lottery services business vary greatly as a function of their large capital base
and the importance of major, long-term governmental procurements to the success
of their operations. There can be no assurance that the estimated value will
have any relationship to the prices at which Unistar Common Stock will trade
following the Offering. Prices for Unistar Common Stock will be determined in
the trading markets, to the extent that such markets exist, and may be
influenced by many factors, including the depth and liquidity of the market for
Unistar Common Stock and investor perceptions of Unistar. In addition, there is
no assurance that the combined prices of Unistar Common Stock and the Executone
Common Stock following the Offering will be equal to or greater than the trading
price of Executone Common Stock prior to the Offering.
Because Executone shareholders generally may be obligated to pay Federal
income taxes on the Rights, it is possible that there may be a larger number of
sellers of Unistar Common Stock than buyers following the Offering due to the
needs of stockholders to generate the cash necessary to make tax payments. This
circumstance could also tend to depress the market price of Unistar Common
Stock. See "FEDERAL INCOME TAX CONSEQUENCES."
No Assurance That Value of Unistar Common Stock at June 30, 1998, Will Reflect
Market Prices Following the Offering
The range of values of Unistar Common Stock (the "Range") estimated by the
Executone Board in connection with the Offering only reflects an estimate of the
likely range of fair market values of Unistar Common Stock as of June 30, 1998.
The Range does not take into account changes occurring since June 30, 1998. The
Range is also based on a number of judgments and assumptions and therefore no
assurance can be given that the Range reflects the prices at which Unistar
Common Stock will be traded on or following the Offering Date. See "THE
OFFERING."
Pending Litigation That Could Have a Material Adverse Effect on Unistar and the
NIL
On September 14, 1998, the CDA, Unistar and representatives of the U.S.
Department of Justice had discussions regarding a declaratory judgment to be
sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is legal under 18 U.S.C. ss.ss.1952 and 1955.
Unistar is informed that the Department of Justice views such operation to be in
violation of such statutes. Executone and Unistar believe, based on advice of
their counsel, Hunton & Williams, that the operation of the NIL is legal. The
Department of Justice has proposed that the parties file a joint stipulation of
facts and cross-motions for summary judgment in the declaratory judgment action.
Unistar has not yet determined whether any such joint stipulation and action for
declaratory judgment is in its best interests. If Unistar and the Department of
Justice do not agree as to such a jointly pursued action, the Department of
Justice may determine to commence civil or criminal proceedings against Unistar.
As in the case of other pending actions, a decision in this proposed proceeding
against the CDA and Unistar could ultimately result in the shutting down of the
NIL's telephone and Internet lotteries. While this is a possible outcome,
Unistar does not believe it to be the probable outcome. However, in the event
that the NIL's activities are suspended, Unistar would have to reevaluate the
extent of impairment of its intangibles, along with the write off of its
reimbursable advances to the NIL, which could have a material adverse effect on
Unistar's current business, financial position and results of operations.
<PAGE>
On October 16, 1995, the CDA filed an action entitled Coeur d'Alene Tribe
v. AT&T Corp. in the Tribal Court, located in Plummer, Idaho (Case No.
C195-097): (i) requesting a ruling that the NIL is legal under the federal
Indian Gaming Regulatory Act of 1988 ("IGRA"), that IGRA preempts state laws on
the subject of Indian gaming, that Section 1084 is inapplicable and that
therefore the states lack authority to issue Section 1084 notification letters
to any long-distance carrier; and (ii) seeking an injunction preventing AT&T
from refusing to provide telephone service to the NIL. This action was necessary
because several long-distance network carriers had been sent Section 1084
letters by states opposed to the NIL. These letters state that the NIL is
illegal under state and federal laws and prohibit the interstate telephone
carriers from carrying "800 number" network traffic for the NIL. Although in
January 1998 the CDA began to offer a weekly draw NIL for which tickets could be
purchased over the telephone, it has done so using a local telephone number,
meaning that the NIL's customers must pay toll charges for each call. The use of
an "800" number for lottery ticket sales may not begin until resolution of this
proceeding and agreement of a telephone network carrier to carry the telephone
traffic of the NIL.
On February 28, 1996, the Tribal Court ruled: (i) that all requirements of
IGRA have been satisfied; (ii) that Section 1084 is inapplicable and the states
lack jurisdiction to interfere with the NIL; and (iii) that AT&T cannot refuse
service to the NIL based upon Section 1084, an allegation that the NIL is in
violation of IGRA or the federal anti-lottery statutes. This ruling and a
related order dated May 1, 1996 were subsequently appealed to the Tribal
Appellate Court, which on July 2, 1997 affirmed the lower Tribal Court's May 1,
1996 ruling and analysis upholding the CDA's right to conduct the NIL telephone
lottery. On August 22, 1997, AT&T filed a complaint for declaratory judgment
against the CDA in the U.S. District Court for the District of Idaho, to obtain
a federal court ruling on the validity and enforceability of the Tribal Court
ruling. The CDA has answered the complaint and filed a motion for partial
summary judgment, which currently is pending. AT&T then filed a cross-motion for
summary judgment. The attorneys general of nineteen states have been granted
leave to submit a brief as amicus curiae in the case with respect to the Tribal
Court's interpretation of IGRA. These matters are still pending.
On May 28, 1997, the Attorney General of the State of Missouri brought an
action in the Circuit Court of Jackson County, Missouri, against the CDA and
UniStar Entertainment seeking to enjoin the NIL games offered by the CDA over
the Internet and managed by UniStar Entertainment. The complaint also sought
civil penalties, attorneys fees and court costs. The complaint alleges that the
NIL violates Missouri anti-gambling laws and that the marketing of the games
violates the Missouri Merchandising Practices Act. UniStar Entertainment and the
CDA removed the case to the U.S. District Court for the Western District of
Missouri, which denied the State's subsequent motion to remand back to the state
court. The court also subsequently granted a motion to dismiss the CDA from this
case based on sovereign immunity. The court preliminarily denied a motion to
dismiss UniStar Entertainment based on sovereign immunity, although the court
indicated it might reconsider that decision. UniStar Entertainment filed a
motion for reconsideration of its motion for dismissal. The State of Missouri
has appealed the dismissal of the CDA to the Eighth Circuit Court of Appeals.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily
the existing federal case against UniStar Entertainment and the next day filed a
new action against Executone, UniStar Entertainment and two tribal officials,
with essentially the same allegations, in state court. The State obtained a
temporary restraining order from a state judge against Executone, UniStar
Entertainment and two tribal officials enjoining the marketing of the NIL
Internet and telephone lotteries in the State of Missouri. On February 5, 1998,
the U.S. District Court for the Eastern District of Missouri ruled that this
second case also should be heard in federal court, transferred the second case
to the Western District of Missouri where the original case had been filed, and
dissolved the state court's temporary restraining order, effective February 9,
1998. A motion to dismiss the second case based on the sovereign immunity of all
the defendants and a motion to abstain in favor of the jurisdiction of the Coeur
d'Alene Tribal Court are pending. The State of Missouri has appealed to the
Eighth Circuit the denial of its motion to remand the case to state court or, in
the alternative, to seek a preliminary injunction. Both the Eighth Circuit
appeals will be argued on September 21, 1998. On July 31, 1998, the District
Court for the Western District of Missouri stayed proceedings in the case before
it pending resolution of the pending appeals in the Eighth Circuit and pending
federal legislation.
<PAGE>
On September 15, 1997, the State of Wisconsin, by its Attorney General,
filed an action in the Wisconsin State Circuit Court for Dane County against
Executone, UniStar Entertainment and the CDA, to permanently enjoin the NIL
offered by the CDA on the Internet. The complaint alleges that the offering of
the NIL violates Wisconsin anti-gambling laws and that legality of the NIL has
been misrepresented to Wisconsin residents in violation of state law. In
addition to an injunction, the suit seeks restitution, civil penalties,
attorneys' fees and court costs. Executone, UniStar Entertainment and the CDA
have removed the case to the U.S. District Court in Wisconsin. On February 18,
1998, the District Court dismissed the CDA from the case based on sovereign
immunity and dismissed Executone based on the State's failure to state a claim
against Executone. The State of Wisconsin has appealed the dismissal of the CDA
to the Seventh Circuit Court of Appeals. Motions to dismiss the case against
UniStar Entertainment on the basis of sovereign immunity were denied. UniStar
Entertainment has appealed the denial of its motion to dismiss to the Seventh
Circuit Court of Appeals.
Executone and Unistar have been advised by their outside counsel, Hunton &
Williams, that based upon such firm's review of the applicable statutes,
regulations and case law, the operation of the NIL is legal and the CDA and
UniStar Entertainment will likely prevail in the pending litigation. However,
such opinion of counsel is not binding upon any court, government agency or
other tribunal and is based upon limited precedental case law and existing
statutes and regulations.
UniStar Entertainment and the CDA believe that the NIL is legal and intend
to defend the right of the CDA to offer the NIL on the Internet and via the
telephone. Based on the outcome of the pending legal actions that UniStar
Entertainment anticipates will occur, UniStar Entertainment does not believe the
outcome of this litigation will have a material adverse effect on UniStar
Entertainment's consolidated financial position, results of operations or
liquidity. However, if the ultimate outcome of the litigation, particularly the
Idaho case, were unfavorable to Unistar, or adverse legislation is enacted, such
outcomes could have a material adverse effect on Unistar's current business,
financial position and results of operations. In addition, the pending
litigation, as well as other litigation that could be brought by states or
others opposed to the NIL, could delay or suspend certain NIL operations. It is
impossible at this time to predict the nature or extent of any delays or
suspension of operations that might occur.
No Arm's-Length Negotiation of Related Agreements
Unistar and Executone have entered into a number of agreements for the
purpose of effecting the Offering and defining the ongoing relationship between
them. These agreements consist of the Reorganization Agreement, Master Services
Agreement and Tax Sharing Agreement (the "Related Agreements") described under
"ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO THE OFFERING" as well as
compensation arrangements described under "EXECUTIVE COMPENSATION." These
agreements have been developed by Executone in connection with its strategy to
cause Unistar Common Stock to be offered to Executone shareholders in the
Offering. Accordingly, none of the agreements are the result of arm's-length
negotiation between independent parties. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
No Assurance of Future Profitability of Unistar
Unistar has generated no revenues through June 30, 1998. Unistar is in the
development stage and its activities to date have been primarily related to the
organization of the company, negotiating the NIL Agreement, and developing the
business and gaming systems necessary to operating a national telephone lottery
and the on-line US Lottery Internet site. Unistar expects to derive the majority
of its near-term revenues from the net profits of the NIL. Although the NIL
became operational in January 1998, it has yet to generate any net profits.
There is no assurance that enough future revenues will be generated by, or that
alternative sources of funding will be available to, Unistar to support the
furtherance of its business plan or to meet its operating expenses.
Unistar Has Never Operated as an Independent Entity
Unistar has never operated as a separate, independent entity, and has
never operated as a public company. Management's ability to operate Unistar as a
public company on a standalone basis, including Unistar's ability to obtain
additional financing, will impact the performance of Unistar and ultimately the
return on each stockholder's investment in Unistar.
<PAGE>
Unavailability of Executone's Financial and Other Resources
Prior to the Offering, Executone has provided all of Unistar's financial
support. Executone has agreed to continue to provide financial support to
Unistar until the Closing Date, which support will not exceed an average sum of
$1.5 million per quarter in accordance with the terms of the Share Exchange
Agreement, dated August 12, 1998 (the "Exchange Agreement"), between Executone
and Unistar and Watertone Holdings L.P., Cooper Life Sciences, Inc., John C.
Shaw, Richard Bartlett, Jerry M. Seslowe, 10-26 S. William Street Associates,
Louis K. Adler and Resource Holdings Ltd., the holders of the Executone
Preferred Stock (the "Executone Preferred Holders"). Executone will also provide
to Unistar, at the Closing Date, in accordance with the terms of the Exchange
Agreement, $3.0 million in cash, and will assume responsibility for, and pay
when due, expenses incurred by Unistar but not yet paid, provided, however, that
the maximum of such expenses shall not exceed $500,000. Unistar will also
receive the proceeds of the Offering, estimated to be approximately $2.5
million. Following the Closing Date, however, Unistar will no longer be a
wholly-owned subsidiary of Executone and, other than as herein provided, will no
longer be able to rely on Executone for financial support. Unistar also will not
be able to benefit from its relationship with Executone to obtain credit for the
purpose of supporting its operations.
Dependence upon Key Personnel
Unistar is dependent upon the ability and experience of its executive
officers. Although Unistar currently has employment contracts with three of
Unistar's executive officers, it does not maintain key man life insurance on the
lives of such executive officers. The loss of the services of any or all of its
executive officers or Unistar's inability in the future to attract and retain
management and other key personnel could have a material adverse effect on
Unistar.
Certain Antitakeover Effects of Certain Provisions of Unistar's Certificate of
Incorporation and Unistar's Bylaws
Certain provisions of Unistar's Amended and Restated Certificate of
Incorporation (the "Unistar Certificate") and Unistar's Bylaws (the "Unistar
Bylaws") may have the effect of making more difficult an acquisition of control
of Unistar in a transaction not approved by the Board of Directors of Unistar
(the "Unistar Board"). See "CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
OF THE UNISTAR CERTIFICATE , THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN AND THE
GENERAL CORPORATION LAW OF DELAWARE." The Unistar Certificate would, in some
circumstances, eliminate certain liabilities of Unistar directors in connection
with the performance of their duties. See "LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS."
Substantial Percentage Ownership of Unistar By Executone Preferred Holders
Holders of approximately two-thirds of the Executone Preferred Stock have
entered into the Exchange Agreement with Executone and Unistar, pursuant to
which they appointed Robert Berman and Jerry M. Seslowe, directors of Unistar,
to vote as each shareholder's proxy all of his or its shares of Executone
Preferred Stock for the Amendments at any meetings, including the Meeting. The
holders of approximately one-third of the Executone Preferred Stock have been
unwilling to enter into the Exchange Agreement, requiring submission of the
Amendments to the Executone shareholders in order to proceed with the Offering.
As a result, the requisite vote needed to approve the Amendments is the
affirmative vote of a majority of the votes cast of the Executone Common Stock
and the Executone Preferred Stock, voting as a single group. Upon approval of
the Amendments and the closing of the Offering, all of the outstanding shares of
Executone Preferred Stock will be converted automatically into (i) shares of
Unistar Common Stock, which shares (exclusive of any shares acquired pursuant to
the Standby Agreement or through the Offering), as of the Closing Date, will
represent 15% of the outstanding shares of Unistar Common Stock (the "Original
Issuance"); and (ii) all shares of Unistar Preferred Stock. No fractional shares
of Unistar Common Stock or Unistar Preferred Stock shall be issued. Upon the
occurrence of certain events, the Executone Preferred Holders will be entitled
to convert the Unistar Preferred Stock into that number of shares of Unistar
Common Stock (the "Underlying Shares") such that, when added to the Original
Issuance, the Executone Preferred Holders will own 34% of the Unistar Common
Stock, including only the Original Issuance and the Underlying Shares. Further,
Unistar Buying Group, LLC, which is owned by certain Executone Preferred
Holders, has agreed to purchase all unsubscribed shares of Unistar Common Stock
pursuant to the Standby Agreement. Thus, depending upon the number of Executone
shareholders that exercise their Rights and whether the Executone Preferred
Holders convert their Unistar Preferred Stock, Executone Preferred Holders could
own a substantial percentage of Unistar.
Competition
The development, licensing and management of gaming technology and the
provision of gaming entertainment are highly competitive. The gaming market is
served by state and nationally sponsored lotteries and by many domestic and
foreign gaming companies, including several large land-based casino companies. A
number of large, mature lottery services companies serve both the domestic and
international markets. All these competitors have substantially more capital,
and therefore broader based technology and marketing resources, than Unistar.
Unistar also competes with other forms of leisure and entertainment activities
for the public's disposable income.
Government Regulation and Legislation
The gaming market is highly regulated and the competition to secure new
contracts is often intense. Awards of government contracts to companies in the
industry may be challenged by competitors. Further, investigations of various
types, including grand jury investigations, conducted by governmental
authorities into possible improprieties and wrongdoing in connection with
efforts to obtain or the awarding of lottery contracts and related matters may
also result. Such incidents could have a material adverse effect on Unistar's
ability to carry out its business plan.
The NIL developed and managed by UniStar Entertainment for the CDA is
authorized under IGRA. In managing the NIL, UniStar Entertainment must observe
all laws and regulations applicable to the NIL. IGRA established the
jurisdictional and regulatory control for each class and created the National
Indian Gaming Commission (the "NIGC") to enforce the provisions of IGRA. IGRA
defines three classes of Indian gaming. Lotteries are defined as Class III
gaming. Class III gaming is governed by the terms of the compact between the CDA
and the state of Idaho and the rules and regulations of the NIGC. The NIL is
also governed by the rules and policies promulgated by the Coeur d'Alene Tribal
Council.
In July 1998, the Senate passed an appropriations bill to fund the
departments of Commerce, Justice and State for fiscal 1999, which included as an
amendment a ban on Internet gaming offered by Senators John Kyl from Arizona and
Richard Bryan from Nevada. The measure would have criminalized certain Internet
gaming activities, but would have allowed states to create their own "closed
loop" intrastate computer gambling networks. A similar bill was proposed in the
House of Representatives. Both bills were in direct conflict with IGRA and
arguably could make the NIL unlawful. Congress adjourned without enacting any
version of this Internet gaming ban into law.
Unistar is supporting efforts to include exceptions in any Internet gaming
bill for gaming conducted by an Indian tribe that is authorized by IGRA. If
legislation is signed into law that prohibits Internet gaming without such an
exception, it would have a material adverse effect on Unistar's business as it
relates to the NIL. However, Unistar believes that if the final legislation
includes exceptions for states to create their own computer gambling networks,
it will create opportunities for Unistar to service this potential market with
ELTs, which are components of Unistar's Intranet System. See "BUSINESS AND
PROPERTIES OF UNISTAR--Products--Intranet System."
Market Development Risks
In addition to the legal risks, there are market risks associated with the
development of Unistar's business. Although much has been learned through its
experience with the NIL, Unistar's existing products have not been the subjects
of extensive market exposure. All of Unistar's products currently in development
are also products that employ new technologies and may not find sufficient
<PAGE>
customer or consumer support to become economically viable. The only executed
contract under which Unistar may be able to generate revenues is the NIL
Agreement. As of June 30, 1998, the registered customer base of the NIL
(including the instant and the weekly games) was approximately 22,000
established accounts with about 4,200 active accounts. Due to advertising,
professional fees and other startup costs, the NIL has yet to generate a net
profit. Because Unistar's revenues from the NIL Agreement are a percentage of
NIL profits, Unistar has not recognized any revenue as of June 30, 1998. Unistar
believes that there is a viable market for the NIL based upon initial results,
research into the experience of other lotteries and conditions in the overall
lottery market within the United States. However, there can be no assurance that
there will be broad-based acceptance of any or all of its telephone or Internet
lottery products. In the event that (i) the telephone and Internet lotteries do
not attain the level of market acceptance anticipated by Unistar or (ii) the
outcome of the pending lawsuits or legislative proposals in Congress is adverse,
there could be a material adverse effect on NIL operations and, accordingly, on
Unistar.
Concentration in Single Industry
Unistar's current operating strategy is to focus on lottery technologies
and services. Although Unistar will seek to develop other lines of business from
the existing lottery business, Unistar is subject to risks associated with
concentrating on a single industry. Therefore, the adverse effect on Unistar's
operating revenue resulting from an economic downturn in the gaming industry
would be more pronounced than if Unistar had diversified its line of business.
No Assurance of Additional Contracts
Although Unistar believes it is well positioned in the event that the
state and national lotteries decide to sell their tickets over the Internet, by
telephone or through networked ELTs, there can be no assurance that the state
and national lotteries will sell their tickets by these methods or, if sold by
these methods, that such lotteries will enter into contracts with Unistar to
utilize the applications of the Systems. Further, Unistar currently is relying
exclusively on the NIL Agreement the term of which ends in January 2003 for the
generation of revenues. There can be no assurance that the NIL Agreement will be
renewed after the expiration of its term or that the NIL Agreement will not be
terminated in accordance with its terms during the term of the NIL Agreement.
Year 2000 Risks
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900 (commonly referred to as the "Year 2000 Problem"). Unistar has tested its
systems and believes them to be Year 2000 compliant and has completed a review
of potential Year 2000 issues with its key data suppliers who have confirmed
that they will be able to process Year 2000 transactions on a timely basis.
There can be no assurance, however, that the computer systems and operations of
Unistar or its data suppliers, vendors or other service providers will be Year
2000 compliant. In addition, Unistar does not have a contingency plan in place
should an unforeseen failure occur. Given Unistar's heavy reliance on
computer systems, the failure of Unistar or those with whom it has relationship
to have Year 2000 compliant systems could have a material adverse effect on the
NIL and on Unistar and its operations. See "Management's Discussion and Analysis
of Financial Condition--Years Ended December 31, 1997, 1996 and 1995--Year 2000
Compliance."
Approval of the CDA
The NIL Agreement requires written consent of the CDA to a change of 5%
or more of the ownership of UniStar Entertainment, which may not be withheld
unreasonably. Failure to obtain the CDA's consent to the Offering, which will
change the ownership of Unistar, UniStar Entertainment's parent company, may
constitute a material breach of the NIL Agreement, triggering a right on the
part of the CDA to terminate the NIL Agreement. Because Unistar currently is
relying exclusively on the NIL for the generation of revenues, such termination
could have a material adverse effect on Unistar and its operations.
<PAGE>
Limited Legal Remedies Available Under the NIL Agreement
Pursuant to the NIL Agreement, any disputes that arise between Unistar and
the CDA concerning interpretation of the NIL Agreement are subject to binding
arbitration. Any dispute with respect to any consent or approval required by
either party, which consent or approval may not be unreasonably withheld, is
also subject to binding arbitration. As a federally recognized Indian tribe, the
CDA has sovereign immunity from civil suits in U.S. federal and state courts. In
the NIL Agreement, the CDA has waived its sovereign immunity only for the
purposes of enforcing binding arbitration to resolve disputes under the NIL
Agreement. In addition, any claim for money damages against the CDA is limited
to the CDA's share of the net revenue from NIL operations and Unistar's
unrecovered capital investment. Therefore, Unistar's legal remedies in the event
of a dispute under the NIL Agreement are limited, which could have a material
adverse effect on Unistar in the event of any such dispute.
EXECUTONE SPECIAL MEETING
Date, Time and Place, Record Date
The Meeting will be held on __________, 1998, at ______, at the Holiday
Inn Select, 700 Main Street, Stamford, Connecticut, 06901. Holders of Executone
Common Stock and Executone Preferred Stock on the Record Date are entitled to
notice of and to vote at the Meeting.
Purposes of and Reasons for Meeting
The purposes of the Meeting are (i) to consider and vote upon a proposal
to approve and adopt Amendments to provide for the automatic conversion of the
shares of Executone Preferred Stock into shares of Unistar Common Stock and
Unistar Preferred Stock upon the occurrence of certain events, one of which
would be the Offering contemplated herein; and (ii) to transact such other
business as may properly come before the Meeting and any continuation or
adjournment thereof. The Executone Preferred Stock was created as part of the
Acquisition to ensure that certain stockholders of Unistar would be able to
participate in Unistar's growth, if any, following the Acquisition. Currently,
the Articles of Incorporation provide for the automatic conversion of the
Executone Preferred Stock into shares of Executone Common Stock upon the
occurrence of certain events, including the Offering. Were the current Articles
of Incorporation to be in effect upon occurrence of the Offering, each share of
Executone Series A Preferred Stock would be converted into 19.17 shares of
Executone Common Stock and each share of Executone Series B Preferred Stock
would be converted into 83.75 shares of Executone Common Stock (which amounts
cumulatively would represent approximately 21% of the issued and outstanding
capital stock of Executone). Because Unistar will be an entity independent of
Executone following the closing of the Offering, the Executone Board believes
that the Amendments are in keeping with the intent of the Executone Preferred
Stock and are in the best interests of the holders of the Executone Common
Stock. There are no arrears in dividends with respect to the outstanding
Executone Preferred Stock.
Description of Conversion of Securities Upon Approval of the Amendments
Holders of approximately two-thirds of the Executone Preferred Stock have
entered into the Exchange Agreement with Executone and Unistar, pursuant to
which they appointed Robert Berman and Jerry M. Seslowe, directors of Unistar,
to vote as each shareholder's proxy all of his or its shares of Executone
Preferred Stock for the Amendments at any meetings, including the Meeting. The
holders of approximately one-third of the Executone Preferred Stock have been
unwilling to enter into the Exchange Agreement, requiring submission of the
Amendments to the Executone shareholders in order to proceed with the Offering.
As a result, the requisite vote needed to approve the Amendments is the
affirmative vote of a majority of the votes cast of the Executone Common Stock
and the Executone Preferred Stock, voting as a single group. Upon approval of
the Amendments and the closing of the Offering, all of the outstanding shares of
Executone Preferred Stock will be converted automatically into: (i) shares of
Unistar Common Stock, which shares (exclusive of any shares acquired pursuant to
the Standby Agreement or through the Offering), as of the Closing Date, will
represent 15% of the Original Issuance; and (ii) all shares of Unistar Preferred
Stock. No fractional shares of Unistar Common Stock or Unistar Preferred Stock
<PAGE>
shall be issued. Upon the occurrence of certain events, the Executone Preferred
Holders will be entitled to convert the Unistar Preferred Stock into the
Underlying Shares such that, when added to the Original Issuance, the Executone
Preferred Holders will own 34% of the Unistar Common Stock, including only the
Original Issuance and the Underlying Shares. Further, Unistar Buying Group, LLC,
which is owned by certain Executone Preferred Holders, has agreed to purchase
all unsubscribed shares of Unistar Common Stock pursuant to the Standby
Agreement. Thus, depending upon the number of Executone shareholders that
exercise their Rights and whether the Executone Preferred Holders convert their
Unistar Preferred Stock, Executone Preferred Holders could own a substantial
percentage of Unistar.
Voting Rights
As of the Record Date, there were outstanding a total of _________ shares
Executone Common Stock, ______ shares of Executone Series A Preferred Stock, and
______ shares of Executone Series B Stock. The Executone Common Stock, the
Executone Series A Preferred Stock and the Executone Series B Preferred Stock
are the only classes of securities of Executone entitled to vote at the Meeting
and each outstanding share of each class has one vote. A majority of the total
number of shares of Executone Common Stock and Executone Preferred Stock
outstanding and entitled to vote as of ______, 1998, or ______ shares, must be
present at the Meeting in person or by proxy in order to constitute a quorum for
the transaction of business. Only holders of record of Executone Common Stock
and Executone Preferred Stock as of the close of business on the Record Date
will be entitled to vote at the Meeting. Approval of the Amendments requires the
affirmative vote of (i) a majority of the votes cast of the Executone Common
Stock and the Executone Preferred Stock, voting as a single group (with each
shareholder of record being entitled to one vote for each share of Executone
Common Stock and Executone Preferred Stock held) and (ii) the holders of
two-thirds of the shares of the Executone Series A Preferred Stock and the
Executone Series B Preferred Stock, each voting as a separate group (with each
shareholder of record being entitled to one vote for each share of Executone
Preferred Stock held). Abstentions and shares held in street name that are not
voted with respect to the Amendments will have the same effect as a negative
vote. Holders of approximately two-thirds of the Executone Preferred Stock have
entered into the Exchange Agreement with Executone and Unistar, pursuant to
which they appointed Robert Berman and Jerry Seslowe, directors of Unistar, to
vote as each shareholder's proxy all of his or its shares of Executone Preferred
Stock for the Amendments at any meetings, including the Meeting. The holders of
approximately one-third of the Executone Preferred Stock have been unwilling to
enter into the Exchange Agreement, requiring submission of the Amendments to the
Executone shareholders in order to proceed with the Offering. As a result, the
requisite vote still needed to approve the Amendments is the affirmative vote of
a majority of the votes cast of the Executone Common Stock and the Executone
Preferred Stock, voting as a single group.
Revocability of Proxies
A proxy may be revoked at any time before it is exercised by: (i) written
notice to such effect received by Executone; (ii) submitting a subsequently
dated proxy; or (iii) attending the Meeting and voting in person.
Solicitation of Proxies
The cost of solicitation of proxies will be borne by Executone. In
addition to the use of the mails, proxies may be solicited personally or by
telephone by regular employees of Executone. _____________ has been engaged to
assist in the solicitation of proxies from brokers, nominees, fiduciaries and
other custodians. Executone will pay that firm $________ for its services and
reimburse its out-of-pocket expenses.
Board of Directors Recommendation
THE EXECUTONE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE ADOPTION OF THE AMENDMENTS.
<PAGE>
THE OFFERING
Purposes of and Reasons for the Offering
Although the Offering is essentially an initial public offering directed
to Executone shareholders, Executone and Unistar believe that the Offering
provides several advantages over a traditional initial public offering.
Executone and Unistar believe that the Offering gives Unistar the opportunity to
offer Unistar Common Stock to investors who, as Executone shareholders, already
have some knowledge of the business of Unistar, to distribute the securities to
a broader shareholder base and to minimize costly underwriting discounts and
commissions. In addition, Executone and Unistar prefer the Offering to a
traditional initial public offering because it affords the Executone
shareholders the opportunity to purchase shares of Unistar Common Stock at a
nominal Subscription Price, while recognizing the current cash needs of Unistar
as an independent company. The structure of the Offering will permit those
Executone shareholders who choose to participate to invest in Unistar at a price
that is estimated to represent a substantial discount from the estimated market
value. Executone and Unistar believe, however, that the structure of the
Offering also affords those Executone shareholders who do not choose to make a
further investment in Unistar an opportunity to sell their Rights, at a price
determined by the market to represent the value of the historical investment by
the Executone shareholders in the Unistar business as a separate operating
entity.
Conditions to the Offering
The Offering is conditioned upon the approval by the Executone
shareholders of the Amendments. The Offering also is subject to a number of
conditions contained in the Reorganization Agreement, including (i) the Unistar
Common Stock shall have been approved for listing on the [Nasdaq National
Market] subject to official notice of issuance; (ii) the Unistar Board shall
have adopted the Unistar Certificate and Unistar Bylaws and the Unistar
Certificate and Unistar Bylaws shall be in effect; and (iii) the Registration
Statement on Form S-1 (together with any amendments hereto, the "Registration
Statement") shall have been declared by the Commission or become effective under
the Securities Act. See "ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO
THE OFFERING--Reorganization Agreement." In addition, the Offering is
conditioned upon the approval of the CDA. The NIL Agreement provides that any
change or changes that separately or cumulatively result in a change of 5% or
more of the ownership of UniStar Entertainment shall require the advance written
approval of the CDA, which approval shall not be unreasonably withheld. Any of
the conditions to the Offering may be waived, at any time prior to the Closing
Date, for any reason, in the sole discretion of the Executone Board.
Determination of Subscription Price
The structure of the Offering will permit those Executone shareholders who
choose to participate in the Offering to invest in Unistar at the Subscription
Price, which is estimated to represent a substantial discount from the estimated
market value. Such structure affords the Executone shareholders the opportunity
to purchase shares of Unistar Common Stock at a nominal Subscription Price,
while recognizing the initial cash needs of Unistar as an independent company.
The Executone Board has estimated, as of June 30, 1998, that, after the Unistar
Common Stock is fully distributed and an orderly market develops, Unistar will
have an aggregate market value of $15 million to $20 million, based on the
recommendation of the Special Committee. This estimate of the aggregate market
value would result in a market value per share of Unistar Common Stock ranging
from $1.28 to $1.70 based on 11,756,351 shares of Unistar Common Stock estimated
to be outstanding after the Offering. There can be no assurance that the
estimated value will have any relationship to the prices at which Unistar Common
Stock will trade following the Offering.
Exercise of the Rights
Beneficial holders of Executone Common Stock or their nominees will
receive Rights based upon the number of shares held by each Holder individually.
Subject to the approval of the Amendments by the Executone shareholders at the
Meeting, until ______________, 1998, each Holder may purchase one share of
Unistar Common Stock at the Subscription Price for each five Rights, or the
Holder may sell the Rights in the market. Unistar will not issue any fractional
shares in the Offering. Each Holder should consult with an investment advisor.
<PAGE>
A Holder may exercise Rights at any time during the Exercise Period
beginning on _________, 1998, and ending at 5:00 p.m., New York City time, on
the Expiration Date. A Holder may exercise the Rights by completing and signing
the election to purchase form that appears on the back of each Rights
certificate (each, an "Election Form"). The Holder must send the completed and
signed form, along with payment in full of the Subscription Price for all shares
that such Holder wishes to purchase to American Stock Transfer and Trust Company
(the "Rights Agent"). The Rights Agent must receive these documents and the
payment by 5:00 p.m. on the Expiration Date. Unistar will not honor the exercise
of Rights received by the Rights Agent after the Expiration Date.
After the Expiration Date, a Holder will not be able to exercise or
transfer the Rights and all unexercised Rights will be worthless. Unistar will
not honor any Rights received for exercise by the Rights Agent after the
Expiration Date, regardless of when such Rights were sent to the Holder for
exercise.
Unistar will, however, accept an exercise if the Rights Agent has received
full payment of the Subscription Price for shares to be purchased through the
exercise of Rights, and has received a letter or telegraphic notice from a bank,
trust company or member firm of the New York Stock Exchange , the National
Association of Securities Dealers, Inc. or the American Stock Exchange setting
forth the Holder's name, address and taxpayer identification number, the number
of shares the Holder wishes to purchase, and guaranteeing that a properly
completed and signed Election Form will be delivered to the Rights Agent by 5:00
p.m. on _________________, 1998. If the properly executed documents are not
received by 5:00 p.m. on _______________, 1998, the subscriptions will not be
accepted.
To ensure timely delivery, each Holder should deliver Rights to the Rights
Agent by overnight or express mail courier or registered mail. To exercise the
Rights, the Holder should mail or deliver the Rights and payment for the
Subscription Price to the Rights Agent as follows:
<TABLE>
<CAPTION>
By Mail: By Hand: By Overnight Courier:
- -------------------------- ------------------------- ------------------------
<S> <C> <C>
American Stock Transfer & American Stock Transfer & American Stock Transfer
Trust Company Trust Company Trust Company
40 Wall Trust 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005 New York, New York 10005
</TABLE>
The Subscription Price must be paid in U.S. dollars by cash, check or
money order payable to the "Unistar Escrow Account." Until the Offering is
closed, each Holder's payment will be held in escrow by __________________, who
will serve as the escrow agent of the Unistar Escrow Account.
The Rights Agent will issue certificates to each Holder representing the
Unistar Common Stock purchased through the exercise of Rights by ____________,
1998, the Closing Date. Until such date, the Rights Agent will hold all funds
received in payment of the Subscription Price in escrow and will not deliver any
funds to Unistar until the shares of Unistar Common Stock have been issued.
A broker or depository that holds Executone Common Stock for the account
of others and that receives Rights certificates for the account of more than one
beneficial owner should provide copies of this Proxy Statement/ Prospectus to
the beneficial owners and carry out their intentions as to the exercise or
transfer of their Rights.
Executone will decide all questions as to the validity, form, eligibility
(including times of receipt, beneficial ownership and compliance with minimum
exercise provisions) and acceptance of Election Forms. Executone will not accept
any alternative, conditional or contingent exercises and reserves the absolute
right to reject any exercise not properly submitted. In addition, Executone may
reject any exercise if the acceptance of the exercise would be unlawful.
Executone also may waive any irregularities or conditions in the exercise of
shares of Unistar Common Stock, and its interpretations of the terms and
conditions of the Offering shall be final and binding.
<PAGE>
Each Holder given notice of a defect in its exercise will have five
business days after the giving of notice to correct it. The Holder will not,
however, be allowed to cure any defect later than _____________, 1998. Executone
is not obligated to give a Holder notification of exercise defects and will not
consider an exercise to be made until all defects have been cured or waived. If
an exercise is rejected, the payment of the Subscription Price will be promptly
returned by the Rights Agent.
Transfer of the Rights
A Holder may transfer all or a portion of his, her or its Rights by
endorsing and delivering to the Rights Agent its Rights certificate. The Holder
must properly endorse the certificate for transfer, the signature must be
guaranteed by a bank or securities broker and the certificate must be
accompanied by instructions to reissue the Rights in the name of the person
purchasing the Rights. The Rights Agent will reissue certificates for the
transferred Rights to the purchaser, and will reissue a certificate for the
balance, if any, to such Holder if it is able to do so before the Expiration
Date. The Holder will be responsible for the payment of any commissions, fees
and other expenses (including brokerage commissions and any transfer taxes)
incurred in connection with the purchase or sale of its Rights. Unistar believes
that a market for the Rights may develop during the Exercise Period. To
facilitate the market, Unistar has received approval from the [Nasdaq National
Market] to have the Rights listed for the period _______, 1998 through ________,
1998. Unistar has reserved ____________ as the symbol under which the Rights
will trade. Any questions regarding the transfer of Rights should be directed to
____________________ at American Stock Transfer and Trust Company, Attention:
_________________, telephone number _________________.
Additional Information
If a Holder wishes to receive additional copies of this Proxy
Statement/Prospectus or additional information concerning the Offering, the
Holder should contact ___________________ at ______________________, telephone
number _________________.
Unsubscribed Shares of Unistar Common Stock
Pursuant to the Standby Agreement, Unistar Buying Group, LLC, will
purchase any shares of Unistar Common Stock that are not subscribed for at the
end of the Exercise Period at the Subscription Price.
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences of
the proposed transactions to Executone shareholders. The legal conclusions set
forth in this summary are based on the advice of Hunton & Williams, counsel to
Executone and Unistar. This summary does not address all tax consequences that
may apply to a shareholder, nor does it address tax consequences to (i) persons
that do not hold shares of Executone Common Stock as capital assets, (ii)
persons that may be subject to special treatment under United States federal
income tax law, such as insurance companies, regulated investment companies,
real estate investment trusts, tax-exempt organizations and dealers in
securities, or (iii) persons that are not citizens or residents of the United
States. This summary is based on current law, which is subject to change at any
time. A change in law could be retroactive and could cause the federal income
tax consequences to vary substantially from those described below.
HOLDERS OF EXECUTONE STOCK ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE FEDERAL TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS, AS
WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, IN LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES.
Issuance of Rights to Holders of Executone Common Stock
Based on a ruling of the Internal Revenue Service (the "IRS") regarding a
substantially similar transaction, the issuance of the Rights should be treated
for federal income tax purposes as if the Rights had been issued to Executone
and then distributed to the holders of Executone Common Stock. Accordingly, each
holder of Executone Common Stock should be treated as receiving from Executone a
distribution in an amount equal to the fair market value, as of the
"distribution date," of the Rights issued to the shareholder. An Executone
shareholder's basis in such Rights will equal such fair market value.
The distribution date of the Rights to holders of Executone Common Stock
is not clear. Because exercisability of the Rights is contingent upon
shareholder approval of the Amendments, it is likely that no distribution will
be deemed to occur until (and unless) the shareholders approve the Amendments.
It is possible, however, that the distribution will be deemed to occur on the
date of issuance of the Rights.
The amount deemed distributed to a holder of Executone Common Stock will
be taxable as a dividend to the extent it is distributed from Executone's
"earnings and profits," as computed for federal income tax purposes. Executone
believes that it had no accumulated earnings and profits at the end of 1997. In
that case, the distribution of Rights will be taxable as a dividend to the
extent the distribution (plus any other distributions made by Executone to its
shareholders in 1998) does not exceed Executone's earnings and profits for 1998,
determined without regard to any deficit in earnings and profits existing at the
end of 1997. To the extent the distribution of Rights is not from Executone's
earnings and profits and therefore is not taxable as a dividend, the
distribution will reduce (but not below zero) a shareholder's basis in the
Executone Common Stock on which Rights are deemed distributed. If the
non-dividend portion of the distribution exceeds the basis of such Executone
Common Stock, the excess will be taxable as gain from the sale of the stock.
The fair market value of the Rights on the distribution date (and
therefore the amount deemed distributed by Executone) likely will not be known
until the Amendments have been approved by the shareholders. In addition, the
amount of Executone's earnings and profits will not be known until 1998 has
ended. In early 1999, Executone is to report to the IRS and to each record
holder of Executone Common Stock except those exempt from information reporting:
(i) the total amount distributed to the shareholder in 1998 and (ii) the portion
of such amount that is taxable as a dividend. For such reporting purposes,
Executone intends to treat the date of shareholder approval of the Amendments as
the distribution date for the Rights.
<PAGE>
Exercise of Rights
A Holder will not recognize gain or loss upon the exercise of Rights. The
basis in shares of Unistar Common Stock acquired through the exercise of Rights
will equal the sum of the exercise price plus the Holder's basis in the Rights
exercised. The holding period for shares of Unistar Common Stock acquired
through the exercise of Rights will begin on the date the Rights are exercised.
Sale or Expiration of Rights
Upon a sale of Rights by a holder of Executone Common Stock, the seller
generally will recognize short-term capital gain or loss equal to the difference
between the amount realized for the Rights and the Holder's basis in the Rights.
If, however, a holder of Executone Common Stock sells Rights before the
shareholders have approved the Amendments, the entire amount realized on the
sale probably will be taxable as ordinary income. If Rights are never exercised
and therefore expire, the Holder of such expired Rights will recognize
short-term capital loss equal to the amount of the Holder's basis (if any) in
the Rights on the Expiration Date.
Consequences to Holders of Executone Preferred Stock
The exchange of Executone Preferred Stock for shares of Unistar Common
Stock and Unistar Preferred Stock will be a taxable transaction. A holder of
Executone Preferred Stock generally will recognize gain or loss equal to the
difference between the holder's federal income tax basis in the Executone
Preferred Stock and the fair market value of the shares of Unistar Common Stock
and Unistar Preferred Stock received in exchange. If shares of Unistar Common
Stock become purchasable by Unistar Buying Group, LLC pursuant to the Standby
Agreement, holders of Executone Preferred Stock that are owners of Unistar
Buying Group, LLC might recognize additional gain or other income. Holders of
Executone Preferred Stock should consult their own tax advisors to determine the
tax consequences of the proposed transactions to them.
Effect of Proposed Transactions on Use of Net Operating Losses
Executone has net operating loss carryovers ("NOLs"), which totaled
approximately $60.5 million at the end of 1997. If there were to be a change in
the ownership of more than 50% in value of the Executone stock over any 36-month
period, subsequent use of the NOLs could be limited under section 382 of the
Internal Revenue Code. The proposed transactions, combined with changes in
ownership of Executone stock within the preceding 36 months, is not expected to
cause an ownership change that would limit Executone's future use of its NOLs.
The proposed transactions, however, would produce a significant change in
ownership of Executone stock and, therefore, would increase the possibility that
subsequent changes in the ownership of Executone stock could result in a total
ownership change of more than 50%.
Unistar also has NOLs, which totaled approximately $2.3 million at the end
of 1997. The proposed transactions might result in an ownership change that
would limit Unistar's future use of its NOLs. For financial accounting purposes,
Unistar's NOLs are not reflected as a net asset, because a valuation allowance
has been provided for the entire, potential deferred tax asset relating to the
NOLs.
USE OF PROCEEDS
Unistar intends to use the net proceeds of this Offering to continue
product development, for working capital and for general corporate purposes.
Unistar believes that the net proceeds from the sale of the Unistar Common Stock
offered hereby, together with its current cash balances and amounts received
from Executone pursuant to the Exchange Agreement, will be sufficient to fund
its development and operating requirements for at least one year from receipt of
the proceeds. Pending such uses, the net proceeds of the Offering will be
invested in short-term, investment-grade, interest-bearing securities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--Years Ended December 31, 1997, 1996 and 1995--Liquidity and Capital
Resources."
THE COMPANY
Unistar began operations in 1993 and was acquired by Executone on December
19, 1995. Unistar develops, provides and maintains telephone, Internet and
enterprise communications, accounting, database and other applications and
services for use by the governmental lottery market. Its principal objective has
been to develop a new generation of lottery technology by anticipating the
impact that recent advances in telecommunications and computers will have on the
nature and delivery of lottery products and the support systems necessary to
administer them. Unistar is the first to develop a secure, integrated telephone
and Internet lottery gaming system, which has been successfully placed in
operation on behalf of a governmental unit. The Systems support both periodic
draw lottery games, providing pari-mutuel outcomes based on the number of
participants in the pool, and instant games, based on the random distribution of
predetermined outcomes within a pool of certain size.
<PAGE>
Unistar has developed the Systems to provide secure electronic production,
delivery, validation, billing and accounting for lottery games. The Systems are
configurable, which allows the addition, deletion and substitution of games
offered. Tickets may be purchased at the lottery operations center using a
telephone connected through the public telephone network, a personal computer
connected via the Internet or a customer designed ELT connected via an LAN.
Unistar is pursuing the sale or license of the Systems and its related
technologies worldwide primarily to domestic and international state and
national lotteries and other potential customers.
The NIL is the first client to install and operate a configuration of one
of the Systems. The NIL is conducted by the CDA under a compact with the State
of Idaho. UniStar Entertainment has entered into the NIL Agreement ending
January 2003 to provide services and systems for the NIL, including development
and management of the software, network design and call center applications for
the NIL's operations. In return for providing these systems and services, the
CDA has agreed to pay UniStar Entertainment a fee equal to 30% of the profits of
the NIL. The NIL has been in operation since January 1998 and is expected to
become profitable in 1999. In an attempt to block the NIL, certain states issued
letters under Section 1084 to prevent the long-distance carriers from providing
toll-free telephone service to the NIL and the States of Missouri and Wisconsin
have filed suit against the NIL. See "RISK FACTORS-Pending Litigation That Could
Have a Material Adverse Effect on Unistar and the NIL." Unistar has proposed to
the CDA a renegotiation of the NIL Agreement. See "BUSINESS AND PROPERTIES OF
UNISTAR--The National Indian Lottery--Renegotiation of the NIL Agreement."
Unistar is also evaluating and, in certain instances, beginning the
development of, additional applications of its technologies and services for the
lottery and non-gaming market. These include the Intranet System, emergency
ticket vending support systems, telephone and Internet based product promotions,
tournament games and other applications. See "BUSINESS AND PROPERTIES OF
UNISTAR-Products."
Unistar's principal executive offices are currently located at Executone's
headquarters at 478 Wheelers Farms Road, Milford, Connecticut 06460 and its
telephone number is 203-876-7600.
DISTRIBUTION POLICY
Unistar currently intends to retain future earnings for use in its
business and, therefore, does not anticipate paying any dividends in the
foreseeable future. The payment of future dividends, if any, will depend, among
other things, on Unistar's results of operations and financial condition and on
such other factors as the Unistar may, in its discretion, consider relevant.
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical and pro forma
capitalization of Unistar as of June 30, 1998, assuming the closing of the
Offering at that date.
The table should be read in conjunction with Unistar's financial
statements and the notes thereto and the unaudited pro forma consolidated
financial information and notes thereto included elsewhere herein. The unaudited
pro forma information set forth below does not necessarily reflect the
capitalization of Unistar in the future.
June 30, 1998
(Unaudited)
---------------------------------------------
Historical Adjustments Pro Forma
------------- --------------- -------------
Stockholders' Equity:
Investment in Unistar $ 28,095,688 $ (28,095,688) $ -
Common Stock of $.01
par value
Authorized 25,000,000
shares;
Issued and Outstanding
11,700,000 shares - 117,000 117,000
Preferred Stock of $.01
par value
Authorized 1,000,000
shares;
Issued and Outstanding
75,000 shares - 750 750
Additional Paid-in Capital - 35,040,123 35,040,123
Accumulated Deficit (1,978,767) - (1,978,767)
----------------- ------------- -----------
Total Stockholders' Equity 26,116,921 7,062,185 33,179,106
-------------- ------------- -----------
Total Capitalization $ 26,116,921 $ 7,062,185 $33,179,106
=============== ============== ===========
<PAGE>
UNISTAR OPERATIONS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidated Balance Sheet of Unistar as
of June 30, 1998 has been prepared pursuant to the Reorganization Agreement as
if the Offering had closed as of the period indicated. The accounting for this
transfer of assets and liabilities will be reflected at their historical
carrying value. The basis for using such accounting is that the transaction
substantially represents a pro rata distribution of Unistar Common Stock to the
holders Executone Common Stock.
The unaudited Pro Forma Consolidated Balance Sheet has been prepared as if
the transactions had occurred on June 30, 1998. A pro forma income statement has
not been presented, since the transaction would not materially change the
historical cost basis income statement. The pro forma financial information set
forth below is unaudited and not necessarily indicative of the results that
would actually have occurred if the transactions had been consummated as of June
30, 1998 or results that may be obtained in the future.
The pro forma adjustments, as described in the Notes to the Pro Forma
Consolidated Balance Sheet, are based on available information and upon certain
assumptions that management believes are reasonable. The unaudited Pro Forma
Consolidated Financial Information should be read in conjunction with Unistar's
financial statements and the notes thereto. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the other
financial information included elsewhere herein.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Pro Forma Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
June 30, 1998 Adjustments June 30, 1998
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Current Assets $ 1,625 $ 5,500,000 (a) $ 5,501,625
Property & Equipment, net 3,915,000 - 3,915,000
Intangible Assets 13,002,580 - 13,002,580
Advances to NIL 10,995,187 - 10,995,187
Investment in IGT 700,000 - 700,000
Other Assets 1,610,085 - 1,610,085
----------- ------------ ------------
TOTAL ASSETS $ 30,224,477 $ 5,500,000 $35,724,477
LIABILITIES AND DIVISIONAL
CONTROL/STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of capital lease
obligations $ 115,336 $ (115,336)(a) -
Accounts payable and accrued
liabilities 1,446,849 (1,446,849)(a) -
----------- ------------ ------------
1,562,185 (1,562,185) -
Deferred Income 2,173,215 - 2,173,215
Capital Lease Obligations 372,156 - 372,156
----------- ------------ ------------
TOTAL LIABILITIES 4,107,556 (1,562,185) 2,545,371
DIVISIONAL CONTROL/STOCKHOLDERS' EQUITY )
Investment in UniStar 28,095,688 (28,095,688)(b) -
Common Stock - 117,000 (b) 117,000
Preferred Stock - 750 (b) 750
Additional Paid in Capital - 35,040,123 (a,b) 35,040,123
Accumulated Deficit (1,978,767) - (1,978,767)
----------- ------------- ------------
TOTAL DIVISIONAL
CONTROL/STOCKHOLDERS' EQUITY 26,116,921 7,062,185 33,179,106
----------- ------------- ------------
TOTAL LIABILITIES AND DIVISIONAL
CONTROL/STOCKHOLDERS' EQUITY $ 30,224,477 $ 5,500,000 $35,724,477
=========== ============= ============
</TABLE>
<PAGE>
Unistar Gaming Corp. and Subsidiary
Notes to Pro Forma Balance Sheet
June 30, 1998
(Unaudited)
(a)Pursuant to the terms of the Exchange Agreement, Executone will provide to
Unistar, at the Closing Date, $3.0 million in cash, and will assume
responsibility for, and pay when due, expenses incurred by Unistar but not
yet paid, up to a maximum of $500,000. The pro forma cash adjustment also
includes approximately $2.5 million in anticipated proceeds from the
Offering. The estimated proceeds are based upon the issuance of rights equal
to Executone's outstanding common shares of 49,964,492 as of September 30,
1998, a conversion ratio of five Rights to purchase one share of Unistar
Common Stock, and a $.25 exercise price for each share.
Executone has also agreed to continue to provide financial support to Unistar
until the Closing Date, which will not exceed an average sum of $1.5 million
per quarter in accordance with the terms of the Exchange Agreement. Such
amounts have not been reflected in the pro forma balance sheet since had the
transaction been consummated as of June 30, 1998, these expenses would not
have been incurred.
(b)Unistar has historically operated as a division of Executone. As a result of
the transactions, Unistar will be a separate corporate entity. This entry
reflects Unistar's new equity accounts.
<PAGE>
UNISTAR OPERATIONS
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data of Unistar should be read in
conjunction with, and is qualified in its entirety by reference to, the
Financial Statements and the related notes thereto included on pages F-1 to
F-19.
Executone acquired Unistar on December 19, 1995. Such acquisition was
accounted for using the purchase method. Accordingly, the assets and liabilities
acquired were recorded on the balance sheet at their fair market values,
resulting in the recording of an intangible asset of approximately $15.8 million
as of the acquisition date. During the period prior to its acquisition by
Executone, Unistar was in its early development stages. The expenditures made by
the previous owners were primarily expenses relating to the startup of the
business, including legal, lobbying, consulting and other professional fees,
along with payroll, travel and other related expenses. These were reflected in
the pre-acquisition statement of operations. Subsequent to the acquisition,
Unistar's expenditures comprised primarily development costs for software and
hardware, building costs and reimbursable advances to the NIL (See Notes 3 and 4
on pages F-8 and F-10, and Note 6 on page F-19), all of which were recorded on
the balance sheet. As a result of purchase accounting and the change in the
nature of the business after the acquisition by Executone, financial data for
the periods prior to Executone's purchase of Unistar on December 19, 1995 is not
comparable to periods subsequent to the acquisition.
In addition, the Statement of Cash Flows ended December 31, 1995 is based
upon cash flows during the pre-acquisition period of January 1, 1995 through
December 18, 1995. Other than the acquisition, which was a non-cash transaction,
there was no Unistar activity from December 19, 1995 through December 31, 1995.
The pre-acquisition financial data has not been restated to conform to the
post-acquisition presentation.
The capital structure that has existed prior to the Closing Date when
Unistar's business operated as part of Executone is not relevant because it does
not reflect Unistar's expected future capital structure as a separate,
independent company. Accordingly, per share data has not been presented.
The historical financial information presented may not necessarily be
indicative of the results of operations or financial condition that would have
been obtained if Unistar had been a separate, independent company during the
periods shown. Neither should the information be deemed to be indicative of
Unistar's future performance as an independent company.
Selected Financial Data
Unistar Gaming Corp. and Subsidiary
(Unaudited)
<TABLE>
<CAPTION>
Post-acquisition Pre-acquisition
----------------------------------------------- --------------------------------
Six months ended Year ended December 31, Year ended December 31,
---------------- ----------------------- -----------------------
June 30, 1998 June 30, 1997 1997 1996 1995 (a) 1994 1993
------------- ------------- ---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $ - $ - $ - $ - $ - $ - $ -
Net Loss (413,000) (474,138) (810,187) (755,582) (2,607,495) (1,162,560) (359,551)
Balance Sheet
Total Assets $30,224,477 $21,079,226 $24,090,424 $18,158,022 84,303 $ 27,708 $ 1,876
Long-Term Debt 372,156 353,917 433,068 - - - -
Divisional
Control/
Equity 26,116,921 19,815,836 22,744,494 17,081,807 (48,941) (578,335) (359,551)
</TABLE>
(a)Executone acquired Unistar on December 19, 1995. Accordingly, the
pre-acquisition balance sheet and income statement data is as of and for the
period ended December 19, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in
conjunction with the financial statements on pages F-1 to F-29 and the
Forward-Looking Statements on page 35. The audited financial statements included
herein may not necessarily be indicative of the results of operations, financial
position and cash flows of Unistar in the future or had it operated as a
separate independent company during the periods presented. The audited financial
statements included herein do not reflect any changes that may occur in the
financing and operations of Unistar as a result of the Offering. All references
to Unistar throughout this section include Unistar Gaming Corp. and its
wholly-owned subsidiary, UniStar Entertainment, Inc.
Introduction
On December 19, 1995, Executone acquired 100% of the Unistar Common Stock
for Executone Common Stock and Executone Preferred Stock with a combined value
of $12.7 million. Under the NIL Agreement, UniStar Entertainment provides
design, development, financial and management services to the NIL. The NIL
Agreement was approved in January 1995 by the NIGC and is authorized by federal
law and a compact between the State of Idaho and the CDA. The NIL encompasses a
telephone lottery and an on-line US Lottery Internet site. In return for these
services, the NIL will pay UniStar Entertainment a fee equal to 30% of net
profits during the five-year term ending January 2003. Net profits are defined
as gross revenues of the NIL, less amounts paid for prizes and total gaming
related operating expenses. The remaining 70% of net profits will be paid to the
CDA. As of September 30, 1998, the NIL is not yet profitable. Unistar believes
that the Lottery will become profitable in the first half of 1999 and that at
such time Unistar will begin collecting its cash advances. Unistar estimates the
advance will be fully repaid and it will start collecting its fee in early 2000.
In accordance with the NIL Agreement, Unistar was responsible for
providing certain operating capital to fund the development of the NIL,
including, but not limited to, the construction of the building to house the
reservation operation center, computer and related software costs to build both
the telecommunications and on-line Internet systems, lobbying and legal fees,
advertising and promotional expenses and other operational costs. The first $8.5
million of such expenditures, which have already been made, are not reimbursable
to Unistar. Any sums advanced above the $8.5 million requirement are recorded as
advances to the NIL from Unistar and will be reimbursed to Unistar from NIL net
profits. In addition, Unistar is required to make a guaranteed monthly advance
of $25,000 to the CDA, which began in 1995 under the previous owners, and will
be reimbursed when the NIL is making profit distributions to Unistar. This
advance is not included in the total expenditures used to calculate expenditures
in excess of the $8.5 million expenditure threshold. There is no time limit in
the NIL Agreement on the reimbursement of expenses or the CDA advances and such
reimbursement will be paid out of the first net profits generated by the NIL.
There will not be reimbursement, however, if and to the extent that there are
not sufficient net profits of the NIL to effect such reimbursement.
Years Ended December 31, 1997, 1996 and 1995
Results of Operations. Unistar did not generate any revenues during 1997,
1996 or 1995 because the NIL was not profitable. Although the NIL became fully
operational in January 1998, it has yet to generate quarterly net profits and
therefore Unistar, which receives revenues only from the net profits of the NIL,
has generated no revenues through June 30, 1998.
Operating expenses for 1997 and 1996 were far lower than the 1995 levels.
As previously noted, the 1995 operating expenses include legal, consulting and
other fees and expenses that, in 1997 and 1996, were charged to the NIL and
reflected on the balance sheet as Advances to NIL. These expenditures will be
reimbursed to Unistar from NIL net profits. Operating expenses for 1997 and 1996
consist primarily of payroll and related costs, recruiting expenses and other
miscellaneous professional fees. The increase in payroll and related costs is
primarily due to increased headcount. Selling, general and administrative
expenses decreased primarily due to a reduction in recruiting charges and other
professional fees. Unistar was allocated $313,044 in overhead costs related to
Executone's administrative costs during the year ended December 31, 1997, which
are included in other selling, general and administrative expenses. Such costs
were not allocated during 1996 or 1995 as they were not material at that stage
of business development. Shared activity expenses are chargeable to the NIL for
future reimbursement to Unistar, in accordance with the NIL Agreement. During
1997, $366,677 of such charges were recorded as Advances to NIL, which are to be
reimbursed to Unistar out of future NIL profits. These expenses were charged as
Unistar expenses during the same period in 1996.
<PAGE>
Unistar has not recorded a tax benefit for its losses for the years ended
December 31, 1997, 1996 and 1995. Based upon a lack of historical earnings and
given that Unistar has only generated taxable losses since its inception, it is
more likely than not that Unistar will not be able to utilize such tax benefits.
Liquidity and Capital Resources. The discussion below details Unistar's
cash flows from operating, investing and financing activities. To date, Unistar
has not generated cash from its operating activities. As previously noted, it
has not generated revenue and has used cash to fund its current expenses and
liabilities. The remainder of Unistar's cash usage relates to the investment
activities, detailed below, which primarily comprise expenditures for Unistar's
capital requirements, along with the operating and capital requirements of the
NIL. Since Unistar has not generated cash to date, its financing activities
consist of funding from Executone.
1997 1996
----------- -----------
Unistar Operating
Activities $ 807,679 $1,256,015
Unistar Investing
Activities
Gaming and Business
Systems 2,326,612 501,098
Distributions to the CDA 300,000 325,000
Investment in IGT -- 700,000
Pre-Acquisition
Liabilities 260,245 1,639,330
NIL - Operations 1,811,708 342,587
NIL - Building Cost 848,928 223,726
Other 47,128 --
5,594,621 3,731,741
Capital Lease Obligations 70,574
Cash Distributed by
Executone -- (73,946)
---------- ---------
Funding from Executone $6,472,874 $4,913,810
The previous owners of Unistar advanced $4.2 million to fund Unistar
operating activities and for capital and other contributions.
Funding of Unistar operations decreased $448,336 in 1997 compared to 1996
primarily due to the 1996 repayment of current liabilities accrued with the
purchase of Unistar at the end of 1995.
The development of the gaming and business software systems for the NIL,
which includes the games themselves, the banking interface, the game reporting
system and the financial accounting systems, resulted in funding of $2.3 million
during 1997. This was an increase of $1.8 million over the 1996 spending level.
No expenditures on these systems were made prior to the acquisition.
Expenditures increased in 1997 as the NIL launched the test-marketing of its
Internet System games in May 1997 and the draw lottery game in January 1998. As
of December 31, 1997, these systems are all assets of Unistar and are classified
in "Other Assets" on the Consolidated Balance Sheets. On January 1, 1998, these
expenditures were reclassified to "Property & Equipment" and are being
depreciated over the term of the NIL Agreement.
As part of the NIL Agreement with the CDA, Unistar is required to make a
guaranteed monthly payment of $25,000 to the CDA. This payment is an advance
against future profit distributions and will be reimbursed when the NIL is
operational and making profit distributions to Unistar. These expenditures are
included in "Advances to NIL" on the Consolidated Balance Sheets.
In February 1997, UniStar Entertainment signed an agreement with
CasinoWorld Holdings, Ltd. ("CWH") under which CWH provides project management
services overseeing the development of the software for the NIL, with UniStar
Entertainment contracting independently for system software development.
<PAGE>
In September 1996, UniStar Entertainment entered into a Securities
Purchase Agreement (the "Purchase Agreement") with Virtual Gaming Technologies,
Inc. ("VGTI," and formerly Internet Gaming Technologies, Inc. ("IGT")). Pursuant
to the Purchase Agreement, UniStar Entertainment invested $700,000 in IGT common
stock (the "IGT Investment"). The Purchase Agreement was terminated in March
1997 and, as part of the release, UniStar Entertainment was granted a
200,000-share, five-year option at $3.45 per share, a price 15% more than the
price per share of the IGT Investment. The IGT Investment is being accounted for
under the cost method.
Unistar incurred $611,126 in capital lease obligations during 1997 for
computer hardware as part of the development costs of the gaming and business
systems. During 1997, Unistar paid $70,574 in lease payments.
With the acquisition of Unistar in December 1995, Executone acquired $2.4
million in liabilities related to the NIL, primarily relating to legal and other
professional fees. The payment of these liabilities is considered part of the
NIL funding. In 1997, such payments decreased by $1.4 million compared to 1996.
The funding of NIL operating activities in 1997 increased $1.5 million
over the 1996 level as the launch of the Internet lottery in 1997 and the ramp
up of the telephone lottery increased NIL operating expenses. This was primarily
due to increases in payroll and related costs, advertising and promotional fees,
and professional fees. As these amounts will be reimbursed to Unistar from NIL
net profits, these expenditures are included in "Advances to NIL" on the
Consolidated Balance Sheets.
The 1997 funding of the building that houses the NIL operations center
increased $625,202 over 1996. The building is owned by the NIL. These
expenditures, considered start-up costs related to the NIL, have been
capitalized and are included in "Other Assets" on the Consolidated Balance
Sheets. See "--New Accounting Pronouncements."
Unistar's financing activities consist solely of funding from Executone.
See "--Six Months Ended June 30, 1998 and 1997--Liquidity and Capital Resources"
for a discussion of Unistar's cash requirements and availability subsequent to
the Closing Date.
The National Indian Lottery. The initial goal of the investment in Unistar
was to establish and manage a telephone lottery that could be played by any
individual of majority age, residing in one of the 36 states or the District of
Columbia that currently operates a state-run lottery. In the original
telephone-based lottery, it was contemplated that calls via an "800" number
would be processed with interactive voice response equipment or live agents
located on the CDA's reservation in Idaho using automated call distribution
("ACD") software to process nationwide lottery sales. The NIL business plan has
evolved in response to legal challenges to encompass Internet-based instant
lottery games, and as of January 1998, a local, non-toll-free telephone and
Internet-accessible weekly draw lottery.
The NIL currently conducts business under the US Lottery trade name. The
US Lottery began test marketing its original instant ticket games on the
Internet in May 1997 and, in April 1998, announced five new instant games on the
Internet. On January 20, 1998, the US Lottery launched its first Draw game, the
"Super6," a national weekly draw lottery. Tickets for the Super6 can be
purchased either over the Internet or by telephone. As of June 30, 1998, the
registered base of the US Lottery was approximately 22,000 people, including
approximately 4,200 active players. Through June 30, 1998, the US Lottery has
generated cumulative revenues of $8.3 million. Due to advertising, professional
fees and other startup costs, the NIL has yet to generate a profit. As a result,
Unistar has not recognized any revenue under the terms of the NIL Agreement as
of June 30, 1998.
New Accounting Pronouncements. In April, 1998, the American Institute of
Certified Pubic Accountants issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. In addition, the
pronouncement requires that, effective January 1, 1999, previously capitalized
start-up costs be expensed and classified as a cumulative effect of a change in
accounting principle. Unistar anticipates that approximately $2.0 million in
start-up costs currently classified as other assets and intangible assets will
be written off effective January 1, 1999, in accordance with this new
pronouncement.
<PAGE>
Year 2000 Compliance. Unistar relies on software and related technologies
in the operation of its business. In its review of its computer systems for Year
2000 compliance, Unistar has reviewed its applications software, operating
systems software and firmware used on its hardware and other devices with the
suppliers of the systems. Unistar tested these systems by processing Year 2000
events and transactions. All systems were found to be Year 2000 compliant.
Failure by data suppliers with whom Unistar associates to successfully
address the Year 2000 issue on a timely basis could result in delays in data
becoming available to Unistar for use in its products. Unistar has completed a
review of potential Year 2000 issues with its key data suppliers who have
confirmed that they will be able to process Year 2000 transactions on a timely
basis. However, there can be no assurance that the systems of other companies on
which Unistar's systems rely will not encounter Year 2000 problems. A failure by
another company to deal successfully with the Year 2000 Problem could have an
adverse effect on Unistar's systems, including the inability of Unistar to
process transactions on the Systems. Unistar does not have a contingency plan in
place should an unforeseen failure occur. Such a plan, if necessary, will be
developed dependent upon the nature and extent of the problem.
Six Months Ended June 30, 1998 and 1997
Results of Operations. Unistar did not generate any revenues during the
six-month periods ended June 30, 1998 and 1997 because the NIL did not generate
any net profits. Although the NIL became operational in January 1998, it has yet
to generate any net profits and therefore Unistar, which receives revenues only
from the net profits of the NIL, has generated no revenues through June 30,
1998.
Operating expenses for the six-month period ended June 30, 1998 were
$412,542, comparable to the same period last year. Depreciation expense
increased $410,949 compared to the same period last year. The system hardware
and software assets, along with other gaming equipment, began their service
lives as of the commencement of the term of the NIL Agreement in January 1998
when the NIL became fully operational. Such assets are being depreciated over
the five-year term of the NIL Agreement. This increase was more than offset by
shared activity expenses for the six-month period ended June 30, 1998. Shared
activity expenses are chargeable to the NIL for future reimbursement to Unistar,
in accordance with the NIL Agreement. During the six-month period ended June 30,
1998, $500,770 of such charges were recorded as Advances to NIL, which are to be
reimbursed to Unistar out of future NIL profits. These expenses were charged as
Unistar expenses during the same period in 1997.
<PAGE>
Liquidity and Capital Resources. The funding of Unistar for the six-month
periods ended June 30, 1998 and 1997 is summarized as follows:
1998 1997
----------- -----------
Unistar Operating
Activities $ 278,098 $ 552,379
Unistar Investing
Activities
Gaming and Business Systems 1,131,052 1,138,418
Distributions to the CDA 150,000 150,000
Pre-Acquisition Liabilities 389,553 154,421
NIL - Operations 1,594,580 428,679
NIL - Building Cost 4,959 741,260
State Business Development
Costs 161,060 -
Other 23,065 23,062
---------- ----------
3,454,269 2,635,840
---------- ----------
Capital Lease Obligations 53,060 19,948
Funding from Executone $3,785,427 $3,208,167
========== ==========
Funding of Unistar operations decreased $274,281 during the six-month
period ended June 30, 1998 compared to the same period last year primarily due
to Unistar shared activity expenses.
Expenditures to develop the gaming and business systems were comparable
during the six-month periods ended June 30, 1998 and 1997. The 1998 expenditures
were incurred in the development of nine new Internet lottery games that were
launched in April 1998. In 1997, these expenditures were incurred in developing
the software systems for the launch of the Internet lottery.
Payments relating to pre-acquisition liabilities increased by $235,132
during the six-month period ended June 30, 1998 compared to the same period last
year. This increase is due to the increase in legal fees incurred to litigate
the Missouri and Wisconsin actions brought during 1997, along with the
continuing AT&T litigation.
The funding of NIL operating activities during the six-month period ended
June 30, 1998 increased by $1.2 million versus the same period last year. The
increase reflects the operational status of both the Internet and draw lotteries
in 1998 and includes payroll and related costs, advertising and promotional
fees, and professional fees. These expenditures are included in "Advances to
NIL" on the Consolidated Balance Sheets. Funding for the NIL building costs
declined $736,301 for the six-month period ended June 30, 1998 compared to the
same period in 1997. As of June 30, 1998, future expenditures for building
construction are expected to be minimal.
Beginning in 1998, Unistar began to incur costs to explore opportunities
to provide Unistar's unique systems and services to state lotteries interested
in providing ticket purchases either through the Internet or through terminals
at various remote locations. For the six-month period ended June 30, 1998,
Unistar incurred $161,060 for the startup of this business. This line of
business is not related to the NIL and such costs are not chargeable to the NIL.
As of June 30, 1998, Unistar had no material commitments for capital
expenditures.
Executone has agreed to continue to provide financial support to Unistar
until the Closing Date, which support will not exceed an average sum of $1.5
million per quarter in accordance with the terms of the Exchange Agreement.
Based upon cash consumed over the last 18 months, it is estimated that Unistar
will require approximately $6 million to fund its operations for 1999. To
provide the necessary funding for Unistar to operate until it is generating a
sufficient amount of cash to fund its own operations, Executone will also
provide to Unistar, at the Closing Date, in accordance with the terms of the
Exchange Agreement, $3.0 million in cash, and will assume responsibility for,
and pay when due, expenses incurred by Unistar but not yet paid; provided,
however, that the maximum of such expenses shall not exceed $500,000. Unistar
will also receive the proceeds of the Offering, estimated to be approximately
$2.5 million. The $5.5 million in cash that Unistar will have on hand as of the
Closing Date, in addition to the maximum of $500,000 in liabilities that
Executone will pay is expected to adequately fund Unistar's cash flow
requirements through the end of 1999, at which time it is expected to be able to
fund it operations on a break-even cash basis.
<PAGE>
Capital investments required to launch the ELT business, planned to begin
in 1999, are expected to be funded using debt financing. Unistar is currently
seeking commitments for such longer-term financing arrangements.
Forward-Looking Statements
All forward-looking statements regarding Unistar and the NIL are based on
the assumptions that the US Lottery will not be forced to delay, suspend or
cease operations due to any legal challenge or the enactment of legislation
adversely affecting its business. Forward-looking statements are also based on
management assumptions regarding potential player acceptance of the NIL games,
NIL advertising and marketing costs, the feasibility, timing and effectiveness
of planned marketing and advertising, and estimates of other operating and
capital expenses. If actual events differ materially from the Unistar's
assumptions, projections and estimates, Unistar's actual results could vary
significantly from the performance projected in the forward-looking statements.
Investors should also be aware that Unistar has never operated as a separate,
independent entity and, as a result, future performance may be impacted
significantly by its management's ability to operate the business on a
standalone basis and, if necessary, obtain additional financing.
<PAGE>
ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR
RELATING TO THE OFFERING
For the purpose of structuring the Offering and certain of the
relationships between Executone and Unistar after the Offering, Executone and
Unistar have entered into the Reorganization Agreement, a Master Services
Agreement (the "Services Agreement") and a Tax Sharing Agreement (the "Tax
Sharing Agreement" and, together with the Exchange Agreement, the Reorganization
Agreement, the Services Agreement and the Standby Agreement, the "Ancillary
Agreements"). All of the Ancillary Agreements are described below or elsewhere
herein and are included as exhibits to the Registration Statement filed with the
Commission, of which this Proxy Statement/ Prospectus is a part. The following
summaries are qualified in their entirety by reference to the agreements as
filed. None of these agreements are the result of arm's-length negotiation. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Reorganization Agreement
The Reorganization Agreement provides for, among other things, the
principal corporate transactions required to effect the Offering and certain
other matters governing the relationship between Executone and Unistar with
respect to or in consequence of the Offering, including but not limited to the
following: (i) the exchange by Executone of shares of Unistar Common Stock held
by Executone for newly-issued shares of Unistar Common Stock and Unistar
Preferred Stock to be transferred to the Executone Preferred Holders pursuant to
the Exchange Agreement; (ii) the transfer by Executone to Unistar of various
assets; (iii) the issuance by Unistar to the common shareholders of Executone of
the Rights pursuant to the Offering; (iv) the division between Executone and
Unistar of certain liabilities; (v) the elimination of intercompany accounts;
and (vi) the execution of certain other agreements governing the relationship
between Executone and Unistar following the Offering. Pursuant to the
Reorganization Agreement, Executone will be liable for: (i) the liabilities of
Executone under the Ancillary Agreements to which Executone is or becomes a
party; (ii) the liabilities relating to any of Executone's businesses accrued or
unaccrued, whenever arising; (iii) providing Unistar with $3.0 million in cash
at the Closing Date; (iv) the liabilities relating to any of Unistar's
businesses that arise and are accrued before the Closing Date; provided,
however, that the maximum of such liabilities shall not exceed $500,000 based on
Executone's undertaking to keep current on expenses incurred by Unistar before
the Closing Date (the "Executone Liability Limitation"); and (v) all expenses
arising in connection with the Offering (collectively, the "Executone
Liabilities"). Unistar will be liable for: (i) the liabilities of Unistar under
the Ancillary Agreements to which Unistar is or becomes a party; (ii) the
liabilities relating to any of Unistar's businesses that arise and are accrued
after the Closing Date; (iii) the liabilities relating to Unistar's businesses
over and above the Executone Liability Limitation; and (iv) liabilities arising
out of litigation to which Unistar or a subsidiary is or becomes a party,
including any claims of patent infringement or contract claims, regardless of
the date as of which such claims arise; provided that all expenses and costs
incurred on prior to the Closing Date in connection with currently pending
litigation to which Unistar or a subsidiary is a party shall be Executone
Liabilities (collectively, the "Unistar Liabilities"). See "THE OFFERING." In
addition, Executone and Unistar have agreed to share the costs associated with
the Transition and Retention Plans described below. See "EXECUTIVE
COMPENSATION--Employment Agreements and Transition Retention Plans."
Conditions. The Reorganization Agreement provides that the Offering is
subject to a number of conditions, including: (i) the Unistar Common Stock shall
have been approved for listing on the [Nasdaq National Market subject to
official notice of issuance; (ii) the Unistar Board shall have adopted the
Unistar Certificate and Unistar Bylaws and the Unistar Certificate and Unistar
Bylaws shall be in effect; and (iii) the Registration Statement shall have been
declared by the Commission or become effective under the Securities Act.
Benefit Plans. The Reorganization Agreement contains a number of
provisions relating to current and former employees. The provisions generally
contemplate that Unistar will assume no obligations or liabilities with respect
to employee plans or benefits prior to the Closing Date and that after the
Closing Date, Unistar will be responsible for providing employee benefits for
Unistar personnel. The Reorganization Agreement also contemplates that Unistar
will contract with Executone for executive and administrative services as
described under the Services Agreement described below.
<PAGE>
Indemnification. The Reorganization Agreement provides that: (i)
Executone will indemnify Unistar against all costs arising in connection with
the Executone Liabilities; and (ii) Unistar will indemnify Executone against all
costs arising in connection with the Unistar Liabilities.
Services Agreement
The Services Agreement provides for Unistar to continue to receive certain
executive and administrative services of Executone for varying periods of time
after the Offering. Such services include legal services, payroll services,
benefits administration, provision of office space, computer services,
accounting and tax services and other miscellaneous services. Executone will
make these services available to Unistar in substantially the same manner as it
makes the same services available for its own operations in exchange for fees
intended to compensate Executone at least for its costs. Executone or Unistar
may discontinue one or more of the services upon the provision of prior written
notice as specified in the Services Agreement.
Tax Sharing Agreement
In connection with the Offering, Unistar and Executone will enter into a
Tax Sharing Agreement that provides, among other things, for the allocation
among the parties thereto of Federal, state, local and foreign income tax
liabilities for all periods through the Closing Date. Though valid as between
the parties thereto, the Tax Sharing Agreement is not binding on the IRS and
does not affect the joint and several liability of Executone and its
subsidiaries to the IRS for all Federal income taxes owed to the IRS by such
corporations.
<PAGE>
BUSINESS AND PROPERTIES OF UNISTAR
General Development of the Business of Unistar
Unistar was incorporated on January 24, 1995 in the state of Delaware as a
wholly-owned subsidiary of Cooper Life Sciences, Inc. for the purpose of
acquiring all of the outstanding common stock of UniStar Entertainment. Unistar
completed the acquisition of UniStar Entertainment on February 29, 1995. UniStar
Entertainment was incorporated on July 29, 1993 in the state of Colorado under
the name Cahill-Caldwell, JAMS, Inc. for the purpose of developing and managing
the NIL throughout the United States. In June 1994, the name of UniStar
Entertainment was changed from "Cahill-Caldwell, JAMS, Inc." to "UniStar
Entertainment, Inc." Executone acquired Unistar on December 19, 1995.
Unistar and UniStar Entertainment have been engaged exclusively in the
business of developing client/server-based gaming systems since their formation.
In 1995, UniStar signed its first contract with the CDA to provide a telephone
lottery using toll free interstate long distance services, which was
subsequently blocked by litigation. See "RISK FACTORS--Pending Litigation That
Could Have a Material Adverse Effect on Unistar and the NIL." On June 27,1996,
the CDA and Unistar amended the NIL Agreement with the approval of the NIGC to
include an Internet based lottery. Unistar began development of this system in
1996 and completed a prototype by March 1997. In July 1997, the NIL began
marketing its Internet games to the public. In June 1997, Unistar began
development of a telephone interface to the Internet system and Super6 draw
game. In January 1998, the NIL began marketing this product using local
telephone numbers where the customer pays the long distance charge. In March
1998, Unistar began development of its Intranet System and completed a prototype
by September 1998. Unistar is currently marketing the Intranet System to state
lotteries.
Unistar expects the proceeds of the Offering and the contribution of
capital by Executone to be sufficient to cover the costs of systems development,
distributions to the CDA and projected operating costs for at least the next 12
months. Unistar expects the working capital required for the installation of a
customer order, when received, will be financed through bank debt. Unistar will
continue enhancing its product line adding features and customizing the Systems
for customer orders.
Products
Unistar develops, provides and maintains telephone, Internet and
enterprise communications, accounting, database and other applications and
services for use by the governmental lottery market. Its principal objective has
been to develop a new generation of lottery technology by anticipating the
impact that recent advances in telecommunications and computers will have on the
nature and delivery of lottery products and the support systems necessary to
administer them.
Unistar has developed the Systems to provide secure electronic production,
delivery, validation, billing and accounting for lottery games. The Systems are
configurable, which allows the addition, deletion and substitution of games
offered. Tickets may be purchased at the lottery operations center using a
telephone connected through the public telephone network, a personal computer
connected via the Internet or a custom designed ELT connected via a LAN.
Development has initially focused on the production, delivery and billing of
lottery games via the NIL's Internet System, and, with modifications, over the
NIL's Intranet System. The Systems support both periodic draw lottery games,
providing pari-mutuel outcomes based on the number of participants in the pool,
and instant games, based on the random distribution of predetermined outcomes
within a pool of certain size. The Internet System has been installed and has
been in continuous operation since January 1998. See "--The National Indian
Lottery." The Intranet System is still in development and not yet operational.
Both Systems contain significant features and procedures to prevent
abusive play. Unistar believes that the Internet System contains processes and
procedures to protect against play by minors and to control problem gaming and
that the Intranet System as implemented will provide protections against such
play at least equal to that provided by existing state-run lottery systems.
Internet System Components. The key functions and components of the Internet
System are as follows:
o Basic Operation. A customer registers, opens an account and receives
a user identification number and password. Registration can be through
the Internet, by telephone or in person. The customer deposits funds
into the account primarily by credit card, although deposits may also
be made in cash or by check with proof of age. Once the account is
funded, the customer may use the available balance to play the games
or for other merchandise. Any prizes also are credited to the account.
As with deposits, customer withdrawals can be requested through the
Internet, but can also be initiated by telephone or in person.
Withdrawals are paid by check.
o Client Server Architecture. The Internet System is designed such
that customers can access the Internet System in various ways using
several different devices connected to the centralized gaming server.
For example, customers can use personal computers connected over the
Internet, ELTs connected via a LAN or over the Internet, or a voice
response unit connected by telephone. Administrative terminals can be
connected via the Internet thus allowing the operation and
administration of the Internet System to be conducted from separate
locations.
o Gaming Server. The gaming server is a centralized network of computers
controlling the essential operations of the games including the game
play, issuing of the tickets or generation of a random event,
determination of a winner and the awarding of the prize.
o Business System. This system accounts for and controls transactions
with customers including registration, deposits, withdrawals,
purchases of tickets or other merchandise and the awarding of prizes.
o Banking System. This system validates the credit card information
received from the customer with the national Visanet network. The
banking system is currently capable of processing 10,000 transactions
per hour in approximately 10 seconds each and is expandable to handle
a larger volume of transactions.
The components of the Internet System can be used together or on a
standalone basis depending upon the specific application.
Intranet System. The Intranet System is based on the same architecture as
the Internet System. Connections are made locally instead of over a wide area
network.
o Basic Operations. In order to participate in the Intranet System, a
player must visit a cashier to open an account and receive a player's
card and a PIN number. The information required in opening an account
will be simple or detailed, depending upon the facility and the needs
of the customers. The cashier is responsible for obtaining from each
customer such required information, including name, address, telephone
number and e-mail address for electronic forms of marketing. Once an
account is opened, the player deposits funds into the account.
o ELTs. To log onto the Intranet System in order to play the games, the
player must insert the card into the magnetic strip reader on the game
ELT and enter his personal identification number (PIN). The player may
select any game that is offered by the gaming server, which can be
resident of hundreds of games. Currently, these games fall into two
categories: Instant Draw Games and Instant "Scratchers."
o In an Instant Draw Game, the player selects a series of numbers
or symbols and submits them for a drawing. The centralized drawing
server produces a drawing and returns the results to the gaming
server. The gaming server determines whether the player's
submission was a winning ticket, and if so, computes the prize and
returns the result to the ELT.
o In the Instant "Scratchers," the player selects a game, the
gaming server selects the ticket from the virtual ticket roll and
returns the ticket to the ELT. While the results of the ticket are
predetermined, the ELT makes the game entertaining to play. In the
simplest case, the player will touch sections of the ticket
display to unveil ("scratch") the ticket and reveal the underlying
patterns.
<PAGE>
o Centralized Accounting Server. A centralized accounting server keeps
track of all of the transactions on the Intranet System. The
centralized accounting server contains the database of the player and
records all of the player's transactions including deposits to his
account, withdrawals, purchases of games and the awarding of prizes.
The centralized accounting server produces reports both to monitor the
player's activities as well as performance of the games according to
his individual working papers.
o Cashier Terminal. The cashier will receive the player's information
either orally at the window or through the completion of application
cards. In order to gain access to the games, the player must enter his
PIN number through a numerical keypad, providing additional protection
against lost cards, much like bank ATM machines. With proper
identification and the adherence to the proper control procedures, the
player can obtain a new card at a customer service desk. Customer
service functions and cashier functions will always be segregated.
o Automatic Cash Machines. Funds can also be added through automated
cash machines. The player inserts the player's card into a reader and
inserts the amount of money he wishes to add. The automatic cash
machine then prints a receipt and returns the card.
Games. The architecture of both Systems allow the addition, deletion and
substitution of games offered. The games have been designed to fall within
generally accepted definitions of a "lottery" game. While the definition of a
"lottery" varies state by state, such state statutes tend to outline certain
common characteristics for lottery games, including the following:
o The game involves the exchange of consideration, the element of chance and
the awarding of a prize;
o No skill is involved in the game;
o The game is not played against a single machine; and
o The game involves either a centralized drawing or a predetermined outcome.
Lottery games generally fall into two broad classifications: (i) instant
games or "Scratchers" in which the outcome is predetermined and known instantly
and (ii) draw games in which the outcome depends upon a random event in the
future. Unistar currently has four families of games that are available on both
the Internet System and Intranet System, Bingo, Lotto, Classics and Draw games,
and each family of games is described in further detail below.
o Bingo. In Bingo, a player selects 24 numbers out of a total of 75 and
wins if the numbers selected match a pattern randomly drawn by a
computer. Unistar has three games in this category: Bingo, Super Bingo
and Ultra Bingo. These games offer several features, including the
ability for the player to create their own card, to select the number
of balls to be drawn and to select the dollar amount of the ticket.
Bingo Cards also can be saved and played at a later time.
o Lotto Games. In Lotto games, a player selects from one to ten numbers
from a possible 34 to 100 numbers and drawings range from five to 20
numbers. Unistar offers four games in this category including Lotto
6/49 instant game, Super Lotto, Super Lotto 100 and Box Lotto 49.
o Classics. The third family of instant games represents variations of
other Scratchers games offered by state lotteries. These games are
produced in "virtual" ticket rolls then "dispensed" electronically to
the player when purchased. Unistar offers two games in this category,
Lucky 21 and the Big Spin.
o Draw Games. In Draw games, players select a pattern of numbers that
are stored in a database until a drawing is conducted. Once the
drawing is conducted, the numbers are matched with the database to
identify the winning patterns and players. Unistar has developed three
variations in this category, including Super6, Pick 3 and Power 6.
<PAGE>
Product Development. Unistar's product development efforts are devoted to
continual improvement in all aspects of the Systems. Unistar is also focused on
development of new products in the following areas:
o Browser-Based Games. These are games that would play within the
players' web browser thereby facilitating the download of the
software.
o Tournaments. Unistar is investigating the development of tournament
games. Players would enter the tournament and pay a membership fee to
play a game of skill and win prizes according to the outcome of the
tournament.
o Traditional Casino Games. Unistar has investigated a suite of casino
games including black jack, video poker, slots, roulette and craps
that can be integrated into the Systems. To date the Company has not
engaged in further development of these games because it has not had
any agreements with entities legally authorized to market such games.
o Intranet System. The Intranet System is nearing completion of
development. The prototypes are functioning, but additional
development is necessary prior to deployment of the Intranet System to
customer sites. Further development of the Intranet System will
involve customization to a specific customer's specifications and only
will be undertaken at such time as such customer enters into a
contract to purchase the Intranet System. Unistar can complete such
customization in less than six months and for less than $500,000.
Although Unistar has done no formal research regarding the possible
acceptance of the Intranet System, it has presented the Intranet
System to six state lotteries.
Unistar has spent $4.3 million on research and product development to
date, primarily related to the development of the Systems, and has plans to
spend an additional $1.5 to $2.0 million over the next year.
Sales and Marketing. Unistar is pursuing the sale of its technology and
the Systems worldwide. Unistar is marketing (i) directly to state agencies and
other licensed entities, (ii) individually through authorized providers and
(iii) through strategic alliances with other providers of games and gaming
technology. Such marketing includes demonstrations of the Systems and visits to
Unistar's premises.
Lottery Market and Targeted Customers. Unistar believes that the lottery
market will continue to grow and is targeting primarily state lotteries and
other licensed domestic entities for the sale of its technology.
o Lottery Market. Worldwide lottery ticket sales in 1997 were
approximately $116.6 billion dollars. No revenues from sales outside
of North America have been included in Unistar's business plan and the
projections included herein. Revenues from international lotteries are
viewed as incremental to Unistar's business plan and Unistar has not
pursued sales in such international markets. Unistar plans to assess
regulatory and trade risks in connection with such international
lotteries on a case-by-case basis prior to pursuit of international
sales. Worldwide lottery sales have grown at an annual compounded rate
of approximately 6% over the past five years. In 1997, lottery sales
in the United States were $35.5 billion and have averaged
approximately 6% annual growth over the last five years. The games
offered by Unistar generally are analogous to the Instant, Video
Lottery and Keno segments. The table below details lottery revenue in
the United States for 1996 and 1997 by type of game and shows annual
growth.
Lottery Sales in the United States (in millions)
Annual Growth
1996 1997 Rate
------------ ----------- ---------------
Instants and Pull $ 14,201 $14,217 0.1%
Tab Games 17,730 17,744 0.1%
Draw Lotteries 1,161 1,605 38.2%
Video Lottery 1,979 1,920 (3.0)%
Keno and other
------------ ----------- --------------
$35,071 $ 35,486 1.2%
======= ======== ===
<PAGE>
o State and Other Governmental Lotteries. Unistar believes that the
Systems represent the next generation of instant lottery technology.
During the last 30 years instant lotteries have evolved from lottery
tickets sold by clerks in stores, to being dispensed through automated
ticket machines designed to increase the accessibility of lottery
tickets. Unistar believes the Systems further increase the
accessibility of lottery tickets by providing lottery tickets that are
available electronically. These tickets can be obtained through client
ELTs connected to the Systems either by a LAN or by telephone lines
if the Systems are remote. Unistar believes it is well positioned in
the event that the state and international lotteries decide to sell
their tickets over the Internet. Unistar has made presentations to
several states discussing utilization of the Systems, but has not yet
entered into any additional contracts.
Competition
The lottery business is highly competitive, and Unistar faces competition
from a number of domestic and foreign instant ticket manufacturers, on-line
lottery system providers and other competitors.
In particular, there are currently three primary lottery services
competitors in the U.S.: G-Tech Corporation ("G-Tech"), AWI International
("AWI"), a subsidiary of Powerhouse Technologies, Inc., and Scientific Games
Holdings Corp. ("Sci-Games"). Unistar believes that these companies engage in
vigorous competition with respect to existing lottery technologies and services
and have experienced a decline in the growth of existing lottery operations. The
objective of Unistar is to provide, either alone or through partnerships with
existing lottery services companies, value added lottery systems and services
for the domestic market. It is believed that these products can support new
methods and styles of lottery participation, providing new growth opportunities
for established state lotteries and higher margin returns for the providers of
related technologies and services.
Internationally, there are many lottery services and product suppliers
that provide competition to Unistar, as well as the companies listed above.
Unistar believes that it has the ability to provide technologies that support
new methods and styles of lottery participation in foreign counties. In
addition, Unistar believes that applications of its Systems, which are based on
the use of standardized components that support a variety of hardware and
software interfaces, can provide cost-effective solutions to improve lottery
operations in remote and developing nations. Unistar anticipates that a
considerable length of time will be needed to develop an independent market
presence in foreign countries other than Canada and Mexico, and there will be
substantially higher costs in pursuing these markets. Therefore, Unistar
anticipates that the marketing of its products and services internationally, if
commenced within the next few years, will be conducted primarily through
ventures with existing providers of lottery services. No assurance can be given
that Unistar will develop such relationships to the point of having a
significant impact on its financial results or operations in the near future.
Both in the domestic market and internationally, factors that influence
the award of lottery contracts in addition to price, are believed to include,
among others, the ability to optimize lottery revenues through game design and
technical capability, quality of the product, dependability, production
capacity, marketing experience, financial condition and reputation of the
bidder, the security and integrity of the bidder's production operations,
products and services and the satisfaction of various other requirements and
qualifications imposed by specific jurisdictions.
Management believes that it has no current competitor in the market for
the specific lottery products it has developed. Competitors have typically
either manufactured only instant tickets or provided only certain on-line
services to support conventional sales of paper lottery tickets, including
software for the management systems, marketing assistance and various other
specific duties. However, certain competitors have announced plans to market
Internet based lottery systems. Unistar has two primary domestic and
international competitors in this regard: Powerhouse Technologies, Inc., which
changed its name from Video Lottery Technologies, Inc. in 1997, and GTech.
Unistar is a relatively recent arrival among the developers of
state-of-the-art technology and marketing concepts for lottery operators. In
addition, Unistar's limited experience in the industry and the potential for
some state lottery operators to view the NIL as a direct competitor, are
expected to negatively
<PAGE>
impact Unistar's competitive position. However, in the delivery of market
tested, secure, integrated telephone, Internet and Intranet technologies that
support new forms of lottery participation and methods of administration,
Unistar believes that its experience level is superior. As the only market
tested provider of products that have the unique capabilities of the Systems,
Unistar can be seen as the only experienced provider in its particular market
niche. Unistar believes that other lottery services and product suppliers have
for several years made capital investments intended to position themselves to
participate in this market niche. However, none has yet demonstrated the unique
focus or devoted the extensive time necessary to develop, customize and install
an operational integrated telephone and Internet lottery system similar to that
provided by Unistar and operated by the NIL. In addition, to some extent, the
technological developments inherent in the Systems have the potential to
materially reduce the capital investment required to finance secure lottery
operations, which could affect the perception that the experience and resources
of competing companies are as valuable as they have been in the past. Thus,
Unistar believes that the fact that all states in the U.S. that have lotteries
have typically required potential suppliers to have prior lottery experience can
be a factor that also limits the ability of Unistar's competitors to compete
with Unistar in the development of this market niche.
Government Regulation
Lotteries are not permitted in various states/jurisdictions of the United
States unless expressly authorized by law. The ongoing operations of authorized
lotteries in the United States typically are extensively regulated. Applicable
legislation varies from jurisdiction to jurisdiction but, in addition to
authorizing the lottery and creating the applicable regulatory authority, the
lottery statutes generally dictate certain broad parameters of lottery
operation, including the percentage of lottery revenues that must be paid out in
prizes. Lottery authorities typically exercise significant control as to the
selection of vendors and award of lottery contracts, ticket prices, types of
games played and marketing strategy, all of which can affect Unistar's operating
results.
Prior to and after granting a lottery contract, governmental authorities
generally conduct an investigation of the company and its employees and such
authorities may require removal of an employee deemed to be unsuitable. Certain
states also require extensive personal and financial disclosure (including,
among other things, submission of fingerprints, personal financial statements
and federal and state income tax returns) and background checks of control
persons and entities beneficially owning a specified percentage (typically 5% or
more) of the company's securities. The failure of such beneficial owners to
submit to such background checks and provide such disclosure could jeopardize
the award of a lottery contract to Unistar or provide the basis for cancellation
of any existing lottery contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated, although this
regulation usually varies from that prevailing in the United States.
Restrictions are frequently imposed on foreign corporations seeking to do
business in such jurisdictions. Laws and regulations applicable to lotteries in
the United States and foreign jurisdictions are subject to change and the effect
of such changes on Unistar's ongoing and potential operations cannot be
predicted with certainty.
Patents, Trademarks and Copyrights
Management believes that the success of Unistar is in part dependent upon
the ability to design, develop and market new products and new or enhanced
applications. The patentability of such new products or applications is
evaluated and patent applications are filed in those jurisdictions where
necessary to protect unique developments. Unistar currently has two U.S. patent
applications pending regarding the connection of key proprietary technology
elements.
Unistar has registered or applied to register its trademarks when it
believes registration to be important to its ongoing business operations.
Unistar also generally claims copyright protection for its software used in
connection with the NIL and relies upon trade secret, contract and copyright
laws to protect its proprietary rights in its software, designs and
documentation.
<PAGE>
Certain of the NIL products incorporate technology and software licensed
by Unistar from independent third parties. Generally, these licenses have
required payment of a license fee for the licensed technology.
Employees
Unistar operates primarily through the use of independent software
development contracts to improve its access to software development talent and
keep its fixed overhead to a minimum. As of June 30, 1998, Unistar employed four
general and administrative management employees, not including the customer
service and technical employees employed by the NIL, none of whom are
represented by unions. Unistar believes that relations with its employees are
good.
Unistar Properties
Unistar's headquarters occupy approximately 1,500 square feet of leased
space in Executone's headquarters building at 478 Wheelers Farms Road, Milford,
Connecticut 06460. Unistar's right to occupy this space expires 120 days after
the Closing Date.
Unistar intends to locate alternative office space for its operation prior
to expiration of this arrangement with Executone. Due to the type and small
amount of space required by Unistar, the management of Unistar does not
anticipate that it will have any difficulty in finding suitable space at a
reasonable cost.
The National Indian Lottery
Overview. Under the NIL Agreement ending January 2003, UniStar
Entertainment provides design, development, financial and management services
for the NIL. UniStar Entertainment provides development and management of the
software, network design and call center applications for the NIL's operations.
In return for providing these management services, the CDA has agreed to pay
UniStar Entertainment a fee equal to 30% of the profits of the NIL. In
accordance with the NIL Agreement, Unistar is responsible for providing
operating capital to fund the development of the NIL including, but not limited
to, the construction of the building to house the reservation operation center,
computer and related software costs to build both the telecommunications and
on-line Systems, lobbying and legal fees, advertising and promotional expenses
and other operational costs. The first $8.5 million of such expenditures, which
have already been made, are not reimbursable to Unistar. Any sums advanced above
the $8.5 million requirement are recorded as advances to the NIL from Unistar
and will be reimbursed to Unistar from NIL net profits. Unistar and the CDA have
limited their remedies in the event that a dispute arises between the parties
with respect to the NIL Agreement. See "RISK FACTORS--Limited Legal Remedies
Available Under the NIL Agreement."
The NIL has commenced operations but is not yet profitable. In an attempt
to block the NIL, certain states issued letters under Section 1084 to prevent
the long-distance carriers from providing toll-free telephone service to the NIL
and the States of Missouri and Wisconsin have filed suit against the NIL. See
"RISK FACTORS--Pending Litigation That Could Have a Material Adverse Effect on
Unistar and the NIL."
On September 14, 1998, the CDA, Unistar and representatives of the U.S.
Department of Justice had discussions regarding a declaratory judgment to be
sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is legal under 18 U.S.C. ss.ss.1952 and 1955.
Unistar is informed that the Department of Justice views such operation to be in
violation of such statutes. Unistar believes that it will prevail in its case
with the Department of Justice. A wide range of outcomes that could be
economically acceptable to Unistar and the NIL are also possible. Nevertheless,
there is a risk that the NIL and/or Unistar could be found to be in violation of
such statutes and be forced to shut down related operations. In this event,
Unistar would devote its entire efforts toward the sales of its Intranet systems
primarily to state lotteries. Unistar expects to derive revenue from such sales
in the later half of 1999. Unistar estimates that the impact of an adverse
decision in its case with the Department of Justice forcing a shutdown of
related operations would be: (i) a one-time charge for costs of shutdown and
moving of the assets of approximately $1,000,000; (ii) a reduction of cash
outflow, which was $_______ for the quarter ending September 30, 1998 as a
result of a net loss of approximately $1.2 million of the NIL, to approximately
$200,000 and a redirection of such cash toward the Intranet product sales; and
(iii) a delay from 1999 until
<PAGE>
2000 until the Company would achieve profitable operations from the sale of its
Intranet product line. The Company believes it would have sufficient financial
resources to sustain operations for at least the ensuing 12 months. In such
event, however, Unistar would have to reevaluate the extent of impairment of its
intangibles, along with the write off of its reimbursable advances to the NIL,
which could have a material adverse effect on Unistar's current business,
financial position and results of operations.
In addition to the legal risks, there are market risks associated with the
development of the NIL. Unistar believes that there is a national market for the
NIL based upon research into the experience of other national lotteries and the
growth of the overall lottery market. However, there is no assurance that there
will be acceptance of a telephone or Internet lottery. See "RISK FACTORS--Market
Development Risks."
The CDA's initial plan was to establish a telephone lottery that could be
played by any individual of majority age residing in one of the 36 states or the
District of Columbia that currently operates a state-run lottery. It was
originally contemplated that customers would call an "800" number and ticket
purchases would be processed with interactive voice response equipment or live
agents in a call center located on the CDA's reservation in Idaho. The call
center would use ACD software to process nationwide lottery sales. In response
to legal challenges, the NIL business plan evolved to encompass Internet-based
instant lottery games, and, as of January 1998, a local, non-toll-free telephone
and Internet-accessible weekly draw lottery.
System. The System installed on the reservation has been operating since
July 1997, and includes the business system, gaming server and banking system
accessible both through the Internet and by telephone . The Internet System is
fully redundant with dual homed web sites supported by battery and generator
power backup systems.
Sales and Marketing. The NIL began test marketing its Instant Ticket games
on the Internet in May 1997. On January 20, 1998, the NIL launched its first
draw game, the "Super6." Tickets for the Super6 can be purchased either over the
Internet or by telephone. As of June 30, 1998, the registered customer base of
the NIL (including the instant and the weekly games) was approximately 22,000
established accounts, including approximately 4,200 active players. Test
marketing efforts for the NIL include Internet links and advertising on
gaming-related Internet sites and on general search engines, direct mail
advertising, and print, radio and television advertising in a few small markets.
NIL revenues were approximately $538,000, $1,254,000, $2,923,000 and $3,570,000
for the quarters ending September 30, 1997, December 31, 1997, March 31, 1998,
and June 30, 1998, respectively.
Financial Results. Due to advertising, professional fees and other startup
costs, the NIL has yet to generate a profit. As a result, Unistar has not
recognized any revenue as of June 30, 1998. See "UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION."
Products. The NIL product portfolio consists of two product lines --
instant lottery games and draw lottery games. The instant game product line
includes Lotto, Bingo and Classic "scratch-off" lottery games. The NIL currently
offers nine instant games . A facility is provided that allows potential
customers to practice these games without financial risk.
The draw product line consists of three games for which lottery tickets
are available both by telephone and over the Internet:
o The Super6 offers a jackpot prize of $1,000,000, which the NIL plans
to increase as the prize pool increases. Drawings are held Tuesdays at
1:00 P.M. Pacific Time.
o The NIL launched a "Pick3" game in October 1998. Drawings will be
held daily Monday through Friday at 12:00 P.M. Pacific Time.
o The NIL expects to commence the "Power6" game in 1999. This game
involves the drawing of five unique numbers from the numbers 1 to 49,
plus a sixth number that is independently drawn from the numbers 1 to
49 and may duplicate one of the first five numbers. The Power6 will
have a guaranteed minimum jackpot of $20,000,000 payable over 25 years
or $10,000,000 paid in a lump sum.
<PAGE>
Customer Service. The NIL provides a customer service center staffed with
customer service representatives trained in the games and technology deployed.
The NIL offers all Instant games in a "demo" mode, providing customers the
opportunity to learn and practice various strategies in connection with the
games without cost. From time to time, the NIL offers special promotions in the
form of "bonus dollars" whereby customers play using credits provided by the
NIL. The NIL also provides a "bank by phone" option whereby customers can
deposit funds using the telephone instead of the Internet. This option is
provided for those customers who may feel insecure about transmitting credit
card information over the Internet.
Competition. The NIL competes primarily with the various state-sponsored
lotteries that have substantially more capital and marketing resources than the
NIL.
Government Regulation and Legislation. The NIL developed and managed by
Unistar for the CDA is authorized under IGRA. In managing the NIL, Unistar must
observe all laws and regulations applicable to the NIL. IGRA established the
jurisdictional and regulatory control for each class and created the NIGC to
enforce the provisions of IGRA. IGRA defines three classes of Indian gaming.
Lotteries are defined as Class III gaming. Class III gaming is governed by the
terms of the CDA/State compact and the rules and regulations of the NIGC. The
NIL is also governed by the rules and policies promulgated by the Coeur d'Alene
Tribal Council.
In 1992, the CDA signed the compact with the State of Idaho (the
"Compact"). The Compact specifically provides for the conduct of the NIL games.
The Compact was approved by the Secretary of the Interior on February 5, 1993
and notice thereof was published in the Federal Register. The CDA entered into
the NIL Agreement for the conduct of the NIL. The Chairman of the NIGC approved
the NIL Agreement and the amendments thereto as required by law. By resolution,
the CDA has authorized the NIL to be conducted under the NIL Agreement. The CDA
has complied with IGRA and all other applicable rules, regulations and laws.
It is the opinion of the CDA and Unistar that state anti-gambling laws and
regulations are not applicable to the NIL because the entire subject of Indian
gaming is governed by federal law and therefore state laws and regulations are
preempted by IGRA. See "RISK FACTORS--Pending Litigation That Could Have a
Material Adverse Effect on Unistar and the NIL."
The employees of the NIL undergo extensive background checks including
fingerprinting, which is sent to the Federal Bureau of Investigation. The NIL
also has made and will continue to make reasonable efforts to address the issue
of problem gambling and to prevent participation by minors. The Internet System
requires each user to have a credit card. To prevent access by minors, the NIL
matches the address provided on the application to the credit card before
allowing access. When verification of the account is sent to the lawful credit
card holder, any unlawful access by a minor should be detected. The NIL mails
all correspondence to the person and address associated with the credit card to
ensure that an adult is the person receiving any correspondence in connection
with the NIL. Winnings are paid only by a check issued and mailed directly to
the person and mailing address on the account.
Renegotiation of the NIL Agreement. Unistar recently proposed to the CDA
that the parties revise the NIL Agreement. Unistar's proposal provides for the
CDA to make royalty payments for the Internet System to Unistar for a term of 15
years in lieu of a management fee paid on 30% of the net profits. Active
management and funding of the NIL would be transitioned to the CDA. Repayment of
the advances made by Unistar would be made through a cash-flow based note
payable to Unistar. While the CDA's initial reaction to the proposal has been
favorable, discussions are in the preliminary stages and there is no assurance
that a revised agreement will be negotiated.
<PAGE>
MANAGEMENT OF UNISTAR
Advisory Board
In anticipation of the Offering, Executone has formed a board consisting
of Robert A. Berman, Jerry M. Seslowe, Stanley M. Blau, Alan Kessman, Stanley J.
Kabala and Michael W. Yacenda (the "Unistar Advisory Board"), to serve as an
advisory board to the Executone Board, providing recommendations to the
Executone Board regarding the current and future structure and business
operations of Unistar, including, without limitation: up to two additional
members of the Unistar Advisory Board, executive compensation, interaction with
the NIL, banking and credit matters and general strategic planning.
Directors and Officers
The directors of Unistar will be divided into three substantially equal
classes and will serve staggered terms of three years each. Each director in
Class I will hold office initially for a term expiring at the first annual
meeting of stockholders of Unistar, each director in Class II will hold office
initially for a term expiring at the second annual meeting of stockholders of
Unistar and each director in Class III will hold office for an initial term
expiring at the third annual meeting of stockholders of Unistar. The following
persons will serve Unistar in the capacities indicated, effective on or before
the date of the Offering:
Name Age Position Class
Director and Chairman of the
Robert A. Berman 38 Board III
Stanley M. Blau 60 Director II
Alan Kessman 51 Director and Vice Chairman I
Jerry M. Seslowe 52 Director II
Director, President and
Michael W. Yacenda 46 Treasurer III
Vice President, Sales and
Marketing - Government
Charles A. Degliomini 40 Lotteries
Vice President, Sales and
Marketing - National Indian
Howard Goldfrach 49 Lottery
Vice President, Operations
Robert W. Hopwood 54 and Customer Service
Robert A. Berman has been the Chairman of the Board and Chief Executive
Officer of Hospitality Worldwide Services, Inc. (hospitality maintenance
services) since November 1997, and currently serves as a director of such
corporation. Since 1993, Mr. Berman also has served as a Managing Director of
Watertone Holdings L.P. (real estate holding company) and Watermark Investments
Limited, LLC (venture capital and asset management). From March 1997 to November
1997, Mr. Berman was President of Hospitality Worldwide. Mr. Berman has an
extensive background in the financial development of a variety of commercial
ventures including commercial real estate and construction.
Stanley M. Blau is President of The Blau Group Ltd., (an investment firm).
He has been a director of Executone since 1983 and was formerly Vice Chairman of
Executone from 1988 until 1996. Mr. Blau was also Chief Executive Officer of one
of Executone's predecessor corporations from 1987 until July 1988.
Alan Kessman served as Chairman of the Board and Chief Executive Officer
of Executone from 1988 until June 1998, and currently serves as a director of
Castelle Corporation. Prior to that time, he had served as President and Chief
Executive Officer of ISOETEC Communications, Inc. (telephone and information
systems), a predecessor of Executone ("ISOETEC"), since 1983. From 1978 to 1983,
Mr. Kessman served as President of three operating subsidiaries of Rolm
Corporation (telecommunications equipment sales), and from 1981 to 1983, he
served as a Corporate Vice President of Rolm Corporation, responsible for sales
and service in the eastern United States.
<PAGE>
Jerry M. Seslowe has been a Managing Director of Resource Holdings Ltd.,
an investment and financial consulting firm ("Resource Holdings"), since 1983.
Prior to 1983, Mr. Seslowe was a partner at KPMG Peat Marwick (an investment and
financial firm). Mr. Seslowe has served as a director of Executone since
February 1996 and prior to Executone's acquisition of Unistar was a director of
Unistar. Mr. Seslowe is a certified public accountant and an attorney.
Michael W. Yacenda has served as Executive Vice President of Executone
since January 1990, and additionally as President of Unistar since 1996. Prior
to that time, he was Vice President, Finance and Chief Financial Officer of
Executone from July 1988 to January 1990. He served as a Vice President of
ISOETEC from 1983 to 1988. From 1974 to 1983, Mr. Yacenda was employed by Arthur
Andersen & Co. (a public accounting firm). Mr. Yacenda is a certified public
accountant.
Charles A. Degliomini has been Vice President, Sales and Marketing -
Government Lotteries of Unistar since September 1, 1998. From 1988 to 1998, he
was President and founder of Atlantic Communications, a New York based corporate
and government affairs management company. From 1985 to 1988, Mr. Degliomini
also served as Chief-of-Staff with the General Services Administration ("GSA"),
the 30,000 employee business arm of the Federal government. Mr. Degliomini has
held positions as Special Assistant to United States Senator Alfonse M. D'Amato;
Director of Communications in New York in 1984 for the Reagan-Bush presidential
campaign; Director of Government Affairs for the Eaton Corporation (global
manufacturer of engineered industrial products); and Assistant Director of
Communications for Rite-Aide founder, Lewis E. Lehrman.
Howard Goldfrach has been Vice President, Sales and Marketing - National
Indian Lottery of Unistar since January 1997. Prior to joining Unistar, Mr.
Goldfrach was Senior Vice President, Account Management, and Senior Vice
President and Director of Database Management of Clarion Marketing and
Communications, Inc. (marketing consultant firm) for a total of nine years.
Prior thereto, Mr. Goldfrach was employed in various marketing management
positions at Philip Morris (multinational consumer products manufacturer) for
twelve years.
Robert W. Hopwood has been Vice President of Executone and Vice
President-Operations and Customer Service of UniStar Entertainment since May
1996, and prior thereto served as Vice President, Customer Care of Executone
from January 1990. From 1983 until 1990, Mr. Hopwood was the Director of
Technical Operations of Executone and ISOETEC.
Two additional persons will be recommended to the Executone Board by the
Unistar Advisory Board for election to the Unistar Board. Such candidates will
be appointed to the Unistar Board prior to the Closing Date; provided that, in
the business judgment of the Executone Board reasonably exercised, such persons
are suitable candidates. If the Executone Board determines that such persons are
not so suitable, the Executone Board will consider other nominees. One such
director will be in Class I and one will be in Class III.
Certain Board Committees
The Unistar Board has two standing committees, an Audit Committee and a
Compensation Committee.
The function of the Audit Committee is to recommend the selection of
auditors and to review the audit report and the adequacy of internal controls.
The members of the Audit Committee will be Mr. Kessman and one of the additional
directors to be named.
The Compensation Committee recommends to the full Unistar Board the
compensation arrangements, stock option grants and other benefits for executive
management of Unistar as well as the incentive plans to be adopted by Unistar.
The members of the Compensation Committee will be Messrs. Blau and Seslowe.
Compensation Committee Interlocks and Insider Participation
Mr. Seslowe, a member of the Compensation Committee, is a Managing
Director of and owns more than 10% of Resource Holdings, a former stockholder
of Unistar. Unistar has entered into a financial advisory agreement with
Resource Holdings pursuant to which Resource Holdings will receive (i) a $5,000
per month retainer for the period beginning July 1, 1998 through December 31,
1999, (ii) 25,000 options priced in the same manner as the options granted to
non-employee directors and (iii) travel and other expenses authorized by
Unistar. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holders of approximately two-thirds of the Executone Preferred Stock have
entered into the Exchange Agreement with Executone and Unistar, pursuant to
which they appointed Robert Berman and Jerry M. Seslowe, directors of Unistar,
to vote as each shareholder's proxy all of his or its shares of Executone
Preferred Stock for the Amendments at any meetings, including the Meeting. The
holders of approximately one-third of the Executone Preferred Stock have been
unwilling to enter into the Exchange Agreement, requiring submission of the
Amendments to the Executone shareholders in order to proceed with the Offering.
As a result, the requisite vote needed to approve the Amendments is the
affirmative vote of a majority of the votes cast of the Executone Common Stock
and the Executone Preferred Stock, voting as a single group. Upon approval of
the Amendments and the closing of the Offering, all of the outstanding shares of
Executone Preferred Stock will be converted automatically into: (i) shares of
Unistar Common Stock, which shares (exclusive of any shares acquired pursuant to
the Standby Agreement or through the Offering), as of the Closing Date, will
represent 15% of the Original Issuance; and (ii) all shares of Unistar Preferred
Stock. No fractional shares of Unistar Common Stock or Unistar Preferred Stock
shall be issued. Upon the occurrence of certain events, the Executone Preferred
Holders will be entitled to convert the Unistar Preferred Stock into the
Underlying Shares such that, when added to the Original Issuance, the Executone
Preferred Holders will own 34% of the Unistar Common Stock, including only the
Original Issuance and the Underlying Shares. Further, Unistar Buying Group, LLC,
which is owned by certain Executone Preferred Holders, has agreed to purchase
all unsubscribed shares of Unistar Common Stock pursuant to the Standby
Agreement. Thus, depending upon the number of Executone shareholders that
exercise their Rights and whether the Executone Preferred Holders convert their
Unistar Preferred Stock, Executone Preferred Holders could own a substantial
percentage of Unistar.
Executone has entered into a retention and incentive program with Messrs.
Yacenda and Hopwood pursuant to which Executone has agreed to extend stock loans
made under the EXECUTONE 1994 Incentive Stock Plan. See "EXECUTIVE
COMPENSATION-Employment Agreements and Transition Retention Plans."
Unistar and Executone have entered into a number of agreements for the
purpose of effecting the Offering and defining the ongoing relationship between
them. These agreements consist of the Reorganization Agreement, Services
Agreement, Standby Agreement and Tax Sharing Agreement described under
"ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO THE OFFERING" as well as
compensation arrangements described under "EXECUTIVE COMPENSATION." These
agreements have been developed by Executone, as Unistar's sole stockholder, in
connection with its strategy to cause Unistar's stock to be distributed to
Executone shareholders in the Offering. Accordingly, none of the agreements are
the result of arm's-length negotiation between independent parties.
In the event that not all of the Rights are exercised during the Exercise
Period, Unistar Buyer Group, LLC, a limited liability company owned by certain
of the Executone Preferred Holders, will purchase the remaining unsold shares of
Unistar Common Stock at the Subscription Price pursuant to the Standby
Agreement.
Mr. Kessman, Director and Vice Chairman of the Board of Unistar, has
entered into a consulting agreement with Unistar pursuant to which Mr. Kessman
will receive (i) a $5,000 per month retainer for the period beginning July 1,
1998 through December 31, 1999, (ii) 25,000 options to acquire shares of Unistar
Common Stock priced in the same manner as the options granted to non-employee
directors and (iii) travel and other expenses authorized by Unistar.
Unistar has entered into an agreement with Resource Holdings pursuant to
which Resource Holdings will act as Unistar's financial advisor. Mr. Seslowe, a
Director of Unistar, is a Managing Director of and owns more than 10% of
Resource Holdings. Under this agreement, Resource Holdings will receive (i) a
$5,000 per month retainer for the period beginning July 1, 1998 through December
31, 1999, (ii) 25,000 options priced in the same manner as the options granted
to non-employee directors and (iii) travel and other expenses authorized by
Unistar.
<PAGE>
Certain software development services have been provided to Unistar by a
firm, one of whose principals is related to an officer of Unistar. As of
December 31, 1997, Unistar had incurred $193,000 in fees from this firm.
EXECUTIVE COMPENSATION
Compensation of Directors
Non-employee directors of Unistar will receive compensation consisting of:
(i) an award of 5,000 stock options when the director first joins the Unistar
Board; (ii) an award of 5,000 stock options for each year of service on the
Unistar Board, including the first year; and (iii) $1,000 for each Board meeting
attended plus out-of pocket expenses incurred in attending meetings of the
Unistar Board. The stock option awards described in (i) and (ii) above shall be
priced at 110% of the market price for the Unistar Common Stock at the time of
the grant, equaling the average closing price for the prior 20 trading days on
the [Nasdaq National Market] or other national exchange on which the Unistar
Common Stock is traded or, if the Unistar Common Stock is not traded on a
national exchange, at a price determined in the sole discretion of the Unistar
Board. For those options granted prior to the Closing Date, the relevant 20
trading days shall be the first 20 trading days after the Unistar Common Stock
commences trading on the [Nasdaq National Market].
Directors who are employees of Unistar will not be paid any additional
remuneration for services as members of the Unistar Board or any committee
thereof.
<PAGE>
Compensation of Executive Officers
The following table summarizes compensation paid to all of Unistar's
Executive Officers for services rendered to Unistar.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------
Securities
Name and Annual Compensation Underlying All Other
Principal Position Year Salary($) Bonus($) Options(#) Compensation($)(3)
------------------ ---- --------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Michael W.Yacenda 1997 $256,000 0 0 $5,997
Executive Vice President 1996 256,000 49,900 0 5,935
and President, UniStar 1995 256,000 0 0 6,353
Entertainment (1).....
Howard Goldfrach,Vice 1997 $145,769 0 75,000 660
President, Sales
and Marketing
- -Government Lotteries,
Unistar ..............
Robert W. Hopwood 1997 130,000 10,000 0 2,707
Vice President, Operations 1996 130,000 19,250 0 2,605
and Customer Service, 1995 130,000 0 0 2,529
Unistar ..............
Charles A.
DegliominiVice
President, Sales and
Marketing-National
IndianLottery, Unistar (2)
</TABLE>
(1) President, Chief Executive Officer and Treasurer of Unistar as of the
Closing Date.
(2) Mr. Degliomini was hired during 1998.
(3) The amounts in this category include for each individual a matching
contribution by
Executone under its 401(k) plan in the amount of $660 each for each year.
This column also includes premiums paid by Executone for long-term
disability and life insurance for Mr. Yacenda ($5,337, $5,275 and $5,693)
and Mr. Hopwood ($2,047, $1,945 and $1,869) in 1997, 1996 and 1995,
respectively.
Option Grants
Each of the following option grants relates to grants of options to
acquire shares of Unistar Common Stock as of the Closing Date.
OPTION GRANTS AS OF THE CLOSING DATE
Individual Grants
- --------------------------------------------------------------------------------
Potential
Realizable Value
at Assumed
Percent of Annuals
Total Rates of
Number of Options Stock Price
Securities Granted to Appreciation
Underlying Employees Exercise ----------------
Option as of the Price Expiration ($)5% ($)10%
Name Grants (#) Closing Date ($/Share) Date
- --------------------------------------------------------------------------------
Michael A. Yacenda 200,000(1) 66.7% $ 1.28 (3) $160,997 $407,998
Howard Goldfrach -- -- -- -- -- --
Robert W. Hopwood 50,000(2) 16.7% 1.28 (3) $ 40,249 $102,000
Charles A.
Degliomini 50,000(2) 16.7% 1.28 (3) $ 40,259 $102,000
(1)One hundred fifty thousand (150,000) of these options will vest as follows:
(i) one-third of such options will vest on September 1, 1999 and (ii) 8.33%
of such options will vest at the end of each calendar quarter after September
1, 1999. Twenty-five thousand (25,000) of these options will vest if and only
if Unistar attains $5 million in gross revenue during the calendar year 1999.
Twenty-five thousand (25,000) of these option will vest if and only if
Unistar attains $10 million in gross revenue during the calendar year 1999.
(2)One-third of these options will vest on September 1, 1999 and 8.33% of these
options will vest at the end of each calendar quarter after September 1,
1999.
(3)Such options shall expire on the tenth anniversary of the Closing Date.
Employment Agreements and Transition Retention Plans
Employment Agreements. Unistar has entered into employment agreements (the
"Employment Agreements") with Messrs. Yacenda, Hopwood and Degliomini,
respectively (the "Executives"). The Employment Agreements with Messrs. Yacenda,
Hopwood and Degliomini each have a three-year term. Each of the Employment
Agreements may be renewed for such one-year periods as the parties to each of
the Employment Agreements mutually agree. The Employment Agreements outline each
Executive's compensation, including salary, the grant of options, insurance
benefits and, in the instance of Messrs. Yacenda and Hopwood, the payment by
Unistar on behalf of the Executive of the Subscription Price for all Rights
received by the Executives in connection with the shares of Executone Common
Stock held by the Executive under his EXECUTONE 1994 Executive Stock Incentive
Plan (the "Stock Plan") stock loan (the "Stock Loan"). Each Executive agreed in
his Employment Agreement not to engage in the lottery or casino business for the
term of his Employment Agreement and for a period of 18 months thereafter.
Finally, upon occurrence of certain events relating to the terms of each
Executive's employment with Unistar, the Executives will receive liquidated
damages in the amount of the Factor (as hereinafter defined) times the
Executive's yearly salary. The "Factor" is 2.99 for the first 12 months of each
Employment Agreement, 2.00 for the second 12 months of each Employment Agreement
and 1.00 thereafter.
Transition and Retention Plans. In order to facilitate Executone's
business plan in connection with the Offering, Executone has offered to Messrs.
Yacenda and Hopwood, participants in the Stock Plan, a retention and incentive
program effective as of ___________, 1998 (the "Transition and Retention
Plans"). The Transition and Retention Plans extend the Stock Loans of Messrs.
Yacenda and Hopwood, the aggregate amount of which is $1.8 million, including
$400,000 in interest advanced to Messrs. Yacenda and Hopwood, to the earlier of
March 31, 2001, or the date on which their respective employment with Unistar
terminates. Under the Transition and Retention Plans, Messrs. Yacenda and
Hopwood earn forgiveness of their respective Stock Loans over time. Unistar has
agreed to advance to Messrs. Yacenda and Hopwood the interest on such loans that
accrues after the Closing Date as it comes due. Executone previously had agreed
to guarantee the Stock Loans. If Messrs. Yacenda or Hopwood resign while there
exists an outstanding balance on their respective Stock Loans, then the
resigning employee is liable for that portion of such Stock Loan that has not
been forgiven. If Messrs. Yacenda and Hopwood remain employed with Unistar and
the full benefit under the Transition and Retention Plans vests, then, pursuant
to the Exchange Agreement, Unistar and Executone will share equally in any
liability incurred under the Transition and Retention Plans. If Messrs. Yacenda
or Hopwood resign from Unistar, Unistar will indemnify Executone for 50% of any
liability it incurs as a result of such guarantee. If Unistar terminates the
employment of Messrs. Yacenda or Hopwood, Unistar will indemnify Executone for
100% of any liability it incurs as a result of such guarantee.
The Option Plan
The existing Unistar Board has adopted, and Executone, as the sole
stockholder of Unistar, has approved, the Unistar Corporation Stock Option Plan
(the "Option Plan") for the purpose of attracting and retaining executive
officers and employees. The Option Plan will be administered by the Compensation
Committee of the Unistar Board (the "Committee").
<PAGE>
Officers and other employees of Unistar and "parent" and "subsidiary"
corporations (within the meaning of Code section 424) of Unistar are eligible to
participate in the Option Plan. Under Code section 424, a "parent" corporation
generally is a corporation possessing at least 50 percent of the total combined
voting power of all classes of stock of a company (or of any other "parent
corporation"), and a "subsidiary" corporation generally is a corporation of
which such company (or any other "subsidiary" of such company) owns at least 50
percent of the total combined voting power of all classes of stock. The
Committee selects the individuals who will participate in the Option Plan
("Participants").
The Option Plan authorizes the issuance of options to purchase up to
1,000,000 shares of Unistar Common Stock. The Plan provides for the grant of (i)
options intended to qualify as incentive stock options under Section 422 of the
Code ("ISOs"), and (ii) options not intended to so qualify ("nonqualified
options"). Code Section 422 imposes various requirements in order for an option
to qualify as an ISO-e.g., a maximum ten-year term and an option price that is
not less than the fair market value of the underlying shares on the date of
grant. In the case of an ISO granted to a Participant who is a Ten Percent
Stockholder (defined below), the ISO must expire within five years of the date
of grant, and the option price may not be less than 110% of the fair market
value of the underlying shares on the date of grant. A Participant is a Ten
Percent Stockholder if he owns, or is deemed to own, more than ten percent of
the total combined voting power of all classes of stock of Unistar or a parent
or subsidiary of Unistar. A Participant is deemed to own any voting stock owned
(directly or indirectly) by the Participant's spouse, brothers, sisters,
ancestors and lineal descendants. A Participant and such persons are also
considered to own proportionately any voting stock owned (directly or
indirectly) by or for a corporation, partnership, estate or trust of which the
Participant or any such person is a stockholder, partner or beneficiary.
In addition, under Code Section 422, no Participant may receive ISOs
(under all incentive stock option plans of Unistar and its parent or subsidiary
corporations) that are first exercisable in any calendar year for Unistar Common
Stock having an aggregate fair market value (determined as of the date the ISO
is granted) that exceeds $100,000 (the "$100,000 Limit"). To the extent options
first become exercisable by a Participant in any calendar year for a number of
shares of Unistar Common Stock in excess of the $100,000 Limit, they will be
treated as nonqualified options.
The principal difference between options qualifying as ISOs under Code
Section 422 and nonqualified options is that a Participant generally will not
recognize ordinary income at the time an ISO is granted or exercised, but rather
at the time the Participant disposes of shares acquired under the ISO. In
contrast, the exercise of a nonqualified option generally is a taxable event
that requires the Participant to recognize, as ordinary income, the difference
between the shares' fair market value and the option price. The employer will
not be entitled to a federal income tax deduction on account of the grant or the
exercise of an ISO, whereas the employer is entitled to a federal income tax
deduction on account of the exercise of a nonqualified option equal to the
ordinary income recognized by the Participant. The employer may claim a federal
income tax deduction on account of certain dispositions of shares acquired upon
the exercise of an ISO.
The Committee will determine the option exercise period and any conditions
on exercisability of options granted under the Option Plan. The exercise price
will be determined by the Committee at the time of grant, but will not be less
than the fair market value of the Unistar Common Stock on the date of grant if
the option is intended to be an ISO (or less than 110% of such fair market value
in the case of an ISO granted to a Ten Percent Stockholder). No Participant may
be granted, in any calendar year, options for more than 200,000 shares of
Unistar Common Stock.
An option may be exercised for any number of shares of Unistar Common
Stock up to the full number for which the option could be exercised. A
Participant will have no rights as a stockholder with respect to shares of
Unistar Common Stock subject to an option until the option is exercised. Any
shares of Unistar Common Stock subject to options that are forfeited (or expire
without exercise) pursuant to the terms established at the time of grant will
again be available for grant under the Option Plan. Payment of the exercise
price of an option granted under the Option Plan may be made in cash, cash
equivalents acceptable to the Committee or, if permitted by the option
agreement, by surrendering to Unistar shares of Unistar Common Stock having a
fair market value equal to the option exercise price.
<PAGE>
No option award may be granted under the Option Plan more than 10 years
after the earlier of the date that the Unistar Board adopted, or the stockholder
of Unistar approved, the Plan. The Unistar Board may amend or terminate the
Option Plan at any time, but an amendment will not become effective without
stockholder approval if the amendment increases the number of shares that may be
issued under the Option Plan (other than equitable adjustments upon certain
corporate transactions), or changes the class of individuals eligible to become
Participants. No amendment will affect a Participant's outstanding award without
the Participant's consent.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS OF UNISTAR COMMON STOCK
AND UNISTAR PREFERRED STOCK
By Management
The following table sets forth the number of shares of Unistar Common
Stock and Unistar Preferred Stock expected to be beneficially owned following
the Offering, directly or indirectly, by each director, each Named Executive
Officer and all directors and executive officers as a group, based upon certain
assumptions. These assumptions are (i) the beneficial ownership by such persons
of Executone Common Stock and Executone Preferred Stock as of September 30, 1998
is the same as such ownership on the Record Date, (ii) each person listed below
exercises all Rights received by him in the Offering, (iii) none of the persons
listed below acquire beneficial ownership of unexercised Rights as a result of
their interest in the Unistar Buying Group, LLC pursuant to the Standby
Agreement with Unistar and (iv) the Executone Preferred Holders have received
15% of the Original Issuance pursuant to the Exchange Agreement. A list of the
individuals who are expected to be executive officers of Unistar immediately
following the Offering is set forth under "MANAGEMENT OF UNISTAR." Except as
otherwise indicated, each individual named is expected to have sole investment
and voting power with respect to the securities shown.
<TABLE>
<CAPTION>
Estimated Amount Estimated Estimated Amount and Estimated
and Nature of Percentage Nature of Preferred Percentage of
Name of Common Stock of Common Stock Beneficial Preferred
Beneficial Owner Beneficial Ownership Stock Ownership Stock
---------------- -------------------- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Robert A. Berman(1)........ 1,089,950 9.3% 46,356 61.8%
Stanley M. Blau.... 107,638 * - -
Alan Kessman....... 347,467 3.0% - -
Jerry M. Seslowe (2)............... 75,020 * 1,408 1.9%
Michael W. Yacenda. 171,372 1.5% - -
Charles A. Degliomini......... - - - -
Howard Goldfrach... - - - -
Robert W. Hopwood.. 21,743 * - -
All Directors and
Officers as a group 1,813,190 15.4% 47,764 63.7%
</TABLE>
* Denotes less than 1% beneficial ownership.
(1)To be owned by Watertone Holdings L.P./Watermark Investments Limited,
L.L.C., an entity controlled by Mr. Berman, which is located at 730 Fifth
Avenue, New York, New York 10038.
(2) Includes shares owned by Resource Holdings.
By Others
The following table sets forth each person or entity (other than persons
set forth in the preceding table) that is expected to beneficially own more than
5% of Unistar Common Stock and Preferred Stock outstanding immediately following
the Offering, based upon certain assumptions. These assumptions are: (i) the
beneficial ownership by such persons of Executone Common Stock and Executone
Preferred Stock as of September 30, 1998 is the same as such ownership on the
Record Date; (ii) each person listed below exercises all Rights received by him
in the Offering; and (iii) none of the persons listed below acquire beneficial
ownership of unexercised Rights as a result of their interest in the Unistar
Buying Group, LLC. pursuant to the Standby Agreement with Unistar.
<PAGE>
<TABLE>
<CAPTION>
Estimated Amount Estimated Estimated Amount and Estimated
and Nature of Percentage Nature of Preferred Percentage of
Name of Common Stock of Common Stock Beneficial Preferred
Beneficial Owner Beneficial Ownership Stock Ownership Stock
- ---------------- -------------------- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Heartland Advisors,Inc. 1,812,971 15.4% - -
790 North Milwaukee Street
Milwaukee, WI 53202
Entities Associated with 649,015 5.5% - -
Edmund H., Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA 91789
Lawndale Capital 685,120 5.8% - -
Management LLC One
Sansome Street, Suite 3900
San Francisco, CA
94104
Cooper Life Sciences 555,976 4.7% 23,646 31.5%
160 Broadway
New York, NY 10038
</TABLE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF
EXECUTONE COMMON STOCK AND EXECUTONE PREFERRED STOCK
By Management
The following table sets forth as of September 30, 1998, except as
otherwise provided in footnote (1) to this table, the beneficial ownership of
Executone's voting shares by all current directors and nominees of Executone,
the Chief Executive Officer, the former Chief Executive Officer and the four
next most highly compensated executive officers in 1997 and all current
directors and executive officers of Executone as a group. Unless otherwise
indicated, each person listed below has sole voting and investment power over
all shares beneficially owned by him or her.
<TABLE>
<CAPTION>
Amount and Nature of
Title of Class Name of Beneficial Owner Beneficial Ownership Percent of Class(1)
-------------- ------------------------ -------------------- -------------------
<S> <C> <C> <C>
Common Stock Louis K. Adler 138,123(2) *
Stanley M. Blau 538,193 1.05
Stanley J. Kabala 400,000 *
Alan Kessman 1,737,337 3.35
Andrew Kontomerkos 407,083 *
John P. Hectus -0- *
Thurston R. Moore 132,235(3) *
Vic Northrup 127,537(4) *
Richard S. Rosenbloom 73,900(5)
Jerry M. Seslowe 209,615(6) *
Shlomo Shur 626,456 1.43
Michael W. Yacenda 856,860(7) 1.72
All Current Directors
and Officers as a
Group (13 Persons) 3,562,480(8) 6.99
Series A Stock Louis K. Adler 1,436 *
Stanley M. Blau -0- *
Stanley J. Kabala -0- *
Alan Kessman -0- *
Andrew Kontomerkos -0- *
John P. Hectus -0- *
Thurston R. Moore -0- *
Vic Northrup -0- *
Richard S. Rosenbloom -0- *
Jerry M. Seslowe 4,692(9) 1.8
Shlomo Shur -0- *
Michael W. Yacenda -0- *
All Current Directors
and Officers as a
Group (13 Persons) 6,128 2.45
Series B Stock Louis K. Adler 575 *
Stanley M. Blau -0-
Stanley J. Kabala -0-
Alan Kessman -0-
Andrew Kontomerkos -0-
Thurston R. Moore -0-
Vic Northrup -0-
Richard S. Rosenbloom -0-
Jerry M. Seslowe 1,877(10) 1.87
Shlomo Shur -0-
Michael W. Yacenda -0-
All Current Directors
and Officers as a
Group (13 Persons) 2,452 2.45
</TABLE>
(1) Information is provided as reported to the Company as of September 30, 1998
for all owners except Andrew Kontomerkos and Shlomo Shur, as to whom the
information is provided as of May 15, 1998, when their employment by
Executone terminated. With respect to the Executone Common Stock,
percentages shown are based upon 49,964,492 shares of Executone Common
Stock actually outstanding as of September 30, 1998. In cases where the
beneficial ownership of the individual or group includes options, warrants
or convertible securities, the percentage is based on 49,964,492 shares of
Executone Common Stock actually outstanding, plus the number of shares
issuable upon exercise or conversion of any such options, warrants or
convertible securities held by the individual or group. The percentage does
not reflect or assume the exercise or conversion of any options, warrants
or convertible securities not owned by the individual or group in question.
<PAGE>
In the case of the Series A Preferred Stock and the Series B Preferred
Stock, percentages shown are based on 250,000 and 100,000 shares,
respectively, actually outstanding as of September 30, 1998.
(2) Includes 83,615 shares issuable upon exercise of options and 25,000 shares
issuable upon exercise of warrants, 91,918 of which are exercisable within
60 days of September 30, 1998. Does not include 76,445 shares of Common
Stock contingently issuable upon conversion of the Preferred Stock owned by
Mr. Adler.
(3) Includes 45,900 shares subject to options exercisable within 60 days of
September 30, 1998.
(4) Includes 56,494 shares subject to options, of which 34,108 are
exercisable within 60 days of September 30, 1998.
(5) Includes 45,900 shares subject to options, all of which are exercisable
within 60 days of September 30, 1998.
(6) Includes 51,612 shares subject to options, all of which are
exercisable, and 25,000 shares subject to warrants, 16,666 of which are
exercisable within 60 days of September 30, 1998. Also, includes 12,755
shares of Common Stock owned and 63,559 shares of Common Stock subject to
exercisable options held by Resource Holdings, of which Mr. Seslowe is a
managing director and in which he holds a greater than 10% ownership
interest. Does not include 203,756 shares of Common Stock contingently
issuable upon conversion of the Preferred Stock owned by Mr. Seslowe or the
45,875 shares of Common Stock contingently issuable upon conversion of the
Preferred Stock owned by Resource Holdings.
(7) Includes 3,576 shares issuable upon conversion of the Company's
Debentures, of which Mr. Yacenda beneficially owns $38,000 in principal
amount or less than 1% of the outstanding principal amount.
(8) Includes 773,921 shares subject to options, and 50,000 shares subject to
warrants, of which 351,593 and 16,666, respectively, are exercisable within
60 days of September 30, 1998, and 35,765 shares issuable upon conversion
of the Company's Debentures.
(9) Includes 862 shares held by Resource Holdings.
(10) Includes 345 shares held by Resource Holdings.
<PAGE>
By Others
The following table lists any person (including any "group" as the term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) who, to the knowledge of Executone, was the beneficial owner as
of September 30, 1998, of more than 5% of the outstanding voting shares of any
class or series of Executone stock. Unless otherwise noted, the owner has sole
voting and dispositive power with respect to the securities.
Amount and
Nature of
Name and Address of Beneficial Percent of
Title of Class Beneficial Owner Ownership Class(1)
-------------- ---------------- --------- --------
Heartland Advisors,Inc.
Executone 790 North Milwaukee
Common Stock Street Milwaukee, WI 53202 9,064,855(2) 18.14%
Lawndale Capital Management LLC
One Sansome Street, Suite 3900
San Francisco, CA 94104 3,425,604 6.86%
Entities Associated with
Edmund H. Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA 91789 3,245,078(3) 6.52%
Executone Watertone Holdings, L.P./
Series A Watermark Investments
Preferred Stock Limited, L.L.C.
730 Fifth Avenue
New York, NY 10038 154,520 61.81%
Cooper Life Sciences
160 Broadway
New York, NY 10038 78,819 31.53%
Executone Watertone Holdings, 61,807 61.81%
Series B L.P./Watermark
Preferred Stock Investments Limited, L.L.C.
730 Fifth Avenue
New York, NY 10038
Cooper Life Sciences 31,528 31.53%
160 Broadway
New York, NY 10038
(1) With respect to the Executone Common Stock, percentages shown are based
upon 49,964,492 shares of Executone Common Stock actually outstanding as of
September 30, 1998. In cases where the beneficial ownership of the
individual or group includes options, warrants or convertible securities,
the percentage is based on 49,964,492 shares actually outstanding, plus the
number of shares issuable upon exercise or conversion of any such options,
warrants or convertible securities held by the individual or group. The
percentage does not reflect or assume the exercise or conversion of any
options, warrants or convertible securities not owned by the individual or
group in question. In the case of the Executone Series A Preferred Stock
and the Executone Series B Preferred Stock, percentages shown are based on
250,000 and 100,000 shares, respectively, actually outstanding as of
September 30, 1998.
(2) Heartland Advisors shares power to vote 625,000 of such shares.
(3) Includes 11,935 shares of Executone Common Stock issuable upon conversion
of Executone's Debentures, of which entities associated with Mr. Shea own
$148,800 in principal amount, representing less than 1% of the outstanding
principal amount. The Shea entities share the power to vote and dispose of
all such shares.
<PAGE>
DESCRIPTION OF UNISTAR CAPITAL STOCK
Under the Unistar Certificate, the total number of shares of all classes
of stock that Unistar has authority to issue is 26,000,000 consisting of
1,000,000 shares of Unistar Preferred Stock, and 25,000,000 shares of Unistar
Common Stock. An aggregate of up to approximately 9,992,000 shares of Unistar
Common Stock is expected to be sold in the Offering, based on the number of
shares of Executone Common Stock outstanding on September 30, 1998. The actual
number of shares sold will depend upon the number of shares of Executone Common
Stock outstanding as of the Record Date.
Unistar Preferred Stock
The Unistar Board is authorized to provide for the issuance of shares of
preferred stock, in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof. See
"CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR CERTIFICATE,
THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN AND THE GENERAL CORPORATION LAW OF
DELAWARE--Preferred Stock."
As of the Closing Date, Unistar will have one series of preferred stock,
the Unistar Preferred Stock, issued and outstanding, of which 75,000 shares will
be issued and outstanding.
Each share of the Unistar Preferred Stock has voting rights equal to one
share of Unistar Common Stock. Until conversion by the holder or redemption by
Unistar, the Unistar Preferred Stock will earn dividends equal to 50% of the
consolidated Retained Earnings (as defined in the Unistar Certificate) of
Unistar since the date of issuance of the Unistar Preferred Stock, as of the end
of a fiscal period, less any dividends paid to the holders of the Unistar
Preferred Stock prior to such date (the "Preferred Dividends"). All dividends on
Unistar Preferred Stock are payable only (i) when and as declared by the Unistar
Board, (ii) upon conversion or redemption of the Unistar Preferred Stock or
(iii) upon liquidation, and only if at the time of a proposed payment (A) the
cumulative Retained Earnings of Unistar is positive, and (B) the net income of
Unistar in the preceding fiscal year exceeded $1,000,000.
The Unistar Preferred Stock is convertible under certain conditions
described below during the Conversion Period for up to a maximum of the number
of shares of Unistar Common Stock necessary, when added to the Unistar Common
Stock issued to the Executone Preferred Holders in the Original Issuance, to
total 34% of the outstanding Unistar Common Stock including only the Original
Issuance and the Underlying Shares. Based on the number of shares of Executone
Common Stock outstanding as of September 30, 1998, this formula would result in
the Unistar Preferred Stock being convertible into a maximum of 3,384,404 shares
of Unistar Common Stock if Unistar meets certain revenue and profit parameters.
The actual number of shares of Unistar Common Stock into which the Unistar
Preferred Stock will be convertible will depend on the number of shares of
Executone Common Stock outstanding on the Record Date. The Conversion Period is
defined as the period commencing on the date of issuance of the Unistar
Preferred Stock and ending on January 20, 2002.
Each share of the Unistar Preferred Stock is convertible, provided Unistar
had net income for the immediately preceding fiscal year of at least $1,000,000,
into the product of the excess of such net income over $1,000,000, divided by 12
million, times the estimated maximum number of shares of Unistar Common Stock
per share of Unistar Preferred Stock, which is estimated to be 44.95 based on
the number of outstanding shares of Executone Common Stock on June 30, 1998. The
Unistar Preferred Stock is also convertible during the Conversion Period for the
estimated maximum of 3,384,404 shares of Unistar Common Stock (or an estimated
44.95 shares of Unistar Common Stock per share of Unistar Preferred Stock), at
any time the cumulative net revenues of Unistar exceed $50 million. The Unistar
Preferred Stock is also convertible during the Conversion Period for the same
maximum number of shares of Unistar Common Stock if a controlling interest in
Unistar is sold, transferred or assigned to a third party who is not a
wholly-owned subsidiary of Unistar.
The Unistar Preferred Stock is redeemable by Unistar for the maximum
number of shares into which it might be converted, or an estimated total of
3,384,404 shares of Unistar Common Stock, at Unistar's option; provided,
however, that such redemption right may not be exercised by Unistar if, on the
date that Unistar elects to exercise its redemption right, the market price of
the Unistar Common Stock is less than $1.00 per share as appropriately adjusted
with respect to any subdivisions, stock dividends or combinations of the Unistar
Common Stock, except with the consent of the holders of two-thirds of the
outstanding shares of Unistar Preferred Stock.
<PAGE>
The Unistar Preferred Stock is entitled to a preference on any voluntary
or involuntary dissolution, liquidation or winding up of Unistar, equal to
$3,500,000 plus any accrued and unpaid Preferred Dividends.
While any of the Unistar Preferred Stock is outstanding, at each annual
meeting of the stockholders at which a vacancy exists in the position of Series
A Director (as hereinafter defined ), the holders of a majority of the
outstanding Unistar Preferred Stock, voting as a single class, to the exclusion
of holders of any capital stock of Unistar ranking junior (either as to
dividends, redemption or upon liquidation, dissolution or winding up) to the
Unistar Preferred Stock, shall have the right to nominate one director for
election to the Unistar Board (the "Series A Director"). Unistar shall use its
best efforts to cause each such nominee to be elected as a member of the Unistar
Board. The designee of the holders of the Unistar Preferred Stock on the Unistar
Board may be removed, and may only be removed, with or without cause, by the
holders of a majority of the outstanding shares of Unistar Preferred Stock,
voting as a separate class. Any vacancy in the position of Series A Director
shall be filled by a majority vote of the holders of the Unistar Preferred Stock
voting as a separate class.
Unistar Common Stock
The holders of Unistar Common Stock are entitled to one vote per share on
all matters voted on by the stockholders, including the election of directors,
and, except as otherwise required by law, the holders of such shares exclusively
possess all voting power. The Unistar Certificate does not provide for
cumulative voting in the election of directors. The holders of Unistar Common
Stock are entitled to such dividends as may be declared from time to time by
Unistar Board from funds available therefor, and upon liquidation are entitled
to receive pro rata all assets of Unistar available for Offering to such
holders. No dividends can be paid to the holders of Unistar Common Stock as long
as there are arrearages in Preferred Dividends. All shares of Unistar Common
Stock received in the Offering will be fully paid and nonassessable and the
holders thereof will not have any preemptive rights. See "CERTAIN ANTITAKEOVER
EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR CERTIFICATE, THE UNISTAR BYLAWS,
THE UNISTAR RIGHTS PLAN AND THE GENERAL CORPORATION LAW OF DELAWARE."
Stockholder Rights Plan
On ___________, 1998, the Unistar Board approved a Stockholder Rights
Agreement, dated as of and to be effective on _____________, 1998 (the
"Stockholder Rights Agreement") between Unistar and ________________, as
Stockholder Rights Agent, having the principal terms summarized below. In
accordance with the Stockholder Rights Agreement, the Unistar Board also
declared a dividend distribution of one right (each, a "Stockholder Right") for
each outstanding share of Unistar Common Stock to stockholders at the close of
business on the Closing Date.
Each Stockholder Right entitles the registered holder to purchase from
Unistar one share of the Unistar Common Stock. Stockholders will receive one
Stockholder Right per share of Unistar Common Stock held of record at the close
of business on the Closing Date. The exercise price of each Stockholder Right
will be $_____, subject to adjustment (the "Purchase Price").
Stockholder Rights will also attach to shares of Common Stock issued after
the Closing but prior to the Distribution Date (as hereinafter defined) unless
the Unistar Board determines otherwise at the time of issuance. The description
and terms of the Stockholder Rights are set forth in the Stockholder Rights
Agreement.
The Stockholder Rights will be appurtenant to the Unistar Common Stock and
will be evidenced by Unistar Common Stock certificates (the "Stockholder Rights
Certificates"), and no separate certificates evidencing the Stockholder Rights
will be distributed initially. The Stockholder Rights will separate from the
Unistar Common Stock and a distribution of the Stockholder Rights Certificates
will occur (the "Distribution Date") upon the earlier of: (i) 10 days following
a public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 25% or more of the outstanding shares of Unistar Common
Stock (the "Stock Acquisition Date"); or (ii) 10 business days following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially becoming an Acquiring Person. Until the Distribution Date,
(i) the Stockholder Rights will be evidenced by the Stockholder Rights
Certificates and will be transferred with and only with Stockholder Rights
Certificates, (ii) any Stockholder Rights Certificates issued will contain a
notation incorporating the Stockholder Rights Agreement by reference and (iii)
the surrender for transfer of any Stockholder Rights Certificates outstanding
will also constitute the transfer of the Stockholder Rights associated with the
Unistar Common Stock represented by such Stockholder Rights Certificates.
<PAGE>
The Stockholder Rights are not exercisable until the Distribution Date and
will expire at the close of business on ________________, 1999, unless earlier
redeemed or exchanged by Unistar as described below. As soon as practicable
after the Distribution Date, Stockholder Rights Certificates will be mailed to
holders of record of the Unistar Common Stock as of the close of business on the
Distribution Date, and thereafter such separate Stockholder Rights Certificates
alone will represent the Stockholder Rights.
While each Stockholder Right will initially provide for the acquisition of
one share of Unistar Common Stock at the Purchase Price, the Stockholder Rights
Agreement provides that if any person becomes an Acquiring Person, proper
provision shall be made so that each holder of a Stockholder Right (except as
set forth below) will thereafter have the right to receive, upon exercise and
payment of the Purchase Price, Unistar Common Stock (or, in certain
circumstances, cash, property or other securities of Unistar) having a value
equal to twice the amount of the Purchase Price.
In the event that, at any time following the Stock Acquisition Date, (i)
Unistar is acquired in a merger, statutory share exchange or other business
combination in which Unistar is not the surviving corporation, or (ii) 50% or
more of Unistar's assets or earning power is sold or transferred, each holder of
a Stockholder Right (except as set forth below) shall thereafter have the right
to receive, upon exercise and payment of the Purchase Price, common stock of the
acquiring company having a value equal to twice the Purchase Price. The events
set forth in this paragraph and in the immediately preceding paragraph are
referred to as the "Triggering Events."
Upon the occurrence of a Triggering Event that entitles Stockholder Rights
holders to purchase securities or assets of Unistar, Stockholder Rights that are
or were owned by the Acquiring Person, or any affiliate or associate of such
Acquiring Person, on or after such Acquiring Person's Stock Acquisition Date
shall be null and void and shall not thereafter be exercised by any person
(including subsequent transferees). Upon the occurrence of a Triggering Event
that entitles Stockholder Rights holders to purchase common stock of a third
party, or upon the authorization of an Exchange (as hereafter defined),
Stockholder Rights that are or were owned by any Acquiring Person or any
affiliate or associate of any Acquiring Person on or after such Acquiring
Person's Stock Acquisition Date shall be null and void and shall not thereafter
be exercised by any person (including subsequent transferees).
The Purchase Price payable, and the number of shares of Unistar Common
Stock or other securities or property issuable upon exercise of the Stockholder
Rights are subject to adjustment from time to time to prevent dilution.
At any time (including a time after any person becomes an Acquiring
Person), the Unistar may exchange all or part of the Stockholder Rights (except
as set forth below) for shares of Unistar Common Stock (an "Exchange") at an
exchange ratio of one share per Stockholder Right, as appropriately adjusted to
reflect any stock split or similar transaction.
At any time until ten days following the Stock Acquisition Date, Unistar
may redeem the Stockholder Rights in whole, but not in part, at a price of $.01
per Stockholder Right (the "Redemption Price"). Unistar may thereafter but prior
to the occurrence of a Triggering Event redeem the Stockholder Rights in whole,
but not in part, at the Redemption Price provided that such redemption is
incidental to a merger or other business combination transaction involving
Unistar that is approved by a majority of the Unistar Board, does not involve an
Acquiring Person, and in which all holders of Unistar Common Stock are treated
alike.
<PAGE>
After the redemption period has expired, Unistar's right of redemption
may be reinstated if an Acquiring Person reduces his beneficial ownership to
less than 10% of the outstanding shares of Unistar Common Stock in a transaction
or series of transactions not involving Unistar. Immediately upon the action of
the Unistar Board ordering redemption of the Stockholder Rights, the Stockholder
Rights will terminate and the only right of the holders of Stockholder Rights
will be to receive the Redemption Price.
Until a Stockholder Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of Unistar, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Stockholder
Rights will not be taxable to stockholders or to Unistar, stockholders may,
depending upon the circumstances, recognize taxable income in the event that the
Stockholder Rights become exercisable for Unistar Common Stock (or other
consideration) or for common stock of the acquiring company as set forth above.
Other than certain provisions relating to the principal economic terms of
the Stockholder Rights, any of the provisions of the Stockholder Rights
Agreement may be amended by the Unistar Board prior to the Distribution Date.
After the Distribution Date, the provisions of the Stockholder Rights Agreement
may be amended by the Unistar Board in order to cure any ambiguity, to make
certain other changes that do not adversely affect the interests of holders of
Stockholder Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Stockholder Rights Agreement;
provided, however, no amendment to adjust the time period governing redemption
may be made at such time as the Stockholder Rights are not redeemable.
DESCRIPTION OF THE RIGHTS
Holders of shares of Executone Common Stock are receiving one Right for
every share of Executone Common Stock owned, or a total of 49,964,492 Rights.
Until __________, 1998, each Holder may purchase one share of Unistar Common
Stock at the Subscription Price for each five Rights, or the Holder may sell the
Rights in the market. A Holder may exercise Rights at any time during the
Exercise Period beginning on _______, 1998 and ending at 5:00 p.m., New York
City time, on the Expiration Date. See "THE OFFERING" for detailed information
regarding the mechanics of the Offering.
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR
CERTIFICATE, THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN
AND THE GENERAL CORPORATION LAW OF DELAWARE
General
The Unistar Certificate and the Unistar Bylaws contain provisions that
will make more difficult the acquisition of control of Unistar by means of a
tender offer, a proxy contest, open market purchases, or otherwise. In addition,
Unistar has adopted the Unistar Rights Plan pursuant to which there will be
outstanding one Right for each share of Unistar Common Stock outstanding on the
Closing Date, or (unless otherwise specified by the Unistar Board at the time of
any such issuance) each share of Unistar Common Stock issued thereafter and
prior to the date the Rights become exercisable. See "DESCRIPTION OF UNISTAR
CAPITAL STOCK--Stockholder Rights Plan." The purpose of the Unistar Rights Plan
and the relevant provisions of the Unistar Certificate and the Unistar Bylaws is
to discourage certain types of transactions, described below, that may involve
an actual or threatened change of control of Unistar and to encourage persons
seeking to acquire control of Unistar to consult first with the Unistar Board to
negotiate the terms of any proposed business combination or offer. The
provisions are designed to reduce the vulnerability of Unistar to an unsolicited
proposal for a takeover of Unistar that does not have the effect of maximizing
long-term stockholder value or is otherwise unfair to stockholders of Unistar,
or an unsolicited proposal for the restructuring or sale of all or part of
Unistar that could have such effects.
Unistar believes that stocks issued in initial public offerings are often
volatile and misunderstood by the market until the spun-off company has a chance
to establish its own record and disseminate sufficient financial information to
support proper financial analysis. Management believes that these anti-takeover
provisions have special value during this early period of potential
vulnerability.
<PAGE>
Also, although federal securities laws and regulations applicable to
certain business combinations govern the disclosure required to be made to
minority stockholders in order to consummate such a transaction, they do not
assure stockholders that the terms of the business combination (i.e., what
stockholders will receive for their shares of stock) will be fair from a
financial standpoint. Although certain provisions of the federal regulations
applicable to tender offers impose certain procedural requirements for the
conduct of a tender offer those provisions are not intended to, and do not,
maximize stockholder value.
The Unistar Rights Plan and certain provisions of the Unistar Certificate
and the Unistar Bylaws, in the view of Executone and Unistar, will help ensure
that the Unistar Board, if confronted by a surprise proposal from a third party
that has acquired a block of Unistar's stock, will have sufficient time to
review the proposal as well as appropriate alternatives to the proposal and to
act in what it believes to be the best interests of the stockholders. In
addition, certain other provisions of the Unistar Certificate and the Unistar
Bylaws are designed to prevent a purchaser from utilizing "two-tier pricing" and
similar inequitable tactics in the event of an attempt to take over Unistar.
These provisions, individually and collectively, will make more difficult,
and may discourage certain types of potential acquirors from proposing a merger,
tender offer or proxy contest, even if such transaction or occurrence may be
favorable to the interest of the stockholders, and may delay or frustrate the
assumption of control by a holder of a large block of Unistar stock and the
removal of incumbent management, even if such removal might be beneficial to
stockholders. By discouraging takeover attempts, these provisions might have the
incidental effect of inhibiting certain changes in management and the temporary
fluctuations in the market price of the shares that often result from actual or
considered takeover attempts.
Set forth below is a description of certain provisions in the Unistar
Certificate, the Unistar Bylaws and the Unistar Rights Plan. The description is
intended as a summary only and is qualified in its entirety by reference to the
Unistar Certificate, the Unistar Bylaws and the Unistar Rights Plan, copies of
which are available upon request. Capitalized terms used and not defined herein
are defined in the Unistar Certificate, the Unistar Bylaws or the Unistar Rights
Plan.
Classified Board of Directors
The Unistar Certificate provides for the Unistar Board to be divided into
three classes serving staggered terms so that directors' initial terms will
expire either at the 1999, 2000 and 2001 annual meeting of stockholders.
Starting with the 1999 annual meeting of stockholders, one class of directors
will be elected each year for a three-year term.See "MANAGEMENT OF UNISTAR--
Officers and Directors."
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Unistar Board in a
relatively short period of time. At least two annual meetings of stockholders,
instead of one, will generally be required to effect a change in a majority of
the Unistar Board.
Executone and Unistar believe that a classified board of directors will
help to ensure the continuity and stability of the Unistar Board and Unistar's
business strategies and policies as determined by the Unistar Board, because
generally a majority of the directors at any given time will have had prior
experience as directors of Unistar. The classified board provision will also
help assure that the Unistar Board, if confronted with an unsolicited proposal
from a third party that has acquired a block of the voting stock of Unistar,
will have sufficient time to review the proposal and appropriate alternatives
and to seek the best available result for all stockholders.
While any of the Unistar Preferred Stock is outstanding, at each annual
meeting of the stockholders at which a vacancy exists in the position of Series
A Director, the holders of a majority of the outstanding Unistar Preferred
Stock, voting as a single class, to the exclusion of holders of any capital
stock of Unistar ranking junior (either as to dividends, redemption or upon
liquidation, dissolution or winding up) to the Unistar Preferred Stock, shall
have the right to nominate the Series A Director. Unistar shall use its best
efforts to cause each such nominee to be elected as a member of the Unistar
Board. The designee of the holders of the Unistar Preferred Stock on the Unistar
Board may be removed, and may only be removed, with or without cause, by the
holders of a majority of the outstanding shares of Unistar Preferred Stock,
voting as a separate class. Any vacancy in the position of Series A Director
shall be filled by a majority vote of the holders of the Unistar Preferred Stock
voting as a separate class.
<PAGE>
Removal of Directors; Filling Vacancies
The Unistar Certificate provides that directors may be removed only for
cause and only by the affirmative vote of holders of at least a majority of the
shares entitled to vote at a meeting of stockholders at which a quorum is
present. This provision, when coupled with the provision in the Unistar Bylaws
authorizing only the Unistar Board to fill vacant directorships until the next
annual meeting of stockholders, will preclude stockholders from removing
incumbent directors without cause and filling the vacancies created by such
removal with their own nominees. Additionally, even if a director is removed for
cause, the directors will fill the vacancy.
Special Meetings
The Unistar Bylaws provide that special meetings of stockholders can be
called only by the Chairman, President or a majority of the Unistar Board.
Stockholders are not permitted to call a special meeting or to require that the
Unistar Board call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business stated in the notice of meeting.
This provision prevents a stockholder from forcing stockholder
consideration of a proposal over the opposition of the Unistar Board by calling
a special meeting of stockholders or calling for a vote on any proposal at a
special meeting other than such proposals stated in the notice of meeting.
This provision prevents a stockholder from forcing stockholder
consideration of a proposal over the opposition of the Unistar Board prior to
the time the Unistar Board believes such consideration to be appropriate.
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
The Unistar Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Unistar Board, of
candidates for election as directors ("the Nomination Procedure") and with
regard to certain matters to be brought before an annual meeting of stockholders
of Unistar (the "Business Procedure").
The Nomination Procedure provides that only persons who are nominated by,
or at the direction of, the Unistar Board or by a stockholder who has given
timely written notice to the secretary of Unistar prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
Unistar. The Business Procedure provides that at an annual meeting, and subject
to any other applicable requirements, only such business may be conducted as has
been brought before the meeting by, or at the direction of, the Unistar Board or
by a stockholder who has given timely prior written notice to the secretary of
Unistar of such stockholder's intention to bring such business before the
meeting. Except for the election of directors at a special meeting, to be
timely, notice under both the Nomination Procedure and the Business Procedure
must be received by Unistar not less than 90 days prior to the meeting. In the
case of an election of directors at a special meeting, notice must be received
by the close of business on the seventh day following the date on which notice
of the meeting is first given to stockholders.
Under the Nomination Procedure, notice to Unistar from a stockholder who
proposes to nominate a person at a meeting for election as a director must
contain certain information about the nominee, including age, business and
residence addresses, principal occupation, the class and number of shares of
Unistar stock beneficially owned and such other information as would be required
to be included in a proxy statement soliciting proxies for the election of the
proposed nominee, and certain information about the stockholder proposing the
nominee. If the Chairman or other officer presiding at a meeting determines that
a person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director.
Under the Business Procedure, notice relating to the conduct of business
other than the nomination of directors must contain certain information about
such business and about the stockholder who proposes to bring the business
before the meeting, including a brief description of the business the
stockholder proposes to bring before the meeting (including the specific
proposal to be presented) and the reasons for conducting such business at the
meeting, the name and record address of the stockholder, the class and number of
shares of Unistar that are beneficially owned by the stockholder, and any
material interest of the stockholder in such business. If the chairman or other
officer presiding at a meeting determines that a proposal was not properly
brought before the meeting in accordance with the Business Procedure, it will
not be considered at the meeting.
<PAGE>
The Nomination Procedure requires advance notice of nominations by
stockholders in order to afford the Unistar Board a meaningful opportunity to
consider the qualifications of the proposed nominees, and to the extent deemed
necessary or desirable by the Unistar Board, to inform stockholders about such
qualifications. The Business Procedure requires advance notice of a proposal in
order to provide a more orderly procedure for conducting annual meetings of
stockholders and, to the extent deemed necessary or desirable by the Unistar
Board, to provide the Unistar Board with a meaningful opportunity to inform
stockholders, prior to the meeting, of the proposal, together with any
recommendation as to the Unistar Board's position or belief as to action to be
taken with respect to the proposal, so as to enable stockholders better to
determine whether they desire to attend the meeting or grant a proxy to the
Unistar Board as to the disposition of the proposal.
Preferred Stock
The Unistar Preferred Stock to be outstanding as of the Closing Date is
convertible under certain conditions into Unistar Common Stock, potentially
making it more difficult for a potential acquiror to acquire control of Unistar.
See "DESCRIPTION OF UNISTAR CAPITAL STOCK--Unistar Preferred Stock."
As discussed in "DESCRIPTION OF UNISTAR CAPITAL STOCK--Unistar Preferred
Stock," the Unistar Certificate authorizes Unistar Board to issue additional
shares of preferred stock, in one or more classes or series. Executone and
Unistar believe that the availability of the preferred stock will provide
Unistar with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. The
authorized shares of preferred stock, as well as shares of Unistar Common Stock,
will be available for issuance without further action by Unistar's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange on which Unistar securities may be listed, although the preferred stock
could, depending on the terms of such class or series, impede the completion of
a merger, tender offer or other takeover attempt that could be in the best
interests of the stockholders of Unistar.
Certain Voting Requirements
The Unistar Certificate requires the affirmative vote of more than
two-thirds of the outstanding shares of Unistar Common Stock for the approval of
mergers, share exchanges, certain dispositions of assets and other extraordinary
transactions.
Stockholder Rights Plan
For a discussion of the Unistar Rights Plan, see "DESCRIPTION OF UNISTAR
CAPITAL STOCK--Stockholder Rights Plan."
Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law ("DGCL") regulates
business combinations with interested stockholders. Under Section 203 of the
DGCL, a Delaware corporation is prohibited from entering into a business
combination with the beneficial owner of 15% or more of more of the
corporation's outstanding voting stock (an "interested stockholder"), or its
affiliates, for three years from the date such stockholder became an interested
stockholder unless (i) prior to the date the stockholder became an interested
stockholder, the board of directors of the corporation approved either the
business combination or the transaction that resulted in such person or entity
becoming an interested stockholder, (ii) the interested stockholder acquired at
least 85% of such corporation's outstanding voting stock (excluding shares owned
by persons who are directors, officers and by certain employee stock plans) in
the same transaction in which such stockholder became an interested stockholder
or (iii) on or subsequent to the date of the transaction by which the
stockholder became an interested stockholder, the business combination is
approved by the board of directors and the holders of two-thirds of the
corporation's outstanding voting stock (not including shares owned by the
interested stockholder). In general, a Delaware corporation must specifically
elect, through an amendment to its bylaws or certificate of incorporation, not
to be governed by these provisions. Unistar has not made such an election and,
therefore, is currently subject to these provisions of the DGCL.
<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Limitation of Liability of Directors.
The Unistar Certificate eliminates the liability of directors of Unistar
to Unistar or its stockholders to the extent permitted by Delaware law.
Indemnification of Directors and Officers.
The Unistar Certificate requires indemnification of officers and directors
of Unistar to the extent permitted by Delaware law.
PLAN OF DISTRIBUTION
Unistar is distributing herewith to each holder of shares of Executone
Common Stock on the Record Date one Right for every share of Executone Common
Stock owned. If the Amendments are approved by the Executone Shareholders at the
Meeting, each five Rights will entitle the Holder to purchase one share of
Unistar Common Stock at the Subscription Price. In the event that (i) not all of
the Rights are exercised during the Exercise Period and (ii) the Offering is not
terminated, Unistar Buying Group, LLC, a limited liability company owned by
certain holders of Executone Preferred Stock, will purchase the remaining unsold
shares of Unistar Common Stock at the Subscription Price pursuant to the Standby
Agreement. For a description of the purposes of and reasons for the Offering,
see "THE OFFERING-Purposes of and Reasons for the Offering." As of the Closing
of the Offering, Unistar will be an independently-traded public company.
Executone will bear the cost of the expenses of the Offering in the amount of
$____________.
LEGAL MATTERS
The validity of the shares of Unistar Common Stock offered hereby will be
passed upon for Unistar by Hunton & Williams, Richmond, Virginia. Thurston R.
Moore, a member of Hunton & Williams, is a director of Executone. As of the
Record Date, Mr. Moore beneficially owned [132,235] shares of Executone Common
Stock, entitling him to receive [132,235] Rights in the Offering.
EXPERTS
The audited financial statements and schedules included in this Proxy
Statement/Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent accountants, and are included herein
in reliance upon the authority of said firm as experts in giving said reports.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Executone pursuant to
the Exchange Act are hereby incorporated by reference herein: (i) Executone's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as filed by
Executone with the Commission on August 14, 1998; (ii) Executone's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, as filed by Executone
with the Commission on May 14, 1998; and (iii) Executone's Annual Report on Form
10-K for the year ended December 31, 1997, as filed by Executone with the
Commission on April 15, 1998 (including those portions of Executone's Annual
Report to Shareholders and definitive Proxy Statement as are incorporated
therein by reference). In addition, all reports and other documents filed
subsequent to the date hereof pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act shall be deemed to be incorporated by reference herein and to
be a part hereof from the date of filing of such reports and documents.
<PAGE>
Executone will provide without charge to each person, including any
beneficial owner, to whom a copy of this Proxy Statement/Prospectus is
delivered, upon the written or oral request of any such person, a copy of any or
all of the documents that are incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to EXECUTONE Information Systems, Inc., 478 Wheelers Farms Road, Milford,
Connecticut 06460, Attention: Barbara C. Anderson, Esquire, Telephone No. (203)
876-7600.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Proxy Statement/Prospectus, except as so modified, and
any statement so superseded shall not be deemed to constitute a part of this
Proxy Statement/Prospectus.
SHAREHOLDER PROPOSALS
Shareholders are entitled to present proposals for action at the Meeting
if they comply with the applicable requirements of Executone's Bylaws then in
effect and with the requirements of the proxy rules as promulgated by the
Commission. Any proposals intended to be presented at the Meeting must be
received in Executone's offices on or before _________, 1998, in order to be
considered for inclusion in this Proxy Statement/Prospectus and form of proxy
relating to such Meeting.
<PAGE>
PROXY CARD
EXECUTONE INFORMATION SYSTEMS, INC.
478 WHEELERS FARMS ROAD, MILFORD, CONNECTICUT 06460
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby appoints Stanley J. Kabala, Michael W. Yacenda and
Barbara C. Anderson, or any of them, with full power of substitution in each,
Proxies, to vote all the shares of Common Stock and Preferred Stock of EXECUTONE
Information Systems, Inc. held of record by the undersigned at the close of
business on ________, 1998, at a Special Meeting of Shareholders (the "Meeting")
to be held on _________, 1998, at ______, or any continuation or adjournment
thereof.
1. Proposal to approve amendments to the Executone Articles of
Incorporation, as amended
FOR WITHHOLD ABSTAIN
( ) ( ) ( )
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
FOR WITHHOLD ABSTAIN
( ) ( ) ( )
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
THE PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
Signature: Date:
Signature if held jointly: Date
Note: Please sign exactly as the name appears hereon. When shares are held
by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by the
President or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Reference
Unistar Gaming Corp. and Subsidiary
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Divisional Control -
Years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Unistar Gaming Corp. and Subsidiary
Consolidated Balance Sheets - June 30, 1998 and 1997 F-15
Consolidated Statements of Operations -
Six months ended June 30, 1998 and 1997 F-16
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 F-17
Notes to Consolidated Financial Statements F-18
National Indian Lottery
Report of Independent Public Accountants F-20
Balance Sheets - June 30, 1998 and September 30, 1997 F-21
Statements of Operations and Accumulated Deficit -
Nine months ended June 30, 1998 and period from
inception (January 16, 1995) to September 30, 1997 F-22
Statements of Cash Flows -
Nine months ended June 30, 1998 and period from
inception (January 16, 1995) to September 30, 1997 F-23
Notes to Financial Statements F-24
All other financial statements and schedules have been omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the above listed financial statements or the notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Unistar Gaming Corp.:
We have audited the accompanying consolidated balance sheets of Unistar Gaming
Corp. and Subsidiary (a development stage company) as of December 31, 1997 and
1996, and the related consolidated statements of operations, cash flows and
divisional control for each of the three years in the period ended December 31,
1997. 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 Unistar Gaming Corp. and
Subsidiary as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
August 28, 1998, except with
respect to certain matters
described in Note 9, as to
which the date is September 14, 1998.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Balance Sheets
(A Development Stage Company)
December 31,
1997 1996
ASSETS ---------- ----------
Current Assets
Notes receivable
$ - $
9,000 ---------- -----------
Total Current Assets
- 9,000
Property & Equipment, net
Intangible Assets, net 24,000 17,000
Advances to NIL 15,841,000 15,841,000
Investment in IGT 2,779,295 667,587
Other Assets 700,000 700,000
System Hardware and Software
Other 3,413,768 487,130
1,332,361 436,305
----------- -----------
4,746,129 923,435
---------- -----------
TOTAL ASSETS $24,090,424 $18,158,022
=========== ===========
LIABILITIES AND DIVISIONAL CONTROL
LIABILITIES
Current Liabilities
Current portion of capital lease obligations $ 107,484 $ -
Accounts payable and accrued liabilities 805,378 1,076,215
------- ---------
912,862 1,076,215
Long-Term Capital Lease Obligations 433,068 -
------- ---------
1,345,930 1,076,215
DIVISIONAL CONTROL
Investment in Unistar 24,310,263 17,837,389
Deficit Accumulated During the Development Stage (1,565,769) (755,582)
---------- --------
22,744,494 17,081,807
---------- ----------
TOTAL LIABILITIES AND
DIVISIONAL CONTROL $24,090,424 $18,158,022
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Operations
(A Development Stage Company)
<TABLE>
<CAPTION>
Cumulative
from Inception
Pre-acquisition Post-acquisition (July 29, 1993)
---------------------------------------------------------
Year-Ended Year-Ended through
December 31, December 31, December 31,
------------ ------------
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
------- -------- -------- --------
Gross Profit $ - $ - $ - $ -
Operating Expenses:
Payroll and related 409,043 460,499 629,287 1,840,925
Other selling, general and administrative 2,036,137 288,331 227,416 3,695,988
Depreciation and amortization 5,767 2,226 4,100 12,093
Allocation of corporate expenses - - 313,044 313,044
Expenses charged to NIL - - (366,677) (366,677)
--------------------------------------------------------
Operating Loss (2,450,947) (751,056) (807,170) (5,495,373
Other Expenses (156,548) (4,526) (3,017) (200,002)
-------------- -------------------------------------------
Net Loss $(2,607,495) $(755,582) $(810,187) $(5,695,375)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Cash Flows
(A Development Stage Company)
<TABLE>
<CAPTION>
Cumulative
from Inception
Pre-acquisition Post-acquisition (July 29, 1993)
Year-Ended Year-Ended through
December 31, December 31, December 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,607,495) $(755,582) $(810,187) $ (5,695,375)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 5,767 2,226 4,100 14,323
Other 13,700 - - 121,507
Changes in working capital items:
Accounts payable and accruals (472,799) (503,319) (10,592) (655,667)
Other working capital items, net (9,750) 660 9,000 (90)
------ --- ----- ---
Net Cash Used by Operating Activities (3,070,577) (1,256,015) (807,679) (6,215,302)
========== ========== ======== ==========
Cash Flows from Investing Activities:
Capital Expenditures - (501,098) (2,326,612) (2,827,710)
Distributions to CDA - (325,000) (300,000) (625,000)
Funding of NIL operations - (342,587) (1,811,708) (2,154,295)
Funding for NIL building and pre-acquisition
legal expenses - (1,863,056) (1,109,173) (2,972,229)
Investment in IGT - (700,000) - (700,000)
Other - - (47,128) (69,432)
-------- -------- ------- -------
Net Cash Used by Investing Activities - (3,731,741) (5,594,621) (9,348,666)
Cash Flows from Financing Activities:
Repayment of Capital Lease Obligations - - (70,574) (70,574)
Funding from Executone 3,136,889 4,913,810 6,472,874 15,634,542
Net Cash Provided by Financing Activities 3,136,889 4,913,810 6,402,300 15,563,968
--------- --------- --------- ----------
Net (Decrease) Increase in Cash 66,312 (73,946) - -
Cash, beginning of period 7,634 73,946 - -
----- ------
Cash, end of period $ 73,946 $ - $ - $ -
============= ======= ======= =========
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Divisional Control
(A Development Stage Company)
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Investment Development
in Unistar Stage Total
<S> <C> <C> <C> <C> <C> <C>
---------- ----- -----
Pre-Acquisition
Balances at Inception (July 29, 1993 $ - $ - $ -
Funding from Predecessor Owner 4,080,665 - 4,080,665
Net Loss - (4,129,606) (4,129,606)
Balances at December 18, 1995 $ 4,080,665 $(4,129,606) $ (48,941)
Post-Acquisition
Balances at December 31, 1995 (*) $ 12,711,000 $ - $12,711,000
Funding from Executone 5,126,389 - 5,126,389
Net Loss - (755,582) (755,582)
-------------------------------------------------
Balances at December 31, 1996 17,837,389 (755,582) 17,081,807
Funding from Executone 6,472,874 - 6,472,874
Net Loss - (810,187) (810,187)
-------------------------------------------------
Balances at December 31, 1997 $24,310,263 $(1,565,769) $22,744,494
=== ==== =========== =========== ===========
</TABLE>
(*) There was no activity from the acquisition date, December 19, 1995, through
December 31, 1995.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Unistar Gaming Corp. and Subsidiary
Notes to Consolidated Financial Statements
(A Development Stage Company)
Note 1 - The Company
Nature of the Business. On December 19, 1995, Executone Information Systems,
Inc. (Executone) acquired 100% of the common stock of Unistar Gaming Corp.
("Unistar") for common and preferred stock with a combined value of $12.7
million. Unistar's wholly-owned subsidiary, UniStar Entertainment, Inc.
("UniStar Entertainment") has an exclusive five-year management agreement (the
"NIL Agreement") with the Coeur d'Alene Tribe of Idaho (the "CDA") to provide
design, development, financial and management services to the National Indian
Lottery (the "NIL"). The NIL Agreement was approved in January 1995 by the
National Indian Gaming Commission (the "NIGC") and is authorized by federal law
and a compact between the State of Idaho and the CDA (the "Compact". The NIL
encompasses a national telephone lottery and an on-line US Lottery Internet
site. In return for these services, the NIL will pay UniStar Entertainment a fee
equal to 30% of net profits as defined in the NIL Agreement. Since December 19,
1995, Unistar has operated as a division of Executone.
Development Stage Risks. Unistar is in the development stage and its activities
to date have been primarily related to the organization of the company,
negotiating the NIL Agreement, and developing the business and gaming systems
necessary to operating a national telephone lottery and the on-line US Lottery
Internet site. Unistar expects to derive the majority of its near-term revenues
from the net profits of the NIL. Although the NIL is operational, it has yet to
generate any net profits. Therefore, Unistar has yet to record any revenue.
Since this is the first venture of its kind, there are currently several legal
challenges in process, along with potential federal legislation addressing
Internet commerce (See Note 9). There can be no assurance that the legal
challenges will be resolved in Unistar's favor, potentially resulting in the
delay or suspension of NIL operations. Additionally, changes in federal law
could make the NIL unlawful. Finally, as a new venture, there is no assurance of
market acceptance of either the telephone or Internet lotteries, or of any of
Unistar's products currently in development to the degree necessary for economic
viability. Any of these events could have a material adverse effect on the
financial condition or results of operation of the business. If these issues
were not resolved in the manner anticipated by Unistar, it would have to
evaluate the extent of impairment of its intangibles (See Intangible Assets in
Note 3) and the collectibility of the receivable from the NIL (See Note 4).
Note 2 - Spin-off of Unistar
On August 12, 1998, the Board of Directors of Executone approved the following
transactions; (a) a Share Exchange Agreement (the "Exchange Agreement") between
the Executone preferred shareholders, Executone and Unistar which will result
after the Offering in the Executone preferred shareholders owning 15% of
Unistar's common stock (the "Unistar Common Stock") and 100% of Unistar's
preferred stock (the "Unistar Preferred Stock") (which will be contingently
convertible into additional shares of Unistar Common Stock up to a total,
including the original issuance to the Executone preferred shareholders of 15%
of the Unistar Common Stock, of 34% of the outstanding shares of Unistar Common
Stock after the original issuance, the conversion and the rights offering), and
(b) a rights offering in which each Executone common shareholder receives one
right for each share of Executone common stock outstanding. Each five rights
will entitle the holder to purchase one share of Unistar Common Stock upon
payment of the exercise price of a total of $.25 per share of Unistar Common
Stock. As a result of these transactions, Unistar will become an independent,
publicly-traded company. These transactions represent a reorganization of
companies under common control and, accordingly, all assets and liabilities will
be reflected at their historical carrying values.
Prior to the transactions described above, Unistar has operated as a division of
Executone since it was acquired by Executone on December 19, 1995. During the
period of ownership, Executone has provided all funding for Unistar's
operations. Executone has agreed to continue to provide financial support to
Unistar until the date of closing of the Offering (the "Closing Date"), which
support will not exceed an average sum of $1.5 million per quarter in accordance
with the terms of Exchange Agreement. Executone will also provide to Unistar, at
the Closing Date, in accordance with the terms of the Exchange Agreement, $3.0
million in cash, and will assume responsibility for, and pay when due, expenses
incurred by Unistar but not yet paid, provided, however, that the maximum of
such expenses shall not exceed $500,000. The purpose of this contribution from
Executone is to provide Unistar with sufficient funds to continue as a going
concern until Unistar achieves a break-even cash position. In addition, Unistar
will receive an estimated $2.5 million in proceeds from the Offering.
<PAGE>
The Consolidated Financial Statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
Unistar in the future or had it operated as a separate independent company
during the periods presented. The Consolidated Financial Statements included
herein do not reflect any changes that may occur in the financing and operations
of Unistar as a result of the spin-off.
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of Unistar and UniStar Entertainment. In consolidating the
accompanying financial statements, all significant intercompany transactions
have been eliminated. Unistar was allocated $313,044 in overhead costs related
to Executone's administrative costs during the year ended December 31, 1997 and
are included in operating expenses in the Consolidated Statements of Operations
(see Note 8). Such costs were not allocated during 1996 or 1995 as they were not
material at that stage of business development. The expenses allocated to
Unistar for these services are not necessarily indicative of the expenses that
would have been incurred if Unistar had been a separate, independent entity and
had otherwise managed these functions. Subsequent to the spinoff, Unistar will
be required to manage these functions and will be responsible for the expenses
associated with the management of a public corporation.
In July 1997, Unistar began charging the NIL for shared activity expenses.
Shared activity expenses represent all expenses incurred by Unistar which are
direct expenses on behalf of the NIL, and consist primarily of payroll, fringe
benefit and travel-related costs for three employees whose time is devoted 100%
to the NIL. Such charges reduce Unistar operating expenses on the statement of
operations and increase the advance to NIL on the balance sheet. These expenses
will be Unistar expenses when Unistar becomes a standalone entity.
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,
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.
Pre-acquisition Financial Data. Executone acquired Unistar on December 19, 1995.
Such acquisition was accounted for using the purchase method. Accordingly, the
assets and liabilities acquired were recorded on the balance sheet at their fair
market values, resulting in the recording of an intangible asset of
approximately $15.8 million as of the acquisition date. During the period prior
to its acquisition by Executone, Unistar was in its early development stages.
The expenditures made by the previous owners were primarily expenses relating to
the startup of the business, including legal, lobbying, consulting and other
professional fees, along with payroll, travel and other related expenses. These
were reflected in the pre-acquisition statement of operations. Subsequent to the
acquisition, Unistar's expenditures comprised primarily development costs for
software and hardware, building costs and reimbursable advances to the NIL, all
of which were recorded on the balance sheet. As a result of purchase accounting
and the change in the nature of the business after the acquisition by Executone,
financial data for the periods prior to Executone's purchase of Unistar on
December 19, 1995 is not comparable to periods subsequent to the acquisition.
See below for a discussion of the accounting treatment for each category of
these costs.
In addition, the Consolidated Statement of Cash Flows for the year ended
December 31, 1995 is based upon cash flows during the pre-acquisition period of
January 1, 1995 through December 18, 1995. Other than the acquisition, which was
a noncash transaction, there was no Unistar activity from December 19, 1995
through December 31, 1995.
The pre-acquisition financial data has not been restated to conform to the
post-acquisition presentation.
<PAGE>
Computer Hardware and Software. The costs of developing of the gaming and
business software systems for the NIL, which includes the games themselves, the
banking interface, the game reporting system and the financial accounting
systems, are all assets of Unistar and are classified in Other Assets on the
Consolidated Balance Sheets. On January 1, 1998, these expenditures were
reclassified to Property & Equipment and are being depreciated over the term of
the NIL Agreement.
Intangible Assets. Intangible assets represent the excess of the purchase price
of Unistar over the fair value of the net liabilities assumed. Intangibles
amortization began January 1, 1998 with the commencement of the NIL Agreement
and will continue over a five-year period. The amortization rate is the
percentage derived by dividing current quarterly NIL revenue by management's
estimate of total NIL revenue during the term of the NIL Agreement.
The carrying value of intangibles is evaluated periodically in accordance with
the provisions of FAS No. 121 Accounting for the Impairment of Long-Lived
Assets, by projecting future undiscounted net cash flows of the underlying
business. If the sum of such cash flows is less than the book value of the
long-lived assets, including intangibles, projected future cash flows are
discounted and intangibles are adjusted accordingly. As of December 31, 1997,
management believes no impairment of the carrying value of intangible assets
exists. This analysis assumes that the issues of legality will be resolved in
favor of Unistar (See Note 9). It also assumes that Unistar's expectation of
future growth of the NIL will occur and that its efforts to market its
technology and systems to state and international lotteries will prove
successful. However, there is no assurance that any of these outcomes will
occur.
Advances to NIL. In accordance with the NIL Agreement, Unistar is responsible
for providing operating capital to fund the development of the NIL including,
but not limited to, the construction of the building to house the reservation
operation center, computer and related software costs to build both the
telecommunications and on-line Internet systems, lobbying and legal fees,
advertising and promotional expenses, Unistar shared activity expenses and other
operational costs. The first $8.5 million of such expenditures are not
reimbursable to Unistar. Such costs consist of Unistar assets, including
computer hardware and software costs, the investment in IGT, NIL startup costs
and amounts expended by Unistar on behalf of the NIL. Computer hardware and
software costs will be depreciated beginning January 1, 1998, while the NIL
start-up costs will be amortized during the fourth quarter of 1998 and
ultimately written off, effective January 1, 1999, in accordance with SOP 98-5.
Any sums advanced above the $8.5 million requirement are recorded as advances
from Unistar and will be reimbursed to Unistar from NIL net profits. Such
reimbursement will be paid out of the first net profits generated by the NIL. In
addition, Unistar is required to make a guaranteed monthly advance of $25,000 to
the CDA, which began in 1995 under the previous owners, and will be reimbursed
when the NIL is making profit distributions to Unistar. This advance is not
included in the total expenditures used to calculate expenditures in excess of
the $8.5 million expenditure threshold.
Unistar faces several legal issues relating to the legality of the NIL (See Note
9) and, to date, has not generated any revenue from its investment in the NIL.
Unistar believes these advances will be collectible based upon a favorable
resolution of the issues of legality and upon its projections for future growth
of Unistar revenue. However, there is no assurance that any of these outcomes
will occur.
Investment in IGT. Unistar owns 233,333 shares (a 2.2% ownership interest) of
IGT (subsequently renamed Virtual Gaming Technologies and referred to herein as
"IGT"). The investment in IGT is recorded at cost. The fair value of this
investment is in excess of its carrying value as of August 28, 1998 and is
approximately $1.3 million.
Other Assets. Unistar expenditures relating to the development of the gaming and
business software systems for the NIL, which includes the games themselves, the
banking interface, the game reporting system and the financial accounting
systems have been included in Other Assets on the Consolidated Balance Sheets as
of December 31, 1997 and 1996 (see Note 5).
Divisional Control. Historically, Unistar operated as a division of Executone.
Accordingly, all operating, financing and investing activities of Unistar were
funded through interdivisional transactions with Executone. The accompanying
financial statements reflect this activity in the divisional control account.
There has been no direct interest income or expense allocated to Unistar by
Executone with respect to net liabilities or receivables. Prior to 1996, Unistar
was funded by its previous owners.
<PAGE>
Income Taxes. The taxable income of Unistar is included in the consolidated
federal and state income tax returns of Executone. As a result, Unistar did not
record a provision for income taxes in its historical financial statements. Due
to the lack of any historical earnings and given that Unistar has only generated
taxable losses since its inception, the accompanying Consolidated Statements of
Operations reflect no current or deferred tax benefit for these losses (see Note
7).
Earnings Per Share. Earnings per share have been omitted from the Consolidated
Statements of Operations since such information is not meaningful and Unistar is
not an entity with its own capital structure.
Noncash Investing and Financing Activities. The following noncash investing and
financing activities took place during the three years ended December 31, 1997:
1997 1996 1995
------- -------- --------
Net assets acquired for Executone
common and preferred stock $ --- $ --- $12,711,000
Capital leases for equipment
acquisitions611,126 --- --- ---
Refer to the Consolidated Statements of Cash Flows for information on
cash-related operating, investing and financing activities.
New Accounting Pronouncements. In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. In addition, the
pronouncement requires that, effective January 1, 1999, previously capitalized
start-up costs be expensed and classified as a cumulative effect of a change in
accounting principle. Unistar anticipates that approximately $2.0 million in
start-up costs currently classified as other assets and intangible assets will
be written off effective January 1, 1999, in accordance with this new
pronouncement.
Note 4 - Advances to NIL
Certain Unistar expenditures to fund the NIL are reimbursable in accordance with
the NIL Agreement. These expenditures for the years ended December 31, 1997 and
1996 are summarized as follows:
1997 1996
--------- ------------
NIL operating activities $2,154,295 $342,587
Guaranteed distributions to the CDA 625,000 325,000
------- -------
Advances to NIL $2,779,295 $667,587
========== ========
Included in NIL operating activities are payroll and related costs, lobbying and
legal fees, advertising and promotional expenses, Unistar shared activity
expenses and other operational costs. Unistar shared activity expenses are
direct NIL-related expenses incurred by Unistar which, effective July 1, 1997,
are charged to the NIL. These costs include payroll and related costs for
Unistar management personnel, as well as certain professional and other
miscellaneous fees. Prior to July 1, 1997, such costs were included in Unistar's
consolidated financial results. Startup costs relating to the development of
additional applications for its technologies and services are not chargeable to
the NIL and are not shared activity expenses.
Note 5 - Other Assets
Other assets consists of the following for the years ended December 31, 1997 and
1996:
1997 1996
--------- ------------
System Hardware and Software $3,413,768 $487,130
NIL Building Costs 1,072,654 223,726
Executive Life Insurance & Other 259,707 212,579
------- -------
Advances to NIL $4,746,129 $923,435
========== ========
With the commencement of the NIL Agreement in January 1998, Systems Hardware and
Software expenditures were reclassified to Property and Equipment and are being
depreciated over a five-year period.
<PAGE>
Note 6 - Capital Lease Obligations
In 1997, Unistar has entered into capital lease arrangements for computer
equipment with a net book value of approximately $540,000 at December 31, 1997.
These leases have been capitalized using implicit interest rates which range
from 8.4% to 9.5%.
The future maturities of long-term debt at December 31, 1997 are as follows:
$107,484 in 1998; $117,674 in 1999; $128,831 in 2000; $141,048 in 2001; $45,515
in 2002.
For the year ended December 31, 1997, cash payments for interest expense on
indebtedness were not material.
Note 7 - Income Taxes
Since Unistar has yet to generate any current revenue and has no historical
earnings to support the realization of any current or deferred tax benefits, no
current or deferred tax benefit has been recorded on the Statements of
Operations for income taxes applicable to the net loss. Unistar does have
certain deferred tax assets which represent future tax deductions, but they can
only be utilized if Unistar generates sufficient future taxable income. As of
December 31, 1997, a valuation allowance has been provided for the entire
deferred tax asset.
The components of and changes in the net deferred tax asset are as follows:
Deferred
Dec. 31, (Expense) Dec. 31
1996 Benefit 1997
---- --------- ----
Net operating losses $ 134,848 $ 794,138 $ 928,986
Deferred startup costs 2,895,833 324,075 3,219,908
------------ ----------- -----------
3,030,681 1,118,213 4,148,894
Valuation allowance (3,030,681) (1,118,213) (4,148,894)
-------------------------------------
Deferred tax asset $ - $ - $ -
======== ======== =======
As of December 31, 1997, Unistar has net operating loss carryforwards (NOLs),
subject to review by the Internal Revenue Service, available to offset future
income for tax return purposes of approximately $2.3 million. The NOLs expire as
follows: $337,000 in 2011; $1,985,000 in 2012.
For the years ended December 31, 1997 and 1996, Unistar's startup costs are
being deferred for tax purposes and will be amortized in the future, as taxable
income generated. The amounts included in Executone's NOLs primarily represent
the deductibility of software development costs for tax purposes, which were
capitalized for financial reporting purposes.
Note 8 - Related Party Transactions
Certain services are provided to Unistar by Executone including corporate
management, legal, accounting, treasury, payroll, benefit administration,
insurance, usage of computer systems, and office space at Executone's corporate
office. During 1997, based upon a specific review of the corporate expenses
incurred by Executone, $313,044 of such administrative costs were allocated to
Unistar.
Certain software development services have been provided to Unistar by a firm,
one of whose principals is related to an officer of Unistar. As of December 31,
1997, Unistar had incurred $193,000 in fees from this firm.
Subsequent to the Offering, certain services will be provided to Unistar by
Executone under the terms of the Master Services Agreement. The services will
include legal, payroll and benefit administration, office space at Executone's
corporate office in Milford, CT, computer and various financial, accounting and
tax services. Unistar will compensate Executone for these services at rates
established in the Master Services Agreement, with such rate being equal to
Executone's cost of providing each service, plus allocable overhead. Executone
will provide these services for a period of 120 days after the separation of
Unistar from Executone. Services can be extended beyond 120 days on a monthly
basis by written agreement between the parties.
Note 9 - Commitments and Contingencies
Unistar, in its attempts to fulfill its responsibilities in accordance with the
NIL Agreement, faces certain risks. In attempting to conduct both the telephone
and Internet lotteries, the NIL, which Unistar is managing, will be directly
competing against lotteries operated by various states. Accordingly, the NIL is
facing anticipated legal attempts to restrict or prohibit these activities.
On September 14, 1998, the CDA, Unistar and representatives of the U.S.
Department of Justice had discussions regarding a declaratory judgment to be
sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is legal under 18 U.S.C. ss.ss.1952 and 1955.
Unistar is informed that the Department of Justice views such operation to be in
violation of such statutes. Executone and Unistar believe, based on advice of
its counsel, Hunton & Williams, that the operation of the NIL is legal. The
Department of Justice has proposed that the parties file a joint stipulation of
facts and cross-motions for summary judgment in the declaratory judgment action.
As in the case of other pending actions, a decision in this proposed proceeding
against the NIL and Unistar could have a material adverse effect on Unistar's
current business, financial position and results of operations. Unistar has not
yet determined whether any such joint stipulation and action for declaratory
judgment is in its best interests. If Unistar and the Department of Justice do
not agree as to such a jointly pursued action, the Department of Justice may
determine to commence civil or criminal proceedings against Unistar.
In an attempt to block the NIL, certain states issued letters under 18 U.S.C.
Section 1084 ("Section 1084") to prevent the long-distance carriers from
providing telephone service to the NIL. In 1995, the CDA initiated legal action
against AT&T Corporation (AT&T) to compel the long-distance carriers to provide
telephone service to the NIL. The CDA's position is that the NIL is authorized
by of the Indian Gaming Regulatory Act of 1988 ("IGRA"), that IGRA preempts
state law, and that Section 1084 is inapplicable and, therefore, the states lack
authority to issue the Section 1084 notification letters to any long distance
carrier. On February 28, 1996, and in a related ruling on May 1, 1996, the
Tribal Court ruled that the CDA had satisfied all requirements of IGRA and that
the Section 1084 letters issued by certain state attorneys general in an effort
to interfere with the lawful operation of the NIL are invalid. In addition, the
Tribal Court ruled that AT&T cannot refuse to provide telephone service based
upon Section 1084. On July 2, 1997, the Tribal Appellate Court affirmed the
lower Tribal Court's rulings and analysis, upholding the CDA's right to conduct
the telephone lottery. On August 22, 1997, AT&T filed a complaint for
declaratory judgment in the U.S. District Court in Idaho against the CDA,
seeking a federal court ruling as to the enforceability of the Tribal Court's
May 1, 1996 order affirming the CDA's right to conduct the telephone lottery.
The CDA has answered that complaint and filed a motion for partial summary
judgment. AT&T has filed a cross-motion for summary judgment. Nineteen state
attorneys general have been granted leave to file a brief as amicus curiae in
respect to the interpretation of IGRA. These matters are still pending.
On May 28, 1997, the State of Missouri brought an action in the Missouri Circuit
Court in Kansas City against UniStar Entertainment and the CDA to enjoin the
NIL's US Lottery Internet instant games offered by the CDA and managed by
UniStar Entertainment. The complaint sought civil penalties, attorneys' fees and
court costs. The complaint alleged that the US Lottery violates Missouri
anti-gaming laws and that the marketing and promotion of the US Lottery violate
the Missouri Merchandising Practices Act. The CDA and UniStar Entertainment
removed the case to the U.S. District Court for the Western District of
Missouri, which denied the State's subsequent motion to remand the case back to
the state court. The Court subsequently granted a motion to dismiss the CDA from
the case based on sovereign immunity. The Court preliminarily denied the motion
to dismiss UniStar Entertainment based on sovereign immunity, although the Court
indicated it might reconsider that decision. Unistar filed a motion for
reconsideration of its motion for dismissal. The State of Missouri has appealed
the dismissal of the CDA to the Eighth Circuit Court of Appeals.
<PAGE>
On January 28, 1998, the State of Missouri sought to dismiss voluntarily the
existing case against Unistar and filed the next day, a new action against the
Executone, UniStar Entertainment and two tribal officials, with essentially the
same allegations, in state court in a different district. The State obtained a
temporary restraining order from a state judge enjoining the marketing of the
Internet and telephone lottery in the State of Missouri. On February 5, 1998,
the U. S. District Court for the Eastern District of Missouri ruled that this
second case also should be heard in federal court, transferred the second case
to the Western District of Missouri where the original case had been filed, and
dissolved the state court's temporary restraining order, effective February 9,
1998. A motion to dismiss the second case based on the sovereign immunity of all
the defendants and a motion to abstain in favor of the jurisdiction of the
Tribal Court are pending. The State of Missouri has appealed to the Eighth
Circuit the denial of its motion to remand the case to State Court or, in the
alternative, to seek a preliminary injunction. Both Eighth Circuit appeals will
be argued on September 21, 1998. On July 31, 1998, the District Court for the
Western District of Missouri stayed proceedings in the case before it pending
resolution of the pending appeals in the Eighth Circuit and pending Federal
legislation.
On September 15, 1997, the State of Wisconsin, by its Attorney General, filed an
action in the Wisconsin State Circuit Court for Dane County against Executone,
UniStar Entertainment and the CDA, to permanently enjoin the US Lottery offered
by the CDA on the Internet and managed by UniStar Entertainment. The complaint
alleges that the offering of the US Lottery violates Wisconsin anti-gambling
laws and that legality of the US Lottery has been misrepresented to Wisconsin
residents in violation of state law. In addition to an injunction, the suit
seeks restitution, civil penalties, attorneys' fees and court costs. Executone,
UniStar Entertainment and the CDA have removed the case to the U.S. District
Court in Wisconsin. On February 18, 1998, the District Court dismissed the CDA
from the case based on sovereign immunity and dismissed Executone based on the
State's failure to state a claim against Executone. Motions to dismiss the case
against UniStar Entertainment on the basis of sovereign immunity were denied.
UniStar Entertainment has appealed the denial of its motion to dismiss to the
Seventh Circuit Court of Appeals.
Executone and Unistar have been advised by their outside counsel, Hunton &
Williams, that based upon such firm's review of the applicable statutes,
regulations and case law, the operation of the NIL is legal and the CDA and
UniStar Entertainment will likely prevail in the pending litigation. However,
such opinion of counsel is not binding upon any court, government agency or
other tribunal and is based upon limited precedental case law and existing
statutes and regulations. In July, 1998, the Senate passed an appropriations
bill to fund the departments of Commerce, Justice and State for fiscal 1999,
which included as an amendment a ban on Internet gaming offered by Senators John
Kyl from Arizona and Richard Bryan from Nevada. The measure would have
criminalized certain Internet gaming activities, but would have allowed states
to create their own "closed loop" intrastate computer gambling networks. A
similar bill was proposed in the House of Representatives. Both bills are in
direct conflict with IGRA, and arguably could make the NIL unlawful. Congress
adjourned without enacting any version of this Internet gaming ban into law.
Unistar is supporting efforts to include exceptions in any Internet gaming bill
for gaming conducted by an Indian tribe that is authorized by IGRA. If
legislation is signed into law that prohibits Internet gaming without such an
exception, it would have a material adverse effect on Unistar's business as it
relates to the NIL However, Unistar believes that if the final legislation
includes exceptions for states to create their own computer gambling networks,
it will create opportunities for Unistar to service this potential market with
its electronic lottery terminals system.
UniStar Entertainment and the CDA believe that the NIL is legal and intend to
defend the right of the CDA to offer the NIL on the Internet and via the
telephone. Based on the outcome of the pending legal actions that UniStar
Entertainment anticipates will occur, UniStar Entertainment does not believe the
outcome of this litigation will have a material adverse effect on UniStar
Entertainment's consolidated financial position, results of operations or
liquidity. However, if the ultimate outcome of the litigation, particularly the
Idaho case, were unfavorable to Unistar, or adverse legislation is enacted, such
outcomes could have a material adverse effect on Unistar's current business,
financial position and results of operations. In addition, the pending
litigation, as well as other litigation that could be brought by states or
others opposed to the NIL, could delay or suspend certain NIL operations. It is
impossible at this time to predict the nature or extent of any delays or
suspension of operations that might occur.
There are also market risks associated with the development of the NIL. Unistar
believes there is a national market for the NIL based upon research into the
experience of other national lotteries and the growth of the overall lottery
market. However, there is no assurance that there will be acceptance of a
telephone or Internet lottery. In the event that the telephone and Internet
lotteries do not attain the level of market acceptance anticipated by Unistar or
if the outcome of the pending lawsuits or legislative proposals in Congress is
adverse, there could be a material adverse effect on NIL operations and,
accordingly, on Unistar.
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Balance Sheets
(A Development Stage Company)
(Unaudited)
June 30,
--------
1998 1997
--------- ---------
ASSETS
Current Assets
Prepaids and other current assets $ 1,625 $ -
---------- -----------
Total Current Assets 1,625 -
Property & Equipment, net 3,915,000 14,000
Intangible Assets 13,002,580 15,841,000
Advances to NIL 10,995,187 1,246,266
Investment in IGT 700,000 700,000
Other Assets 1,610,085 3,277,960
------------ -----------
TOTAL ASSETS $30,224,477 $21,079,226
=========== ===========
LIABILITIES AND DIVISIONAL CONTROL
LIABILITIES
Current Liabilities
Current portion of capital lease obligations $ 115,336 $ 76,971
Accounts payable and accrued liabilities 1,446,849 832,502
------------ -----------
1,562,185 909,473
Deferred Income 2,173,215 -
Long-Term Capital Lease Obligations 372,156 353,917
---------- -----------
4,107,556 1,263,390
DIVISIONAL CONTROL
Investment in Unistar 28,095,688 21,045,556
Deficit Accumulated During the Development Stage (1,978,767) (1,229,720)
---------- ----------
26,116,921 19,815,836
---------- ----------
TOTAL LIABILITIES AND
DIVISIONAL CONTROL $30,224,477 $21,079,226
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Operations
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Six-Month Periods Ended from Inception
June 30, (July 29, 1993)
----------------------- through
1997 1998 June 30, 1998
---- ---- -------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
Cost of Revenues - - -
----------- ----------- -----------
Gross Profit - - -
Operating Expenses:
Payroll and related 331,424 300,320 2,141,245
Other selling, general and administrative 137,648 199,993 3,895,981
Depreciation and amortization 2,050 412,999 425,092
Allocation of corporate expenses - - 313,044
Expenses charged to NIL - (500,770) (867,447)
--------- -------- --------
Operating Loss (471,122) (412,542) (5,907,915)
Other Income (Expenses) (3,016) (458) (200,460)
---------- --------- ----------
Net Loss $ (474,138) $ (413,000) $ (6,108,375)
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Cash Flows
(A Development Stage Company)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Six-Month Periods Ended from Inception
June 30, (July 29, 1993)
--------------- through
1997 1998 June 30, 1998
---- ---- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (474,138) $ 413,000) $ (6,108,375)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 2,050 412,999 427,322
Other - - 121,507
Changes in working capital items
Accounts payable and accruals (89,291) (276,473) (932,140)
Other working capital items, net 9,000 (1,624) (1,714)
----- ------ ------
Net Cash Used by Operating Activities (552,379) (278,098) (6,493,400)
Cash Flows from Investing Activities:
Capital Expenditures (1,138,418) (1,131,052) (3,958,762)
Distributions to CDA (150,000) (150,000) (775,000)
Funding of NIL operations (428,679) (1,594,580) (3,748,875)
Funding for NIL building and pre-acquisition
legal expenses (895,681) (394,512) (3,366,741)
Investment in IGT - - (700,000)
Other (23,062) (184,125) (253,557)
Net Cash Used by Investing Activities (2,635,840) (3,454,269) (12,802,935)
---------- ---------- -----------
Cash Flows from Financing Activities:
Repayment of Capital Lease Obligations (19,948) (53,060) (123,634)
Funding from Executone 3,208,167 3,785,427 19,419,969
--------- --------- ----------
Net Cash Provided by Financing Activities 3,188,219 3,732,367 19,296,335
--------- --------- ----------
Net (Decrease) Increase in Cash - - -
Cash, beginning of period - - -
--------- --------- ----------
Cash, end of period $ - $ - $ -
======== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
Unistar Gaming Corp and Subsidiary
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 1998 and 1997
(Unaudited)
Note 1 - The Consolidated Balance Sheets at June 30, 1998 and 1997 and the
Consolidated Statements of Operations and Cash Flows for the six-month periods
ended June 30, 1998 and 1997 have not been audited, but have been prepared in
conformity with the accounting principles applied in the Unistar Gaming Corp.
and Subsidiary ("Unistar") audited consolidated financial statements as of
December 31, 1997 and 1996 and for the three years in the period ended December
31, 1997. In the opinion of management, this information includes all material
adjustments necessary for a fair presentation. The results for the six-month
periods are not necessarily indicative of the results expected for the year.
These consolidated financial statements should be read in conjunction with the
audited financial statements and notes as of December 31, 1997 and 1996 and for
the three years in the period ended December 31, 1997.
Unistar is in the development stage and its activities to date have been
primarily related to the organization of the company, negotiating the NIL
Agreement, and developing the business and gaming systems necessary to operating
a national telephone lottery and the on-line US Lottery Internet site. See Note
1 in the audited financial statements and notes as of December 31, 1997 and 1996
and for the three years in the period ended December 31, 1997 for a discussion
of development stage risks.
Advances to NIL as of June 30, 1998, include approximately $1.3 million of costs
incurred by the NIL, which are not yet funded by Unistar.
Note 2 - In January 1998, the National Indian Lottery (the "NIL") became
operational with the launch of the draw lottery. Unistar reclassified $4.3
million of assets from Other Assets to Property & Equipment during the six-month
period ended June 30, 1998 and commenced depreciating the assets over the 5-year
term of the management agreement between the Coeur d'Alene Tribe of Idaho (the
"CDA") and UniStar Entertainment, Inc. ("Unistar Entertainment") which commenced
in January, 1998 (the "NIL Agreement"). Property & Equipment consists of the
following at June 30, 1998 and 1997:
1998 1997
--------- --------
Computer Hardware $ 743,749$ -
Computer Software 3,347,138 -
Office Phone System 116,073 -
Other 101,366 18,276
------------ ----------
4,308,326 18,276
Less: Accumulated Depreciation (393,326) (4,276)
------------ ----------
$3,915,000 $ 14,000
========== =========
Depreciation expense for the six-month period ended June 30, 1998 was $387,000.
Effective January 1998, Unistar also began amortizing intangibles. Intangibles
amortization for the six-month period ended June 30, 1998 was $26,000.
Intangibles will be charged to expense over the 5-year term of the NIL
Agreement. The amortization rate is the percentage derived by dividing current
quarterly NIL revenue by management's estimate of total NIL revenue during the
term of the NIL Agreement.
Note 3 - Beginning in July 1997, and in accordance with the NIL Agreement,
Unistar commenced charging the NIL for Unistar shared activity expenses. During
the six-month period ended June 30, 1998, $500,770 of shared activity expenses
were charged to the NIL.
Note 4 - Due to advertising, professional fees and other startup costs, the NIL
has yet to generate profits. As a result, Unistar has not recognized any revenue
under the terms of the NIL Agreement as of June 30, 1998.
<PAGE>
Note 5 - In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. In addition, the pronouncement requires that,
effective January 1, 1999, previously capitalized start-up costs be expensed and
classified as a cumulative effect of a change in accounting principle. Unistar
anticipates that approximately $2.0 million in start-up costs currently
classified as other assets and intangible assets will be written off effective
January 1, 1999, in accordance with this new pronouncement.
Note 6 - During the three-month period ended June 30, 1998, certain provisions
in the NIL Agreement have been clarified based upon the current operational
status of the NIL. These provisions relate to the reclassification of certain
costs from a non-reimbursable asset category to a reimbursable category to
Unistar by the NIL. Accordingly, $5.0 million has been reclassified to Advances
to NIL representing additional amounts reimbursable from the NIL, offset by a
$2.8 million reduction in intangibles (reflecting pre-acquisition costs) and
$2.2 million in deferred income (reflecting post-acquisition costs previously
expensed by Unistar prior to 1998). These adjustments reflect the additional
expenditures which are receivable from the NIL and will be repaid when the NIL
is making profit distributions.
Note 7 - In order to facilitate Executone's business plan in connection with the
Offering, Executone has offered to Michael W. Yacenda and Robert Hopwood,
participants in the Stock Plan, a retention and incentive program effective as
of ___________, 1998 (the "Transition and Retention Plans"). The Transition and
Retention Plans extend the Stock Loans of Messrs. Yacenda and Hopwood, the
aggregate amount of which is $1.8 million, including $400,000 in interest
advanced to Messrs. Yacenda and Hopwood, to the earlier of March 31, 2001, or
the date on which their respective employment with Unistar terminates. Under the
Transition and Retention Plans, Messrs. Yacenda and Hopwood earn forgiveness of
their respective Stock Loans over time. Unistar has agreed to advance to Messrs.
Yacenda and Hopwood the interest on such loans that accrues after the Closing
Date as it comes due. Executone previously had agreed to guarantee the Stock
Loans. If Messrs. Yacenda or Hopwood resign while there exists an outstanding
balance on their respective Stock Loans, then the resigning employee is liable
for that portion of such Stock Loan that has not been forgiven. If Messrs.
Yacenda and Hopwood remain employed with Unistar and the full benefit under the
Transition and Retention Plans vests, then, pursuant to the Exchange Agreement,
Unistar and Executone will share equally in any liability incurred under the
Transition and Retention Plans. If Messrs. Yacenda or Hopwood resign from
Unistar, Unistar will indemnify Executone for 50% of any liability it incurs as
a result of such guarantee. If Unistar terminates the employment of Messrs.
Yacenda or Hopwood, Unistar will indemnify Executone for 100% of any liability
it incurs as a result of such guarantee.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Tribal Gaming Director of the Coeur d'Alene Tribe:
We have audited the accompanying balance sheet of the National Indian Lottery as
of September 30, 1997, and the related statements of operations and accumulated
deficit and cash flows for the period from inception (January 16, 1995) to
September 30, 1997. These financial statements are the responsibility of the
entity'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 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 audit provides 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 the National Indian Lottery as
of September 30, 1997, and the results of its operations and its cash flows for
the period from inception to September 30, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
November 4, 1997, except
with respect to certain matters
discussed in Note 4, as to which
the date is September 14, 1998.
<PAGE>
National Indian Lottery
Balance Sheets
September 30, June 30,
1997 1998
---- ----
Assets (Unaudited)
Current Assets
Cash $ 10,470 $ 39,565
Accounts receivable 26,402 53,408
Other current assets 185,527 170,584
--------- ---------
Total current assets 222,399 263,557
Property and equipment, net 2,523,036 2,511,565
--------- ---------
Total Assets $2,745,435 $2,775,122
========== ==========
Liabilities & Deficit
Current Liabilities
Accounts payable & accrued liabilities $ 320,306 $ 19,095
Customer deposits 123,005 226,393
--------- ---------
Total current liabilities 443,311 245,488
Advances from Unistar:
Operating capital 3,237,303 9,970,187
Guaranteed distributions to CDA 800,000 1,025,000
--------- ---------
4,037,303 10,995,187
--------- ---------
Total Liabilities 4,480,614 11,240,675
Contributed Capital from Unistar 5,324,356 3,241,275
Accumulated Deficit (7,059,535) (11,706,828)
---------- ----------
Total Deficit (1,735,179) (8,465,553)
---------- ----------
Total Liabilities & Deficit $2,745,435 $2,775,122
========== ==========
The accompanying notes are an integral part of these balance sheets.
<PAGE>
National Indian Lottery
Statements of Operations and Accumulated Deficit
Inception Nine-Month Cumulative From
Jan. 16, 1995) to Period Ended Inception Through
Sept. 30, 1997 June 30, 1998 June 30, 1998
-------------- ------------- ---------
(Unaudited) (Unaudited)
Revenues $ 537,645 $ 7,747,009 $ 8,284,654
Cost of Revenues 455,915 6,913,516 7,369,431
--------- ------------ ------------
Gross Profit 81,730 833,493 915,223
--------- ------------ ------------
Costs and Expenses:
Payroll and payroll-related 218,946 492,227 711,173
Travel and entertainment 271,374 5,646 277,020
Professional fees 2,565,858 968,208 3,534,066
Legal and audit fees 1,113,054 1,276,998 2,390,052
Shared activities 1,396,086 701,081 2,097,167
Advertising & promotions 433,903 1,382,978 1,816,881
CDA Payment 128,001 - 128,001
Depreciation - 42,600 42,600
Other 214,043 386,048 600,091
------------ ------------ -----------
6,341,265 5,255,786 11,597,051
------------ ------------ -----------
Net Loss (6,259,535) (4,422,293) (10,681,828)
============ ============ ===========
Accumulated Deficit,
beginning of period - (7,059,535) -
Guaranteed Distributions
to the CDA (800,000) (225,000) (1,025,000)
----------- ----------- ------------
Accumulated Deficit,
end of period $(7,059,535) $(11,706,828) $(11,706,828)
=========== ============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
National Indian Lottery
Statement of Cash Flows
<TABLE>
<CAPTION>
Inception Nine-Month Cumulative From
(Jan. 16, 1995) to Period Ended Inception To
Sept. 30, 1997 June 30, 1998 June 30, 1998
-------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(6,259,535) $(4,422,293) $(10,681,828)
Depreciation - 42,600 42,600
Changes in working capital items 231,382 1,097,613 1,328,995
------- --------- ---------
Net Cash Used by Operating Activities (6,028,153) (3,282,080) (9,310,233)
Cash Flows from Investing Activities:
Capital expenditures (2,523,036) (31,129) (2,554,165)
---------- ------- ----------
Net Cash Used by Investing Activities (2,523,036) (31,129) (2,554,165)
Cash Flows from Financing Activities:
Contributed capital from Unistar 5,324,356 (2,083,081) 3,241,275
Advances from Unistar 4,037,303 5,650,385 9,687,688
Guaranteed distributions to the CDA (800,000) (225,000) (1,025,000)
-------- -------- ----------
Net Cash Provided by Financing 8,561,659 3,342,304 11,903,963
--------- --------- ----------
Activities
Net Increase in Cash 10,470 29,095 39,565
Cash, Beginning of Period - 10,470 -
-------- ------ ---------
Cash, End of Period $ 10,470 $ 39,565 $ 39,565
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
National Indian Lottery
Notes to Financial Statements
Note 1 - Nature of the Business
Organization
The Coeur d'Alene Tribe of Idaho (the "CDA") is a federally recognized Indian
tribe possessing sovereign powers of self-government over the Coeur d'Alene
Indian Reservation. The CDA established an enterprise known as the National
Indian Lottery (the "NIL") on January 16, 1995. The NIL consists of the
activities related to the development and operation of a telephone lottery and
related Internet games.
Gaming Compact
Regulation of gaming on Indian lands is provided for under the provisions of the
Indian Gaming Regulatory Act of 1988 ("IGRA"). Pursuant to IGRA, an Indian tribe
may conduct gaming on Indian land if that tribe has entered into a compact with
the state where the tribe is located and the Secretary of the Interior has
approved the compact. In December 1992, the CDA entered into a 1992 Class III
Gaming Compact (the "Compact") with the State of Idaho, which set forth the
provisions under which the CDA would conduct specified gaming operations,
including a lottery, on its reservation. The Compact also authorized the CDA to
enter into management agreements for the development and operation of its gaming
activities.
NIL Agreement
The CDA entered into a management agreement (the "NIL Agreement") with UniStar
Entertainment, Inc. ("UniStar Entertainment") to provide design, development,
financial and management services to the NIL. The NIL Agreement was approved in
January 1995 by the National Indian Gaming Commission ("NIGC"). The NIL
encompasses a national telephone lottery and an on-line US Lottery Internet
site. In return for these management services, the NIL will pay UniStar
Entertainment a fee equal to 30% of net profit. Net profit is defined as gross
revenues of the NIL, less amounts paid for prizes and total gaming related
operating expenses. The remaining 70% of the net profits will be paid to the
CDA. Under the NIL Agreement, Unistar is required to provide funding for the
development of the NIL, including the construction of the NIL facility on the
reservation, computer and software costs to build the operating systems and
other development costs. See Note 3 for further detail on Unistar funding.
Although UniStar Entertainment is responsible for the development and day-to-day
management of the NIL, the CDA's Director of Gaming has direct management
oversight authority over budgets relating to the startup and/or operation of the
NIL, all contracts or subcontracts entered into for the purposes of operating
the NIL and other matters specified in the NIL Agreement.
The term of the NIL Agreement is for five years from the date the NIL begins
gaming activities (for contract purposes, gaming activities commenced in January
1998). The NIL Agreement can be extended for an additional two years with the
approval of the NIGC. The CDA shall have the right after the five- or seven-year
term of the NIL Agreement, subject to NIGC requirements and approvals, to
continue to operate the NIL, utilizing UniStar Entertainment proprietary systems
for an indefinite period for an annual royalty payment to be negotiated between
the CDA and UniStar Entertainment of not more than 5% of net profits.
NIL Lottery Games
Unistar contracted with third parties for software development and system
architecture for the NIL's Internet and telephone-based lottery. The
architecture of the NIL Internet-based lottery, particularly the business
system, data base structure and the banking interface, was completed in 1997 for
the CDA's Internet instant games, which began test marketing in July 1997. This
was a critical building block in Unistar's further development of the NIL's
telephone-based lottery that the CDA launched in January 1998.
The NIL product portfolio consists of two product lines - instant lottery games
and draw lottery games. Both the instant and draw lottery games are conducted
under the US Lottery trade name. Instant games are modeled after state lottery
scratch off instant tickets and include such games as Lotto and Bingo. The draw
product line consists of the Super 6 national weekly draw lottery where tickets
are available both by telephone and over the Internet. The Super 6 was launched
on January 20, 1998.
Development Stage Risks
The NIL's activities to date have been primarily related to the development of
the NIL telephone lottery, including the on-line Internet site. The NIL was
considered a development stage enterprise until it commenced its planned
principal operations on January 20, 1998 with the launch of the Super6 draw
lottery, a telephone-based lottery game. The NIL has generated $8.3 million in
gross revenues since inception on January 16, 1995. In addition, as of June 30,
1998, the NIL has incurred cumulative losses since inception of $10.7 million.
The NIL's funding through June 30, 1998 has been provided through advances and
capital contributions from Unistar totaling $14.2 million.
There is no assurance that the legal issues currently pending will be resolved
in favor of the NIL (See Note 4). Such challenges could result in a temporary or
permanent restriction or prohibition of NIL activities in certain states or
nationwide. In addition, there is no assurance that there will be market
acceptance of a telephone or Internet lottery, both of which are new to the
marketplace. Even in the event that these risks are overcome, the NIL is not
expected to generate significant net profit until 1999.
In addition, the NIL is dependent upon the capital, management and operational
skills of Unistar, including the development of the call center and Internet
software systems necessary for the operation of the telephone and Internet
lotteries.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements include the accounts of the NIL, an
enterprise wholly-owned by the CDA and established to develop and operate a
telephone lottery and related Internet games. Accordingly, the accompanying
financial statements do not include any other entities owned or operated by the
CDA.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
Revenue from the NIL's Internet lottery is recognized when a customer
electronically purchases a ticket for one of the US Lottery games at the
reservation operation center located on the Coeur d'Alene Reservation in Idaho.
In the telephone and Internet draw lottery, revenue is recognized when the
drawing is held and is based upon the sales value of tickets purchased.
Operating Capital
Unistar, in accordance with the NIL Agreement, is funding the operations of the
NIL. Funding which is not reimbursable from the future net profits of the NIL is
being reflected in the accompanying financial statements as contributed capital.
Funding which is reimbursable from the future net profits of the NIL is
reflected in the accompanying financial statements as advances from Unistar (See
Notes 3 and 6).
Income Taxes
The CDA is an Indian Tribal Corporation organized under Section 17 of the Indian
Reorganization Act of 1934 and is not subject to either federal or state income
taxes. As a result, the NIL has made no provision for such taxes.
Property and Equipment
Property and equipment at June 30, 1998 and September 30, 1997 consists of the
building which serves as the NIL operations center. Depreciation commenced in
January 1998 when the NIL was deemed operational and will continue on a
straight-line basis over the building's estimated 30-year service life.
Accumulated depreciation as of June 30, 1998 totaled $42,600.
Note 3- Funding Provided by Unistar
In accordance with the NIL Agreement, Unistar is responsible for providing
operating capital to fund the development of the NIL including, but not limited
to, the construction of the building to house the reservation operation center,
computer and related software costs to build both the telecommunications and
on-line Internet systems, lobbying and legal fees, advertising and promotional
expenses and other operational costs. The first $8.5 million of such
expenditures are not reimbursable to Unistar. Certain expenditures that are
included in the $8.5 million requirement are Unistar assets, such as the
computer system and related software development costs, and do not appear as
assets of the NIL. NIL operating expenses funded by Unistar are recorded as
capital contributions to the NIL to the extent they are not reimbursable. Any
sums advanced above the $8.5 million requirement are recorded as advances from
Unistar and will be reimbursed to Unistar from lottery net profits once the NIL
begins generating net profits. Based upon expenditures through June 30, 1998,
Unistar has exceeded the $8.5 million minimum requirement.
A cumulative summary of operating capital funded by Unistar through June 30,
1998 and September 30, 1997 is as follows:
<TABLE>
<CAPTION>
NIL Statements September 30, 1997 June 30, 1998
- -------------- ------------------ -------------
<S> <C> <C>
NIL operating and development expenses $ 6,259,535 $ 10,681,828
Building costs, net of depreciation 2,523,036 2,511,565
Other (220,912) 18,069
8,561,659 13,211,462
Unistar Assets Used by NIL
Computer system development 3,017,094 5,082,833
Miscellaneous PP&E 158,550 175,892
------------ -------------
3,175,644 5,258,725
Total Funding by Unistar 11,737,303 18,470,187
Non-Reimbursable Funding 8,500,000 8,500,000
------------ -------------
Reimbursable to Unistar $ 3,237,303 $ 9,970,187
============ =============
</TABLE>
Cumulative expenditures at June 30, 1998 are approximately $10.0 million in
excess of the $8.5 million minimum. This excess is reimbursable to Unistar and,
accordingly, $10.0 million of the Unistar funding as of June 30, 1998 has been
reflected as an advance from Unistar.
Advances from Unistar to the NIL as of June 30, 1998, include approximately $1.3
million of costs incurred by the NIL, which are not yet funded by Unistar.
Note 4 - Commitments and Contingencies
Unistar, in its attempts to fulfill its responsibilities in accordance with the
NIL Agreement, faces certain risks. In attempting to conduct both the telephone
and Internet lotteries, the NIL, which Unistar is managing, will be directly
competing against lotteries operated by various states. Accordingly, the NIL is
facing anticipated legal attempts to restrict or prohibit these activities.
On September 14, 1998, the CDA, Unistar and representatives of the U.S.
Department of Justice had discussions regarding a declaratory judgment to be
sought jointly from the U.S. District Court for the District of Idaho as to
whether the operation of the NIL is legal under 18 U.S.C. ss.ss.1952 and 1955.
Unistar is informed that the Department of Justice views such operation to be in
violation of such statutes. Executone and Unistar believe, based on advice of it
counsel, Hunton & Williams, that the operation of the NIL is legal. The
Department of Justice has proposed that the parties file a joint stipulation of
facts and cross-motions for summary judgment in the declaratory judgment action.
As in the case of other pending actions, a decision in this proposed proceeding
against the CDA and Unistar could have a material adverse effect on Unistar's
current business, financial position and results of operations. Unistar has not
yet determined whether any such joint stipulation and action for declaratory
judgment is in its best interests. If Unistar and the Department of Justice do
not agree as to such a jointly pursued action, the Department of Justice may
determine to commence civil or criminal proceedings against Unistar.
In an attempt to block the NIL, certain states issued letters under 18 U.S.C.
Section 1084 ("Section 1084") to prevent the long-distance carriers from
providing telephone service to the NIL. In 1995, the CDA initiated legal action
against AT&T Corporation (AT&T) to compel the long-distance carriers to provide
telephone service to the NIL. The CDA's position is that the NIL is authorized
by the Indian Gaming Regulatory Act ("IGRA") passed by Congress in 1988, that
IGRA preempts state law, and that Section 1084 is inapplicable and, therefore,
the states lack authority to issue the Section 1084 notification letters to any
long-distance carrier. On February 28, 1996, and in a related ruling on May 1,
1996, the Tribal Court ruled that the CDA had satisfied all requirements of IGRA
and that the Section 1084 letters issued by certain state attorneys general in
an effort to interfere with the lawful operation of the NIL are invalid. In
addition, the Tribal Court ruled that AT&T cannot refuse to provide telephone
service based upon Section 1084. On July 2, 1997, the Tribal Appellate Court
affirmed the lower Tribal Court's rulings and analysis, upholding the CDA's
right to conduct the telephone lottery. On August 22, 1997, AT&T filed a
complaint for declaratory judgment in the U.S. District Court in Idaho against
the CDA, seeking a federal court ruling as to the enforceability of the Tribal
Court's May 1, 1996 order affirming the CDA's right to conduct the telephone
lottery. The CDA has answered that complaint and filed a motion for partial
summary judgment. AT&T has filed a cross-motion for summary judgment. Nineteen
state attorneys general have been granted leave to file a brief as amicus curiae
in respect to the interpretation of IGRA. These matters are still pending.
On May 28, 1997, the State of Missouri brought an action in the Missouri Circuit
Court in Kansas City against UniStar Entertainment and the CDA to enjoin the
NIL's US Lottery Internet instant games offered by the CDA and managed by
UniStar Entertainment. The complaint sought civil penalties, attorneys' fees and
court costs. The complaint alleged that the US Lottery violates Missouri
anti-gaming laws and that the marketing and promotion of the US Lottery violate
the Missouri Merchandising Practices Act. The CDA and UniStar Entertainment
removed the case to the U.S. District Court for the Western District of
Missouri, which denied the State's subsequent motion to remand the case back to
the state court. The Court subsequently granted a motion to dismiss CDA from the
case based on sovereign immunity. The Court preliminarily denied the motion to
dismiss UniStar Entertainment based on sovereign immunity, although the Court
indicated it might reconsider that decision. Unistar filed a motion for
reconsideration of its motion for dismissal. The State of Missouri has appealed
the dismissal of the CDA to the Eighth Circuit Court of Appeals.
On January 28, 1998, the State of Missouri sought to dismiss voluntarily the
existing case against Unistar and filed the next day, a new action against the
Executone, UniStar Entertainment and two tribal officials, with essentially the
same allegations, in state court in a different district. The State obtained a
temporary restraining order from a state judge enjoining the marketing of the
Internet and telephone lottery in the State of Missouri. On February 5, 1998,
the U. S. District Court for the Eastern District of Missouri ruled that this
second case also should be heard in federal court, transferred the second case
to the Western District of Missouri where the original case had been filed, and
dissolved the state court's temporary restraining order, effective February 9,
1998. A motion to dismiss the second case based on the sovereign immunity of all
the defendants and a motion to abstain in favor of the jurisdiction of the
Tribal Court are pending. The State of Missouri has appealed to the Eighth
Circuit the denial of its motion to remand the case to State Court or, in the
alternative, to seek a preliminary injunction. Both Eighth Circuit appeals will
be argued on September 21, 1998. On July 31, 1998, the District Court for the
Western District of Missouri stayed proceedings in the case before it pending
resolution of the pending appeals in the Eighth Circuit and pending Federal
legislation.
On September 15, 1997, the State of Wisconsin, by its Attorney General, filed an
action in the Wisconsin State Circuit Court for Dane County against Executone,
UniStar Entertainment and the CDA, to permanently enjoin the US Lottery offered
by the CDA on the Internet and managed by UniStar Entertainment. The complaint
alleges that the offering of the US Lottery violates Wisconsin anti-gambling
laws and that legality of the US Lottery has been misrepresented to Wisconsin
residents in violation of state law. In addition to an injunction, the suit
seeks restitution, civil penalties, attorneys' fees and court costs. Executone,
UniStar Entertainment and the CDA have removed the case to the U.S. District
Court in Wisconsin. On February 18, 1998, the District Court dismissed the CDA
from the case based on sovereign immunity and dismissed Executone based on the
State's failure to state a claim against Executone. Motions to dismiss the case
against UniStar Entertainment on the basis of sovereign immunity were denied.
UniStar Entertainment has appealed the denial of its motion to dismiss to the
Seventh Circuit Court of Appeals.
Executone and Unistar have been advised by their outside counsel, Hunton &
Williams, that based upon such firm's review of the applicable statutes,
regulations and case law, the operation of the NIL is legal and the CDA and
UniStar Entertainment will likely prevail in the pending litigation. However,
such opinion of counsel is not binding upon any court, government agency or
other tribunal and is based upon limited precedental case law and existing
statutes and regulations. In July, 1998, the Senate passed an appropriations
bill to fund the departments of Commerce, Justice and State for fiscal 1999,
which included as an amendment a ban on Internet gaming offered by Senators John
Kyl from Arizona and Richard Bryan from Nevada. The measure would have
criminalized certain Internet gaming activities, but would have allowed states
to create their own "closed loop" intrastate computer gambling networks. A
similar bill was proposed in the House of Representatives. Both bills are in
direct conflict with IGRA, and arguably could make the NIL unlawful. Congress
adjourned without enacting any version of this Internet gaming ban into law.
Unistar is supporting efforts to include exceptions in any Internet gaming bill
for gaming conducted by an Indian tribe that is authorized by IGRA. If
legislation is signed into law that prohibits Internet gaming without such an
exception, it could have a material adverse effect on Unistar's business as it
relates to the NIL However, Unistar believes that if the final legislation
includes exceptions for states to create their own computer gambling networks,
it will create opportunities for Unistar to service this potential market with
its electronic lottery terminals system.
UniStar Entertainment and the CDA believe that the NIL is legal and intend to
defend the right of the CDA to offer the NIL on the Internet and via the
telephone. Based on the outcome of the pending legal actions that UniStar
Entertainment anticipates will occur, UniStar Entertainment does not believe the
outcome of this litigation will have a material adverse effect on UniStar
Entertainment's consolidated financial position, results of operations or
liquidity. However, if the ultimate outcome of the litigation, particularly the
Idaho case, were unfavorable to Unistar, or adverse legislation is enacted, such
outcomes could have a material adverse effect on Unistar's current business,
financial position and results of operations. In addition, the pending
litigation, as well as other litigation that could be brought by states or
others opposed to the NIL, could delay or suspend certain NIL operations. It is
impossible at this time to predict the nature or extent of any delays or
suspension of operations that might occur.
There are also market risks associated with the development of the NIL. Unistar
believes there is a national market for the NIL based upon research into the
experience of other national lotteries and the growth of the overall lottery
market. However, there is no assurance that there will be acceptance of a
telephone or Internet lottery. In the event that the telephone and Internet
lotteries do not attain the level of market acceptance anticipated by Unistar or
if the outcome of the pending lawsuits or legislative proposals in Congress is
adverse, there could be a material adverse effect on NIL operations and,
accordingly, on Unistar.
Note 5 - Related Party Transactions
Shared activity expenses are expenses incurred by Unistar on behalf of the NIL
and consist of payroll and related costs, professional fees and other
miscellaneous costs. Such amounts are included on the NIL statement of
operations and totaled $701,081 for the nine-month period ended June 30, 1998
and $1.4 million from inception through September 30, 1997. In 1995, the NIL
paid $128,001 to the CDA.
Note 6 - Guaranteed Distributions to CDA
Unistar is required to fund a minimum of $25,000 each month to the CDA as a
guaranteed net profit distribution, regardless of whether the NIL has commenced
operations or whether its net profits are adequate to fund such commitment. This
guaranteed payment will be deducted from the CDA's share of future NIL net
profit distributions and will be reimbursed to Unistar. Accordingly, the
guaranteed payments to the CDA are reflected as a distribution from the NIL in
the accompanying financial statements. Since inception, these advances from
Unistar on behalf of the NIL total $800,000 and $1,025,000 as of September 30,
1997 and June 30, 1998, respectively.
<PAGE>
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Proxy Statement/Prospectus in connection with the offer made by this Proxy
Statement/Prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or the
Underwriters. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
Page
PROXY STATEMENT/PROSPECTUS SUMMARY...........................................1
RISK FACTORS.................................................................9
EXECUTONE SPECIAL MEETING...................................................16
THE OFFERING................................................................17
FEDERAL INCOME TAX CONSEQUENCES.............................................21
USE OF PROCEEDS.............................................................22
THE COMPANY.................................................................23
DISTRIBUTION POLICY.........................................................23
CAPITALIZATION..............................................................24
UNISTAR OPERATIONS UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...25
UNISTAR OPERATIONS SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION...28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..............................................................30
ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO THE OFFERING.........36
BUSINESS AND PROPERTIES OF UNISTAR..........................................38
MANAGEMENT OF UNISTAR.......................................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................49
EXECUTIVE COMPENSATION......................................................50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF UNISTAR COMMON STOCK
AND UNISTAR PREFERRED STOCK................................................55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF EXECUTONE COMMON STOCK
AND EXECUTONE PREFERRED STOCK..............................................57
DESCRIPTION OF UNISTAR CAPITAL STOCK........................................60
DESCRIPTION OF THE RIGHTS...................................................63
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR
CERTIFICATE, THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN AND THE
GENERAL CORPORATION LAW OF DELAWARE........................................63
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................67
PLAN OF DISTRIBUTION........................................................67
LEGAL MATTERS...............................................................67
EXPERTS.....................................................................67
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................67
SHAREHOLDER PROPOSALS.......................................................68
INDEX TO FINANCIAL STATEMENTS..............................................F-1
Until __________ __, 199_ (25 days after the date of this Proxy
Statement/Prospectus), all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotment or subscriptions.
9,992,838 Shares
UNISTAR GAMING CORP.
Common Stock
-------------
PROSPECTUS
-------------
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the approximate amount of the fees and
expenses payable by the Registrant in connection with the issuance and
distribution of the Rights and the Unistar Common Stock.
Securities and Exchange Commission, registration fee.............. $ 737
NASD filing fee................................................... ______
[Nasdaq National Market] listing fee............................. ______
Printing and mailing.............................................. ______
Accountant's fees and expenses.................................... ______
Counsel fees and expenses......................................... ______
Miscellaneous..................................................... ______
Total......................................................... $
=======
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
The Amended and Restated Certificate of Incorporation of the Registrant
(the "Certificate") provides that each person who was or is made a party or is
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was or has agreed to become a director
or officer of the Registrant or is or was serving or has agreed to serve at the
request of the Registrant as a director, officer, trustee, fiduciary, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, or by reason of any action alleged to have
been taken or omitted in any such capacity, shall be indemnified and held
harmless by the Registrant to the fullest extent authorized by the DGCL against
all costs, expenses (including, but not limited to, attorneys' fees), judgments,
fines, penalties, damages, losses, liabilities and amounts paid in settlement
that are actually and reasonably incurred in defending any such proceeding in
advance of its final disposition, such advances to be paid by the Registrant
within 30 days after the receipt by the Registrant of a written statement or
statements from the claimant requesting such advance or advances from time to
time; provided, however, that it shall be a condition precedent to the advance
payment of such expenses that there shall have been delivered to the Registrant
a written undertaking by or on behalf of such director or officer to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified hereunder or otherwise. No bond or
other security shall be required. The Registrant shall not be obligated to
reimburse the costs of any settlement to which it has not agreed.
No amendment, termination or repeal of such provision or any of the
relevant provisions of the DGCL or any other applicable laws shall in any way
diminish the rights of any director or officer of the Registrant to
indemnification or to the advancement of costs and expenses under such provision
with respect to any proceeding arising out of or relating to any actions,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
If such provision or any portion thereof shall be invalidated on any
ground by any court of competent jurisdiction, the Registrant shall nevertheless
indemnify, and advance costs and expenses to, each director or officer of the
Registrant as to any costs, expenses (including, but not limited to, attorneys'
fees), judgments, fines, penalties, damages, losses, liabilities and amounts
paid in settlement with respect to any proceeding, to the full extent permitted
by any applicable portion of such provision that shall not have been invalidated
and to the fullest extent permitted by law.
If the DGCL is amended after the filing of the Certificate with the
Delaware Secretary of State to further expand the indemnification permitted to
directors and officers of the Registrant, then the Registrant shall indemnify
such persons to the fullest extent permitted by the DGCL, as so amended.
The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
The Certificate also provides that no director of the Registrant shall be
personally liable to the Registrant or its stockholders for any monetary damages
for breaches of fiduciary duty as a director provided that this provision shall
not eliminate or limit the liability of a directors: (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders; (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (ii) under Section 174 of the DGCL; or (iv) or any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended after the initial filing of the Certificate to further eliminate
or limit the personal liability of directors, then the liability of a Director
of the Registrant shall be eliminated or limited to the fullest extent permitted
by the DGCL, as so amended. No amendment, termination or repeal of such
provision shall in any way diminish any right or protection of a director of the
Registrant that existed at the time of the final adoption of such amendment,
termination or repeal.
The Reorganization Agreement provides for indemnification by Executone of
the Registrant, its Directors and officers, and by the Registrant of Executone,
its Directors and officers for certain liabilities, including certain
liabilities arising in connection with the Offering.
Item 15. Recent Sales of Unregistered Securities
On December 19, 1995, Executone acquired 100% of the Unistar Common Stock
with a combined value of for Executone Common Stock and Executone Preferred
Stock with a combined value of $12.7 million. Registrant issued these shares of
Unistar Common Stock in reliance on an exemption from registration under Section
4(2) of the Securities Act.
On August 12, 1998, Registrant entered into a Share Exchange Agreement
pursuant to which Registrant will issue at the Closing Date Unistar Common Stock
and Unistar Preferred Stock with a combined value ranging between approximately
$5.1 million and $6.8 million, based on the estimate of the Executone Board, to
holders of Executone Preferred Stock as described in the Prospectus. Registrant
will issue these shares of Unistar Common Stock and Unistar Preferred Stock in
reliance on an exemption from registration under Section 4(2) of the Securities
Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Financial Statements. All other schedules are omitted because the
required information is not applicable or the information required has been
disclosed in the financial statements and related notes included in the
Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1 Form of Common Stock Certificate
4.2 Form of Rights Certificate
4.3 Form of Stockholder Rights Agreement between Registrant and _________________.
5.1 Opinion of Hunton & Williams
8.1 Tax Opinion of Hunton & Williams
10.1* Share Exchange Agreement, dated August 12, 1998, between Executone, Registrant and
Watertone Holdings L.P., Cooper Life Sciences, Inc., John C. Shaw, Richard
Bartlett, Jerry M. Seslowe, 10-26 S. William Street Associates, Louis K. Adler and
Resource Holdings Ltd.
10.2* Form of Reorganization Agreement between Registrant and Executone
10.3* Form of Master Services Agreement between Registrant and Executone
10.4* Form of Tax Sharing Agreement between Registrant and Executone
10.5* Form of Standby Agreement between Registrant and Unistar Buyer Group, LLC
10.6* Unistar Corporation Stock Option Plan
10.7* Employment Agreement, dated August 31, 1998, between Registrant and Michael W.
Yacenda
10.8* Employment Agreement, dated August 31, 1998, between Registrant and Robert W.
Hopwood
10.9* Employment Agreement, dated August 31, 1998, between Registrant and Charles A.
Degliomini
10.10* Transition and Retention Plan of Michael W. Yacenda
10.11* Transition and Retention Plan of Robert W. Hopwood
10.12* NIL Agreement, dated January 16, 1995, between UniStar Entertainment and the
National Indian Lottery
10.13 Consulting Agreement, dated ________, between Registrant and Alan Kessman
10.14 Financial Advisory Agreement, dated _______, between Registrant and Resource
Holdings Ltd.
10.15** Securities Purchase Agreement, dated September 5, 1996, between UniStar
Entertainment, Inc. and Virtual Gaming Technologies, Inc. (formerly Internet
Gaming Technologies, Inc.).
10.16** Common Stock Purchase Warrant for the purchase of up to 200,000 shares of common
stock, $.00001 par value, of Virtual Gaming Technologies, Inc.
10.17** Agreement, dated February 11, 19997, between UniStar Entertainment, Inc. and
CasinoWorld Holdings, Ltd.
21.1** Subsidiaries of Unistar
23.1** Consent of Hunton & Williams
23.2** Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
27.1** Financial Data Schedule for the Six-Month Period Ended June 30, 1998
27.2* Financial Data Schedule for the Year Ended December 31, 1997
99.1* Consent of Robert A. Berman to be named as a Director nominee
99.2* Consent of Stanley M. Blau to be named as a Director nominee
99.3* Consent of Alan Kessman to be named as a Director nominee
99.4* Consent of Jerry M. Seslowe to be named as a Director nominee
99.5* Consent of Michael W. Yacenda to be named as a Director nominee
</TABLE>
- ------------------------
* Previously Filed
**Filed herewith
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act, and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by Unistar Buying Group, LLC during the
subscription period, the amount of unsubscribed securities to be purchased by
Unistar Buying Group, LLC, and the terms of any subsequent reoffering thereof.
If any public offering by Unistar Buying Group, LLC is to be made, a
post-effective amendment will be filed to set forth the terms of such offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Milford, State of
Connecticut, on the 13th day of November, 1998.
UNISTAR GAMING CORP.
a Delaware corporation
(Registrant)
By: /s/ Michael W. Yacenda
_________________________________
Michael W. Yacenda
President, Treasurer, Principal Executive
Officer, Principal Financial Officer and
Principal Accounting Officer
Each person whose signature appears below hereby constitutes and appoints
Michael W. Yacenda his true and lawful attorney-in-fact with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to cause the same to be filed,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
whatsoever requisite or desirable to be done in and about the premises, as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all acts and things that said attorney-in-fact
and agent, or his substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 13th day
of November, 1998 in the capacities indicated.
Signature Title
- --------- -----
/s/ Alan Kessman Director and Vice Chairman
- ------------------------
Alan Kessman
By Michael W. Yacenda,
Attorney-in-Fact
/s/ Michael W. Yacenda Director, President, Treasurer
- ------------------------- Principal Executive Officer,
Michael W. Yacenda Principal Financial Officer
and Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Document Numbered Page
------- -------- -------------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1 Form of Common Stock Certificate
4.2 Form of Rights Certificate
4.3 Form of Stockholder Rights Agreement between Registrant and ________________.
5.1 Opinion of Hunton & Williams
8.1 Tax Opinion of Hunton & Williams
10.1* Share Exchange Agreement, dated August 12, 1998, between
Executone, Registrant and Watertone Holdings L.P., Cooper Life
Sciences, Inc., John C. Shaw, Richard Bartlett, Jerry M.
Seslowe, 10-26 S. William Street Associates, Louis K. Adler
and Resource Holdings Ltd.
10.2* Form of Reorganization Agreement between Registrant and Executone
10.3* Form of Master Services Agreement between Registrant and Executone
10.4* Form of Tax Sharing Agreement between Registrant and Executone
10.5* Form of Standby Agreement between Registrant and Unistar Buyer Group, LLC
10.6* Unistar Corporation Stock Option Plan
10.7* Employment Agreement, dated August 31, 1998, between Registrant and
Michael W. Yacenda
10.8* Employment Agreement, dated August 31, 1998, between Registrant and
Robert W. Hopwood
10.9* Employment Agreement, dated August 31, 1998, between Registrant and
Charles A. Degliomini
10.10* Transition and Retention Plan of Michael W. Yacenda
10.11* Transition and Retention Plan of Robert W. Hopwood
10.12* NIL Agreement, dated January 16, 1995, between UniStar Entertainment
and the National Indian Lottery
10.13 Consulting Agreement, dated ________, between Registrant and Alan Kessman
10.14 Financial Advisory Agreement, dated _______, between Registrant and
Resource Holdings Ltd.
10.15** Securities Purchase Agreement, dated September 5, 1996, between UniStar
Entertainment, Inc. and Virtual Gaming Technologies, Inc. (formerly
Internet Gaming Technologies, Inc.).
10.16** Common Stock Purchase Warrant for the purchase of up to
200,000 shares of common stock, $.00001 par value, of Virtual
Gaming Technologies, Inc.
10.17** Agreement, dated February 11, 19997, between UniStar Entertainment, Inc.
and CasinoWorld Holdings, Ltd.
21.1** Subsidiaries of Unistar
23.1** Consent of Hunton & Williams
23.2** Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
27.1** Financial Data Schedule for the Six-Month Period Ended June 30, 1998
27.2* Financial Data Schedule for the Year Ended December 31, 1997
99.1* Consent of Robert A. Berman to be named as a Director nominee
99.2* Consent of Stanley M. Blau to be named as a Director nominee
99.3* Consent of Alan Kessman to be named as a Director nominee
99.4* Consent of Jerry M. Seslowe to be named as a Director nominee
99.5* Consent of Michael W. Yacenda to be named as a Director nominee
</TABLE>
- -----------
* Previously Filed
**Filed herewith
Exhibit 10.15
INTERNET GAMING TECHNOLOGIES, INC.
SECURITIES PURCHASE AGREEMENT
----------------------
September 5, 1996
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Purchase and Sale of Securities...................................1
Section 2. Closing...........................................................2
Section 3. Conditions to Close...............................................2
Section 4. Representation and Warranties of the Company......................4
Section 5. Representations, Warranties and Covenants of the Purchaser.......10
Section 6. Registration Rights..............................................12
Section 7. Miscellaneous....................................................21
<PAGE>
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement ("Agreement") is entered into
this 5th day of September 1996 between INTERNET GAMING TECHNOLOGIES, INC., a
Delaware corporation (the "Company"), and UNISTAR ENTERTAINMENT, INC., a
Colorado corporation ("Purchaser").
R E C I T A L S
A. The Company desires to obtain funds from the Purchaser in order
to further the operations of the Company.
B. In order to obtain such funds, the Company desires to sell and
issue to the Purchaser up to 600,000 shares (the "Shares") of the Company's
$.00001 per value common stock ("Common Stock") at a price of $5.00 per Share.
C. Purchaser desires to purchase the Shares subject to the Company's
ability to provide or arrange for the development and delivery of a turn-key
Internet gaming system ("System"), on the terms and subject to the conditions
set forth herein.
D. Concurrent with the execution of this Agreement, Purchaser and
CasinoWorld Holdings, Ltd., a Delaware corporation ("CWH"), have entered into
that certain Nonexclusive License Agreement ("License Agreement") providing for
the development and delivery of the System.
E. In addition to the foregoing transactions, the Company is
currently conducting a private placement ("Private Placement") of 1,000,000
shares of its Common Stock, at $5.00 per share, pursuant to a Private Placement
Memorandum dated July 24, 1996 ("Memorandum").
A G R E E M E N T
It is agreed as follows:
1. Purchase and Sale of Securities.
1.1 Purchase and Sale of Securities. Subject to the terms and
conditions herein stated, the Company agrees to sell and issue to Purchaser, and
Purchaser agrees to purchase from the Company, up to 600,000 Shares at a
purchase price of $5.00 per Share. Concurrent with the execution of this
Agreement, the Company shall sell and deliver to Purchaser a certificate for
140,000 Shares, and Purchaser shall purchase said Shares and deliver to the
Company by cashier's check or wire transfer $700,000. Purchaser shall purchase,
and the Company shall sell and issue to Purchaser, the balance of the Shares
subject to the following incremental development of the System:
1.1.1 Milestone Phase I - Purchaser shall purchase 20,000
Shares, and deliver to the Company $100,000, upon the installation of the
hardware and software necessary to launch the National Indian Lottery ("NIL")
homepage ("Homepage") for the website and virtual CasinoWorld(TM) site pursuant
to Section 2.2.2 of the License Agreement.
<PAGE>
1.1.2 Milestone Phase II - Purchaser shall purchase 30,000
Shares, and deliver to the Company $150,000, upon the installation of all gaming
software necessary to launch the NIL Homepage pursuant to Section 2.2.3 of the
License Agreement.
1.1.3 Milestone Phase III - Purchaser shall purchase 50,000
Shares, and deliver to the Company $250,000, upon the installation of all
business systems necessary to launch the NIL Homepage pursuant to Section 2.2.4
of the License Agreement.
1.1.4 Milestone Phase IV - Purchaser shall purchase 50,000
Shares, and deliver to the Company $250,000, upon the installation of all
hardware and software necessary to launch the commercial/public release version
of the NIL Homepage pursuant to Section 2.2.5 of the License Agreement.
1.1.5 Milestone Phase V - Purchaser shall purchase 70,000
Shares, and deliver to the Company $350,000, upon the installation of all
carrier equipment and related hardware necessary to launch the NIL telephone
system pursuant to Section 2.2.6 of the License Agreement.
1.1.6 Milestone Phase VI - Purchaser shall purchase 90,000
Shares, and deliver to the Company $450,000, upon the completion of all IVR
software necessary to launch the NIL IVR system pursuant to Section 2.2.7 of the
License Agreement.
1.1.7 Milestone Phase VII - Purchaser shall purchase 150,000
Shares, and deliver to the Company $750,000, upon the installation of all IVR
hardware necessary to launch the NIL IVR system pursuant to Section 2.2.8 of the
License Agreement.
2. Closing. The initial close of the transactions contemplated by this
Agreement ("Close") shall take place at 10:00 a.m., Pacific Daylight Time
("PDT"), at the offices of the Company, 8989 Rio San Diego Drive, Suite 320, San
Diego, California 92108 on September 6, 1996, or at such other time or place as
the parties hereto shall by written instrument designate. At the initial Close,
the Company shall deliver to Purchaser certificates representing 140,000 Shares
to be purchased by the Purchaser under this Agreement in definitive form and
registered in the name of Purchaser, against delivery to the Company by the
Purchaser of a check or wire transfer in the amount of $700,000. Additional
Closes, upon substantially identical terms and conditions to those contained
herein, shall be held in accordance with the increments and timetable set forth
in Section 1 until all 600,000 Shares have been sold. Unless otherwise stated,
the initial Close and any additional Closes shall be referred to herein as the
"Close."
3. Conditions to Close.
3.1 Purchaser Conditions to Close. The obligations of each of the
Purchaser to purchase the Shares hereunder shall be subject to the satisfaction
of the following conditions precedent at or before each Close.
<PAGE>
(a) Performance of Covenants. The Company shall have performed
all of its covenants and obligations under this Agreement to be performed by the
Company on or prior to the Close.
(b) Representations and Warranties Correct. The representations
and warranties of the Company contained in this Agreement shall be true and
correct in all material respects when made and shall be true and correct in all
material respects at and as of the Close with the same force and effect as if
they had been made on and as of said date.
(c) Approvals and Consents. The Company shall have received all
necessary approvals required by any state or province for the offer and sale of
the Shares pursuant to this Agreement and all necessary approvals and consents
shall have been obtained from any and all government departments and agencies
and from all other commissions, boards, agencies and from any other person or
persons whose approval or consent is necessary to consummate the transactions
contemplated under this Agreement.
(d) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to the Purchaser and the
Purchaser's counsel, and the Purchaser or the Purchaser's counsel shall have
received all such counterpart originals or certified or other copies of such
documents as the Purchaser or they may reasonably request.
(e) Opinion of Company Counsel. Purchaser shall have received
from Bruck & Perry, counsel for the Company, an opinion, dated as of the date of
the initial Close, in the form attached hereto as Exhibit A.
(f) Shareholders Agreement. The Company, Purchaser and Daniel
Najor shall have executed a shareholder's agreement substantially in the form
attached hereto as Exhibit B relating to the election of a member of the Board
of Directors.
(g) License Agreement. Purchaser and CWH shall have executed the
License Agreement as of the date hereof.
3.2 Company Conditions to Close. The obligations of the Company to
sell the Shares hereunder shall be subject to the satisfaction of the following
conditions precedent at or before the Close.
(a) Performance of Covenants. The Purchaser shall have performed
all of its covenants and obligations under this Agreement to be performed by the
Purchaser on or prior to the Close.
(b) Representations and Warranties Correct. The representations
and warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects when made and shall be true and correct in all
material respects at and as of the Close with the same force and effect as if
they had been made on and as of said date.
<PAGE>
(c) Approvals and Consents. The Company shall have received all
necessary approvals required by any state or province for the offer and sale of
the Shares pursuant to this Agreement and all necessary approvals and consents
shall have been obtained from any and all government departments and agencies
and from all other commissions, boards, agencies and from any other person or
persons whose approval or consent is necessary to consummate the transactions
contemplated under this Agreement.
3.3 Access to Information. The Company has given and shall continue
to give to the Purchaser and its counsel, accountants and other advisors,
agents, consultants and representatives (collectively, "Representatives"), full
access, during normal business hours throughout the period prior to Close, to
all of the properties, books, contracts, commitments and records of the Company,
and has furnished and will continue to furnish during such period all such
information concerning it (including its operations, financial condition and
business plan) as the Purchaser may reasonably request. Provided, that any
furnishing of such access or information to the Purchaser or its Representatives
or any investigation by the Purchaser or its Representatives shall not affect
the right of the Purchaser to rely on the representations and warranties of the
Company made in this Agreement. The Purchaser agrees to hold in strict
confidence all documents and information concerning the Company so furnished
which is of a trade secret or confidential nature ("Confidential Information")
unless the same shall have become public knowledge other than through disclosure
by the Purchaser or its Representatives and, if the transactions contemplated by
this Agreement are not consummated, such confidence shall be maintained and all
such Confidential Information (in written form) shall be immediately returned by
the Purchaser to the Company. The Company agrees to clearly identify such
Confidential Information.
4. Representation and Warranties of the Company.
As a material inducement to the Purchaser to enter into this
Agreement and to purchase the Shares, the Company represents and warrants that
the following statements are true and correct in all material respects as of the
date hereof and will be true and correct in all material respects at Close,
except as expressly qualified or modified herein.
4.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full corporate power and authority to enter into and perform
its obligations under this Agreement, and to own its properties and to carry on
its business as presently conducted and as proposed to be conducted. The Company
is duly qualified to do business as a foreign corporation in every jurisdiction
in which the failure to so qualify would have a material adverse effect upon the
Company.
4.2 Capitalization. The authorized capital stock of the Company
consists of 15,000,000 shares of Common Stock of which 5,675,000 shares of
Common Stock are issued and outstanding as of the date of this Agreement (and
prior to the issuance of the 1,000,000 shares ("Private Placement Shares") of
Common Stock pursuant to the Private Placement). All outstanding shares of
Common Stock have been duly authorized and validly issued, and are fully paid,
nonassessable, and free of any preemptive rights. Except for subscriptions or
sales of the Private Placement Shares and up to 15,000 shares of Common Stock
issuable pursuant to that certain Consulting Services Agreement dated July 1996
between the Company and Jason Wirtzer, at Close there will not be outstanding,
nor will the Company be subject to any agreement under which there may become
outstanding, any right to purchase, or security convertible into or exchangeable
for, any capital stock of the Company, including, but not limited to, options,
warrants, or rights. Except as set forth herein, the Company is under no
obligation (contingent or otherwise) to purchase or otherwise acquire or retire
any of its securities.
<PAGE>
4.3 Subsidiaries. The Company does not own, directly or indirectly,
any equity or debt securities of any corporation, partnership, or other entity,
other than its equity interest in Internet Gaming Technologies, Inc., a Nevada
corporation, and Emerald Riviera Ltd., an Irish corporation (the
"Subsidiaries"), both of which are wholly-owned subsidiaries of the Company.
4.4 Validity of Transactions. This Agreement, and each document
executed and delivered by the Company in connection with the transactions
contemplated by this Agreement, have been duly authorized, executed and
delivered by the Company and is each the valid and legally binding obligation of
the Company, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency reorganization and moratorium laws and other
laws affecting enforcement of creditor's rights generally and by general
principles of equity. The Shares issuable hereunder, when issued and paid for by
Purchaser in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
4.5 No Violation. The execution, delivery and performance of this
Agreement has been duly authorized by the Company's Board of Directors and, to
the extent necessary, the shareholders of the Company, will not violate any law
or any order of any court or government agency applicable to the Company, or the
Certificate of Incorporation or Bylaws of the Company, as amended, and will not
result in any breach of or default under, or, except as expressly provided
herein, result in the creation of any encumbrance upon any of the assets of the
Company pursuant to the terms of any agreement or instrument by which the
Company or any of its assets may be bound. No approval of or filing with any
governmental authority is required for the Company to enter into, execute or
perform this Agreement.
4.6 Litigation. Except as set forth on the Company Disclosure
Schedule attached hereto as Exhibit C ("Company Disclosure Schedule"), there are
no suits or proceedings (including without limitation, proceedings by or before
any arbitrator, government commission, board, bureau or other administrative
agency) pending or, to the knowledge of the Company, threatened against or
affecting the Company which, if adversely determined, would have a material
adverse effect on the consolidated financial condition, results of operations,
prospects or business of the Company, and the Company is subject to or in
default with respect to any order, writ, injunction or decree of any federal,
state, local or other governmental department.
4.7 Use of Proceeds. The Company represents and warrants that up to
$1,000,000 of the proceeds from the sale of the shares will be applied towards
the payment of equipment pursuant to the terms of that certain Hardware, Mutual
Use and Emergency Backup Agreement of even date herewith by and among Purchaser,
CWH and the Company. The Company intends to use, and will use its best efforts
to see that it does use, the balance of the proceeds from the sale of the Shares
solely for the purpose of furthering the operations of the Company.
<PAGE>
4.8 Taxes. Federal income tax returns and state and local income tax
returns for the Company have been filed as required by law; all taxes as shown
on such returns or on any assessment received subsequent to the filing of such
returns have been paid, and there are no pending assessments or adjustments or
any income tax payable for which reserves, which are reasonably believed by the
Company to be adequate for the payment of any additional taxes that may come
due, have not been established. All other taxes imposed on the Company have been
paid and any reports or returns due in connection herewith have been filed.
4.9 No Defaults. Except as set forth on the Company Disclosure
Schedule, no material default (or event which, with the passage of time or the
giving of notice, or both, would become a material default) exists or is alleged
to exist with respect to the performance of any obligation of the Company under
the terms of any indenture, license, mortgage, deed of trust, lease, note,
guaranty, joint venture agreement, operating agreement, partnership agreement,
or other contract or instrument to which the Company is a party or any of their
assets are subject, or by which they are otherwise bound, and, to the best
knowledge of the Company, no such default or event exists or is alleged to exist
with respect to the performance of any obligation of any party thereto.
4.10 Securities Law Compliance. Assuming the accuracy of the
representations and warranties of Purchaser set forth in Section 5 of this
Agreement, the offer, issue, sale and delivery of the Shares under the
circumstances contemplated by this Agreement constitutes or will constitute an
exempt transaction under the Securities Act of 1933 (the "1933 Act"), as now in
effect, and registration of the Shares under the Securities Act, is not
required, and no notice, filing, registration, or qualification under any U.S.
state securities or "Blue Sky" law is required in connection therewith except
for such filings as may be necessary to comply with the Blue Sky laws of any
state, which filings will be made in a timely manner.
4.11 Corporate Documents. The Company has furnished to Purchaser, or
will furnish upon request, true and complete copies of the Certificate of
Incorporation and Bylaws of the Company certified by its secretary and copies of
the resolutions adopted by the Company's Board of Directors authorizing and
approving this Agreement and the transactions contemplated hereby.
4.12 Compliance with Laws. The Company has complied in all material
respects with all laws, regulations and orders affecting its business and
operations and is not in default under or in violation of any provision of any
federal, state or local rule, regulation or law.
4.13 Anti-Dilution Adjustment. In the event that the Company shall at
any time or from time to time during the twelve (12) month period immediately
following the date of this Agreement issue, sell or otherwise dispose of shares
of Common Stock without consideration, or for a consideration per share less
than $5.00 (in each case, a "Disposition"), then simultaneously with such
Disposition the Company shall issue to the Purchaser, for no additional
consideration, an additional number of shares of Common Stock equal to the
amount obtained by subtracting (x) from (y), where (y) equals the number of
shares of Common Stock issued to the Purchaser under this Agreement (including
this Section 4.14) prior to the Disposition and (x) equals the total amount of
cash consideration paid by the Purchaser to the Company divided by the cash
consideration per share received by the Company in the Disposition.
<PAGE>
4.14 Co-Signature Arrangement. Until such time as the Company has
received equity or debt capital in an amount of not less than $2,000,000, in
addition to the payments received from Purchaser hereunder, the Company shall
not disburse any portion of the $700,000 in cash proceeds delivered by the
Purchaser at the initial Close without the Purchaser's prior written consent
which shall not be unreasonably withheld. At the Purchaser's request, the
Company shall deposit the $700,000 in a special operating account that requires
two signatures, one from the Company and one of the Purchaser, for any
withdrawals, transfers or check drafts.
4.15 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement.
4.16 Patents and Trademarks. The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted as described in the
Memorandum without any conflict with or infringement of the rights of others.
Except as disclosed in the Memorandum, there are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. Except as set forth on the Company Disclosure Schedule,
the Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed in the Memorandum, will, to the
Company's knowledge, conflict with or result in a material breach of the terms,
conditions, or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company.
<PAGE>
4.17 Compliance with Other Instruments.
(a) The Company is not in material violation or material
default of any provisions of its Certificate of Incorporation or Bylaws or of
any instrument, judgment, order, writ, decree or contract to which it is a party
or by which it is bound or, to its knowledge, of any provision of federal or
state statute, rule or regulation applicable to the Company. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any material portion of the assets of the Company.
(b) The Company has avoided every condition, and has not
performed any act, the occurrence of which would result in the Company's loss of
any right granted under any license, distribution or other agreement which loss
would have a material adverse effect on the Company.
4.18 Agreements; Action.
(a) Except for agreements disclosed in the Memorandum or
explicitly contemplated hereby, there are no agreements, understandings or
proposed transactions between the Company and any of its officers, directors,
affiliates, or any affiliate thereof which are material to the business,
affairs, prospects, operations, properties, assets or financial condition of the
Company.
(b) Except for agreements as disclosed in the Memorandum or
explicitly contemplated hereby, there are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to the Company
in excess of, $5,000, as of the date of the initial Close, except as previously
disclosed to Purchaser, or (ii) the license of any patent, copyright, trade
secret or other proprietary right to or from the Company, or (iii) provisions
restricting or affecting the development, manufacture or distribution of the
Company's products or services, or (iv) indemnification by the Company with
respect to infringements of proprietary rights.
(c) Except as disclosed in the Memorandum, the Company has not
(i) declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock, (ii) except for
legal fees incurred in connection with this transaction and loans received from
Daniel Najor, incurred any indebtedness for money borrowed or any other
liabilities individually in excess of $5,000 or, in the case of indebtedness
and/or liabilities individually less than $5,000, in excess of $25,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights other than the sale of its inventory in the ordinary
course of business.
<PAGE>
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) Except for agreements disclosed in the Memorandum, the
Company is not a party to and is not bound by any contract, agreement or
instrument, or subject to any restriction under its Certificate of Incorporation
or Bylaws, which materially adversely affects its business as now conducted or
as proposed to be conducted, its properties or its financial condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
4.19 Disclosure. The Company believes it has fully provided the
Purchaser with all the information which the Purchaser has requested for
deciding whether to purchase the Common Stock and all information which the
Company believes is reasonably necessary to enable the Purchaser to make such
decision. Neither this Agreement nor any other statements or certificates made
or delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
4.20 Memorandum. The Company has presented to the Purchaser a copy of
the Memorandum. The Memorandum has been prepared in good faith by the Company
and does not contain any untrue statement of a material fact nor does it omit to
state a material fact necessary to make the statements made therein not
misleading, except that with respect to projections contained in the Memorandum,
the Company represents only that such projections were prepared in good faith
and that the Company reasonably believes there is a reasonable basis for such
projections.
4.21 Registration Rights. Except as provided in Section 6 of this
Agreement and the Registration Rights Agreement attached as Exhibit II to the
Memorandum, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
4.22 Title to Property and Assets. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
<PAGE>
4.23 Minute Books. The minute books of the Company and its
subsidiaries provided to the Purchaser contain a complete summary of all
meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
5. Representations, Warranties and Covenants of the Purchaser.
As a material inducement to the Company to enter into this Agreement
and to sell and issue the Shares, the Purchaser represents, warrants and
covenants that the following statements are true and correct as of the date
hereof and will be materially true and correct at Close.
5.1 Domicile and Accredited Purchaser. The Purchaser is domiciled in
the State of Connecticut, a wholly-owned subsidiary of Executone Information
Systems, Inc., a Virginia corporation, and is an accredited investor as that
term is defined by Rule 501 under the 1933 Act.
5.2 Power and Authority. The Purchaser is duly organized, validly
existing and in good standing under the laws of the State of Colorado, and has
taken all corporate and other action on the part of the Purchaser, as
applicable, necessary for the execution, delivery and consummation of the
transactions contemplated by this Agreement. Purchaser has full and absolute
right, power and authority and legal capacity to execute, deliver and perform
this Agreement and all other agreements contemplated hereby to be executed by
such Purchaser and, upon such execution, this Agreement and all such other
agreements will be the valid and binding obligation of Purchaser, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting enforcement of creditors rights generally.
5.3 No Violation. The execution, delivery and performance of this
Agreement and all other agreements contemplated hereby to be executed and
delivered by Purchaser, and the consummation of the transactions contemplated
hereby and thereby will not materially violate, with or without the giving of
notice or the lapse of time, or both, any provision of law applicable to
Purchaser and will not conflict with or result in the breach or termination of
any provision of, or constitute a default under, or give any person the right to
accelerate any material obligation under, or result in the creation of any lien,
security interest, charge or encumbrance upon any material properties, assets or
business of Purchaser, pursuant to the organizational or charter documents of
Purchaser, if any, or any indenture, mortgage, deed of trust, lien, lease or
other instrument or agreement or any order, judgment, arbitration award or
decree to which Purchaser is a party or by which Purchaser or any of its assets
and properties is or may be bound.
5.4 Acquisition for Investment. Purchaser is acquiring the Shares for
its or its own account, for investment purposes only and not with a view to, or
for sale in connection with, a distribution, as that term is used in Section
2(11) of the 1933 Act thereof in a manner which would require registration under
the 1933 Act or any state securities laws.
5.5 Restrictive Legend. Purchaser understands that the Shares have
not been registered under the 1933 Act, or the securities laws of any state, in
reliance upon exemption from registration for nonpublic offers and sales of
securities. Consequently, the right to transfer, sell, pledge or otherwise
dispose of the Shares will be limited by the 1933 Act and the rules thereunder.
Purchaser understands and acknowledges that the certificates evidencing the
Shares issued pursuant to this Agreement shall bear the following restrictive
legend:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF A
CURRENT AND EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT WITH
RESPECT TO SUCH SHARES, OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER THE
ACT.
or such other restrictive legend as counsel to the Company may reasonably deem
appropriate at the time of such issuance.
5.6 Confidentiality of Information. Purchaser agrees that any
information obtained by Purchaser pursuant to Section 3.3 which is proprietary
to the Company or otherwise confidential, and clearly identified by the Company
as such, will not be disclosed without the prior written consent of the Company.
Provided, that Purchaser may disclose such information without the prior written
consent of the Company to its partners, associates, representatives or employees
for purposes of evaluating, or otherwise taking action, in respect of its
investment.
5.7 Speculative Nature and Risk. Purchaser understands and
acknowledges the speculative nature of and substantial risk of loss associated
with an investment in the Shares. Purchaser represents and warrants that the
Shares constitute an investment which is suitable and consistent with
Purchaser's financial condition and that Purchaser is able to bear the risks of
this investment for an indefinite period of time, which may include the total
loss of Purchaser's investment in the Company. Purchaser further represents that
Purchaser has adequate means of providing for Purchaser's current financial
needs and corporate contingencies and that there is no need for liquidity in
Purchaser's investment in the Shares and that Purchaser has sufficient financial
and business experience to evaluate the merits and risks of an investment in the
Company.
5.8 Independent Investigation and Advisors. Purchaser confirms that
(i) Purchaser has received, reviewed, understands and has fully considered for
purposes of Purchaser's acquisition of the Shares the Company's Memorandum and
organizational documents, (ii) Purchaser has been expressly offered the
opportunity to be provided a copy of and to review all reports, documents and
exhibits referenced therein and such other agreements, documents and information
as Purchaser deems necessary or appropriate in determining to make an investment
in the Company; (iii) the Company has limited financial resources and will need
sources of capital, in addition to the proceeds from the sale of the Shares
under this Agreement, to implement its current business plan, the availability
of which is uncertain and cannot be assured, and (iv) the Shares are highly
speculative investments with a high degree of risk of loss by Purchaser of his
investment therein. Purchaser represents and warrants that in making the
decision to acquire the Shares, it has relied upon its own independent
investigation of the Company and the independent investigations of the Company
by its representatives, including his own professional legal, tax, and business
advisors, and that Purchaser and its representatives have been given the
opportunity to examine all relevant documents and to ask questions of and to
receive answers from the Company, or person(s) acting on its behalf, concerning
the terms and conditions of acquisition by Purchaser of the Shares and any other
matters concerning an investment in the Company, and to obtain any additional
information Purchaser deems necessary or appropriate to verify the accuracy of
the information provided.
<PAGE>
6. Registration Rights. To induce the Purchaser to purchase the Shares,
the Company has agreed to provide registration rights with respect to the
Registrable Securities (as defined below) as set forth in this Section 6. The
Company hereby covenants and agrees as follows:
6.1 Definitions. As used in this Section 6, the following terms
have the meanings indicated:
"Demand Registration" has the meaning assigned such term
in Section 6.3(a).
"Designated Holder" means each of the Holders and any
transferee of any of them to whom Registrable Securities have been transferred,
other than a transferee to whom such securities have been transferred pursuant
to a registration statement under the 1933 Act or Rule 144 under the 1933 Act.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Inspector" has the meaning assigned such term in Section
6.6(a)(viii).
"Holders" means the Purchaser and any Person to whom
Registrable Securities are transferred by any of them.
"NASD" has the meaning assigned such term in Section
6.6(a)(xiv).
"Person" shall mean any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, limited liability company, government (or an agency or
political subdivision thereof) or other entity of any kind, and shall include
any successor (by merger or otherwise) of such entity.
"Registrable Securities" mean each of the following: (a) the
Shares, (b) any shares of Common Stock issued pursuant to Section 4.13, and (c)
any shares of Common Stock issued or issuable to the Holders of the Shares by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise and shares of Common Stock issuable upon conversion, exercise or
exchange thereof.
<PAGE>
"Registration Expenses" has the meaning assigned to such
term in Section 6.5(d).
"SEC" means the Securities and Exchange Commission.
"Underwriter" has the meaning assigned such term in Section
6.3(e).
6.2 Securities Subject to this Agreement.
(a) Registrable Securities. For the purposes of this Agreement,
Registrable Securities will cease to be Registrable Securities when a
registration statement covering such Registrable Securities has been declared
effective under the 1933 Act by the SEC and such Registrable Securities have
been disposed of pursuant to such effective registration statement.
(b) Holders of Registrable Securities. A Person is deemed to be
a holder of Registrable Securities whenever such Person owns of record
Registrable Securities, or holds an option to purchase, or a security
convertible into or exercisable or exchangeable for, Registrable Securities,
whether or not such acquisition or conversion has actually been effected and
disregarding any legal restrictions upon the exercise of such rights. If the
Company receives conflicting instructions, notices or elections from two or more
persons with respect to the same Registrable Securities, the Company may act
upon the basis of the instructions, notice or election received from the
registered owner of such Registrable Securities. Registrable Securities issuable
upon exercise of an option or upon conversion of another security shall be
deemed outstanding for the purposes of this Agreement.
6.3 Demand Registration.
(a) Request for Demand Registration. At any time during the
eighteen (18) month period commencing six (6) months from the initial Close,
subject to extension as provided in Section 6.5 hereof, the Holders holding more
than 50% of the Registrable Securities then held by of the Holders may make a
written request for registration (such Designated Holders making such request
being deemed to be "Initiating Holders") of Registrable Securities under the
1933 Act, and under the securities or blue sky laws of any jurisdiction
reasonably designated by such holder or holders (a "Demand Registration");
provided, the Company will not be required to effect more than two (2) Demand
Registrations at the request of the Holders pursuant to this Section 6.3. Such
request for a Demand Registration shall specify the amount of the Registrable
Securities proposed to be sold, the intended method of disposition thereof and
the jurisdictions in which registration is desired. Upon a request for a Demand
Registration, the Company shall promptly take such steps as are necessary or
appropriate to prepare for the registration of the Registrable Securities to be
registered. Within 15 days after the receipt of such request, the Company shall
give written notice thereof to all other Designated Holders holding Registrable
Securities (the "Non-Initiating Holders") and include in such registration all
Registrable Securities held by a Designated Holder with respect to which the
Company has received written requests for inclusion therein within 15 days of
the receipt by such Designated Holder of such written notice. Each such request
shall specify the number of Registrable Securities to be registered, the
intended method of disposition thereof and the jurisdictions in which
registration is desired. Unless Designated Holders holding the majority of the
Registrable Securities to be included in the Demand Registration consent in
writing, no other party, including the Company (but not including any other
Designated Holder), shall be permitted to offer securities under any such Demand
Registration.
<PAGE>
(b) Effective Demand Registration. A registration shall not
constitute a Demand Registration until it has become effective and remains
continuously effective until the earlier of (i) the date of sale of all
Registrable Securities registered thereunder or (ii) 90 days from the effective
date. The Company shall use its best efforts to cause any such Demand
Registration to become effective not later than 90 days after it receives a
request under Section 3(a) hereof.
(c) Expenses. The Company shall pay all Registration Expenses
(other than underwriting discounts and commissions) in connection therewith,
whether or not such Demand Registration becomes effective; provided, however,
that each Designated Holder participating in such Demand Registration shall bear
the costs of its own legal counsel.
(d) Underwriting Procedures. If Initiating Holders holding a
majority of the Registrable Securities held by all such Initiating Holders so
elect, the offering of such Registrable Securities pursuant to such Demand
Registration shall be in the form of a firm commitment underwritten offering and
the managing underwriter or underwriters selected for such offering shall be the
Underwriter selected in accordance with Section 6.3(e). In such event, if the
Underwriter advises the Company in writing that in its opinion the aggregate
amount of such Registrable Securities requested to be included in such offering
is sufficiently large to have a material adverse affect on the success of such
offering, the Company shall include in such registration only the aggregate
amount of Registrable Securities that in the opinion of the Underwriter may be
sold without any such material adverse affect and shall reduce, first as to any
stockholders who are the Non-Initiating Holders as a group and then as to the
Initiating Holders as a group, pro rata within each group based on the number of
Registrable Securities included in the request for Demand Registration, the
amount of Registrable Securities to be included by each Designated Holder in
such registration.
(e) Selection of Underwriters. If any Demand Registration of
Registrable Securities is in the form of an underwritten offering, the
Initiating Holders holding a majority of the Registrable Securities held by all
such Initiating Holders shall, in their discretion, select and obtain an
investment banking firm to act as the managing underwriter of the offering (the
"Underwriter"), subject to approval by the Company which shall not be
unreasonably withheld.
6.4 Piggy-Back Registration.
(a) Piggy-Back Rights. If during the three year period
following the initial Close the Company proposes to file a registration
statement under the Act, other than pursuant to Section 6.3 hereof, with respect
to an offering by the Company for its own account of any class of security
(other than a registration statement on Form S-4 or S-8 or any successor or
other forms not available for registering capital stock for sale to the public),
then the Company shall give written notice of such proposed filing to each of
<PAGE>
the Designated Holders of Registrable Securities at least 30 days before the
anticipated filing date, and such notice shall describe in detail the proposed
registration and distribution (including those jurisdictions where registration
under the securities or blue sky laws is intended) and offer such Designated
Holders the opportunity to register the number of Registrable Securities as each
such holder may request. The Company shall use its best efforts (within ten days
of the notice provided for in the preceding sentence) to cause the managing
underwriter or underwriters of a proposed underwritten offering (the "Company
Underwriter") to permit the Designated Holders of Registrable Securities who
have requested to participate in the registration for such offering to include
such Registrable Securities in such offering on the same terms and conditions as
the securities of the Company included therein. Notwithstanding the foregoing,
if the Company Underwriter delivers a written opinion to the Designated Holders
of Registrable Securities that the total amount or kind of securities which
they, the Company and any other persons or entities intend to include in such
offering (the "Total Securities") is sufficiently large so as to have a material
adverse effect on the distribution of the Total Securities, then the amount or
kind of securities to be offered for the account of such Designated Holders and
such other persons or entities (other than the Company) shall be reduced pro
rata to the extent necessary to reduce the Total Securities to the amount
recommended by the Company Underwriter. Unless waived by a Designated Holder in
writing, each Designated Holder shall have the right to participate pro rata
based upon the proportion of the Registrable Securities held by them bears to
all Registrable Securities.
6.5 Holdback Agreements and Termination.
(a) Delay of Rights Under Special Circumstances. Upon receipt
by the Company of a request for Demand Registration pursuant to Section 6.3(a)
hereof, the Company shall have the right, in the event that the Company is then
engaged in business negotiations which would be materially adversely affected by
a Demand Registration, or any other material business development or event has
occurred which the Company believes in its reasonable judgment would be
adversely affected by a Demand Registration, to delay the effectiveness of such
request by the Initiating Holders for a period of up to 120 days; provided,
however, that this right may only be exercised by the Company on one occasion.
The Company shall exercise the foregoing delay right by delivering to the
Initiating Holders, within 15 days after the receipt of such request, a written
notice attesting to the necessity of such a delay.
(b) Restrictions on Demands by Designated Holders and
Termination of Demand Rights. Each Designated Holder of Registrable Securities
agrees that the right to request a Demand Registration shall be suspended for a
period of up to 180 days commencing upon the date the Company executes a letter
of intent with an underwriter for a firm commitment underwritten public offering
of its securities having an aggregate offering price of not less than
$5,000,000, provided that a registration statement with respect to such offering
is filed by the Company with the SEC within 45 days from the date of execution
of such letter of intent. The foregoing suspension of the rights of the Holders
will cease if such registration statement is not declared effective by the SEC
within 60 days of the filing thereof.
<PAGE>
6.6 Registration Procedures.
(a) Obligations of the Company. Whenever registration of
Registrable Securities has been requested pursuant to Sections 6.3 or 6.4 of
this Agreement, the Company shall use its best efforts to effect the
registration and sale of such Registrable Securities in accordance with the
intended method of distribution thereof as quickly as practicable, and in
connection with any such request, the Company shall, as expeditiously as
possible:
(i) diligently use its best efforts to prepare and file
with the SEC a registration statement on any form for which the Company then
qualifies of which counsel for the Company shall deem appropriate and which form
shall be available for the sale of such Registrable Securities in accordance
with the intended method of distribution thereof, and use its best efforts to
cause such registration statement to become effective; provided, however, that
before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall (A) provide counsel selected by the
Designated Holders holding a majority of the Registrable Securities being
registered in such registration ("Holders' Counsel") and any other Inspector (as
hereinafter defined) with an adequate and appropriate opportunity to participate
in the preparation of such registration statement and each prospectus included
therein (and each amendment or supplement thereto) to be filed with the SEC,
which documents shall be subject to the review of Holders' Counsel, and (B)
notify the Holders' Counsel and each seller of Registrable Securities of any
stop order issued or threatened by the SEC and take all reasonable action
required to prevent the entry of such stop order or to remove it if entered;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than 90 days, or such shorter period which
will terminate when all Registrable Securities covered by such registration
statement have been sold, and comply with the provisions of the 1933 Act with
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish
to each seller of Registrable Securities, prior to filing a registration
statement, copies of such registration statement as is proposed to be filed, and
thereafter such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as each such seller may reasonably request
in order to facilitate the disposition of the Registrable Securities owned by
such seller;
(iv) use its best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller of Registrable Securities reasonably requests,
and to continue such qualification in effect in such jurisdiction for as long as
is permissible pursuant to the laws of such jurisdiction, or for as long as any
such seller requests or until all of such Registrable Securities are sold,
whichever is shortest, and do any and all other acts and things which may be
reasonably necessary or advisable to enable any such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller; provided, however, that the Company shall not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 6.6(a)(iv), (B) subject itself to
taxation in any such jurisdiction or (C) consent to general service of process
in any such jurisdiction;
<PAGE>
(v) use its best efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of the Company to enable the seller or
sellers of Registrable Securities to consummate the disposition of such
Registrable Securities;
(vi) notify each seller of Registrable Securities at
any time when a prospectus relating thereto is required to be delivered under
the 1933 Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement contains
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, and the
Company shall promptly prepare a supplement or amendment to such prospectus and
furnish to each seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, after delivery to the
purchasers of such Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made;
(vii) enter into and perform customary agreements
(including an underwriting agreement n customary form with the Underwriter, if
any, selected as provided in Sections 6.3 or 6.4) and take such other actions as
are prudent and reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities;
(viii) make available for inspection by any
seller of Registrable Securities, any managing underwriter participating in
any disposition pursuant to such registration statement, Holders' Counsel and
any attorney, accountant or other agent retained by any such seller or any
managing underwriter (each, an "Inspector" and collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and properties of
the Company and its subsidiaries (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's and its subsidiaries, officers,
directors and employees, and the independent public accountants of the Company,
to supply all information reasonably requested by any such Inspector in
connection with such registration statement. Records that the Company
determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (A)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in the registration statement, (B) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, or (C) the information in such records has been made generally
available to the public other than through a breach of the confidentiality
requirement set forth above. Each Seller of Registrable Securities agrees that
it shall, upon learning that disclosure of such Records is required by any court
of competent jurisdiction, give notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent disclosure of
the Records deemed confidential;
<PAGE>
(ix) if such sale is pursuant to an underwritten
offering, use its best efforts to obtain a "cold 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 Holders'
Counsel or the managing underwriter reasonably request;
(x) use its best efforts to furnish, at the request
of any seller of Registrable Securities on the date such securities are
delivered to the underwriters for sale pursuant to such registration or, if such
securities are not being sold through underwriters, on the date the registration
statement with respect to such securities becomes effective, an opinion, dated
such date, of counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to the seller making
such request, covering such legal matters with respect to the registration in
respect of which such opinion is being given as such seller may reasonably
request and are customarily included in such opinions;
(xi) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable but no later than 15 months after the
effective date of the registration statement, an earnings statement covering a
period of 12 months beginning after the effective date of the registration
statement, in a manner which satisfies the provisions of Section 6.11(a) of the
1933 Act;
(xii) cause all such Registrable Securities to be
listed on each securities exchange on which similar securities issued by the
Company are then listed, provided, that the applicable listing requirements are
satisfied;
(xiii) keep each seller of Registrable Securities
advised in writing as to the initiation and progress of any registration under
Sections 6.3 or 6.4 hereunder;
(xiv) cooperate with each seller of Registrable
Securities and each underwriter 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"); and
(xv) use best efforts to take all other steps
necessary to effect the registration of the Registrable Securities contemplated
hereby.
(b) Seller Information. 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 seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
(c) Notice to Discontinue. Each Designated Holder of
Registrable Securities agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 6.6(a)(vi), such
Designated Holder shall forthwith discontinue disposition of Registrable
Securities pursuant to the registration statement covering such Registrable
Securities until such Designated Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 6.6(a)(vi) and, if so
directed by the Company, such Designated Holder shall deliver to the Company (at
the Company's expense) all copies, other than permanent file copies then in such
Designated Holders possession, of the prospectus covering such Registrable
Securities which is current at the time of receipt of such notice. If the
Company shall give any such notice, the Company shall extend the period during
which such registration statement shall be maintained effective pursuant to this
Agreement (including without limitation the period referred to in Section
6.6(a)(ii)) by the number of days during the period from and including the date
of the giving of such notice pursuant to Section 6.6(a)(vi) to and including the
date when the Designated Holder shall have received the copies of the
supplemented or amended prospectus contemplated by and meeting the requirements
of Section 6.6(a)(vi).
<PAGE>
(d) Registration Expenses. The Company shall pay all expenses
(other than as set forth in Section 6.3(c)) arising from or incident to the
performance of, or compliance with, this Agreement, including without
limitation, (i) SEC, stock exchange and NASD registration and filing fees, (ii)
all fees and expenses incurred in complying with securities or blue sky laws
(including reasonable fees, charges and disbursements of counsel in connection
with blue sky qualifications of the Registrable Securities), (iii) all printing,
messenger and delivery expenses, (iv) the fees, charges and disbursements of
counsel to the Company and of its independent public accountants and any other
accounting and legal fees, charges and expenses incurred by the Company
(including without limitation any expenses arising from any special audits
incident to or required by any registration or qualification), and (v) any
liability insurance or other premiums for insurance obtained (which insurance
the Company agrees to use its best efforts to obtain upon the reasonable request
of any seller of Registrable Securities) retained in connection with any Demand
Registration or piggy-back registration pursuant to the terms of this Agreement,
regardless of whether such registration statement is declared effective. All of
the expenses described in this Section 6.5 are referred to herein as
"Registration Expenses."
6.7 Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to
indemnify, to the fullest extent permitted by law, each Designated Holder, its
officers, directors, partners, employees, advisors and agents and each Person
who controls (within the meaning of the 1933 Act or the Exchange Act) such
Designated Holder from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue, or allegedly untrue, statement of a material
fact contained in any registration statement, prospectus or preliminary
prospectus or notification or offering circular (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) or
arising out of or based upon 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 Designated Holder
expressly for use therein. The Company shall also indemnify any underwriters of
the Registrable Securities, their officers, directors and employees and each
Person who controls such underwriters (within the meaning of the 1933 Act and
the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Designated Holders of Registrable Securities.
<PAGE>
(b) Indemnification by Designated Holders. In connection with
any registration statement in which a Designated Holder is participating
pursuant to Sections 6.3 or 6.4 hereof, each such Designated Holder shall
furnish to the Company in writing such information with respect to such
Designated Holder as the Company may reasonably request or as may be required by
law for use in connection with any such registration statement or prospectus and
each Designated Holder agrees to indemnify, to the fullest extent permitted by
law, the Company, any underwriter retained by the Company and their respective
directors, officers, employees and each Person who controls the Company or such
underwriter (within the meaning of the 1933 Act and the Exchange Act) to the
same extent as the foregoing indemnity from the Company to the Designated
Holders, but only with respect to any such information furnished in writing by
such Designated Holder; provided, however, that the total amount to be
indemnified by such Designated Holder pursuant to this Section 6.7(b) shall be
limited to the net proceeds received by such Designated Holder in the offering
to which the registration statement or prospectus relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled
to indemnification hereunder (the "Indemnification Party") agrees to give prompt
written notice to the indemnifying party (the "Indemnifying Party") after the
receipt by the Indemnified Party of any written notice of the commencement of
any action, suit, proceeding or investigation or threat thereof made in writing
for which the Indemnified Party intends to claim indemnification or contribution
pursuant to this Agreement; provided, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party of any liability
that it may have to the Indemnified Party hereunder. If notice of commencement
of any such action is given to the Indemnifying Party as above provided, the
Indemnifying Party shall be entitled to participate in and, to the extent it may
wish, jointly with any other Indemnifying Party similarly notified, to assume
the defense of such action at its own expense, with counsel chosen by it and
satisfactory to such Indemnified Party. The Indemnified Party shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel (other than
reasonable costs of investigation) shall be paid by the Indemnified Party unless
(i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party
fails to assume the defense of such action with counsel satisfactory to the
Indemnified Party in its reasonable judgment, (iii) the named parties to any
such action (including any impleaded parties) have been advised by such counsel
that either (A) representation of such Indemnified Party and the Indemnifying
Party by the same counsel would be inappropriate under applicable standards of
professional conduct or (B) there may be one or more legal defenses available to
it which are different from or additional to those available to the Indemnifying
Party. In either of such cases the Indemnifying Party shall not have the right
to assume the defense of such action on behalf of such Indemnified Party. No
Indemnifying Party shall be liable for any settlement entered into without its
written consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this
Section 6.7 from the Indemnifying Party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party and Indemnified Party in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative faults of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Sections 6.7(a), 6.7(b) and 6.7(c), any
legal or other fees, charges or expenses reasonably incurred by such party in
connection with any investigation or proceeding. The parties hereto agree that
it would not be just and equitable if contribution pursuant to this Section
6.7(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person.
6.8 Rule 144. The Company covenants that, from and after the date
that the Company has a class of equity securities registered under the Exchange
Act, it shall (i) file any reports required to be filed by it under the Exchange
Act and the rules and regulations adopted by the SEC thereunder; and (ii) take
such further action as each Designated Holder of Registrable Securities may
reasonably request (including providing any information necessary to comply with
Rules 144 and 144A under the 1933 Act), all to the extent required from time to
time to enable such Designated Holder to sell Registrable Securities without
registration under the 1933 Act within the limitation of the exemptions provided
by (a) Rule 144 or Rule 144A under the 1933 Act, as such rules may be amended
from time to time, or (b) any similar rules or regulations hereafter adopted by
the SEC. The Company shall, upon the request of any Designated Holder of
Registrable Securities, deliver to such Designated Holder a written statement as
to whether it has complied with such requirements.
7. Miscellaneous
7.1 Board Representation. The Company agrees that from the date that
Purchaser has paid for and acquired a number of Shares equal to 5% of the then
outstanding common shares of the Company, and continuing for so long as
Purchaser owns any of the Shares, or until such earlier date that Purchaser
fails to purchase and pay for Shares agreed to be purchased in accordance with
this Agreement (unless such failure is caused by a breach or event of default on
the part of the Company), its management will recommend and nominate for
election to the Board of Directors of the Company a designee of Purchaser, and
use its best efforts to maintain a sufficient number of seats on the Board of
Directors to permit such designee to serve as a director and to replace any
vacancy in the seat held by Purchaser's designee by another designee of
Purchaser.
7.2 Survival of Representations. All representations, warranties and
agreements contained herein or made in writing by the Company and the Purchaser
in connection with the transactions contemplated hereby except any
representation, warranty or agreement as to which compliance may have been
appropriately waived, shall survive the execution and delivery of this Agreement
and continue for a period of two years from the date of the Close, at which time
all representations, warranties and agreements hereunder shall expire.
<PAGE>
7.3 Waiver of Conditions. At any time or times during the term
hereof, the Company may waive fulfillment of any one or more of the conditions
to its obligations in whole or in part, and the Purchaser may waive fulfillment
of any one or more of the foregoing conditions to their obligation, in whole or
in part, by delivering to the other party a written waiver or waivers of
fulfillment thereof to the extent specified in such written waiver or waivers.
7.4 Partial Invalidity. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of such term, covenant or condition to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby and each term, covenant or condition of this Agreement shall be
valid and be enforced to the fullest extent permitted by law.
7.5 Notices. Any notices relating to this Agreement shall be deemed
sufficiently given and served for all purposes if given by a telegram filed,
charges prepaid, or a writing deposited in the United States mail, postage
prepaid and registered or certified within the United States, addressed as
follows:
If to the Company:
Internet Gaming Technologies, Inc.
8989 Rio San Diego Drive, Suite 320
San Diego, California 92108
Attention: Daniel B. Najor, Chief Executive Officer
If to the Purchaser:
Unistar Entertainment, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Michael W. Yacenda, President
7.6 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of the parties hereto and no
right or liability or obligation arising hereunder may be assigned by any party
hereto.
7.7 Law Governing. This Agreement shall be construed and
interpreted in accordance with and governed and enforced in all respects by the
laws of the State of California.
7.8 Headings. The section, subsection and paragraph headings
throughout this Agreement are for convenience and reference only, and the words
contained therein shall not be held to expand, modify, amplify or aid in the
interpretation, construction or meaning of this Agreement.
<PAGE>
7.9 Counterparts. This Agreement may be executed in any number of
counterparts, each signed by different persons and all of said counterparts
together shall constitute one and the same instrument, and such instrument shall
be deemed to have been made, executed and delivered on the date first
hereinabove written, irrespective of the time or times when the same or any
counterparts thereof actually may have been executed and delivered a counterpart
thereof to the Company and the Purchaser.
7.10 Entire Agreement. This Agreement and the exhibits contain the
entire agreement of the parties hereto and may not be modified, altered or
changed in any manner whatsoever, except by a written agreement signed by the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first written above.
INTERNET GAMING TECHNOLOGIES, INC.,
a Delaware corporation
By:/s/ Daniel B. Najor
----------------------------------------
Daniel B. Najor, Chief Executive Officer
UNISTAR ENTERTAINMENT, INC.,
a Colorado corporation
By:/s/ Michael W. Yacenda
----------------------------------------
Michael W. Yacenda, President
Exhibit 10.16
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "1933 ACT"), AND SUCH SECURITY MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM
REGISTRATION AS CONFIRMED IN AN OPINION OF COUNSEL SATISFACTORY TO VIRTUAL
GAMING TECHNOLOGIES, INC., OR (2) PURSUANT TO A REGISTRATION STATEMENT FILED
UNDER THE 1933 ACT, AND IN EACH CASE IN ACCORDANCE WITH ANY OTHER APPLICABLE
LAW.
COMMON STOCK PURCHASE WARRANT
For the Purchase of up to 200,000 Shares of Common Stock,
$.00001 Par Value
of
VIRTUAL GAMING TECHNOLOGIES, INC.
(A Delaware Corporation)
THIS CERTIFIES THAT, for value received, UNISTAR ENTERTAINMENT, INC. (the
"Holder"), as registered owner of this Warrant, is entitled to at any time or
from time to time before 5:00 p.m., California Time, March 5, 2002, but not
thereafter, to subscribe for, purchase and receive 200,000 fully paid and
nonassessable shares of the $.00001 par value common stock (the "Common Stock"),
of VIRTUAL GAMING TECHNOLOGIES, INC., a Delaware corporation (the "Company").
The exercise price for such number of shares shall be $3.45 per share. The
number of shares of Common Stock deliverable hereunder, and the price to be paid
for a share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable hereunder, as adjusted from time
to time, are hereinafter sometimes referred to as "Warrant Stock." The exercise
price of a share of Warrant Stock in effect at any time, and as adjusted from
time to time, is hereinafter sometimes referred to as the "Exercise Price."
1. Exercise of Warrant. This Warrant may be exercised by presentation and
surrender of this Warrant and payment by cashier's check of the Exercise Price
for such shares of Warrant Stock to the Company at the principal office of the
Company. If the subscription rights represented hereby are not exercised at or
before 5:00 P.M., California Time, on March 5, 2002, this Warrant shall become
and be void without further force or effect, and all rights represented hereby
shall cease and expire. This Warrant may be exercised in accordance with its
terms in whole or in part (payment of a portion of the Exercise Price shall
proportionately reduce the number of shares to be issued to the Holder). In the
event of the exercise in part only, the Company shall cause to be delivered to
the Holder a new Warrant of like tenor to this Warrant in the name of the Holder
evidencing the right of the Holder to purchase the number of shares of the
Warrant Stock purchasable hereunder as to which this Warrant has not been
exercised or assigned.
2. Right of Repurchase. This Warrant contains no express or mandatory
repurchase right or right of redemption.
<PAGE>
3. Rights of the Holder. Holder shall not be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained herein be construed to confer upon the
Holder of this Warrant, as such, any of the rights of a shareholder of the
Company or any right to vote for the election of directors or upon any matters
submitted to shareholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or to receive dividends
or subscription rights or otherwise until this Warrant shall have been exercised
and the Warrant Stock issuable upon the exercise hereof shall have become
deliverable as provided herein.
4. Adjustments to Exercise Price and Number of Shares.
(a) Adjustment for Reclassifications. In case at any time or from
time to time after the issue date the holders of the Common Stock of the Company
(or any shares of stock or other securities at the time receivable upon the
exercise of this Warrant) shall have received, or, on or after the record date
fixed for the determination of eligible stockholders, shall have become entitled
to receive, without payment therefore, other or additional stock or other
securities or property (including cash) by way of stock-split, spinoff,
reclassification, combination of shares or similar corporate rearrangement
(exclusive of any stock dividend of its or any subsidiary's capital stock), then
and in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1, shall be entitled to receive the amount of stock and
other securities and property which such Holder would hold on the date of such
exercise if on the issue date he had been the holder of record of the number of
shares of Common Stock of the Company called for on the face of this Warrant and
had thereafter, during the period from the issue date, to and including the date
of such exercise, retained such shares and/or all other or additional stock and
other securities and property receivable by him as aforesaid during such period,
giving effect to all adjustments called for during such period. In the event of
any such adjustment, the Exercise Price shall be adjusted proportionately.
(b) Adjustment for Reorganization, Consolidation, Merger. In case of
any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
after the issue date, or in case, after such date, the Company (or any such
other corporation) shall consolidate with or merge into another corporation or
convey all or substantially all of its assets to another corporation, then and
in each such case the Holder of this Warrant, upon the exercise hereof as
provided in Section 1 at any time after the consummation of such reorganization,
consolidation, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the exercise of this
Warrant prior to such consummation, the stock or other securities or property to
which such Holder would be entitled had the Holder exercised this Warrant
immediately prior thereto, all subject to further adjustment as provided herein;
in each such case, the terms of this Warrant shall be applicable to the shares
of stock or other securities or property receivable upon the exercise of this
Warrant after such consummation.
(c) If at any time during the 18 months beginning March 6, 1997 the
Company shall issue shares of Common Stock for consideration of less than $3.00
per share of Common Stock, then the Exercise Price shall be decreased to an
amount determined by multiplying such Exercise Price in effect immediately prior
to the issuance date by a fraction, the denominator of which is the product of
the total number of shares of Common Stock outstanding immediately after such
issuance multiplied by three (3), and the numerator of which is the sum of (x)
the product of multiplying the number of shares of Common Stock outstanding
immediately prior to such issuance by three (3), plus (y) the dollar value of
the consideration received by the Company for such issued shares.
<PAGE>
5. Transfer to Comply with the Securities Act of 1933.
(a) This Warrant and the Warrant Stock or any other security issued
or issuable upon exercise of this Warrant may not be sold, transferred or
otherwise disposed of except to a person who, in the opinion of counsel for the
Company, is a person to whom this Warrant or such Warrant Stock may legally be
transferred without registration and without the delivery of a current
prospectus under the 1933 Act with respect thereto and then only against receipt
of an agreement of such person to comply with the provisions of this Section 5
with respect to any resale or other disposition of such securities.
(b) The Company may cause the following legend to be set forth on
each certificate representing Warrant Stock or any other security issued or
issuable upon exercise of this Warrant, unless counsel for the Company is of the
opinion as to any such certificate that such legend is unnecessary:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND SUCH SECURITY MAY NOT BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) PURSUANT TO AN
EXEMPTION FROM REGISTRATION AS CONFIRMED IN AN OPINION OF COUNSEL
SATISFACTORY TO VIRTUAL GAMING TECHNOLOGIES, INC., OR (2) PURSUANT TO A
REGISTRATION STATEMENT FILED UNDER THE 1933 ACT, AND IN EACH CASE IN
ACCORDANCE WITH ANY OTHER APPLICABLE LAW.
6. Reservation of Common Stock, Etc. There have been reserved, and the
Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer on this 5th day of March, 1997.
VIRTUAL GAMING TECHNOLOGIES, INC.
a Delaware corporation
By:/s/ Daniel B. Najor
------------------------------
Daniel B. Najor,
Chief Executive Officer
Exhibit 10.17
AGREEMENT
This DEVELOPMENT AGREEMENT (the "Agreement"), is made and entered into
effective as of the 11th day of February, 1997 by and between EXECUTONE
INFORMATION SYSTEMS, INC., a Virginia corporation ("Executone"), UNISTAR
ENTERTAINMENT, INC. a Colorado corporation ("Unistar") and CASINOWORLD HOLDINGS,
LTD., a Delaware corporation ("CWH") (collectively referred to as the
"Parties").
RECITALS
A. Executone, through its subsidiary, Unistar, desires to offer a new
Internet service and software application to offer a lottery, lottery-style
games or other games over the Internet from a website.
B. CWH has developed certain proprietary software and hardware
applications, know-how, trade secrets, copyrights and trademarks, and has
obtained certain license(s) to software for use by Content Providers on the
Internet.
C. Executone and Unistar desire to retain CWH, and CWH desires to be
retained by Executone and Unistar to manage the Project (as defined below)
wherein CWH will integrate its Proprietary Technology and Current Software with
the developed New Software and shall create, develop and implement the Work
Product (as defined below) which will be a part of this Project.
In consideration of the promises contained herein, the Parties agree as
follows:
1. DEFINITIONS.
1.1. "Web Pages" shall mean the layout and content for a Site related
to the Project available on the Internet and in conformance with the
specifications set forth in Exhibit A. The term "Web Pages" shall be deemed to
include all artwork, text, sound, animation, video, source code or scripts used
in connection with the Web Pages.
1.2. "Software" shall mean the object and source code versions of the
computer software or applications meeting the specifications set forth in
Exhibit A and developed or being developed by CWH as well as the object version
of computer programs licensed by CWH. The term "Software" shall generally refer
to code (source and object) of computer programs developed, or being developed
by CWH, or code (object only) of computer programs licensed for use by CWH which
shall connect the client, the gaming server and the business server as more
fully described in Exhibit A. "Software" also shall be deemed to include all
operating instructions, operating manuals, subsystems, subroutines, ideas,
specifications, and descriptions of the Software as they exist and are available
as a result of development or licensing of the Software. The term "Software"
shall not include the computer programs being developed by Random Games, Inc. or
Stellcom Technologies, Inc.
1.3. "Stellcom Software" shall mean the object and source code
versions of computer software and applications being developed by Stellcom
Technologies, Inc. pursuant to the agreement between Stellcom Technologies,
Inc. and CWH dated January 10, 1997.
1.4. "Random Games Software" shall mean the object and source
code versions of the computer software and applications being developed by
Random Games, Inc. pursuant to the agreement between Random Games, Inc. and
CWH dated September 20, 1996.
1.5. "Project" shall mean all work related to the creation,
integration, delivery and acceptance of the Work Product as set forth in the
Functional Specification document dated December 3, 1996, the addendum dated
December 24, 1996, the addendum dated January 7, 1997, and Exhibit A.
1.6. "Site" shall mean the Virtual Lottery(TM) domain at
http//www.nilgaming.com, or such other URLs as Unistar may decide is necessary
to operate the Virtual Lottery(TM) website, accessible as a website via the
Internet running on a server(s) to be located on the Coeur d'Alene Indian Tribe
Reservation (the "Reservation") in Coeur d' Alene, Idaho.
1.7. "Proprietary Technology" shall mean CWH's know-how, whether
patented or unpatented, registered or unregistered, copyrighted or
uncopyrighted, confidential or disclosed, or acquired by assignment, license, or
other means. The term Proprietary Technology shall include, but shall not be
limited to CWH's Virtual CasinoWorld(TM).
1.8. "Virtual Lottery" shall mean Unistar's unique identity lottery
software application(s) derived from CWH's Virtual CasinoWorld(TM) template,
operating on the Website referred to as the National Indian Lottery ("NIL").
1.9. "Content Provider" shall mean Unistar which shall generate all
content to be posted on the Site.
1.10. "Current Software" shall mean the Software developed by CWH,
as implemented and operational at CWH's affiliated Websites at
http:\\www\vcasino.com, http:\\www.worldclass.com\nil,
http:\\www.crownepalace.com, and http:\\www.vcw.com, or as hereafter developed
by CWH and as delivered in source code and object code form to Unistar.
1.11. "New Software" shall mean the Internet Software system derived
from CWH's template to be referred to as the National Indian Lottery, which
shall include the object and source code versions of computer software and
applications being developed by Stellcom Technologies, Inc., pursuant to the
agreement between CWH and Stellcom dated January 10, 1997, as well as the object
and source code versions of computer software and applications being developed
by Random Games, Inc., pursuant to the agreement between CWH and Random dated
September 20, 1996. This definition shall not include, and shall specifically
exclude any and all software and applications being developed by either Stellcom
or Random for CWH on any contracts not related to this Agreement.
1.12. "Work Product" shall mean the Current Software, Software, Web
Pages, and New Software.
1.13. "Internet" shall mean a global web of computer networks
accessible through telephonic means by computer for specific uses, including,
but not limited to recreational activities, including games, ticket purchases,
information, and related support activities, also commonly referred to as a
"network of networks".
2. SERVICES. In connection with the Project, CWH will provide the
following general services (the "Services"):
a. manage the Project;
b. consult with Executone or Unistar on the design and
specifications of the Web Pages;
c. consult with Executone or Unistar on the design and
specifications of the Software;
d. design the Web Pages;
e. design the Software;
f. coordinate all necessary approvals required hereunder
by Executone or Unistar;
g. write and debug the Software;
h. write and debug the Web Pages;
i. install the Software and the Web Pages at the location
designated by Unistar;
j. demonstrate the Software and the Web Pages to Executone
and Unistar at the designated location;
k. CWH shall, during the thirty (30) days following
final acceptance, provide not more than five (5) days
of overview training to Unistar's designated
employee(s) in the use and maintenance of the Work Product.
Said training shall require that the designated
representative demonstrate a thorough knowledge of
standard application management (i.e., CWH shall not be
responsible for training anyone to become the system
operator). Executone or Unistar shall reimburse CWH for
all actual expenses incurred during travel to Unistar's
facility;
l. CWH shall provide technical support and system maintenance
consulting for a period of one (1) year after the
expiration of the Warranty Period on a time and materials
basis at CWH's hourly billing rate; and
m. CWH shall be available to meet at reasonable times with
Unistar representatives at Executone headquarters or other
locations designated by Unistar. Any travel, lodging or
other direct costs associated with any meeting will be
billed to Unistar at CWH's actual cost.
3. SOFTWARE AND WEB PAGE DEVELOPMENT. In addition to the Services
generally described above, CWH also hereby agrees to the following:
3.1. CWH has commenced and will diligently proceed with the
development of the Project which Project will comply, in all material respects,
with the specifications and standards set forth on Exhibit A (the
`Specifications"). In the event that CWH is required to acquire any third-party
software, hardware or related materials in order to ensure the complete and
successful operation of the Project that is not anticipated, described or
contemplated by the Specifications, CWH shall notify Unistar and Executone of
such requirements which shall be approved and directly paid for by Executone or
Unistar. Nothing in this Section shall obligate CWH to develop or acquire
software not called for by the Specifications, nor is CWH obligated to acquire
any third-party software, hardware or related materials as part of the
Specifications except as approved and paid for by Executone.
3.2. CWH will commit and utilize reasonable commercial resources
within the scope of this Agreement to complete, and subject to the terms of the
Notice and Acceptance provisions of this Agreement, shall complete development
of the Project within the development timetable set forth in Exhibit B.
4. LABOR.
4.1. CWH will provide personnel and services in accordance with this
Agreement, and such personnel will possess the skills to ensure that the Project
is completed in a timely and efficient manner and in accordance with generally
accepted standards of quality and workmanship in the industry.
4.2. CWH will assign Bernie Tyler to work on the development of the
Work Product and act as the Project Coordinator. CWH will be responsible for
coordinating with the work of others on the Project to use reasonable commercial
efforts to have others provide their work in a timely and orderly fashion. CWH
may change the Project Coordinator, subject to a reasonable advance notice by
CWH, so long as any change from Bernie Tyler is of equal or greater skills in
terms of project management experience, and so long as such replacement can be
acquired without costs in excess of current fees paid to the Project
Coordinator.
5. REPORTS AND DOCUMENTATION. CWH will develop a list of specific
deliverables required to complete the Project ("Deliverables") and shall
designate the milestones on the timetable attached hereto as Exhibit B. CWH
shall use reasonable commercial efforts to deliver the Deliverables in
conformance with the specified milestone. Failure by third parties contracted by
Executone or Unistar to deliver Deliverables required by CWH in order to meet
the milestones and causing CWH to miss such milestones will not constitute
breach of this Section by CWH.
6. SCHEDULE.
6.1. Time is of the essence with respect to the performance of both
party's obligations hereunder. CWH will deliver the Web Pages and the Software
in accordance with the Specifications and in accordance with the schedule set
forth in Exhibit B.
6.2. If CWH fails to create or deliver any Deliverable of the
Project or to perform Services on or before the dates specified in Exhibit B, so
long as such failure is not due to Executone's or Unistar's failure to provide
Deliverables, in a timely manner, requested by CWH and necessary to support
CWH's performance of this Agreement, any such failure will constitute a default
of this Agreement. Upon occurrence of any CWH Default, as described in Section
17, and at any time thereafter, in addition to all other rights and remedies
available under applicable law, this Agreement or otherwise, Executone and
Unistar shall, at their option, be entitled to terminate this Agreement without
any further obligation to CWH except for any obligations, including payment
obligations, that have occurred on or before the date of such termination, with
or without notice or consent by CWH.
7. ASSIGNMENT AND LICENSING OF RIGHTS.
7.1. CWH hereby agrees that any and all of its right, title, and
interest in and to the Software and Current Software, as incorporated into,
delivered and accepted as the Work Product, including all electronic media and
interfaces related thereto, developed pursuant to the Agreement, including, but
not limited to, all copyrights, inventions, discoveries, improvements, ideas,
trade secrets, know-how, confidential information, trademarks and all other
intellectual property pertaining to the Work Product , except as specifically
set forth in Section 7.2 shall be jointly owned by Unistar and CWH, subject to
payment and acceptance by Executone. CWH and Unistar also agree that all right,
title and interest in and to the Stellcom Software shall be jointly owned by
Unistar and CWH, subject to payment and acceptance by Executone (Collectively
referred to as "Joint Property"). Both CWH and Unistar shall be free to copy,
distribute, license or otherwise make use of the Joint Property without being
obligated to account to the other party for the receipt of any consideration
received by a party for such use, subject to the provisions and conditions of
Paragraph 23. CWH and Unistar hereby agree to take whatever steps may be
necessary to ensure the Joint Property will be jointly owned without any
additional compensation. Nothing in this Agreement shall be construed as any
ownership by Executone of CWH's Virtual CasinoWorld(TM) gaming system.
7.2. CWH hereby agrees and acknowledges that any and all right,
title and interest in and to the Web Pages developed pursuant to the Agreement,
including but not limited to, all copyrights, trademarks, ideas, trade secrets,
know-how, confidential information and all other intellectual property
pertaining to the Web Pages shall be owned solely by Unistar. CWH and Unistar
acknowledge and agree that all right, title and interest in and to the Random
Games Software also shall be owned solely by Unistar. (Collectively, the
"Unistar Property"). Title to the Web Pages will pass from CWH to Unistar as the
Web Pages are accepted and paid for by Unistar. The Unistar Property will be the
sole property of Unistar and Unistar will have the sole right to determine the
treatment of any such Unistar Property, including the right to keep such Unistar
Property as trade secrets, to file registrations for copyright or trademark on
them in its own name, or to follow any other procedure that Unistar deems
appropriate. CWH agrees: (a) to disclose promptly in writing to Unistar all
Unistar Property; (b) to cooperate with and assist Unistar to apply for, and to
execute any applications and/or assignments reasonably necessary to obtain, any
copyright, trademark or other statutory protection for the Unistar Property in
Unistar's name as Unistar deems appropriate; and (c) to otherwise treat all
Unistar Property as "Confidential Information", as defined herein. These
obligations to disclose, assist, execute and keep confidential will survive the
expiration or termination of the Agreement. In addition, CWH hereby grants and
transfers all right and title to and possession of the media and documentation
(including source code) that pertain to, are associated with or constitute all
copies of the Random Games Software, Web Pages and their respective component
parts.
7.3. Subject to the terms and conditions of the Agreement, CWH
hereby grants to Unistar, and Unistar hereby accepts from CWH, a perpetual,
nonexclusive, transferable, irrevocable, fully paid-up, license to use the
materials listed on Exhibit C for whatever purposes Unistar wishes.
8. ESCROW. CWH hereby agrees, at the sole and complete cost of Executone
or Unistar, to escrow a copy of the source code, HTML code or other code
(whether object or source code) for all elements or portions of the Web Pages
and the Work Product not provided to Executone or Unistar in source code form
(the "Escrow Materials"), with a third party agent acceptable to Executone or
Unistar and under contractual terms acceptable to Executone or Unistar. Any such
escrow agreement will at least allow for Unistar and Executone access to the
Escrow Materials if CWH is declared bankrupt or files for bankruptcy. The
Parties currently know of no software that will have to be escrowed pursuant to
this Section.
9. TERM. Unless earlier terminated as provided in this Agreement, this
Agreement shall terminate upon the expiration of the Warranty Period as defined
in Paragraph 12.
10. TERMINATION. Either Party may terminate this Agreement for the other's
default as defined in Section 17 or Section 18 of this Agreement. Upon
occurrence of any Notice of Termination, in addition to all other rights and
remedies available under the Uniform Commercial Code of California or other
applicable law, this Agreement or otherwise, a Party shall, at their option, be
entitled to terminate this Agreement without any further obligation to the other
Parties except for any obligations, including payment obligations, that have
occurred on or before the date of such termination, with or without notice to or
consent, except if such notice, consent, or judicial process is expressly
required by law. If Executone or Unistar terminates this Agreement, Executone or
Unistar may elect to contract with another party to complete the Project in
accordance with the designs and specifications without payment of any royalty or
other fee to CWH.
11. POINT OF CONTACT. CWH will obtain authorizations, information and
approvals reasonably requested from Executone or Unistar during the performance
of the Agreement from Bob Hopwood (the "Point of Contact"). Unistar may change
the Point of Contact, subject to reasonable advance notice by Unistar, so long
as any change from Bob Hopwood is of equal or greater skills.
12. WARRANTY. CWH hereby warrants that the completed work performed by it
pursuant to the Agreement, including all services, labor and all elements of the
Work Product, shall execute in accordance with the specifications for a period
of six (6) months from the date of final acceptance of the Work Product by
Unistar. Any correction shall be furnished in a form reasonably selected by
Unistar, including correction documentation, corrected code, or a restriction or
bypass. If Unistar reports to CWH a failure of any portion of the Work Product
or the Documentation to conform to the foregoing warranties during the
applicable Warranty Period, and provides such reasonable detail as CWH may
reasonably require to permit CWH, using reasonable commercial efforts, to
reproduce such failure, CWH, at its expense, shall use reasonable commercial
efforts to repair or replace the incorrect portion of the Project to correct
such failure. CWH must use reasonable commercial efforts to reproduce any
failure. This warranty shall not apply to any portion of the Project if it has
been modified by Executone or Unistar or any third party.
Should any future operating system or network system not in existence
today become commercially viable and/or desirable as a platform for the Work
Product during the first three (3) years following commercial release of the
Work Product, CWH agrees to make reasonable efforts to give Executone and
Unistar the highest priority in scheduling labor for any conversion and/or
translation upgrade desired at then prevailing rates.
THE FOREGOING STATES CWH'S SOLE AND EXCLUSIVE WARRANTY TO CUSTOMER
CONCERNING THE PERFORMANCE OF THE WORK PRODUCT. EXCEPT FOR THE EXPRESS
WARRANTIES STATED IN THIS AGREEMENT, CWH MAKES NO ADDITIONAL WARRANTIES,
EXPRESS, IMPLIED, ARISING FROM COURSE OF DEALING OR USAGE OF TRADE, OR
STATUTORY, AS TO THE WORK PRODUCT, OR ANY MATTER WHATSOEVER IN PARTICULAR, ANY
AND ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND
NONINFRINGEMENT OF THIRD PARTY RIGHTS ARE EXPRESSLY EXCLUDED.
13. FINAL ACCEPTANCE.
13.1. Deliverables. CWH will develop a list of specific Deliverables
required to complete the development of the Project, per Exhibit B, and shall
designate the milestone on the Milestone Schedule to which each such Deliverable
applies. CWH shall use reasonable commercial efforts to deliver the applicable
Deliverable not later than the date specified as the milestone date for each
Deliverable. Failure by third parties contracted by Executone or Unistar to
deliver Deliverables required by CWH in order to meet the Milestone Schedule and
causing CWH to miss such milestones will not constitute a breach of this Section
by CWH. Failure by providers of hardware to deliver Deliverables required by CWH
in order to meet the Milestone Schedule causing CWH to miss such milestones will
not constitute a breach of this Section by CWH.
13.2. Acceptance.
a. Unistar shall test or review each Deliverable, within the
time period indicated in Exhibit B after delivery by CWH, to determine if it
meets the applicable portion(s) of the Specifications. Unistar shall either
accept or reject the Deliverable, in writing, within such period. The
Deliverable will be deemed to have been accepted by Unistar if CWH does not
receive such written acceptance or rejection within the time period indicated
for each Deliverable in Exhibit B. Any rejection by Unistar must set forth with
particularity the reason why Unistar is rejecting the Deliverable. CWH will use
reasonable commercial efforts to correct any Deliverable so rejected within two
(2) days provided that it is reproducible by CWH using its reasonable commercial
efforts. CWH must use its commercial efforts to reproduce any failure. CWH will
resubmit such corrected Deliverable to Unistar for acceptance. Unistar will,
within the days, as indicated in Exhibit B, of such redelivery, provide CWH with
written acceptance or a rejection. Failure to accept or reject within this
period shall be deemed acceptance of the Deliverable by Unistar.
b. Final Acceptance. Executone and Unistar shall have thirty
(30) days from the date on which CWH delivers the Work Product to examine and
test the Work Product to determine whether it executes in accordance with the
Specifications. Within such period, Executone and Unistar shall provide CWH with
written acceptance or a statement of any errors to be corrected. This acceptance
procedure pertains to the Work Product as delivered by CWH and does not apply to
any errors in the Work Product which are a result of any additions,
modifications or changes in the Work Product implemented by Executone and
Unistar or third parties. The Work Product will be deemed to have been accepted
by Executone and Unistar if CWH does not receive such written acceptance or
statement of errors within such thirty (30) day time period. CWH shall use
reasonable commercial efforts to correct any such error within five (5) days
which is reproducible by CWH using its reasonable commercial efforts and will
redeliver the Work Product to Executone and Unistar at no additional cost to
Executone or Unistar. CWH must use its reasonable commercial efforts to
reproduce any failure. Executone and Unistar will then have an additional
fifteen (15) days to evaluate the Work Product and either accept or reject the
Work Product in conformance with the terms of this Section. If Executone or
Unistar rejects the Work Product for a third time, CWH shall be deemed in breach
of this Agreement and Executone and Unistar shall have the right to terminate as
set forth in Section 10, without limitation to any other rights Executone and
Unistar may have. The Work Product will be deemed to have been accepted by
Executone and Unistar if CWH does not receive such written acceptance or a
statement of errors within the initial thirty (30) day period or any subsequent
fifteen (15) day period.
c. Training. CWH shall provide Unistar, during the ninety (90)
days immediately following acceptance of the "Work Product" initial technical
training in the installation and use of the Work Product, not to exceed five (5)
days of instruction, at Unistar's designated facilities. CWH shall bill and
Unistar shall pay, within fifteen (15) days of the date of the invoice, all
actual expenses incurred during travel to Unistar's designated facilities.
d. Testing of the Project, Web Pages or Software. Prior to
final acceptance, CWH will test the Project, Web Pages or Software in accordance
with CWH's acceptance test as generally approved by Executone and Unistar. CWH's
acceptance test shall be written in to test both the functions and performance
specified in the Functional Specifications. CWH's acceptance test will be
supplied to Executone and Unistar by CWH prior to or at the time of delivery of
the Work Product in accordance with Exhibit B. Executone or Unistar will monitor
the acceptance testing performed by CWH and CWH agrees to give Executone and
Unistar sufficient written notice to enable Executone or Unistar to attend.
14. COMPENSATION.
14.1. As compensation for the Services provided by CWH hereunder,
and the rights granted herein, payment shall be on a time and materials basis
where time is to be paid at Eighty Dollars ($80) per hour spent on the Project
where costs have been incurred by CWH employees or consultants, and actual costs
incurred for material and travel ("Compensation"). CWH shall submit an invoice
for all costs incurred by CWH pursuant to this Agreement.
14.2. Without the prior written approval of Executone or Unistar, in
no event will the total Compensation invoiced under the Agreement exceed Four
Hundred Thousand Dollars ($400,000). CWH hereby acknowledges the receipt of One
Hundred Seventy-five Thousand Dollars ($175,000) under the Agreement which
Executone or Unistar has already paid to CWH as compensation under this
Agreement.
14.3. All invoices submitted by CWH must contain a detailed
application for payment, including: (a) detailed explanation of all materials
furnished, with receipts, and back-up documentation, including detailed time
reports, and (b) a waiver of liens for all materials furnished. Shipping and
insurance expenses will be subject to the prior written approval of Executone or
Unistar based on written estimates submitted by CWH. Expenses over One Thousand
Dollars ($1,000) must be approved in writing in advance by Executone or Unistar.
Executone or Unistar will pay CWH in accordance with each invoice within ten
(10) days of Executone's or Unistar's receipt of each such invoice.
14.4. Unistar and Executone shall indemnify and hold CWH harmless
against any disputes arising between Unistar and any subcontractors under
assigned subcontracts as long as such dispute does not involve any Deliverable
owed by CWH.
15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF EXECUTONE.
Executone and Unistar represent to CWH the following:
15.1. Authority. Executone and Unistar have all necessary power and
authority to execute, deliver and perform their obligations under the Agreement,
and that the execution, delivery and performance by Executone and Unistar of the
Agreement has been duly authorized by all necessary action on the part of
Executone and Unistar and requires no additional consent to be effective.
15.2. Enforceability. The Agreement constitutes a legal,
valid and binding obligation of Executone and Unistar enforceable against
Executone and Unistar in accordance with its terms.
15.3. Capitalization. Executone is financially solvent, able to
pay its debts as they mature, and possesses sufficient working capital to
complete its obligations under the Agreement.
15.4. Legality. Executone and Unistar represent and warrant to CWH
that (i) no consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state,
local or provincial governmental authority on the part of Executone or Unistar
is required in connection with the consummation of the transactions contemplated
by this Agreement; (ii) there is no action, suit, proceeding or investigation
pending or currently threatened against Executone or Unistar which questions the
validity of this Agreement or the right of Executone and Unistar to enter into
it, or to consummate the transactions contemplated hereby; (iii) Unistar has,
and is in compliance with, all franchises, permits, licenses, and any similar
authority necessary for the conduct of its business as now being conducted by it
and believes it can obtain any similar authority for the conduct of its business
as planned to be conducted; and (iv) to Executone's and Unistar's knowledge
Executone and Unistar are in compliance in all material respects with all
federal or state statutes, rules or regulations applicable to the transactions
contemplated by this Agreement and the execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby will not
result in any such violation or cause the suspension, revocation, impairment,
forfeiture, or non-renewal of any material permit, license, authorization, or
approval applicable to the Virtual Lottery(TM).
15.5. Non-reliance. Executone and Unistar acknowledge and agree that
they are not relying on CWH to advise it with respect to legal or regulatory
compliance in connection with the Virtual Lottery(TM) or any other uses of the
Work Product and that Executone and Unistar are making their own determinations
with respect thereto and is relying on its own legal counsel to advise it in
connection therewith. Notwithstanding the foregoing, each Party mutually
acknowledges the existence of regulatory jurisdiction of national and
subnational, and covenants and agrees to cooperate at its own expenses with all
such units to obtain any regulatory review, license, concession, or other
permission such units may reasonably require.
15.6. Indemnification. Executone and Unistar will defend, indemnify
and hold harmless CWH, its officers, directors, shareholders, employees or
agents for any losses, liabilities, costs or expenses due to a breach of a
representation or warranty made by Executone to CWH pursuant to Section 15.4 or
due to any action or proceeding by any Federal, state, or local government
authority related to Executone's use (including, but not limited to marketing)
of the Work Product in any jurisdiction.
16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CWH. CWH represents
to Executone the following:
16.1. Authority. CWH has all necessary power and authority to
execute, deliver and perform its obligations under the Agreement, and that the
execution, delivery and performance by CWH of this Agreement has been duly
authorized by all necessary action on the part of CWH and requires no additional
consent to be effective.
16.2. Enforceability. The Agreement constitutes a legal, valid and
binding obligation of CWH enforceable against CWH in accordance with its terms.
16.3. Title to the Work Product. CWH warrants that all titles and
licenses specified herein to the Work Product will be good, that the Work
Product will be free from all security interests, claims, demands, liens and
other encumbrances. CWH will do, execute, acknowledge and deliver, or cause to
be done, executed, acknowledged and delivered, any such further acts,
instruments, papers and documents as may be necessary to transfer good title to
Unistar to the Web Pages and an unlimited license to use the items set forth in
Exhibit C without any additional compensation. The Web Pages furnished by CWH in
the course of CWH's performance of Services hereunder will belong to Unistar,
except as set forth in Exhibit C. The Software furnished by CWH in the course of
CWH's performance of services hereunder will be jointly owned, except as set
forth in Section 7.2.
16.4. Intellectual Property. CWH further represents and warrants
that it has no knowledge or any reason to know of any claim of infringement of,
and that the Work Product does not infringe, any patent, copyright, trademark,
or misappropriate any trade secret or other proprietary right of any third party
as a result of the performance of the obligations under the Agreement and the
creation and development of the Work Product.
16.5. Cooperation. CWH will cooperate and coordinate with Unistar
and Executone and all Project contractors and consultants in furthering the
interests of Unistar and Executone in completing the Work Product, consistent
with the terms and conditions of the Agreement.
16.6. Audits and Records. CWH, its employees and agents will
maintain detailed and accurate books and records of account with respect to
activities undertaken on behalf of Executone and Unistar, including original
receipts. Records of disbursements must indicate the check number, dollar
amount, identity of the payee and reason for the expenditure. CWH will provide
periodic reports as and when reasonably requested by Executone or Unistar on 14
days prior written notice and a final accounting within 60 days of the
completion of all Services. The final accounting must include an itemization of
all expenses incurred and must be certified by an appropriate officer or
authorized representative of CWH. Upon Executone's or Unistar's request, during
the term of the Agreement and for six months following the expiration,
cancellation or termination of the Agreement, Executone, Unistar or their
designated agent may inspect, review and copy CWH's books and records at
reasonable times during normal business hours upon 14 days prior written notice
to CWH and at the expense of Executone or Unistar.
17. DEFAULT BY CWH. During the term of the Agreement, the occurrence
of one or more of the following events will be deemed a "CWH Default".
17.1. If CWH defaults in any material respect in the observance or
performance of any covenant, condition or obligation of CWH contained herein
(including without limitation, failure to use reasonable commercial efforts to
correct or reproduce a reported failure of the Work Product or any Deliverable
under Section 12 or 13) or CWH makes any material false or misleading statement
in any certificate or document made or given pursuant to the Agreement, and such
default continues for fourteen (14) days after written notice to CWH specifying
the default and demanding that the same be remedied; provided, however, that if
such default relates to CWH's failure to comply with the timetable set forth in
Exhibit B, CWH will have no more than five days after the date of any written
notice to cure such default.
17.2. If CWH (a) files a petition commencing a voluntary bankruptcy
or similar proceeding under any applicable bankruptcy or similar law or (b) is
declared bankrupt or insolvent under any law relating to bankruptcy.
17.3. If a custodian, receiver, trustee or liquidator is appointed
in any proceeding brought against CWH and is not discharged within sixty (60)
days after such appointment.
18. DEFAULT BY EXECUTONE OR UNISTAR. During the term of the Agreement,
the occurrence of one or more of the following events will be deemed a
"Executone Default":
18.1. If Executone or Unistar defaults in any material respect in
the observance or performance of any covenant, condition or obligation of
Executone or Unistar contained herein and such default continues for fourteen
(14) days after written notice to Executone or Unistar specifying the default
and demanding that the same be remedied; provided, however, that any breach
relating to payments due under this Agreement as defined in Exhibit B must be
cured within five (5) days after written notice to Executone and Unistar.
18.2. If Executone or Unistar (a) files a petition commencing a
voluntary bankruptcy or similar proceeding under any applicable bankruptcy or
similar law or (b) is declared bankrupt or insolvent under any law relating to
bankruptcy.
18.3. If a custodian, receiver, trustee or liquidator is appointed
in any proceeding brought against Executone or Unistar and is not discharged
within 60 days after such appointment.
19. REMEDIES.
19.1 Nonconforming Materials. If Executone or Unistar discovers that
any part of the Work Product supplied by CWH hereunder fails to conform to the
warranties set forth in Section 12, then CWH will, at no cost to Executone or
Unistar, promptly replace or modify any such nonconforming Work Product so that
it conforms to the above warranties. The cost of transporting repaired or
modified Work Product will be borne by CWH. The repaired or modified item will
be covered by the warranty given above, and nonconforming conditions will be
subject to this remedy. Nothing in this section will be deemed to prohibit
Executone, Unistar or CWH from exercising its rights to recover any and all
damages suffered as a result of the breach of warranty.
19.2. Timeliness. Both Parties will perform its remedial obligations
hereunder in a timely manner consistent with the other party's reasonable
requirements and the continuous, uninterrupted operation of the Project and the
maintenance of quality and uninterrupted services during the Project. If a party
is unable to remedy such nonconformity during a time period consistent with this
Agreement, the other party may undertake to remedy the nonconformity, and in
such case the breaching party will reimburse the other party for any reasonable
expenses thereby incurred. If Executone or Unistar terminates this Agreement,
Executone or Unistar may elect to contract with another party to complete the
Project in accordance with the designs and specifications without payment of any
royalty or other fee to CWH.
19.3. Nonexclusivity. No party's remedies set forth in this Section
19 will not be exclusive, but will be cumulative and may be exercised
concurrently or consecutively, and will be in addition to all other remedies any
party may have under the Agreement or provided by law.
20. CWH'S INDEMNITY. CWH agrees to indemnify and hold harmless Executone,
Unistar, their affiliates and their respective officers, employees, directors
and agents from all claims, liabilities, costs and expenses, including
reasonable attorneys' fees that arise from, or may be attributable to, any claim
of patent, copyright or trade secret infringement by any third party related to
the manufacture, sale, operation or use of the Work Product as accepted by
Executone or Unistar and excluding any misuse or modifications by Executone or
Unistar or a third party. CWH's obligation to indemnify and hold harmless will
expire eighteen (18) months after the termination of the Warranty Period.
21. MAINTENANCE AFTER WARRANTY. CWH agrees to provide maintenance support
for the Project on a time and materials basis at CWH's then applicable rates. In
addition, at Executone's or Unistar's request, CWH will provide its standard
software maintenance services, in accordance with the terms and conditions of
CWH's then Software maintenance agreement for a period of one (1) year on a time
and materials basis. CWH also agrees to provide consulting services on a time
and materials basis, at CWH's then applicable rates, to implement any additions,
modifications, enhancements or changes to the Project desired by Executone or
Unistar. Any travel, lodging or other direct costs associated with maintenance
or consulting services will be billed to Executone or Unistar by CWH at CWH's
actual cost. However, any fees or costs to be charged to Executone or Unistar
under this section shall be no more than the lowest charges or costs charged by
CWH to any other party.
22. DISPUTE RESOLUTION.
22.1. Intent. It is the intention of the Parties to make a good
faith effort to resolve, without resort to arbitration, any Dispute (as defined
below) according to the procedures set forth in this Section. A "Dispute" is any
controversy or claim arising out of or relating to the Agreement or any breach,
termination or invalidity hereof.
22.2. Procedure. CWH's, Executone's and Unistar's designated
representatives will attempt to resolve all Disputes by negotiation. In the
event a Dispute cannot be resolved promptly by CWH's and Executone's or
Unistar's representatives, each party will immediately designate a senior
executive with authority to resolve the Dispute. The designated senior
executives will promptly begin discussions in an effort to agree upon a
resolution of the Dispute. If the senior executives do not agree upon a
resolution of the Dispute within 10 days of the referral to them, either party
may elect to abandon negotiations. If a Dispute cannot be resolved pursuant to
the procedures outlined in this Section, the Parties will then proceed to
arbitration.
22.3. Arbitration. All claims, demands, or disputes of any kind
between the Parties arising under or related to this Agreement shall first be
submitted to mediation before a single mediator selected by the Parties. If
after thirty (30) days after such mediation has been initiated, the dispute has
not been resolved to the satisfaction of both Parties, the Parties shall then
submit the dispute to binding arbitration conducted in the English language in
San Diego, California, under the rules of the American Arbitration Association.
Each party shall select an arbitrator, after which the arbitrators selected by
each party shall select a third arbitrator. Any award from the panel of
arbitrators shall be confirmable in any court of competent jurisdiction and
shall be entered as a judgment enforceable by the prevailing party. Any award
from the panel of arbitrators shall include an award of reasonable attorney's
fees and costs to the prevailing party. The Parties agree that discovery in
accordance with the federal rules of civil procedure will be available in any
such arbitration, provided that neither party may take more than two (2)
depositions, propound more than ten (10) requests for admissions, propound more
than two (2) interrogatories, make more than one (1) request for production of
documents and that all documents requested will be produced within five (5) days
of any request, all interrogatories and requests for admissions will be answered
within fifteen (15) days and all depositions will be taken before the expiration
of the thirty-first day (31 st) day after the initiation of arbitration.
23. COVENANT NOT TO COMPETE.
23.1. Agreement by CWH. CWH agrees not to use any of the Work
Product to compete with Executone or Unistar in any aspect (including without
limitation, system development or management) of any Class II or III regulated
gaming to be offered by any Native American Indian tribe as federally recognized
by the United States. CWH, its parents, subsidiaries, affiliates, officers,
directors, shareholders, and employees shall not use any information disclosed
by Executone, including but not limited to Executone's business prospects and
opportunities, business connections and their identity, needs or requirements,
whether confidential or not, and deal, directly or indirectly without Executone,
with any individual or entity Executone identifies as included in the definition
of Native Tribes as described above, in the course of this Agreement.
23.2. Agreement by Executone. Executone and Unistar agree not to use
any of the Work Product to compete with CWH in any aspect (including without
limitation, system development or management) of any regulated non-Indian
casinos domiciled outside the United States to operate a virtual casino.
Executone, its parents, subsidiaries, affiliates, officers, directors,
shareholders, and employees shall not use any information disclosed by CWH,
including but not limited to CWH's business prospects and opportunities,
business connections and their identity, needs or requirements, whether
confidential or not, and deal, directly or indirectly without CWH, with any
individual or entity CWH identifies as included in the definition of a regulated
non-Indian casino as described above, in the course of this Agreement.
23.3. Notice of Third Party Solicitation. Each Party shall provide
prompt notice to the other if a third party requests or expresses interest in
the other Party's Work Product as described above.
23.4. Continuing Nature of Obligations. The obligations under this
Paragraph 23 shall survive the expiration of termination of this Agreement, and
shall be binding upon each of the Party's, their employees, administrators,
legal representatives, and assigns.
23.5. Notification of Prospective Customers and Others. Each Party
shall notify in writing all subsequent prospective customers or any other actual
or potential customers, before entering into any contractual relationship,
respectively, of their continuing obligations to the other Party under this
Agreement.
23.6. Agreement With Officers, Directors, and Employees. Each Party
expressly warrants that all its employees performing work on this Project and
all officers and directors having knowledge of this Agreement do hereby accept
and be bound by each and every obligation in this Paragraph 23.
23.7. The Parties recognize the unique and irreplaceable nature of
the Work Product to each Party's future business prospects and agree any
competitive use by the other Party shall cause irreparable injury to the
non-offending Party not adequately compensated by money damages. Accordingly,
upon any actual or threatened breach of this Paragraph 23, the non-offending
Party shall be entitled to obtain equitable relief including a temporary
restraining order, preliminary injunction, and permanent injunction, without the
need to post any bond or other security and without having to demonstrate any
special or unique damages. This provision shall not limit the right of the
non-offending Party to seek money damages or other relief at law or equity. The
prevailing Party shall be entitled to its reasonable attorney's fees and costs
if it prevails, in whole or in part, in any such action.
24. GENERAL.
24.1. Independent Contractor. CWH is an independent contractor, and
the Agreement will not be construed to create an association, partnership, joint
venture, relation of principal and agent or employer and employee between
Executone, Unistar and CWH or its agents within the meaning of any federal,
state or local law. CWH will not enter into any agreement, oral or written, on
behalf of Executone or Unistar or otherwise obligate Executone or Unistar
without Executone's or Unistar's advance written approval which shall not be
unreasonably withheld. It will be the duty of CWH, and not of Executone or
Unistar, to control directly the time and manner of the work and services to be
performed by the employees of CWH and to comply with all applicable federal,
state and local laws, ordinances and regulations applicable to such employees.
24.2. Confidentiality and Confidential Information. The party
receiving any confidential and proprietary information of the other
("Confidential Information") from the other party shall treat all such
Confidential Information which may be disclosed by the disclosing party as
confidential commercial property and shall not use or disclose to others, except
as provided by this Agreement, any Confidential Information which may heretofore
or hereafter come within the knowledge of the receiving party in performing its
duties hereunder. This limitation on disclosure shall extend to the substance of
any discussions concerning the Confidential Information. The foregoing shall not
prevent the receiving party (a) from making use of or disclosing to others
information which the receiving party can show has become part of the public
domain other than by acts or omissions of the receiving party; (b) which the
receiving party can show has been furnished to him/her by third parties as a
matter of right, without restriction on disclosure; (c) which the receiving
party can show was in his/her possession prior to disclosure of the information
from the disclosing party to the receiving party; or (d) which is required to be
disclosed to a court of law or governmental agency as a matter of law. (In the
event of the occurrence of a disclosure pursuant to subparagraph (d), the
receiving party agrees to notify the disclosing party promptly of the disclosure
and of the circumstances concerning the disclosure and agrees to take whatever
legal steps are necessary to assist the disclosing party in protecting the
Confidential Information.)
24.3. Governing Law. This Agreement shall be governed by the laws of
the California. All disputes hereunder shall be resolved in the applicable state
or federal courts of the California. The Parties consent to the jurisdiction of
such courts, agree to accept service of process by mail, and waive any
jurisdictional or venue defenses otherwise available.
24.4. Nonwaiver. The failure of either party to demand strict
performance of the terms of this Agreement or to exercise any right conferred by
this Agreement will not be construed as a waiver or relinquishment of its right
to assert or rely on any such term or right in the future.
24.5. Severability. If any provision of this Agreement is held
invalid or unenforceable by a court of competent jurisdiction, such invalidity
shall not affect the validity or operation of any other provision, and such
invalid provision shall be deemed to be severed from the Agreement.
24.6. Assignment and Subcontracting. CWH may subcontract or
otherwise hire any reasonable resources necessary to perform the services or
meet its obligations hereunder at a rate of no more than Eighty Dollars ($80)
per hour without Executone's or Unistar's approval. Any resources to be billed
or charged to Executone or Unistar at a rate of more than Eighty Dollars ($80)
per hour must be approved by Executone or Unistar in writing before any charges
are incurred. CWH may not assign any of its rights or obligations hereunder
without Executone's or Unistar's prior written consent which consent by
Executone or Unistar shall not be unreasonably withheld. CWH may engage
temporary consultants as they would employees should the need arise.
24.7. Survival. All warranties, indemnities, intellectual property,
ownership and confidentiality rights and obligations provided herein will
survive the termination, completion or cancellation of this Agreement.
24.8. Amendments. No amendment, modification or waiver of any term
of this Agreement will be effective unless set forth in writing signed by
Executone, Unistar and CWH.
24.9. Headings. Headings contained in this Agreement are
inserted for convenience and will have no effect on the interpretation or
construction of this Agreement.
24.10. Publicity. Each party agrees that no information relative to
the Agreement will be released for publication, advertising or any other purpose
without the other party's prior written consent.
24.11 Counterparts. The Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of
which when taken together will constitute one and the same document
24.12. Negotiated Agreement. This Agreement and the exhibits
represent the negotiated agreement of both Parties and will not be construed
against a drafting party. In the event of any conflict or inconsistency between
the Agreement or any of the exhibits, the terms of this executed Agreement will
control.
24.13. Entire Agreement. The Agreement and the exhibits constitute
the entire agreement of the Parties with respect to the subject matter and
supersedes any prior or contemporaneous agreement or understanding between the
Parties.
24.14. Termination of Letter of Intent. The Parties hereby agree
that the Letter of Intent to Enter into Joint Venture dated September 5, 1996,
between CWH and Executone is terminated and shall be of no further force and
effect.
24.15. Notices. Notices provided will be in writing and sent by
certified mail, return receipt requested. Notices to CWH will be sent to Kendell
R. Lang, CEO, CasinoWorld Holdings, Ltd., 915 Camino del Mar, Suite 100, Del
Mar, California 92014. Notices sent to Executone and Unistar will be sent to
Barbara Anderson, Esq., Vice President and General Counsel, Executive
Information Systems, Inc., 478 Wheelers Farms Road, Milford, Connecticut 06460.
24.16. Force Majeure. No party will be responsible or liable for
delay in the performance of their respective obligations under the Agreement due
solely to circumstances beyond their control, including events of force majeure;
provided, however, that the party experiencing the force majeure will exercise
best efforts to attempt to overcome any force majeure impediment to its
performance and will notify the other party in writing of the force majeure
impediment and the efforts taken to overcome the force majeure impediment.
24.17. Termination for Change in Law. If any federal, state,
municipal or local law, regulation, ordinance, order, ruling, judgment, consent
decree or other governmental action becomes effective that, in the reasonable
opinion of Executone or Unistar, makes the Services to be provided pursuant to
the Agreement, or the Project as contemplated by the Agreement, unlawful or
impracticable or materially reduces the value of the Agreement to Unistar,
Unistar or Executone may terminate the Agreement as of the effective date of the
law, regulation, ordinance, order, ruling, judgment, consent decree or action
provided 30 days prior written notice is provided to CWH. If the Agreement is so
terminated, Executone and Unistar will have no liability to CWH after the
effective date of termination with the exception of fees earned and all
documented nonrecoverable costs properly incurred by CWH, including
subcontractors hired by CWH to work on the Project, on behalf of Executone and
Unistar in connection with the Agreement prior to the date of termination. CWH
will immediately deliver to Executone and Unistar documentation for all such
fees and costs.
IN WITNESS WHEREOF, the Parties hereto have entered into this Agreement as
of the date first written above.
CASINOWORLD HOLDINGS, LTD.
By: /s/ Kendell R. Lang
-------------------------------
Title: Chief Executive Officer
UNISTAR ENTERTAINMENT, INC.
By: /s/ Michael W. Yacenda
-------------------------------
Title: President
EXECUTONE INFORMATION SYSTEMS, INC.
By: /s/ Michael W. Yacenda
-------------------------------
Title: Executive Vice President
<PAGE>
EXHIBIT A
Specifications for Web Page
<PAGE>
EXHIBIT A
Specifications for Software
<PAGE>
EXHIBIT B
Timetable
<PAGE>
EXHIBIT C
Listed Materials
<PAGE>
EXHIBIT D
Subcontractors
1. Random Games, Inc.
2. Stellcom Technologies, Inc.
Exhibit 21.1
SUBSIDIARIES OF UNISTAR GAMING CORP.
UniStar Entertainment, Inc., an Idaho corporation
Exhibit 23.1
CONSENT OF HUNTON & WILLIAMS
November 13, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, CT 06460
Unistar Gaming Corp.
Proxy Statement/Amendment No. 1
to the Registration Statement on Form S-1
Gentlemen:
This firm has reviewed the information set forth in the first and seventh
paragraphs under the section entitled "RISK FACTORS--Pending Litigation That
Could Have a Material Adverse Effect on Unistar and the NIL" of the Proxy
Statement/Amendment No. 1 to the Registration Statement on Form S-1 (the "Proxy
Statement/Registration Statement") of Unistar Gaming Corp., a Delaware
corporation (the "Company"). We understand that the information set forth
therein as it relates to the issue of the authorization of the National Indian
Lottery under 25 U.S.C. 2701 et seq. is based upon the advice provided to the
Company by this firm.
We consent to the summarization of such advice and the reference to us in the
Proxy Statement/Registration Statement, including the references to us in the
sections entitled "FEDERAL INCOME TAX CONSEQUENCES" and "LEGAL MATTERS."
Very truly yours,
HUNTON & WILLIAMS
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
included in this registration statement, and to the incorporation by reference
in this registration statement of our report dated February 7, 1998,
incorporated by reference in EXECUTONE Information System, Inc.'s Form 10-K for
the year ended December 31, 1997, and to all references to our Firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
November 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF UNISTAR GAMING CORP. AND SUBSIDIARY FOR THE SIX
MONTH PERIOD ENDED JUNE 30, 1998 INCLUDED IN THE REGISTRANT'S FILING ON
FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,625
<PP&E> 4,308,326
<DEPRECIATION> 393,326
<TOTAL-ASSETS> 30,224,477
<CURRENT-LIABILITIES> 1,562,185
<BONDS> 372,156
0
0
<COMMON> 0
<OTHER-SE> 26,116,921
<TOTAL-LIABILITY-AND-EQUITY> 30,224,477
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 412,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (413,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (413,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (413,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
