As Filed with the Securities and Exchange Commission on September 16, 1998
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
------------
UNISTAR GAMING CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S><C>
DELAWARE 7999 13-3808625
--------------------------------- ------------------------------------------- -------------------
(State or other jurisdiction (Primary Standard Industrial Classification (I.R.S. Employer
of incorporation or organization) Code No.) Identification No.)
</TABLE>
------------
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>
<S><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 Amount To Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered Be Registered Offering Price Per Unit(1) Aggregate Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S><C>
Common Stock 9,953,251 shares $.25 $2,488,313 $734.05
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase 9,953,251 rights N/A N/A N/A
Rights(2)
- ----------------------------------------------------------------------------------------------------------------------------
Subscription Rights(3) 49,766,255 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 9,953,251 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>
Subject to Completion, dated September 16, 1998
PROSPECTUS
9,953,251 Shares
[LOGO]
UNISTAR GAMING CORP.
COMMON STOCK
(AND 49,766,255 RIGHTS TO ACQUIRE UP TO 9,953,251 OF SUCH SHARES)
------------
Unistar Gaming Corp. ("Unistar") is granting at no cost to you, as a holder
of common stock of EXECUTONE Information Systems, Inc. ("Executone"),
transferable rights ("Rights") to purchase shares of common stock of Unistar,
par value $0.01 per share ("Unistar Common Stock"). As an Executone stockholder,
you will receive one Right for every share of Executone common stock, par value
$0.01 per share ("Executone Common Stock"), that you own as of ___________, 1998
(the "Offering Record Date"). 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
9,953,251 shares of Unistar Common Stock will be offered in the Rights offering
(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 (the "Executone Preferred Holders") 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"), will
purchase such remaining unsold shares at the Subscription Price pursuant to a
Standby Agreement between Unistar and Unistar Buying Group, LLC, dated
_________, 1998.
------------
YOU SHOULD CAREFULLY CONSIDER THE RISKS THAT ARE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 6. 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 PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Exercise and Proceeds to
Offer Price Unistar
--------------------------------
Per Share* $.25 $.25
Total $2,488,313 $2,488,313
*Five Rights and $.25 entitle the holder to purchase one share of Unistar Common
Stock. It is estimated that a total of 11,709,707 shares of Unistar Common Stock
will be issued and outstanding after completion of the Offering, based on
49,766,255 shares of Executone Common Stock issued and outstanding as of July
31, 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 9,953,251 shares of Unistar Common Stock.
Before the Offering, the Unistar Common Stock has not been listed on any stock
exchange or the Nasdaq Stock Market. The Rights and the Unistar Common Stock
have been approved for quotation on the Nasdaq Stock Market.
The Date of this Prospectus is ____________, 1998.
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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
(continued from Cover Page)
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 __________, 1998, the Offering Record Date.
If there are fewer than or more than 49,766,255 shares of Executone Common Stock
outstanding on the Offering Record Date, Unistar will grant fewer than or more
than 49,766,255 Rights in the Offering. It is estimated that a total of
9,953,251 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 Offering 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE UNISTAR
COMMON STOCK, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE NASDAQ
STOCK MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN THE MARKET
PRICE OF THE UNISTAR COMMON STOCK.
-ii-
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................1
The Company............................................................1
The Offering...........................................................1
RISK FACTORS.................................................................6
No Prior Market for Unistar Common Stock...............................6
Potential Volatility of Unistar Stock Price............................6
No Assurance that Value of Unistar Common Stock at June 30, 1998,
will reflect Market Prices Following the Offering......................6
No Arms-Length Negotiation of Related Agreements.......................6
Unavailability of Executone's Financial and Other Resources............7
Dependence upon Key Personnel..........................................7
Certain Antitakeover Effects of Certain Provisions of Unistar's
Certificate of Incorporation and Unistar's Bylaws......................7
Legal Matters..........................................................7
Competition............................................................9
Government Regulation and Legislation..................................9
Market Development.....................................................9
Concentration in Single Industry......................................10
No Assurance of Additional Contracts..................................10
Share Exchange........................................................10
THE OFFERING................................................................10
Purpose of the Offering...............................................10
Exercise of the Rights................................................11
Transfer of the Rights................................................12
Additional Information................................................12
Unsubscribed Shares of Unistar Common Stock...........................12
FEDERAL INCOME TAX CONSEQUENCES.............................................13
Issuance of Rights to Holders of Executone Common Stock...............13
Exercise of Rights....................................................13
Sale or Expiration of Rights..........................................13
THE COMPANY.................................................................14
USE OF PROCEEDS.............................................................14
DISTRIBUTION POLICY.........................................................14
CAPITALIZATION..............................................................15
UNISTAR OPERATIONS UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...16
UNISTAR OPERATIONS SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION...19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................20
Introduction..........................................................20
Years Ended December 31, 1997, 1996 and 1995..........................20
Six Months Ended June 30, 1998 and 1997...............................23
Forward-Looking Statements............................................26
ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR RELATING TO THE OFFERING.........27
Reorganization Agreement..............................................27
Services Agreement....................................................28
Tax Sharing Agreement.................................................28
BUSINESS AND PROPERTIES OF UNISTAR..........................................29
Products..............................................................29
Competition...........................................................32
Patents, Trademarks and Copyrights....................................32
Employees.............................................................32
Unistar Properties....................................................32
The National Indian Lottery...........................................32
MANAGEMENT OF UNISTAR.......................................................35
Advisory Board........................................................35
Directors and Officers................................................35
Certain Board Committees..............................................36
Compensation Committee Interlocks and Insider Participation...........36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................36
(i)
<PAGE>
EXECUTIVE COMPENSATION......................................................37
Compensation of Directors.............................................37
Compensation of Executive Officers....................................38
Option Grants.........................................................39
Employment Agreements and Transition Retention Plans..................39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF UNISTAR COMMON STOCK
AND UNISTAR PREFERRED STOCK.................................................42
By Management.........................................................42
By Others.............................................................43
DESCRIPTION OF UNISTAR CAPITAL STOCK........................................44
Unistar Preferred Stock...............................................44
Unistar Common Stock..................................................45
Stockholder Rights Plan...............................................45
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE UNISTAR
CERTIFICATE, THE UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN....................47
AND THE GENERAL CORPORATION LAW OF DELAWARE.................................47
General...............................................................47
Classified Board of Directors.........................................48
Removal of Directors; Filling Vacancies...............................48
Special Meetings......................................................48
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors..............................................49
Preferred Stock.......................................................49
Certain Voting Requirements...........................................50
Stockholder Rights Plan...............................................50
Delaware General Corporation Law......................................50
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.....................50
Limitation of Liability of Directors..................................50
Indemnification of Directors and Officers.............................50
LEGAL MATTERS...............................................................50
EXPERTS.....................................................................50
ADDITIONAL INFORMATION......................................................51
(ii)
<PAGE>
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 Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes (i) a subscription price of $.25 per share of Unistar
Common Stock, (ii) 49,766,255 shares of 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 System, 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 has developed a client server based
gaming system (the "System") initially focused on the production, delivery and
billing of lottery games. The architecture of the System allows the addition,
deletion and substitution of games offered. The games are played using a
personal computer connected by the Internet, a kiosk connected by a local area
network ("LAN") or a telephone connected through the public telephone network.
Unistar's product development efforts are devoted to continual improvement in
all aspects of the System. Unistar is pursuing the sale or license of its
technology and the System worldwide primarily to state lotteries, international
lotteries and other potential customers. UniStar Entertainment, Inc., Unistar's
wholly-owned subsidiary ("UniStar Entertainment"), has entered into an exclusive
contract (the "Management Agreement") ending January 2003 to design, develop,
finance and manage the National Indian Lottery (the "Lottery") of the Coeur
d'Alene Tribe of Idaho (the "CDA" or the "Tribe"), the implementation of which
is the first application of the System. UniStar Entertainment provides
development and management of the software, network design and call center
applications for the Lottery'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 Lottery. The Lottery has commenced operations but
is not yet profitable. In an attempt to block the Lottery, certain states issued
letters under 18 U.S.C. Section 1084 ("Section 1984) to prevent the
long-distance carriers from providing toll-free telephone service to the Lottery
and the States of Missouri and Wisconsin have filed suit against the Lottery.
See "RISK FACTORS--Legal Matters."
The Offering
<TABLE>
<S> <C>
Description of the Rights Offering.... Each holder of shares of Executone
common stock, $.01 par value per share
("Executone Common Stock"), on
__________, 1998 (the "Offering Record
Date"), will receive one right (each, a
"Right") for every share of Executone
Common Stock owned (the "Offering").
Each five Rights entitle the holder
thereof (the "Holder") to purchase one
share of Unistar common stock, $.01 par
value per share ("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 only 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").
How Rights Will be Evidenced.......... Each Holder will receive a certificate
representing the Rights.
1
<PAGE>
Purchase of Unsubscribed Shares....... In the event that not all of the Rights
are exercised during the Exercise
Period, 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 9,953,251 shares of Unistar Common Stock
Offered in the Offering.............. will be offered in the Offering.
Number of Shares of Common Stock Approximately 11,709,707 shares of
to be Outstanding After the Offering. 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, holders of
Executone Preferred Stock, in exchange for
their shares of Executone Preferred Stock, will
receive as of the Closing Date pursuant to the
Exchange Agreement (as defined herein) 15%
of the outstanding shares of Unistar Common
Stock and all shares of Unistar's Cumulative
Convertible Preferred Stock, Series A (the
"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 the 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."
Sale of Rights........................ The Rights are transferable until the
last business day prior to the Expiration Date.
Use of Proceeds....................... For working capital and for general
corporate purposes.
Risk Factors.......................... See "Risk Factors" beginning on page 6
for a discussion of factors to be
considered in connection with the
Offering and the exercise of the Rights.
Nasdaq Stock Market Symbols........... The Rights are authorized for trading on
the Nasdaq Stock Market under the symbol
______ and the Unistar Common Stock is
authorized for trading on the Nasdaq
Stock Market under the symbol _____
</TABLE>
2
<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-26.
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 National Indian
Lottery (See Notes 3 and 4 on pages F-7 and F-9, and Note 6 on page F-17), 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 Year ended December 31,
--------------------------- ------------------- --------------------------------
June 30, 1998 June 30, 1997 1997 1996 1995(a) 1994 1993
------------- ------------- ---- ---- ------- ---- ----
<S><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 $28,916,978 $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.
3
<PAGE>
National Indian Lottery
Summary Financial Information
UniStar Entertainment has an exclusive five-year Management Agreement with
the CDA to design, develop, finance and manage the Lottery. In return for these
services, the Lottery will pay UniStar Entertainment a fee equal to 30% of net
revenues during the five-year term ending January 2003. While the Lottery has
yet to make any profit distributions to Unistar, the following information
represents the summary operating results for the first four quarters of the
Lottery'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
National Indian Lottery and the related notes thereto included on pages F-17 to
F-26.
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>
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 Loss $(1,965,262) $(1,218,798) $(1,238,233) $(772,270)
</TABLE>
4
<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........................................ 34,416,978
Current Liabilities................................. -
Long-term debt...................................... 372,156
Stockholders' equity................................ 31,871,607
5
<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 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
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.
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 Stock
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.
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 Board of Directors of Executone (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. This estimate of the aggregate market value would result in a market
value per share of Unistar Common Stock ranging from $1.28 to $1.71 based on
11,709,707 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. 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 stockholders 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."
Legal Matters
On September 14, 1998, the Tribe, 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 Lottery 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 counsel, that the operation of the Lottery 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 Tribe and Unistar would 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.
On October 16, 1995, the Tribe 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 Lottery is legal under the federal
Indian Gaming Regulatory Act of 1988 ("IGRA"), that IGRA preempts state laws on
the subject of Indian gaming, that 18 U.S.C. Section 1084 ("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
Lottery. This action was necessary because several long-distance network
carriers had been sent Section 1084 letters by states opposed to the Lottery.
These letters state that the Lottery is illegal under state and federal laws and
prohibit the interstate telephone carriers from carrying "800 number" network
traffic for the Lottery. Although in January 1998 the Tribe began to offer a
weekly draw Lottery for which tickets could be purchased over the telephone, it
has done so using a local telephone number, meaning that the Lottery'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 Lottery.
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 Lottery; and (iii) that AT&T cannot
refuse service to the Lottery based upon Section 1084, an allegation that the
Lottery 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 Tribe's right to conduct the
telephone Lottery. On August 22, 1997, AT&T filed a complaint for declaratory
judgment against the Tribe 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 Tribe 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 Lottery games offered by the Tribe
over the Internet and managed by UniStar Entertainment. The complaint also
sought civil penalties, attorneys fees and court costs. The complaint alleges
that the Lottery violates Missouri anti-gambling laws and that the marketing of
the games violates the Missouri Merchandising Practices Act. UniStar
Entertainment and the Tribe 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 Tribe 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 Tribe 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 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 Coeur
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. See "Government Regulation and Legislation."
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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 Lottery
offered by the Tribe on the Internet. The complaint alleges that the offering of
the Lottery violates Wisconsin anti-gambling laws and that legality of the
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 Tribe
have removed the case to the U.S. District Court in Wisconsin. On February 18,
1998, the District Court dismissed the Tribe 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
Tribe 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 Tribe 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. Currently,
there are two bills pending in Congress, Amendment 3266 to Senate appropriations
bill S. 2260 (the "Kyl/Bryant Amendment") and H.B. 4427 (the "Goodlatte/McCollum
Bill"). The Senate passed the Kyl/Bryant Amendment in July and the
Goodlatte/McCollum Bill is currently pending in the House of Representatives.
Both bills are in direct conflict with IGRA, and arguably could make the Lottery
unlawful. It is anticipated that an amendment to the pending House bill will be
offered to specifically exempt from the prohibitions contained in that bill
Indian gaming conducted in accordance with IGRA. UniStar Entertainment and the
Tribe believe that the Lottery is legal and intend to defend the right of the
Tribe to offer the Lottery 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 Lottery, could delay or
suspend certain Lottery operations. It is impossible at this time to predict the
nature or extent of any delays or suspension of operations that might occur.
No Arms-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
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developed by Executone in connection with its strategy to cause Unistar Common
Stock to be offered to Executone stockholders 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."
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 Associates, 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. Unistar currently has employment contracts with three of Unistar's
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."
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Share Exchange
[Two-thirds of the] Executone Preferred Holders have entered into the
Exchange Agreement with Executone and Unistar, pursuant to which Executone, in
exchange for all of the outstanding shares of Executone Preferred Stock, will
proportionately transfer to the Executone Preferred Holders: (i) shares of
Unistar Common Stock, which shares, as of the Closing Date, will represent 15%
of the outstanding shares of Unistar Common Stock (the "Original Issuance"),
exclusive of any shares acquired pursuant to the Standby Agreement or through
the Offering; 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 stockholders 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
Unistar has little competition in the development and management of
authorized Indian lottery enterprises. The broader areas of development,
licensing and management of gaming technology and the provision of gaming
entertainment are highly competitive. The gaming market is served by the States
through state-sponsored lotteries and by many domestic and foreign gaming
companies, including several large land-based casino companies. All of these
competitors have substantially more capital, and therefore more technology and
marketing resources, than Unistar.
Government Regulation and Legislation
The Lottery developed and managed by UniStar Entertainment for the Tribe is
authorized under IGRA. In managing the Lottery, UniStar Entertainment must
observe all laws and regulations applicable to the Lottery. 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 Tribe/State
compact and the rules and regulations of the NIGC. The Lottery is also governed
by the rules and policies promulgated by the Coeur d'Alene Tribal Council.
In July 1998, the Senate passed the Kyl/Bryant Amendment and the
Goodlatte/McCollum Bill is currently pending in the House of Representatives.
Both bills are in direct conflict with IGRA, and arguably could make the Lottery
unlawful. It is anticipated that an amendment to the pending House bill will be
offered to specifically exempt from the prohibitions contained in that bill
Indian gaming conducted in accordance with IGRA and Unistar is supporting
efforts to include such an exemption in any legislation that is enacted.
However, if adverse legislation is enacted, it could have a material adverse
effect on Unistar's current business, financial position and results of
operations.
Market Development
In addition to the legal risks, there are market risks associated with the
development of Unistar's business. Unistar is currently dependent exclusively
upon the success of the Lottery for its profits. As of June 30, 1998, the
registered customer base of the Lottery (including the instant and the weekly
games) was approximately 22,000 established accounts with about 4,200 active
players. Due to advertising, professional fees and other startup costs, the
Lottery has yet to generate a profit. Because Unistar's revenues from the
Management Agreement are a percentage of Lottery profits, Unistar has not
recognized any revenue as of June 30, 1998. Unistar believes that
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there is a national market for the Lottery based upon research into the
experience of other national lotteries and the growth of the overall lottery
market. However, there can be no assurance that there will be acceptance of a
telephone or Internet Lottery.
Concentration in Single Industry
Unistar's current operating strategy is to focus on the production,
delivery and billing of gaming technology. 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 international lotteries decide to sell their tickets over the Internet, by
telephone or through networked kiosks, there can be no assurance that the state
and international 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 System. Further, Unistar currently is relying exclusively on the
Management Agreement the term of which ends in January 2003 for the generation
of revenues. There can be no assurance that the Management Agreement will be
renewed after the expiration of its term or that the Management Agreement will
not be terminated in accordance with its terms during the term of the agreement.
THE OFFERING
Purpose of the Offering
Although the Offering is essentially an initial public offering directed to
Executone stockholders, 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 stockholders, already have some
knowledge of the business of Unistar, to distribute the securities to a broader
stockholder 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 stockholders 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.
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Exercise of the 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. Unistar will not issue any fractional shares in
the Offering. Each Holder should consult with an investment advisor.
Nominees for beneficial holders of Executone Common Stock will receive
Rights based upon the number of shares held by each beneficial holder
individually.
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. After the Expiration Date, a Holder will not be able to
exercise or transfer the Rights and all Rights will be worthless. Unistar will
not honor any Rights received for exercise by American Stock Transfer and Trust
Company (the "Rights Agent") after the Expiration Date, regardless of when such
Rights were sent to the Holder for exercise.
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 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.
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 or the Nasdaq Stock
Market 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>
American Stock Transfer & Trust American Stock Transfer & Trust American Stock Transfer & Trust
Company Company Company
40 Wall Street 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. 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 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
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<PAGE>
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.
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 Stock
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 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.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences to
holders of Executone Common Stock who receive Rights in the Offering. 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 holder of Executone Common Stock, 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 COMMON STOCK ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE FEDERAL TAX CONSEQUENCES OF THE OFFERING, 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
date of issuance, of the Rights issued to the stockholder. An Executone
stockholder's basis in such Rights will equal such fair market value.
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 stockholders
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 stockholder'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 date of issuance (and thus the
amount deemed distributed by Executone) will not be known until the Rights have
been issued, and the amount of Executone's earnings and profits for 1998 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 (i) the total amount
distributed to the stockholder in 1998 and (ii) the portion of such amount that
is taxable as a dividend.
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
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
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 in the Rights on the Expiration Date.
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THE COMPANY
Unistar began operations in 1993 and was acquired by Executone on December
19, 1995. Unistar has developed the System initially focused on the production,
delivery and billing of lottery games. The architecture of the System allows the
addition, deletion and substitution of games offered. The games are played using
a personal computer connected by the Internet, a kiosk connected by a LAN or a
telephone connected through the public telephone network. Unistar's product
development efforts are devoted to continual improvement in all aspects of the
System. Unistar is pursuing the sale of its technology and the System worldwide
primarily to state lotteries, international lotteries and other potential
customers. UniStar Entertainment entered into the Management Agreement with the
Tribe to design, develop, finance and manage the Lottery, the implementation of
which is the first application of the System. UniStar Entertainment provides
development and management of the software, network design and call center
applications for the Lottery's operations. In return for providing these
management services, the Tribe has agreed to pay UniStar Entertainment a fee
equal to 30% of the profits of the Lottery for a five-year term ending January
2003. The Lottery has commenced operations but is not yet profitable. In an
attempt to block the Lottery, certain states issued letters under Section 1084
to prevent the long-distance carriers from providing toll-free telephone service
to the Lottery and the States of Missouri and Wisconsin have filed suit against
the Lottery. See "RISK FACTORS--Legal Matters." Unistar's principal executive
offices currently are located at Executone's headquarters at 478 Wheelers Farms
Road, Milford, Connecticut 06460 and its telephone number is 203-876-7600.
USE OF PROCEEDS
Unistar intends to use the net proceeds of this Offering 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 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--Liquidity and Capital Resources."
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.
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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.
<TABLE>
<CAPTION>
June 30, 1998
(Unaudited)
------------------------------------------
Historical Adjustments Pro Forma
---------- ----------- ---------
<S><C>
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 - 33,732,624 33,732,624
Accumulated Deficit (1,978,767) - (1,978,767)
----------- ------------ ------------
Total Stockholders' Equity 26,116,921 5,754,686 31,871,607
----------- ------------ ------------
Total Capitalization $26,116,921 $ 5,754,686 $ 31,871,607
=========== ============ ============
</TABLE>
15
<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 represents a reorganization of companies
under common control and, accordingly, all assets and liabilities will be
reflected at their historical carrying value.
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.
16
<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>
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 9,687,688 - 9,687,688
Investment in IGT 700,000 - 700,000
Other Assets 1,610,085 - 1,610,085
----------- ------------ ------------
TOTAL ASSETS $28,916,978 $ 5,500,000 $ 34,416,978
=========== ============ ============
LIABILITIES AND DIVISIONAL
CONTROL/SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Current portion of capital lease obligations $ 115,336 $ (115,336)(a) -
Accounts payable and accrued liabilities 139,350 (139,350)(a) -
----------- ------------ ------------
254,686 (254,686) -
Deferred Income 2,173,215 - 2,173,215
Capital Lease Obligations 372,156 - 372,156
----------- ------------ ------------
TOTAL LIABILITIES 2,800,057 - 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 - 33,732,624 (a,b) 33,732,624
Accumulated Deficit (1,978,767) - (1,978,767)
----------- ------------ ------------
TOTAL DIVISIONAL CONTROL/STOCKHOLDERS'
EQUITY 26,116,921 5,754,686 31,871,607
----------- ------------ ------------
TOTAL LIABILITIES AND DIVISIONAL
CONTROL/STOCKHOLDERS' EQUITY $28,916,978 $ 5,500,000 $ 34,416,978
=========== ============ ============
</TABLE>
17
<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 49,766,255 as of July 31,
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.
18
<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-26.
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 National Indian
Lottery (See Notes 3 and 4 on pages F-7 and F-9, and Note 6 on page F-17), 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.
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>
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 $28,916,978 $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.
19
<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-1to F-26 and the
Forward-Looking Statements on page 26. 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.
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 National Indian
Lottery (See Notes 3 and 4 on pages F-7 and F-9, and Note 6 on page F-17), 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 "Liquidity and Capital Resources" for a detailed description of these costs
and their accounting treatment.
In addition, the 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
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.
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. UniStar Entertainment has an exclusive five-year Management
Agreement with the CDA to design, develop, finance and manage the Lottery. The
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 Lottery
encompasses a national telephone lottery and an on-line US Lottery Internet
site. In return for these services, the Lottery will pay UniStar Entertainment
a fee equal to 30% of net revenues during the five-year term ending January
2003. Net revenue is defined as gross revenues of the Lottery, less amounts
paid for prizes and total gaming related operating expenses. The remaining 70%
of net revenues will be paid to the CDA.
In accordance with the Management Agreement, Unistar is responsible for
providing operating capital to fund the development of the Lottery, 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 Lottery from Unistar and will be reimbursed to
Unistar from Lottery net revenues.
Years Ended December 31, 1997, 1996 and 1995
Results of Operations. Unistar did not generate any revenues during 1997,
1996 or 1995 because the Lottery was not operational. Although the Lottery
became operational in January 1998, it has yet to generate any net revenues and
therefore Unistar, which receives revenues only from the net revenues of the
Lottery, has generated no revenues through June 30, 1998.
20
<PAGE>
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 Lottery and
reflected on the balance sheet as Advances to NIL. These expenditures will be
reimbursed to Unistar from Lottery net revenues. 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 Lottery
for future reimbursement to Unistar, in accordance with the Management
Agreement. During 1997, $366,677 of such charges were recorded as Advances to
NIL, which are to be reimbursed to Unistar out of future Lottery profits. These
expenses were charged as Unistar expenses during the same period in 1996.
Unistar has not recorded a tax benefit for its losses for the years ended
December 31, 1997, 1996 and 1995. Based upon a lack of historical earnings and
given that Unistar has only generated taxable losses since its inception, it is
more likely than not that Unistar will not be able to utilize such tax benefits.
Liquidity and Capital Resources. The funding of Unistar comprises
expenditures for Unistar operating and capital expenditures, along with
operating and capital requirements of the Lottery. The funding of Unistar for
the years ended December 31, 1997 and 1996 is summarized as follows:
1997 1996
------------- --------------
Unistar Operating Activitie$ 807,679 $ 1,256,015
Gaming and Business Systems 2,326,612 501,098
Distributions to CDA 300,000 325,000
Investment in IGT -- 700,000
Capital Lease Obligations 70,574 --
Pre-Acquisition Liabilities 260,245 1,639,330
Lottery - Operating Activities 1,811,708 342,587
Lottery - Building Cost 848,928 223,726
Other 47,128 --
Cash Distributed by Executone -- (73,946)
---------- -----------
Advances from Executone $6,472,874 $ 4,913,810
========== ===========
The previous owners of Unistar advanced $4.1 million to fund Unistar
operating activities and for capital and other contributions.
Funding of Unistar operating activities 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
Lottery, 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 Lottery launched its US
Lottery Internet 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 Management Agreement.
As part of Unistar's Management 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
Lottery 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 signed agreements with Virtual Gaming
Technologies ("VGTI," and formerly Internet Gaming Technologies ("IGT")) and
CasinoWorld Holdings, Ltd. ("CWH"). The agreements required Unistar to invest
$700,000 in IGT common stock in September 1996 under a previous agreement. In
addition,
21
<PAGE>
Unistar was granted a 200,000-share, five-year option set at 15% more than the
price per share on the initial investment, or $3.45 per share. CWH provided
project management services overseeing the development of the software for the
Lottery, with Unistar contracting independently for system software development.
The investment in IGT 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 Lottery, primarily relating to legal and
other professional fees. The payment of these liabilities is considered part of
the Lottery funding. In 1997, such payments decreased by $1.4 million compared
to 1996.
The funding of Lottery 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 Lottery 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 Lottery net revenues, these expenditures are included in "Advances
to NIL" on the Consolidated Balance Sheets.
The 1997 funding of the building that houses the lottery operations center
increased $625,202 over 1996. The building is owned by the Lottery. These
expenditures, considered start-up costs related to the Lottery, have been
capitalized and are included in "Other Assets" on the Consolidated Balance
Sheets. See "--New Accounting Pronouncements."
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 Lottery 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 Lottery 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 Lottery has yet to generate a profit. As a
result, Unistar has not recognized any revenue under the terms of the Management
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.
Year 2000 Compliance. Unistar relies on software and related technologies
in the operation of its business. Based upon a review of its computer systems,
Unistar has determined that it is substantially Year 2000 compliant. For those
systems that are not Year 2000 compliant, Unistar believes that it will be able
to modify or replace its affected systems in a timely manner and with no
significant disruptions to its operations. Compliance costs to be incurred with
respect to the affected systems are not expected to exceed $50,000. Modification
costs will be expensed as incurred, while the cost of new software and
equipment, if needed, will be capitalized and amortized over the useful life of
the assets.
22
<PAGE>
Unistar is also communicating with its data suppliers regarding the Year
2000 issue. Failure by data suppliers to successfully address the issue on a
timely basis could result in delays in data becoming available to Unistar for
use in its products. While Unistar expects to be Year 2000 compliant on a
timely basis, there can be no assurance that the systems of other companies on
which Unistar's systems rely also will be converted on a timely basis. A
failure by another company to convert successfully could have an adverse effect
on Unistar's systems.
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. Although the Lottery became
operational in January 1998, it has yet to generate any net revenues.
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 Management Agreement in January
1998 when the Lottery became fully operational. Such assets are being
depreciated over the five-year term of the Management 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 Lottery for future
reimbursement to Unistar, in accordance with the Management 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 Lottery
profits. These expenses were charged as Unistar expenses during the same period
in 1997.
Liquidity and Capital Resources. The funding of Unistar comprises
expenditures for Unistar operating and capital expenditures, along with
operating and capital requirements of the Lottery. 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
Gaming and Business Systems 1,131,052 1,138,418
Distributions to CDA 150,000 150,000
Capital Lease Obligations 53,060 19,948
Pre-Acquisition Liabilities 389,553 154,421
Lottery - Operating Activities 1,594,580 428,679
Lottery - Building Cost 4,959 741,260
State Business Development Costs 161,060 -
Other 23,065 23,062
---------- ----------
Advances from Executone $3,785,427 $3,208,167
========= ==========
Funding of Unistar operating activities 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. See "--Legal, Market and Other Risks."
The funding of Lottery 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 Lottery
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.
23
<PAGE>
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 kiosks 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 Lottery and such costs are not chargeable to the Lottery.
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.
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 cash contributions and proceeds described
above are expected to be sufficient to fund Unistar's cash flow requirements
until it is operating on a break-even cash basis.
Legal, Market and Other Risks. Unistar, in its attempts to fulfill its
responsibilities in accordance with the Management Agreement, faces certain
risks. In attempting to conduct both the telephone and Internet lotteries, the
Lottery, which Unistar is managing, will be directly competing against lotteries
operated by various states. Accordingly, the Lottery and Unistar are facing
anticipated legal attempts to restrict or prohibit these activities.
On September 14, 1998, the Tribe, 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 Lottery 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 counsel, that the operation of the Lottery 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 Tribe and Unistar would 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.
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 Lottery is legal under 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 Lottery. This action was
necessary because several long-distance network carriers had been sent Section
1084 letters by states opposed to the Lottery. These letters state that the
Lottery is illegal under state and federal laws and prohibit the interstate
telephone carriers from carrying "800 number" network traffic for the Lottery.
Although in January 1998 the Tribe began to offer a weekly draw Lottery for
which tickets could be purchased over the telephone, it has done so using a
local telephone number, meaning that the Lottery'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 Lottery.
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 Lottery; and (iii) that AT&T cannot
refuse service to the Lottery based upon Section 1084, an allegation that the
Lottery 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 Tribe's right to conduct the
telephone Lottery. On August 22, 1997, AT&T filed a complaint for declaratory
judgment against the Tribe 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 Tribe has answered the complaint and filed a motion for
partial summary judgment. 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.
24
<PAGE>
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 Lottery games offered by the Tribe
over the Internet and managed by UniStar Entertainment. The complaint also
sought civil penalties, attorneys' fees and court costs. The complaint alleges
that the Lottery violates Missouri anti-gambling laws and that the marketing of
the games violates the Missouri Merchandising Practices Act. UniStar
Entertainment and the Tribe 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 Tribe 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 Tribe 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 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 Coeur
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 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 Lottery
offered by the Tribe on the Internet. The complaint alleges that the offering of
the Lottery violates Wisconsin anti-gambling laws and that legality of the
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 Tribe
have removed the case to the U.S. District Court in Wisconsin. On February 18,
1998, the District Court dismissed the Tribe 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
Tribe 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 Tribe 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. Currently,
there are two bills pending in Congress, The Kyl/Bryant Amendment and the
Goodlatte/McCollum Bill. The Senate passed the Kyl/Bryant Amendment in July
1998, and the Goodlatte/McCollum Bill is currently pending in the House of
Representatives. Both bills are in direct conflict with IGRA, and arguably could
make the Lottery unlawful. It is anticipated that an amendment to the pending
House bill will be offered to specifically exempt from the prohibitions
contained in that bill Indian Gaming conducted in accordance with IGRA. UniStar
Entertainment and the Tribe believe that the Lottery is legal and intend to
defend the right of the Tribe to offer the Lottery 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 Lottery, could delay or suspend certain Lottery
operations. It is impossible at this time to predict the nature or extent of any
delays or suspension of operations that might occur.
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There are also market risks associated with the development of the Lottery.
Unistar believes there is a national market for the Lottery 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 would be
a material adverse effect on Lottery operations and, accordingly, on Unistar.
Forward-Looking Statements
All forward-looking statements regarding Unistar and the Lottery 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 Lottery
games, Lottery 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
Company'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.
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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 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 arms-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 become 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 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 Stock 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.
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.
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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.
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BUSINESS AND PROPERTIES OF UNISTAR
Products
Unistar has developed client/server-based gaming systems initially focused
on the production, delivery and billing of lottery games over the Internet and
by telephone (the "Internet System") and, as modified, to deliver games over
closed loop or "Intranet" systems (the "Intranet System" and, together with the
Internet System, the "Systems"). The implementation of the Lottery is the first
application of the Internet System. See "--The National Indian Lottery."
Both Systems contain significant features and procedures to prevent play by
minors, such as through the requirement of age verification, credit card numbers
or Social Security numbers to establish an account, or through availability in
age-restricted environments. Unistar believes that the Internet System contains
processes and procedures to protect against play by minors and that the Intranet
System as implemented will provide protections against play by minors 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 System is designed such that customers
can access the 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, kiosks 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 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 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 personal identification number (PIN). 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.
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o Kiosks. To log onto the Intranet in order to play the games, the player
must insert the card into the magnetic strip reader on the game kiosk
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 kiosk.
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 kiosk. While the results of the ticket are
predetermined, the kiosk 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.
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 the System allows 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, 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.
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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.
Product Development. Unistar's product development efforts are devoted to
continual improvement in all aspects of the System. 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 System. 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 an alpha
stage of development. While the prototypes are functioning, additional
development is necessary to complete the Intranet System.
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 million over the next year.
Sales and Marketing. Unistar is pursuing the sale of its technology and
the System worldwide, primarily to state lotteries and international lotteries.
o Lottery Market. Worldwide lottery ticket sales in 1996 were
approximately $118.9 billion dollars. Worldwide lottery sales have
grown at an annual compounded rate of approximately 6% over the past
five years. In 1996, lottery sales in the United States were $35.1
billion and have averaged approximately 5% annual growth over the last
five years. From 1995 to 1996 sales of Draw lottery tickets declined
while sales of tickets for Instant lotteries, Video Lottery Tickets
("VLT") and Keno have increased. The games offered by Unistar generally
are analogous to these segments. The table below details lottery
revenue in the United States for 1995 and 1996 by type of game and shows
annual growth.
Lottery Sales in the United States (in millions)
Annual
Growth
1995 1996 Rate
---- ---- ------
Instants and Pull Tab Games $12,753 $14,201 11.4%
Draw Lotteries 18,001 17,730 (1.5)%
Video Lottery 814 1,161 42.6%
Keno and other 1,582 1,979 25.1%
------- ------- ----
$33,150 $35,071 5.8%
o State and Other Governmental Lotteries. Unistar believes that the System
represents 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 System further increases the accessibility of
lottery tickets by providing lottery tickets that are available
electronically. These
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tickets can be obtained through client kiosks connected to the System
either by LAN or by telephone lines if the System is 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 System, but has not yet entered into any additional contracts.
Competition
Unistar has little competition in the development and management of
authorized Indian lottery enterprises. The broader segments of development,
licensing and management of gaming technology and the provision of gaming
entertainment are highly competitive. The gaming market is served by the states
through state-sponsored lotteries and by many domestic and foreign companies,
including several large land-based casino companies. All of the competitors
have substantially more capital, and therefore more technology and marketing
resources, than Unistar.
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.
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 Lottery and relies upon trade secret, contract and copyright
laws to protect its proprietary rights in its software, designs and
documentation.
Certain of the Lottery 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 Lottery, 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. UniStar Entertainment has an exclusive Management Agreement with
the Tribe ending January 2003 to design, develop, finance and manage the
Lottery. UniStar Entertainment provides development and management of the
software, network design and call center applications for the Lottery's
operations. In return for providing these management services, the Tribe has
agreed to pay UniStar Entertainment a fee equal to 30% of the profits of the
Lottery for five years. In accordance with the Management Agreement, Unistar is
responsible for providing operating capital to fund the development of the
Lottery 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
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reimbursable to Unistar. Any sums advanced above the $8.5 million requirement
are recorded as advances to the Lottery from Unistar and will be reimbursed to
Unistar from Lottery net revenues.
The Lottery has commenced operations but is not yet profitable. In an
attempt to block the Lottery, certain states issued letters under Section 1084
to prevent the long-distance carriers from providing toll-free telephone service
to the Lottery and the States of Missouri and Wisconsin have filed suit against
the Lottery. See "RISK FACTORS--Legal Matters."
In addition to the legal risks, there are market risks associated with the
development of the Lottery. Unistar believes that there is a national market
for the Lottery 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."
The Tribe'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 Tribe's reservation in Idaho. The call
center would use ACD software to process nationwide lottery sales. In response
to legal challenges, the Lottery 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 and the Internet. The
System is fully redundant with dual homed web sites supported by battery and
generator power backup systems.
Sales and Marketing. The Lottery began test marketing its Instant Ticket
games on the Internet in May 1997. On January 20, 1998, the Lottery 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 Lottery (including the instant and the weekly games) was
approximately 22,000 established accounts, including approximately 4,200 active
players. Test marketing efforts for the Lottery 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. Lottery 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 Lottery 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 Lottery 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 Lottery
currently offers nine instant games that are also offered in a "demo" mode only.
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 Lottery plans
to increase as the prize pool increases. Drawings are held Tuesdays at
1:00 P.M. Pacific Time.
o The Lottery expects to launch a "Pick3" game in 1998. Drawings will be
held daily Monday through Friday at 12:00 P.M. Pacific Time.
o The Lottery 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.
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Customer Service. The Lottery provides a customer service center staffed
with customer service representatives trained in the games and technology
deployed. The Lottery 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 Lottery offers special
promotions in the form of "bonus dollars" whereby customers play using credits
provided by the Lottery. The lottery 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 Lottery competes primarily with the various
state-sponsored lotteries that have substantially more capital and marketing
resources than the Lottery.
Government Regulation and Legislation. The Lottery developed and managed
by Unistar for the Tribe is authorized under IGRA. In managing the Lottery,
Unistar must observe all laws and regulations applicable to the Lottery. 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 Tribe/State compact and the rules and regulations
of the NIGC. The Lottery is also governed by the rules and policies promulgated
by the Coeur d'Alene Tribal Council.
In 1992, the Tribe signed the Compact with the State of Idaho (the
"Compact"). The Compact specifically provides for the conduct of the Lottery
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 Tribe
entered into a management agreement with Unistar for the conduct of the Lottery.
The Chairman of the NIGC approved the management contract and the amendments
thereto as required by law. By resolution, the Tribe has authorized the Lottery
to be conducted under the Management Agreement. The Tribe has complied with
IGRA and all other applicable rules, regulations and laws.
It is the opinion of the Tribe and Unistar that state anti-gambling laws
and regulations are not applicable to the Lottery 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--Legal Matters."
The employees of the Lottery undergo extensive background checks including
fingerprinting, which is sent to the Federal Bureau of Investigation. The
Lottery also has made and will continue to make reasonable efforts to address
the issue of problem gambling and to prevent participation by minors. The
system requires each user to have a credit card. To prevent access by minors,
the Lottery 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
Lottery 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 Lottery. Winnings are paid only by a check issued and
mailed directly to the person and mailing address on the account.
34
<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 Lottery, 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:
<TABLE>
<CAPTION>
Name Age Position Class
- ---- --- -------- -----
<S><C>
Robert A. Berman 38 Director and Chairman of the Board III
Stanley M. Blau 60 Director II
Alan Kessman 51 Director and Vice Chairman I
Jerry M. Seslowe 52 Director II
Michael W. Yacenda 46 Director, President and Treasurer III
Charles A. Degliomini 40 Vice President, Sales and Marketing - Government Lotteries
Howard Goldfrach 49 Vice President, Sales and Marketing - National Indian Lottery
Robert W. Hopwood 54 Vice President, Operations and Customer Service, and Secretary
</TABLE>
Robert A. Berman has been the Chairman of the Board and Chief Executive
Officer of Hospitality Worldwide Services, Inc. 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. and Watermark
Investments Limited, LLC. 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., a predecessor of Executone
("ISOETEC"), since 1983. From 1978 to 1983, Mr. Kessman served as President of
three operating subsidiaries of Rolm Corporation, 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.
Jerry M. Seslowe has been a Managing Director of Resource Holdings Ltd., an
investment and financial consulting firm, since 1983. Prior to 1983, Mr.
Seslowe was a partner at KPMG Peat Marwick. 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.
35
<PAGE>
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; 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. for a total of nine years. Prior thereto, Mr. Goldfrach
was employed in various marketing management positions at Philip Morris for
twelve years.
Robert W. Hopwood has been Vice President of Executone and Vice
President-Operations 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 Associates, a former stockholder
of Unistar ("Resource Holdings"). 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."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
[Two-thirds of the] Executone Preferred Holders have entered into the
Exchange Agreement with Executone and Unistar pursuant to which Executone, in
exchange for all of the outstanding shares of Executone Preferred Stock, will
36
<PAGE>
proportionately transfer to the Executone Preferred Holders (i) shares of
Unistar Common Stock, which shares, as of the Closing Date, will represent 15%
of the Original Issuance, exclusive of any shares acquired pursuant to the
Standby Agreement or through the Offering, and (ii) all shares of Unistar
Preferred Stock. No fractional shares of Unistar Common Stock or Unistar
Preferred Stock will 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. Executone has
agreed in the Exchange Agreement to continue to fund Unistar until the Closing
Date at a rate not to exceed an average of $1.5 million per quarter. In addition
to such funding, Executone will (i) provide Unistar with $3.0 million in cash
and (ii) assume responsibility for, and pay when due, expenses incurred but not
yet paid, provided, however, that the maximum of such expenses will not exceed
$500,000, based on Executone's undertaking to keep payments current on expenses
incurred by Unistar prior to the Closing Date. The Exchange Agreement was
negotiated on behalf of Executone solely by members of the Executone Board who
owned no Executone Preferred Stock, including the members of the Special
Committee.
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 stockholders 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.
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) $1,000 for each Board meeting
attended plus out-of pocket expenses incurred in attending meetings of the
Unistar Board. The stock option awards described in (i) and (ii) above shall be
priced at 110% of the market price for the Unistar Common Stock at the time of
the grant, equaling the average closing price for the prior 20 trading days on
the Nasdaq Stock Market or other national exchange on which the Unistar Common
Stock is traded or, if the Unistar Common Stock is not traded on a national
exchange, at a price determined in the sole discretion of the Unistar Board. For
those options granted prior to the Closing Date, the relevant 20 trading days
shall be the first 20 trading days after the Unistar Common Stock commences
trading on the Nasdaq Stock Market.
Directors who are employees of Unistar will not be paid any additional
remuneration for services as members of the Unistar Board or any committee
thereof.
37
<PAGE>
Compensation of Executive Officers
The following table summarizes compensation paid to all of Unistar's
Executive Officers for services rendered to Unistar. The principal positions
listed in the footnotes to the table are those that will be held by the Named
Executive Officers with Unistar as of the Closing Date.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation Securities
Name and ------------------- Underlying All Other
Principal Position Year Salary($) Bonus($) Options(#) Compensation($)(3)
------------------ ---- -------- -------- ---------- ------------------
<S><C>
Michael W. Yacenda 1997 $256,000 0 0 $5,997
Executive Vice President 1996 256,000 49,900 0 5,935
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. Degliomini
Vice President, Sales and
Marketing - National Indian
Lottery, Unistar(2)
</TABLE>
(1) President, Chief Executive Officer and Treasurer of Unistar.
(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 $1,869) in 1997, 1996 and 1995,
respectively.
38
<PAGE>
Option Grants
Each of the following option grants relates to grants of options to acquire
shares of Unistar Common Stock as of the Closing Date.
OPTION GRANTS AS OF THE CLOSING DATE
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------------------
Percent of Potential Realizable
Number of Total Options Value at Assumed
Securities Granted to Annuals Rates of
Underlying Employees as Exercise Stock Price
Option Grants of the Closing Price Expiration Appreciation
------------------
Name (#) Date ($/Share) Date 5%($) 10%($)
- ------------------------------------------------------------------------------------------------
<S><C>
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) 40,249 102,000
</TABLE>
(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
39
<PAGE>
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").
Officers and other employees of the Company and "parent" and "subsidiary"
corporations (within the meaning of Code section 424) of the Company 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 the Company (or of any
other "parent corporation"), and a "subsidiary" corporation generally is a
corporation of which the Company (or any other " subsidiary" of the 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 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 Shareholder
(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
Shareholder if he owns, or is deemed to own, more than ten percent of the total
combined voting power of all classes of stock of the Company or a parent or
subsidiary of the Company. 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 shareholder, partner or beneficiary.
In addition, under Code Section 422, no Participant may receive ISOs (under
all incentive stock option plans of the Company and its parent or subsidiary
corporations) which are first exercisable in any calendar year for 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 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 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 Shareholder). No Participant may
be granted, in any calendar year, options for more than 200,000 shares of Common
Stock.
40
<PAGE>
An option may be exercised for any number of shares of Common Stock up to
the full number for which the option could be exercised. A Participant will
have no rights as a shareholder with respect to shares of Common Stock subject
to an option until the option is exercised. Any shares of 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 the Company shares
of Common Stock having a fair market value equal to the option exercise price.
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 shareholder
of the Company approved, the Plan. The Unistar Board may amend or terminate the
Option Plan at any time, but an amendment will not become effective without
shareholder 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.
41
<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 July 31, 1998 is
the same as such ownership on the Offering 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>
Robert A. Berman(1) 1,085,630 9.3% 46,356 61.8%
Stanley M. Blau 107,638 * - -
Alan Kessman 342,467 2.9% - -
Jerry M. Seslowe 54,312 * 1,408 1.9%
Michael W. Yacenda 170,656 1.5% - -
Charles A. Degliomini - - - -
Howard Goldfrach - - - -
Robert W. Hopwood 21,743 * - -
All Directors and
Officers as a group 1,782,446 15.2% 47,764 63.7%
</TABLE>
* Denotes less than 1% beneficial ownership.
(1) Owned by Watertone Holdings L.P., an entity controlled by Mr. Berman.
42
<PAGE>
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 July 31, 1998 is the same as such ownership on the
Offering 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.
<TABLE>
<CAPTION>
Estimated Amount Estimated Estimated Amount Estimated
and Nature of Percentage and Nature of Percentage
Common Stock of Common Preferred Stock of Preferred
Name of Beneficial Owner Beneficial Ownership Stock Beneficial Ownership Stock
- ------------------------ -------------------- ---------- -------------------- ------------
<S><C>
Heartland Advisors, Inc. 1,812,971 15.5% - -
790 North Milwaukee Street
Milwaukee, WI 53202
Entities Associated with Edmund H., 649,015 5.5% - -
Shea, Jr.
655 Brea Canyon Road
Walnut Creek, CA 91789
Lawndale Capital Management LLC 575,560 4.9% - -
One Sansome Street, Suite 3900
San Francisco, CA 94104
Cooper Life Sciences 395,554 3.4% 16,890 22.5%
160 Broadway
New York, NY 10038
</TABLE>
43
<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 9,953,000 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 July 31, 1998. The actual number of
shares sold will depend upon the number of shares of Executone Common Stock
outstanding as of the Offering 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--Unistar 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 July 31, 1998, this formula would result in the
Unistar Preferred Stock being convertible into a maximum of 3,371,250 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 Offering 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 3,371,250 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 3,371,250
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
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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.
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 % 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
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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.
The Stockholder Rights are not exercisable until the Distribution Date and
will expire at the close of business on ________________, 2008, 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. 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
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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.
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.
Management has been advised 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.
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
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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--Directors of Unistar".
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.
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.
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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.
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
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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.
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.
LEGAL MATTERS
The validity of the shares of Unistar Common Stock offered hereby will be
passed upon for Unistar by Hunton & Williams, Richmond, Virginia.
EXPERTS
The audited financial statements and schedules included in this 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.
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ADDITIONAL INFORMATION
Unistar has filed with the Commission a Registration Statement on Form S-1
(including all amendments thereto, the "Registration Statement") under the Act
with respect to the Unistar Common Stock and the Rights offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement. For further
information with respect to Unistar and the Unistar Common Stock and the Rights
offered hereby, reference is hereby made to the Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus regarding the contents of any agreement or other document filed as an
exhibit to the Registration Statement are not necessarily complete, and in each
instance reference is made to the copy of such agreement filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549,
and copies of all or any part thereof may be obtained from such office upon
payment of the prescribed fees. In addition, the Commission maintains a Web site
at http://www.sec.gov that contains reports, proxy statements, information
statements and other information regarding Unistar.
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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-14
Consolidated Statements of Operations -
Six months ended June 30, 1998 and 1997 F-15
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 F-16
Notes to Consolidated Financial Statements F-17
National Indian Lottery
Report of Independent Public Accountants F-18
Balance Sheets - June 30, 1998 and September 30, 1997 F-19
Statements of Operations and Accumulated Deficit -
Nine months ended June 30, 1998 and period from
inception (January 16, 1995) to September 30, 1997 F-20
Statements of Cash Flows -
Nine months ended June 30, 1998 and period from
inception (January 16, 1995) to September 30, 1997 F-21
Notes to Financial Statements F-22
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.
F-1
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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 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
F-2
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---- ----
<S><C>
ASSETS
Current Assets
Notes receivable $ - $ 9,000
----------- -----------
Total Current Assets - 9,000
Property & Equipment, net 24,000 17,000
Intangible Assets, net 15,841,000 15,841,000
Advances to NIL 2,779,295 667,587
Investment in IGT 700,000 700,000
Other Assets
System Hardware and Software 3,413,768 487,130
Other 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
Accumulated Deficit (1,565,769) (755,582)
----------- -----------
22,744,494 17,081,807
----------- -----------
TOTAL LIABILITIES AND
DIVISIONAL CONTROL $24,090,424 $18,158,022
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Post-acquisition Pre-acquisition
---------------------------------------
Year-Ended Year-Ended
December 31, December 31,
1997 1996 1995
-------- --------- -------
<S><C>
Revenues $ - $ - $ -
Cost of Revenues - - -
--------- --------- -----------
Gross Profit - - -
Operating Expenses:
Payroll and related 629,287 460,499 409,043
Other selling, general and administrative 227,416 288,331 2,036,137
Depreciation and amortization 4,100 2,226 5,767
Allocation of corporate expenses 313,044 - -
Expenses charged to NIL (366,677) - -
--------- --------- -----------
Operating Loss (807,170) (751,056) (2,450,947)
Other Expenses (3,017) (4,526) (156,548)
--------- --------- -----------
Net Loss $(810,187) $(755,582) $(2,607,495)
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Post-acquisition Pre-acquisition
Year-Ended Year-Ended
---------------------------------------
December 31, December 31,
1997 1996 1995
-------- ---------- -------
<S><C>
Cash Flows from Operating Activities:
Net Loss $ (810,187)$ (755,582) $(2,607,495)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,100 2,226 5,767
Other - - 13,700
Changes in working capital items:
Accounts payable and accruals (10,592) (503,319) (472,799)
Other working capital items, net 9,000 660 (9,750)
----------- ----------- -----------
Net Cash Used by Operating Activities (807,679) (1,256,015) (3,070,577)
----------- ----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures (2,326,612) (501,098) -
Distributions to CDA (300,000) (325,000) -
Funding for NIL Operating Activities (1,811,708) (342,587) -
Capital Contributed to NIL (1,109,173) (1,863,056) -
Investment in IGT - (700,000) -
Other (47,128) - -
----------- ----------- -----------
Net Cash Used by Investing Activities (5,594,621) (3,731,741) -
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of Capital Lease Obligations (70,574) - -
Advances from Executone 6,472,874 4,913,810 -
Pre-acquisition Capital Contributions - - 3,136,889
----------- ----------- -----------
Net Cash Provided by Financing Activities 6,402,300 4,913,810 3,136,889
----------- ----------- -----------
Net (Decrease) Increase in Cash - (73,946) 66,312
Cash, beginning of period - 73,946 7,634
----------- ----------- -----------
Cash, end of period $ - $ - $ 73,946
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Divisional Control
<TABLE>
<CAPTION>
Investment Accumulated
in Unistar Deficit Total
--------------------------------------
<S><C>
Pre-Acquisition
Balances at December 31, 1994 $ 943,776 $(1,522,111) $ (578,335)
Capital Contribution 3,136,889 - 3,136,889
Net Loss - (2,607,495) (2,607,495)
----------------------------------------
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
Capital Contribution 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
Capital Contribution 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.
F-6
<PAGE>
Unistar Gaming Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - The Company
On December 19, 1995, Executone Information Systems, Inc. (Executone) acquired
100% of the common stock of Unistar Gaming Corp for common and preferred stock
with a combined value of $12.7 million. Unistar Gaming Corp.'s wholly-owned
subsidiary, UniStar Entertainment, Inc. has an exclusive five-year Management
Agreement with the Coeur d'Alene Tribe of Idaho (CDA) to design, develop,
finance and manage the National Indian Lottery (NIL). The agreement was
approved in January 1995 by the National Indian Gaming Commission (NIGC) and is
authorized by federal law and a compact between the State of Idaho and the CDA.
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 revenues as defined in the Management
Agreement. Since December 19, 1995, Unistar has operated as a division of
Executone.
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 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 the Share Exchange Agreement, dated August 12, 1998, between
Executone and Unistar and the Executone Preferred Holders (the 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 position. In addition, Unistar will receive an estimated
$2.5 million in proceeds from the Offering.
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 Gaming Corp and its wholly-owned subsidiary,
UniStar Entertainment, Inc.. 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.
F-7
<PAGE>
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 National
Indian Lottery (See Notes 3 and 4 on pages F-7 and F-9, and Note 6 on page
F-17), 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 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.
Computer Hardware and Software. The costs of developing of the gaming and
business software systems for the Lottery, 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 Management Agreement.
Intangible Assets. Intangible assets represent the excess of the purchase price
of Unistar over the fair value of the net liabilities assumed. Goodwill
amortization began January 1, 1998 with the commencement of the Management
Agreement with the NIL 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
Management 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.
Advances to NIL. In accordance with the Management 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 have been deferred and will be depreciated
beginning January 1, 1998 or charged to income as profit distributions are made
to Unistar from the NIL, as applicable. Any sums advanced above the $8.5 million
requirement are recorded as advances from Unistar and will be reimbursed to
Unistar from NIL net revenues. 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 operational and 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.
F-8
<PAGE>
Investment in IGT. Unistar owns 233,333 shares (a 2.2% ownership interest) of
IGT (subsequently renamed Virtual Gaming Technologies). 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.
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 acquisitions 611,126 -- --
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. The Company 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 Management 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 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.
F-9
<PAGE>
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 Management Agreement in January 1998, System
Hardware and Software expenditures were reclassified to Property and Equipment
and are being depreciated over a five-year period.
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 NOL primarily represent
the deductibility of software development costs for tax purposes, which were
capitalized for financial reporting purposes.
F-10
<PAGE>
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.
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
Management 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 Tribe, 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 Lottery 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 counsel, that the operation of the Lottery 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 Tribe and Unistar would 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) of the Indian Gaming Regulatory Act passed by
Congress in 1988 (IGRA) 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 lottery is
authorized by 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 CDA Tribal Court ruled that 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
F-11
<PAGE>
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 Tribe 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 CDA
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 Tribe 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 Tribe
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.
Based on consultation with and opinion rendered by outside legal counsel, it is
anticipated that the favorable rulings of the tribal courts will be affirmed by
the Idaho federal court. It is also anticipated that UniStar Entertainment also
will prevail in the Missouri and Wisconsin lawsuits. However, there is no
assurance of such a legal outcome.
Currently, there are two bills pending in Congress, Amendment 3266 to Senate
appropriations bill S. 2260 (the Kyl/Bryant Amendment) and H.B. 4427 (the
Goodlatte/McCollum Bill). The Senate passed the Kyl/Bryant Amendment in July
1998, and the Goodlatte/McCollum Bill is currently pending in the House of
Representatives. Both bills are in direct conflict with IGRA, and arguably
could make the Lottery unlawful. It is anticipated that an amendment to the
pending House bill will be offered to specifically exempt from the prohibitions
contained in that bill Indian Gaming conducted in accordance with IGRA. The
Company is continuing to support efforts to include exceptions in these bills
for gaming conducted by an Indian tribe that is authorized by IGRA.
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 would be a material adverse effect on NIL operations and,
accordingly, on Unistar.
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
F-12
<PAGE>
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.
F-13
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
--------- -------
<S><C>
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 9,687,688 1,246,266
Investment in IGT 700,000 700,000
Other Assets 1,610,085 3,277,960
----------- -----------
TOTAL ASSETS $28,916,978 $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 139,350 832,502
----------- -----------
254,686 909,473
Deferred Income 2,173,215 -
Long-Term Capital Lease Obligations 372,156 353,917
----------- -----------
2,800,057 1,263,390
DIVISIONAL CONTROL
Investment in Unistar 28,095,688 21,045,556
Accumulated Deficit (1,978,767) (1,229,720)
----------- -----------
26,116,921 19,815,836
----------- -----------
TOTAL LIABILITIES AND
DIVISIONAL CONTROL $28,916,978 $21,079,226
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-14
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six-Month Periods Ended
June 30,
--------------------------
1998 1997
--------- -------
<S><C>
Revenues $ - $ -
Cost of Revenues - -
--------- ---------
Gross Profit - -
Operating Expenses:
Payroll and related 300,320 331,424
Other selling, general and administrative 199,993 137,648
Depreciation and amortization 412,999 2,050
Expenses charged to NIL (500,770) -
--------- ---------
Operating Loss (412,542) (471,122)
Other Expenses (458) (3,016)
--------- ---------
Net Loss $(413,000) $(474,138)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-15
<PAGE>
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six-Month Periods Ended
June 30,
--------------------------
1998 1997
---------- ---------
<S><C>
Cash Flows from Operating Activities:
Net Loss $ (413,000) $ (474,138)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 412,999 2,050
Changes in working capital items
Accounts payable and accruals (276,473) (89,291)
Other working capital items, net (1,624) 9,000
----------- -----------
Net Cash Used by Operating Activities (278,098) (552,379)
----------- -----------
Cash Flows from Investing Activities:
Capital Expenditures (1,131,052) (1,138,418)
Distributions to CDA (150,000) (150,000)
Advances to NIL (1,594,580) (428,679)
Capital Contributed to NIL (394,512) (895,681)
Other (184,125) (23,062)
----------- -----------
Net Cash Used by Investing Activities (3,454,269) (2,635,840)
----------- -----------
Cash Flows from Financing Activities:
Repayment of Capital Lease Obligations (53,060) (19,948)
Advances from Executone 3,785,427 3,208,167
----------- -----------
Net Cash Provided by Financing Activities 3,732,367 3,188,219
----------- -----------
Net Change in Cash - -
Cash, Beginning of Period - -
----------- -----------
Cash, End of Period $ - $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-16
<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 or the Company) 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.
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. 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 goodwill. Goodwill
amortization for the six-month period ended June 30, 1998 was $26,000. Goodwill
will be charged to expense over the 5-year term of the Management 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
Management Agreement.
Note 3 - Beginning in July 1997, and in accordance with the Management
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 Management Agreement as of June 30, 1998.
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. The
Company 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 Management 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 goodwill (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.
F-17
<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
F-18
<PAGE>
National Indian Lottery
Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------------- -----------
(Unaudited)
<S><C>
Assets
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 $ 1,326,594
Customer deposits 123,005 226,393
----------- ------------
Total current liabilities 443,311 1,552,987
Advances from Unistar:
Operating capital 3,237,303 8,662,688
Guaranteed distributions to CDA 800,000 1,025,000
----------- ------------
4,037,303 9,687,688
----------- ------------
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
=========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-19
<PAGE>
National Indian Lottery
Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Inception Nine-Month Cumulative From
(Jan. 16, 1995) to Period Ended Inception Through
Sept. 30, 1997 June 30, 1998 June 30, 1998
-------------- ------------- -------------
(Unaudited) (Unaudited)
<S><C>
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 CDA (800,000) (225,000) (1,025,000)
----------- ------------ ------------
Accumulated Deficit, end of period $(7,059,535) $(11,706,828) $(11,706,828)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<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>
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 CDA (800,000) (225,000) (1,025,000)
----------- ----------- -----------
Net Cash Provided by Financing Activities 8,561,659 3,342,304 11,903,963
----------- ----------- -----------
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.
F-21
<PAGE>
NATIONAL INDIAN LOTTERY
Notes to Financial Statements
Note 1 - Nature of the Business
Organization
- ------------
The Coeur d'Alene Tribe (CDA or the Tribe) 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 (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 Coeur d'Alene Tribe of Idaho
entered into a 1992 Class III Gaming Compact (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.
Management Agreement
- --------------------
The CDA entered into a Management Agreement (Management Agreement) with UniStar
Entertainment, Inc. to design, develop, finance and manage the NIL. The
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 revenues. Net revenue 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 revenues will be paid
to the CDA. Under the Management Agreement, UniStar is required to provide
funding for the development of the NIL, including the construction of the
lottery 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 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 Management Agreement.
The term of the Management Agreement is for five years from the date the NIL
begins gaming activities (for contract purposes, gaming activities commenced in
January 1998). The Management 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 Management 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 of not more than 5% of net
revenues.
Lottery Games
- -------------
Unistar contracted with third parties for software development and system
architecture for the Internet and telephone-based Lottery. The architecture of
the Internet-based Lottery, particularly the business system, data base
structure and the banking interface, was completed in 1997 for the Tribe's
Internet instant games, which began test marketing in July 1997. This was a
critical building block in Unistar's further development of the telephone-based
Lottery that the Tribe launched in January 1998.
The Lottery 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.
F-22
<PAGE>
Development Stage Risks
- -----------------------
The NIL's activities to date have been primarily related to the development of
the 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
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 $12.9 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 revenue 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 National
Indian Lottery, 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 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 Management Agreement, is funding the operations
of the NIL. Funding which is not reimbursable from the future net revenues of
the NIL is being reflected in the accompanying financial statements as
contributed capital. Funding which is reimbursable from the future net revenues
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
F-23
<PAGE>
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 Management 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 the net lottery
revenues once gaming has commenced. 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>
NIL operating and development expenses $ 6,259,535 $ 10,681,828
Building costs, net of depreciation 2,523,036 2,511,565
Unpaid commitments (220,912) (1,289,430)
------------ -------------
6,561,659 11,903,963
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 11,737,303 11,737,303
Non-Reimbursable Funding 8,500,000 8,500,000
----------- -------------
Reimbursable to Unistar $ 3,237,303 $ 8,662,688
============= =============
</TABLE>
Cumulative expenditures at June 30, 1998 are approximately $8.7 million in
excess of the $8.5 million minimum. This excess is reimbursable to Unistar and,
accordingly, $8.7 million of the Unistar funding as of June 30, 1998 has been
reflected as an advance from Unistar.
Note 4 - Commitments and Contingencies
Unistar, in its attempts to fulfill its responsibilities in accordance with the
Management 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 Tribe, 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 Lottery 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 counsel, that the operation of the Lottery 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 Tribe and Unistar would 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.
F-24
<PAGE>
In an attempt to block the NIL, certain states issued letters under 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 lottery 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 CDA Tribal Court ruled
that 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 Tribe 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 CDA
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 Tribe 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 Tribe
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.
Based on consultation with and opinion rendered by outside legal counsel, it is
anticipated that the favorable rulings of the tribal courts will be affirmed by
the Idaho federal court. It is also anticipated that UniStar Entertainment also
will prevail in the Missouri and Wisconsin lawsuits. However, there is no
assurance of such a legal outcome.
F-25
<PAGE>
Currently, there are two bills pending in Congress, Amendment 3266 to Senate
appropriations bill S. 2260 (the Kyl/Bryant Amendment) and H.B. 4427 (the
Goodlatte/McCollum Bill). The Senate passed the Kyl/Bryant Amendment in July
1998, and the Goodlatte/McCollum Bill is currently pending in the House of
Representatives. Both bills are in direct conflict with IGRA, and arguably
could make the Lottery unlawful. It is anticipated that an amendment to the
pending House bill will be offered to specifically exempt from the prohibitions
contained in that bill Indian Gaming conducted in accordance with IGRA. The
Company is continuing to support efforts to include exceptions in these bills
for gaming conducted by an Indian tribe that is authorized by IGRA.
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 would 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 net revenue is adequate to fund such commitment. This
guaranteed payment will be deducted from CDA's share of future NIL net revenue
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.
F-26
<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
Prospectus in connection with the offer made by this 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 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 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
----
PROSPECTUS SUMMARY 1
RISK FACTORS 6
THE OFFERING 10
FEDERAL INCOME TAX CONSEQUENCES 13
THE COMPANY 14
USE OF PROCEEDS 14
DISTRIBUTION POLICY 14
CAPITALIZATION 15
UNISTAR OPERATIONS UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION 16
UNISTAR OPERATIONS SELECTED HISTORICAL
CONSOLIDATED FINANCIAL INFORMATION 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ARRANGEMENTS BETWEEN EXECUTONE AND UNISTAR
RELATING TO THE OFFERING 27
BUSINESS AND PROPERTIES OF UNISTAR 29
MANAGEMENT OF UNISTAR 35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 36
EXECUTIVE COMPENSATION 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS OF UNISTAR COMMON STOCK AND UNISTAR
PREFERRED STOCK 42
DESCRIPTION OF UNISTAR CAPITAL STOCK 44
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN
PROVISIONS OF THE UNISTAR CERTIFICATE, THE
UNISTAR BYLAWS, THE UNISTAR RIGHTS PLAN 47
AND THE GENERAL CORPORATION LAW OF DELAWARE 47
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS 50
LEGAL MATTERS 50
EXPERTS 50
ADDITIONAL INFORMATION 51
Until __________ __, 199_ (25 days after the date of this 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.
================================================================================
9,953,251 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.............. $ 734
NASD filing fee................................................... ______
Nasdaq Stock 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
II-1
<PAGE>
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.
II-2
<PAGE>
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
Number 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
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 Associates.
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* Management 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 Associates
23.1* Consent of Hunton & Williams
23.2* Consent of Arthur Anderson 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>
- ------------
*Filed herewith.
II-3
<PAGE>
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.
II-4
<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 16th day of September, 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 16th day
of September, 1998 in the capacities indicated.
Signature Title
- --------- -----
/s/ Alan Kessman Director and Vice Chairman
______________________
Alan Kessman
/s/ Michael W. Yacenda Director, President, Treasurer
______________________ Principal Executive Officer,
Michael W. Yacenda Principal Financial Officer
and Principal Accounting Officer
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Document
------- --------
<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
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 Associates.
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* Management 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 Associates
23.1* Consent of Hunton & Williams
23.2* Consent of Arthur Anderson 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>
- ------------
*Filed herewith.
II-6
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UNISTAR GAMING CORP.
1. The name of the Corporation is Unistar Gaming Corp.
2. The original Certificate of Incorporation was filed in the office of
the Secretary of the State of Delaware on January 24, 1995, under the name
Unistar Gaming Corp., and amended and restated as of February 21, 1995.
3. This Amended and Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of Directors
of the Corporation, duly adopted by written consent of sole stockholder of the
Corporation in lieu of a meeting and vote, and duly executed and acknowledged by
the officers of the Corporation, all in accordance with the provisions of
Sections 103, 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
4. The text of the Amended and Restated Certificate of Incorporation is
hereby amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is Unistar Corporation.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, Wilmington, Delaware 19805 in New Castle
County. The name of its registered agent at such address is Corporation Service
Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the laws of the General
Corporation Law of the State of Delaware.
FOURTH:
A. CAPITAL STOCK.
The total number of shares of all classes of capital stock that the
Corporation shall have the authority to issue is 26 million (26,000,000) shares,
of which 25 million (25,000,000) shares will be common stock, par value $.01 per
share (the "Common Stock"), and 1 million (1,000,000) shares will be preferred
stock, par value $.01 per share (the "Preferred Stock").
<PAGE>
B. COMMON STOCK.
1. Each share of Common Stock shall be entitled to one vote on all
matters submitted to a vote at any meeting of stockholders.
2. Subject to the rights of holders of Preferred Stock and subject to
any other provisions of this Certificate or any amendments hereto,
holders of Common Stock shall be entitled to receive such dividends
and other distributions in cash, stock or property of the
Corporation as may be declared thereon by the Board of Directors
from time to time.
C. PREFERRED STOCK.
1. Issuance and Authority.
The Preferred Stock may be issued from time to time, in one or more
series. The Board of Directors of the Corporation is hereby expressly authorized
to provide, by resolution or resolutions duly adopted by it prior to issuance,
for the creation of each such series and to fix the designation, powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the Board of Directors with
respect to each series of Preferred Stock shall include, but not be limited to,
determining the following:
(a) the designation of such series, the number of shares to constitute
such series and the stated value, if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and if so, the terms
of such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, the
preference or relation that such dividends shall bear to the
dividends payable on any shares of stock of any other class or any
other series of Preferred Stock;
(d) whether the shares of such series shall be subject to redemption by
the Corporation, and, if so, the times, prices and other conditions
of such redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the operation
of a retirement or sinking fund, and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied
to the purchase or redemption of the shares of such series for
retirement or other corporate purposes and the terms and provisions
relating to the operation thereof;
<PAGE>
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other
series of Preferred Stock or any other securities and, if so, the
price or prices or the rate or rates of conversion or exchange and
the method, if any, of adjusting the same, and any other terms and
conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends
or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, the Common
Stock or shares of stock of any other class or any other series of
Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class; and
(j) any other powers, preferences and relative, participating, optional
and other special rights, and any qualifications, limitations and
restrictions, thereof.
The powers, preferences and relative, participating, optional
and other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding. All shares
of any one series of Preferred Stock shall be identical in all respects
with all other shares of such series, except that shares of any one series
issued at different times may differ as to the dates from which dividends
thereon shall be cumulative.
2. Cumulative Convertible Preferred Stock, Series A.
(a) Definitions. As used in this Section C.2. of Article FOURTH, unless
defined herein, capitalized terms shall have the meanings set forth
below:
"Accrued Preferred Dividend" shall have the meaning set forth in
Section C.2.(d)(i).
"Affiliate" shall mean, with respect to a person, any person that
directly or indirectly controls, is controlled by, or is under common control
with, the person in question.
"Certified Financial Statements of the Corporation" shall mean, the
published audited consolidated balance sheet and consolidated profit and loss
statement of the Corporation for a fiscal year or part thereof derived from the
published, audited financial statements of the Corporation for the corresponding
accounting period (prepared in accordance with GAAP, consistently applied with
the published audited financial statements of the Corporation) and certified by
the accountants that prepared the Corporation's audited financial statements as
having been prepared in accordance with the terms of this Certificate.
<PAGE>
"Certificate Notice" shall have the meaning set forth in Section
C.2.(e)(ii)(A).
"Conversion Date" shall have the meanings set forth in Section
C.2.(e)(iii).
"Conversion Period" shall mean the period ending on January 20,
2002.
"Conversion Ratio" shall have the meaning set forth in Section
C.2.(e)(i).
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
person, whether through ownership of voting securities, by contract or
otherwise.
"Current Market Price" shall mean, for any day, the average of the
high and low sales prices of the Common Stock as quoted on any national
securities exchange or the Nasdaq National Market, as appropriate, for the 30
consecutive business days preceding such date, or if not so quoted, as
determined by the Board of Directors of the Corporation in good faith.
"Dividend Distribution" shall mean a distribution made by the
Corporation of cash or other property.
"Dividend Payment Default" shall mean: (i) the excess of the
cumulative aggregate of the Accrued Preferred Dividends over $1,000,000; and
(ii) the Board of Directors shall not have declared and paid by the end of the
quarter in which the amount of the excess exceeds $1,000,000 a dividend on the
Series A Preferred Stock that eliminates the excess over $1,000,000.
"Election Period" shall mean (i) with respect to the exercise of the
conversion rights set forth in Section C.2.(e)(i)(A), the last three fiscal
quarters of the fiscal year following the delivery of the Corporation's audited
consolidated financial statements for a fiscal year; and (ii) with respect to
the exercise of the conversion rights set forth in Section C.2.(e)(i)(B), the
period between the delivery of the Corporation's Form 10-Q for the immediately
preceding fiscal quarter and the delivery of the Corporation's Form 10-Q for the
succeeding fiscal quarter, provided, however, that, with respect to the
Corporation's fiscal year that includes the last day of the Conversion Period,
(A) if the Conversion Period ends within the first quarter thereof, the Election
Period shall not terminate until the close of business on the 60th day after the
receipt by the holders of the Series A Preferred Stock of the detailed
statements required by Section C.2.(j) for the immediately preceding fiscal
year, and (B) if the Conversion Period ends within the last three quarters
thereof, the Election Period shall not terminate until the close of business on
the 60th day after the receipt by the holders of the Series A Preferred Stock of
the detailed statements required by Section C.2.(j) for the fiscal quarter
immediately preceding the fiscal quarter in which the Conversion Period ends.
"GAAP" shall mean generally accepted accounting principles in the
United States.
<PAGE>
"Junior Stock" shall mean any capital stock of the Corporation
ranking junior (either as to dividends, redemption or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock.
"Maximum Number" shall have the meaning set forth in Section
C.2.(e)(i)(A).
"National Indian Lottery" shall mean the tele-lottery gaming
enterprise to be known as the National Indian Lottery pursuant to the Indian
Gaming Regulatory Act of 1988, the 1992 Class III Gaming Compact by and between
the Coeur D'Alene Tribe and the State of Idaho and the Coeur D'Alene Tribal
Charitable Gaming Code, Chapter 30 1.01 - 14.01.
"Net Income" shall mean net income determined in accordance with
GAAP, consistently applied in accordance with the published audited financial
statements of the Corporation, with the exceptions that no deductions from gross
income will be taken with respect to goodwill or payments, if any, made to
EXECUTONE Information Systems, Inc. on indemnity claims arising out of such
corporation's guarantees of any loans made by bank(s) to Michael W. Yacenda and
Robert Hopwood or any payments of interest accruing under such loans. The costs
of the Corporation in arranging credit to be used in financing the operations of
the National Indian Lottery in an amount equal to the effective interest rate
paid to the lender extending such credit (reflecting, without limitation, all
interest, fees and charges imposed in connection with such financing, whether
payable at the time of closing of the financing or periodically thereafter, any
equity issued in connection with such financing and legal fees and expenses
incurred in connection with the arrangement of such financing) shall be charged
or amortized against the Net Income of the Corporation whether or not such funds
are direct obligations of the Corporation.
"Net Revenues" shall mean the gross revenues of the Corporation less
returns and rebates, and without regard to any excise, sales, franchise or other
tax or imposition imposed upon such revenues (other than any tax or imposition
based on income).
"Redemption Date" shall have the meaning set forth in Section
C.2.(f)(ii).
"Redemption Notice" shall have the meaning set forth in Section
C.2.(f)(ii).
"Retained Earnings" shall mean the cumulative consolidated Net
Income of the Corporation from the Effective Date, determined without regard to
any distributions.
"Sale" shall have the meaning set forth in Section C.2.(e)(ii)(B).
"Sale Advance Notice" shall have the meaning set forth in Section
C.2.(e)(ii)(B).
"Sale Date" shall have the meaning set forth in Section
C.2.(e)(ii)(B).
"Sale Notice" shall have the meaning set forth in Section
C.2.(e)(ii)(B).
"Series A Director" shall have the meaning set forth in Section
C.2.(l).
"Series A Preferred Stock" shall have the meaning set forth in
Section C.2.(b)(i).
<PAGE>
"Subsidiary" of any person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such person.
"Transaction" shall have the meanings set forth in Section
C.2.(e)(viii).
"Unaudited Financial Statements" shall mean, as applicable, the
unaudited consolidated balance sheet and consolidated profit and loss statement
of the Corporation as derived from the Corporation's most recently prepared Form
10-Q.
"UEI" shall mean Unistar Entertainment, Inc., an Idaho corporation
which is a wholly owned subsidiary of the Corporation.
(b) Designation.
(i) The shares of this Series shall be designated "Cumulative
Convertible Preferred Stock, Series A" (the "Series A
Preferred Stock") and the number of shares initially
constituting the Series A Preferred Stock shall be
seventy-five thousand (75,000). Shares of the Series A
Preferred Stock shall have a par value of $0.01 per share.
(ii) The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution or winding up,
rank prior to any other class or series of Preferred Stock
and the Common Stock.
(c) Voting Rights. The holders of Series A Preferred Stock shall have
the following voting rights:
(i) Except as otherwise provided in this Certificate or the
General Corporation Law of the State of Delaware, each share
of Series A Preferred Stock shall entitle the holder thereof
to vote on all matters voted on by the holders of Common
Stock, voting together with the shares of Common Stock as a
single class at all meetings of stockholders, and with
respect to any such vote, each share of Series A Preferred
Stock shall entitle the holder thereof to cast one vote per
share.
(ii) Except as otherwise provided in this Certificate or the
General Corporation Law of the State of Delaware, the Series
A Preferred Stock shall not be considered as a separate
class of shares for any voting purpose, and the holders of
the Series A Preferred Stock shall have no separate voting
rights and their separate consent shall not be required for
the taking of any corporate action. The holders of the
shares of the Series A Preferred Stock shall vote as a
separate class, to the exclusion of the holders of Junior
Stock and any other series of Preferred Stock, with respect
to the following matters. The affirmative vote of the
holders of 66-2/3% of the outstanding shares of the Series A
Preferred Stock taken at a meeting, or by written consent
without a meeting, shall be required to approve any of the
following matters:
<PAGE>
(A) A proposed amendment of this Certificate if the
amendment would: (I) increase or decrease the aggregate
number of authorized shares of the Series A Preferred
Stock; (II) effect an exchange or reclassification of
all or part of the shares of the Series A Preferred
Stock into shares of another class; (III) effect an
exchange or reclassification, or create the right of
exchange, of all or part of the shares of another class
into shares of the Series A Preferred Stock; (IV)
change the designation, rights, preferences or
limitations of all or part of the shares of the Series
A Preferred Stock, but the Series A Preferred Stock
shall not be entitled to vote as a separate class on an
amendment increasing the number of authorized shares of
a Junior Stock solely because both such classes vote on
some or all matters as a single class; (V) change the
shares of all or part of the Series A Preferred Stock
into a different number of shares of the Series A
Preferred Stock; (VI) create a new class of shares, or
change a Junior Stock into a class of shares having
rights or preferences with respect to dividends,
distributions or to dissolution, liquidation or winding
up of the Corporation that are prior, superior or
substantially equal to the shares of the Series A
Preferred Stock, or increase the rights, preferences or
number of authorized shares of any class having rights
or preferences with respect to distributions or to
dissolution that are prior, superior or substantially
equal to the shares of the Series A Preferred Stock;
(VII) limit or deny an existing preemptive right of all
or part of the shares of the Series A Preferred Stock;
or (VIII) cancel or otherwise affect rights to
distributions or dividends that have accumulated but
not yet been declared on all or part of the shares of
the Series A Preferred Stock;
(B) An authorization or increase in the number of shares or
other units of any security convertible into, or
exchangeable for, or evidencing the right to purchase,
shares of the Series A Preferred Stock or any class of
stock ranking prior to, or on a parity with, the Series
A Preferred Stock as to dividend rights and rights on
liquidation, dissolution or winding up; and
<PAGE>
(C) The amendment or repeal of the second and third
sentences of this Section C.2.(c)(ii).
(d) Dividend Rights.
(i) Accrued Preferred Dividends. The dividends provided in this
Certificate shall be cumulative, whether or not declared. On
any date, the cumulative accrued dividend with respect to
the Series A Preferred Stock (the "Accrued Preferred
Dividend") shall be an amount equal to (A) 50% of the
consolidated Retained Earnings of the Corporation as of the
end of the Corporation's fiscal quarter immediately
preceding the fiscal quarter in which occurs the date with
respect to which the determination is being made, less (B)
any amounts paid to the holders of the Series A Preferred
Stock prior to such date pursuant to Sections C.2.(d)(ii),
C.2.(e)(iv) and C.2.(f)(v). At any time, the Accrued
Preferred Dividend with respect to each share of Series A
Preferred Stock outstanding shall be an amount equal to the
Accrued Preferred Dividend divided by 75,000.
(ii) Payment of Accrued Preferred Dividend. Dividends are payable
in cash (except as otherwise provided in Section
C.2.(e)(iii) and subject to the applicable provisions of the
General Corporation Law of the State of Delaware) (A) when
and as declared by the Board of Directors, (B) upon
conversion or redemption of the shares of Series A Preferred
Stock or (C) upon liquidation, as provided herein. The
declaration and payment of dividends on the Series A
Preferred Stock, the amount thereof and the record date
shall at all times be solely within the discretion of the
Board of Directors, except upon conversion or redemption of
such shares and upon liquidation, dissolution or winding up
of the Corporation. Notwithstanding the foregoing, no
Accrued Preferred Dividend shall be paid (except upon
conversion or redemption of shares of the Series A Preferred
Stock or liquidation, dissolution or winding up of the
Corporation or a Dividend Distribution) unless at the time
of the proposed payment:
(A) the cumulative Retained Earnings of the Corporation is
positive; and
(B) the Net Income of the Corporation exceeds $1,000,000 in
respect of the fiscal year immediately preceding the
fiscal year of the Corporation in which the dividends
are to be paid.
<PAGE>
(iii) Dividend Payment Default.
(A) Whenever Accrued Preferred Dividends are not paid in
full, thereafter and until all Accrued Preferred
Dividends shall have been paid in full (determined as
of the end of the Corporation's fiscal quarter
immediately preceding the fiscal quarter in which such
payment shall be made), the Corporation shall not
declare or pay dividends, or make any other
distributions, on any shares of Junior Stock, other
than dividends or distributions payable in Junior
Stock.
(B) Whenever a Dividend Payment Default exists, thereafter
and until such Dividend Payment Default is remedied,
the Corporation shall not redeem, purchase or otherwise
acquire for consideration any shares of Junior Stock;
provided, however, that (1) the Corporation may at any
time redeem, purchase or otherwise acquire shares of
Junior Stock in exchange for any shares of Junior
Stock; and (2) the Corporation may accept shares of any
Junior Stock (I) for conversion, (II) for payment of
the exercise price of employee stock options or (III)
for redemptions, purchases or other acquisitions of
shares acquired by exercise of employee stock options
to the extent that the aggregate amount paid for such
redemptions, purchases, or other acquisitions in any
fiscal year of the Corporation, pursuant to this
Section C.2.(d)(iii)(B), does not exceed $750,000.
(C) The Corporation shall not permit any Subsidiary of the
Corporation to purchase or otherwise acquire for
consideration any shares of capital stock of the
Corporation, unless the Corporation could pursuant to
Section C.2.(d)(iii)(B) purchase such shares at such
time and in such manner.
(iv) Dividend Limit. No Dividend Distribution shall be made
except from Retained Earnings, calculated net of Dividend
Distributions.
(A) Notwithstanding anything to the contrary provided in
this Certificate, no Dividend Distribution shall be
made unless the Board of Directors shall declare a
dividend with respect to the Series A Preferred Stock
payable on or before the end of the Corporation's
fiscal quarter in which the Dividend Distribution will
occur, in an amount equal to the lesser of (A) 50% of
the amount of such Dividend Distribution, or (B) the
amount of the Accrued Preferred Dividend.
(B) For all purposes of this Certificate, Retained Earnings
as of the end of any quarter shall be determined on the
basis of the Unaudited Financial Statements for such
quarter, except if such quarter is the fourth quarter
in which case the determination shall be made based on
the Certified Financial Statements of the Corporation
for the fiscal year ended with the end of such fourth
quarter.
<PAGE>
(e) Conversion Rights.
(i) Conversion. Subject to the provisions for adjustment set
forth in, and upon compliance with the provisions of, this
Section C.2.(e), each share of the Series A Preferred Stock
shall be convertible into a number of fully paid and
nonassessable shares of Common Stock, determined as set
forth below (said number of shares of Common Stock, as
adjusted from time to time pursuant to the provisions of
Section C.2.(e), being hereinafter referred to as the
"Conversion Ratio"); provided, however, that the right to
convert shall terminate at the close of business on the
fifth business day prior to the date fixed by the
Corporation for redemption pursuant to Section C.2.(f).
(A) At any time during the Conversion Period and provided
that at such time as the conversion right is exercised
the Corporation has Net Income, in respect of the
fiscal year immediately preceding the fiscal year in
which the conversion is being made, equal to or
exceeding $1,000,000, the Conversion Ratio shall equal,
for each share of Series A Preferred Stock, the product
of (1) the excess of such Net Income over $1,000,000
divided by 12,000,000 and (2) [44.95] (the "Maximum
Number");
(B) At any time during the Conversion Period and provided
that at such time as the conversion right is exercised,
calculated from the Effective Date, of the cumulative
Net Revenues of the Corporation exceeds $50,000,000,
the Conversion Ratio shall equal ____ shares of Common
Stock for each share of Series A Preferred Stock; or
(C) At any time during the Conversion Period after the sale
or transfer of a controlling interest in the
Corporation or the sale or assignment of substantially
all of the business or assets of the Corporation to a
third party that is not a wholly-owned Subsidiary of
the Corporation, the Conversion Ratio shall equal ____
shares of Common Stock for each share of Series A
Preferred Stock.
<PAGE>
(ii) Conversion Procedure.
(A) Conversion Based on Financial Statements. Not later
than 5 days after the date of publication of (1) the
Corporation's audited consolidated financial statements
for each fiscal year ending prior to the end of the
Conversion Period and (2) the Corporation's Form 10-Q
for each fiscal quarter ending prior to the expiration
of the Conversion Period, the Corporation shall deliver
to the holders of the Series A Preferred Stock a notice
together with a copy of the certificate referred to in
Section C.2.(e)(iv) of this Certificate prepared with
respect to such fiscal period (a "Certificate Notice").
Each Certificate Notice shall state: (1) that during
the relevant Election Period, each holder may elect to
convert all, but not less than all, his shares of
Series A Preferred Stock in accordance with the
provisions of Section C.2.(e)(i)(A) or (B); (2) that in
order to exercise such conversion right, the holder
must, within the Election Period, surrender the
certificate representing such shares at the office of
the Corporation and give written notice to the
Corporation that such holder elects to convert the
same, specifying the name or names and denominations in
which such holder wishes the certificate or
certificates for the Common Stock to be issued; and (3)
the address of the office of the Corporation where
certificates for such shares are to be surrendered.
Notwithstanding anything to the contrary provided in
this Section C.2.(e)(ii)(A), no conversion may be
elected within the first quarter of any fiscal year of
the Corporation.
In order to exercise the conversion privilege, the
holder of shares of Series A Preferred Stock to be
converted shall, within the Election Period, surrender
the certificate representing such shares at the office
of the Corporation designated in such notice and give
written notice to the Corporation at said office that
such holder elects to convert the same. From and after
the making of the election provided herein, all rights
of a holder of shares of Series A Preferred Stock shall
cease except for the right, upon surrender of the
certificate representing such shares, to receive
certificates representing shares of Common Stock and/or
any Accrued Preferred Dividend as contemplated by this
Section C.2.(e)(ii)(A).
<PAGE>
(B) Conversion Based upon Consummation of a Sale. Not later
than 15 days prior to the consummation of any event
referred to in Section C.2.(e)(i)(C) (a "Sale"), the
Corporation shall notify the holders of the Series A
Preferred Stock of the occurrence of such Sale (a "Sale
Advance Notice"). Each Sale Advance Notice shall state
(1) the anticipated date of consummation of such Sale
and (2) that all shares of Series A Preferred Stock
owned by each holder shall be automatically converted
in accordance with Section C.2.(e)(i)(C) as a result of
such Sale. Not later than 10 days following the
consummation of a Sale referred to in a Sale Advance
Notice, the Corporation shall notify the holders of the
Series A Preferred Stock of the consummation of such
Sale (a "Sale Notice"). Each Sale Notice shall state
(1) the date of consummation of such Sale (the "Sale
Date"); (2) that all shares of Series A Preferred Stock
owned by each holder have been automatically converted
in accordance with Section C.2.(e)(i)(C) as a result of
such Sale; (3) that, in order to receive the Common
Stock and other consideration payable to such holder as
a result of such conversion, such holder must surrender
the certificate representing all of his shares Series A
Preferred Stock at the office of the Corporation within
thirty days following the date of receipt of the Sale
Notice, specifying the name or names and denominations
in which such holder wishes the certificate or
certificates for the Common Stock to be issued; and (4)
the address of the office of the Corporation where
certificates for such shares are to be surrendered.
In order to exercise the conversion privilege, the
holder of shares of Series A Preferred Stock to be
converted shall surrender the certificate representing
such shares at the office of the Corporation designated
in such Sale Notice within thirty days following the
receipt of the Sale Notice. From and after the delivery
of the Sale Notice, all rights of a holder of shares of
Series A Preferred Stock shall cease except for the
right upon surrender of the certificate representing
such shares to convert such shares into certificates
representing shares of Common Stock and any Accrued
Preferred Dividend as contemplated by this Section
C.2.(e)(ii). The failure of a holder of shares of
Series A Preferred Stock to submit the certificate
representing his shares of Series A Preferred Stock to
the Corporation in accordance with the Sale Notice
shall not terminate such holder's right to receive the
Common Stock for which such shares were converted or
any Accrued Preferred Dividend payable with respect to
such shares, but the Corporation shall not be obligated
to pay interest or any other allowance for the delay in
payment of any Accrued Preferred Dividend or any other
amounts or consideration payable to such holder.
<PAGE>
(C) Issuance of Certificates. Upon submission of his shares
of Series A Preferred Stock pursuant to Section
C.2.(e)(ii)(A) or (B), each holder shall specify the
name or names and denominations in which such holder
wishes the certificate or certificates for the Common
Stock to be issued (which notice may be in the form of
a notice of election to convert, which may be printed
on the reverse of the certificates for the shares of
Series A Preferred Stock). Unless the shares issuable
on conversion are to be issued in the same name as the
name in which such shares of Series A Preferred Stock
are registered, the shares surrendered for conversion
shall be accompanied by instruments of transfer, in
form reasonably satisfactory to the Corporation, duly
executed by the holder or his duly authorized attorney,
and by an amount sufficient to pay any transfer or
similar tax. Other than transfer taxes, the Corporation
shall pay all expenses in connection with the
conversion and issuance of Common Stock thereupon,
other than personal expenses of the converting holder
(including, without limitation, income taxes).
(D) Notice Delivery. Any notice delivered pursuant to this
Section C.2.(e)(ii) shall be sent by facsimile,
personal delivery, overnight courier or certified mail
return receipt requested, in each case notice being
effective on receipt.
(iii) Accrued Preferred Dividend. The holders of shares of Series
A Preferred Stock shall be entitled to receive any unpaid
Accrued Preferred Dividend payable with respect to such
shares calculated:
(A) In the case of a conversion under Section
C.2.(e)(ii)(A) or (B), as of the end of the
Corporation's fiscal quarter immediately preceding the
fiscal quarter in which occurs the date on which the
shares of Common Stock issuable with respect to a
conversion of such shares are issued in accordance with
Section C.2.(e)(iv) (the "Conversion Date"), without
further action, based upon the Unaudited Financial
Statements for such immediately preceding fiscal
quarter. At the sole option of the Corporation and
provided that the issuance of such additional shares of
Common Stock has been approved by a majority of the
holders of the Common Stock, in the event that less
than a majority of the then outstanding shares of
Series A Preferred Stock are converted in any fiscal
year of the Corporation, the Accrued Preferred Dividend
may be paid in the form of Common Stock. In such event,
the number of shares of Common Stock to be issued to a
holder of shares of Series A Preferred Stock shall be
determined by dividing the amount of the Accrued
Preferred Dividend payable to such holder by the
Current Market Price of the Common Stock on the date of
such holder's notice delivered to the Corporation
pursuant to Section C.2.(e)(ii). Such payment in shares
shall be made at the time that the shares of Common
Stock into which the Series A Preferred Stock is
converted are issued pursuant to Section C.2.(e)(iv).
<PAGE>
(B) In the case of a conversion under Section
C.2.(e)(ii)(C), as of the Sale Date, without further
action. In such event, the Accrued Preferred Dividend
shall be determined based upon the Retained Earnings of
the Corporation as of the last day of the quarter of
the Corporation's fiscal year ending immediately prior
to the Sale Date, plus or minus the product of (1) the
number of days between the end of the immediately
preceding quarter and the Sale Date, times (2) the
quotient of (I) the difference between the Retained
Earnings as of the end of the immediately preceding
fiscal quarter and the end of the second immediately
preceding quarter, divided by (II) the number of days
in the first immediately preceding quarter. The
Retained Earnings for such immediately preceding
quarter shall be based upon the figures contained in
the Certified Financial Statements of the Corporation,
where such quarter is the Corporation's fourth quarter
and such Certified Financial Statements are available
or Unaudited Financial Statements of the Corporation,
if such quarter is any quarter other than the fourth
quarter of the Corporation's fiscal year.
(C) Except as provided above, the Corporation shall make no
payment or allowance for unpaid dividends, whether or
not in arrears, on converted shares or for dividends on
the shares of Common Stock issued upon such conversion.
<PAGE>
(iv) Issuance of Common Stock and Payment of Accrued Preferred
Dividend. As promptly as practicable after the surrender of
the certificates for shares of Series A Preferred Stock as
aforesaid, but in no event later than five business days
after the holder's compliance with the requirements in this
Section C.2.(e) for conversion, the Corporation shall issue
and shall deliver to such holder, or according to his
written instructions, (A) a certificate or certificates for
the number of full shares of Common Stock issuable upon the
conversion of such shares in accordance with the provisions
of this Section C.2.(e), and with respect to an Accrued
Preferred Dividend settled in shares of Common Stock
pursuant to Section C.2.(e)(iii), and (B) a certified or
bank check in the amount of the Accrued Preferred Dividend
payable with respect to such shares of Series A Preferred
Stock pursuant to Section C.2.(e)(iii), and any amount
payable in lieu of fractional shares. Each conversion shall
be deemed to have been effected immediately prior to the
close of business on the day prior to (A) the Conversion
Date, in the case of a conversion under Section
C.2.(e)(i)(A) or (B); and (B) the Sale Date, in the case of
a conversion pursuant to Section C.2.(e)(i)(C), and the
person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented
thereby at such time on such date. All shares of Common
Stock delivered upon conversion of the shares of Series A
Preferred Stock will upon delivery be duly and validly
issued and fully paid and nonassessable, free of all liens
and charges of the Corporation and not subject to any
preemptive rights.
(v) Fractional Interests. No fractional shares or scrip
representing fractions of shares of Common Stock shall be
issued upon conversion of shares of Series A Preferred
Stock. Instead of any fractional interest in a share of
Common Stock that would otherwise be deliverable upon the
conversion of a share of Series A Preferred Stock, the
Corporation shall pay to the holder of such share of Series
A Preferred Stock an amount in cash (computed to the nearest
cent, with one-half cent being rounded upward) equal to the
Current Market Price of the Common Stock on the trading day
immediately preceding the day of conversion multiplied by
the fraction of a share of Common Stock represented by such
fractional interest. If more than one share of Series A
Preferred Stock shall be surrendered for conversion at one
time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on
the basis of the aggregate number of the shares of Series A
Preferred Stock so surrendered.
<PAGE>
(vi) Adjustments to Conversion Ratio. The Conversion Ratio for
each share of Series A Preferred Stock set forth in Section
C.2.(e)(i) and the Maximum Number, shall be subject to
adjustments, from time to time, which shall be made to the
nearest one-thousandth of a share of Common Stock or, if
none, to the next lower one-thousandth and which shall be
made, from time to time, upon the occurrence of the
following events:
(A) If the Corporation shall pay to the holders of its
Common Stock a dividend in shares of Common Stock or in
securities convertible into Common Stock other than the
shares of Series A Preferred Stock, the Conversion
Ratio and the Maximum Number shall be proportionately
increased, effective at the opening of business on the
next full business day after the record date fixed for
the determination of the holders of Common Stock
entitled to such dividend.
(B) If the Corporation shall subdivide the outstanding
shares of its Common Stock into a greater number of
shares or combine the outstanding shares into a smaller
number, the Conversion Ratio and the Maximum Number
shall be proportionately increased in the case of a
subdivision or decreased in the case of a combination,
effective at the opening of business on the next full
business day after the day such action becomes
effective.
(C) If the Corporation shall issue to the holders of its
Common Stock rights or warrants to subscribe for or
purchase shares of its Common Stock at a price less
than the Current Market Price of the Corporation's
Common Stock at the record date fixed for the
determination of the holders of Common Stock entitled
to such rights or warrants, the Conversion Ratio and
the Maximum Number shall be increased, effective at the
opening of business on the next full business day after
such record date, to the respective amounts determined
by multiplying such Conversion Ratio and the Maximum
Number by a fraction, the numerator of which is the
number of shares of Common Stock of the Corporation
outstanding immediately prior to such record date plus
the number of additional shares of its Common Stock
offered for subscription or purchase and the
denominator of which is said number of shares
outstanding immediately prior to such record date plus
the number of shares of Common Stock of the Corporation
which the aggregate subscription or purchase price of
the total number of shares so offered would purchase at
the Current Market Price of the Corporation's Common
Stock at such record date.
<PAGE>
(D) If the Corporation shall distribute to the holders of
its Common Stock any evidences of its indebtedness, any
other security not convertible into Common Stock other
than Common Stock, or any rights or warrants to
subscribe for any security other than its Common Stock,
or any other assets (excluding cash dividends paid in
the ordinary course of business), the Conversion Ratio
and the Maximum Number shall be increased, effective at
the opening of business on the next full business day
after the record date fixed for the determination of
the holders of Common Stock entitled to such
distribution, to the respective amounts determined by
multiplying such Conversion Ratio and the Maximum
Number by a fraction, the numerator of which is the
Current Market Price of one share of the Corporation's
Common Stock at such record date and the denominator of
which is such Current Market Price less the fair market
value (as determined by the Board of Directors, whose
good faith determination shall be conclusive) of such
evidences of indebtedness, securities, rights, warrants
or other assets (excluding dividends and distributions
in cash as aforesaid) so distributed that is applicable
to one share of Common Stock.
(E) Anything in this Section C.2.(e)(vi) to the contrary
notwithstanding, the Corporation shall not be required
to make any adjustment of the Conversion Ratio and the
Maximum Number in any case in which the amount by which
such Conversion Ratio and the Maximum Number would be
adjusted in accordance with the foregoing provisions
would be less than 3% of such Conversion Ratio and the
Maximum Number, as the case may be, before such
adjustment, but in such case any adjustment that would
otherwise be required then to be made will be carried
forward and made at the time of, and together with, the
next subsequent adjustments which, together with any
and all such adjustments so carried forward, shall
amount to 3% or more of such Conversion Ratio and the
Maximum Number before such adjustments.
(F) For purposes of this Section C.2.(e)(vi), the number of
shares of Common Stock at any time outstanding shall
not include any shares of Common Stock then owned or
held by or for the account of the Corporation.
<PAGE>
Whenever the Conversion Ratio is adjusted pursuant to
this Section C.2.(e)(vi), the Corporation shall promptly
after the adjustment (1) place on file at its offices and at
the offices of each of its transfer agents, if any, for the
Series A Preferred Stock, a statement signed by the Chairman
of the Board, the President or a Vice President of the
Corporation and by its Treasurer or an Assistant Treasurer
showing in detail the facts requiring such adjustment, the
method by which the adjustment is calculated and the
Conversion Ratio and the Maximum Number after such
adjustment and shall make such statement available for
inspection by shareholders of the Corporation; and (2) mail
or cause to be mailed by its transfer agent to each holder
of record of the Series A Preferred Stock a notice stating
the adjustment, the method by which the adjustment is
calculated and the adjusted Conversion Ratio and the Maximum
Number, with a statement of any firm of independent
certified public accountants of nationally recognized
standing (which may be the firm regularly retained by the
Corporation) to the effect that such adjustment is in
accordance with this Section C.2.(e).
(vii) In case of any reclassification or change of the outstanding
shares of Common Stock of the Corporation (except a
subdivision or combination of shares), effective provision
shall be made by the Corporation (A) that the holder of each
share of Series A Preferred Stock then outstanding shall
thereafter have the right to convert such share into the
kind and amount of stock or other securities, upon such
reclassification or change, by a holder of the number of
shares of Common Stock into which such share of Series A
Preferred Stock might have been converted immediately prior
thereto, and (B) that there shall be subsequent adjustments
of the Conversion Ratio and the Maximum Number which shall
be equivalent, as nearly as practicable, to the adjustments
provided for in Section C.2.(e)(vi), above. The provisions
of this Section C.2.(e)(vii) shall similarly apply to
successive reclassifications or changes. Any provision that
shall be made for the purposes specified herein before in
this Section C.2.(e)(vii) that shall be approved by a
resolution or resolutions of the Board of Directors of the
Corporation and that shall, in the written opinion of a firm
of independent certified public accountants of nationally
recognized standing selected by the Corporation (which may
be the firm regularly retained by the Corporation), be fair
and equitable, shall be binding and conclusive upon all
holders of shares of Series A Preferred Stock then
outstanding. In the event that securities or property other
than Common Stock shall be issuable or deliverable upon any
of the events referred to in this Section C.2.(e)(vii), all
references in this Section C.2.(e)(vii) shall be deemed to
apply, so far as appropriate and nearly as may be, to such
other securities or property.
<PAGE>
(viii) In case of any consolidation or merger of the Corporation
with or into another corporation, or in case of any sale or
conveyance to another corporation of all or substantially
all of the assets or property of the Corporation (each of
the foregoing being referred to as a "Transaction"), each
share of Series A Preferred Stock then outstanding shall
thereafter be convertible into, in lieu of the Common Stock
issuable upon such conversion prior to consummation of such
Transaction, the kind and amount of shares of stock and
other securities and property (including cash) receivable
upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share
of Series A Preferred Stock was convertible immediately
prior to such Transaction (including, on a pro rata basis,
the cash, securities or property received by holders of
Common Stock in any tender or exchange offer that is a step
in such Transaction). The number of shares of stock and
other consideration into which each share of Series A
Preferred Stock shall be converted shall be determined
according to the Conversion Ratio and Maximum Number set
forth in Section C.2.(e)(i). In case securities or property
other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all references in this
Section C.2.(e)(viii). shall be deemed to apply, so far as
appropriate and nearly as may be, to such other securities
or property.
(ix) Shares of Series A Preferred Stock converted as provided
herein shall become authorized and unissued shares of
Preferred Stock which may thereafter be designated as shares
of any other series.
(x) The Corporation shall at all times reserve and keep
available for issuance upon the conversion of the Series A
Preferred Stock, such number of its authorized but unissued
shares of Common Stock as will from time to time be
sufficient to permit the conversion of all outstanding
shares of Series A Preferred Stock, and shall take all
action required to increase the authorized number of shares
of Common Stock if necessary to permit the conversion of all
outstanding shares of Series A Preferred Stock.
(f) Redemption Rights.
(i) Redemption. All, but not less than all, the Series A
Preferred Stock shall be subject to redemption in whole at
the sole and absolute discretion of the Corporation at any
time after the date of issuance of the Series A Preferred
Stock, provided, however, that such redemption right may not
be exercised by the Corporation if on the date that the
Corporation elects to exercise its redemption rights the
Current Market Price of the Common Stock is less than $1.00
per share as appropriately adjusted with respect to any
subdivisions, stock dividends or combinations of the Common
Stock, except with the consent of the holders of two-thirds
of the outstanding shares of Unistar Preferred Stock.
<PAGE>
(ii) Redemption Notice. In the event that the Corporation shall
redeem all shares of Series A Preferred Stock, notice of
such redemption (the "Redemption Notice") shall be given by
personal delivery, overnight courier or certified mail,
return receipt requested, not less than 30 nor more than 60
days prior to the redemption date, to each holder of the
Series A Preferred Stock at his address on the transfer
books of the Corporation. Such notice shall be effective
upon receipt and shall state: (A) the date on which such
redemption shall take place (the "Redemption Date"); (B)
that all shares of Series A Preferred Stock are to be
redeemed; (C) the office of the Corporation where
certificates for such shares are to be surrendered; and (D)
that Accrued Preferred Dividends on the shares to be
redeemed will be determined as of and payable on the
Redemption Date. On the Redemption Date, each share of
Series A Preferred Stock then outstanding shall be
converted, without the necessity of any action by the Board
of Directors, into a right to receive ________ shares of
Common Stock. The redemption ratio set forth in this Section
C.2.(f)(ii) shall be adjusted in the same manner as the
Conversion Ratio and Maximum Number are adjusted pursuant to
Section C.2.(e)(vi). From and after the Redemption Date, all
rights of a holder of shares of Series A Preferred Stock
shall cease except for the right, upon surrender of the
certificate representing such shares, to receive
certificates representing shares of Common Stock for which
such shares were redeemed together with any payment in lieu
of a fractional share of Common Stock and of any Accrued
Preferred Dividend as contemplated by this Section. Each
holder of Series A Preferred Stock shall be deemed to be a
holder of Common Stock on the Redemption Date.
(iii) Timing of Redemption. Within 30 business days after receipt
of the Redemption Notice, the holder of each share of Series
A Preferred Stock shall surrender the certificate
representing such share at the office of the Corporation and
shall give written notice to the Corporation at said office
specifying the name or names and denominations in which such
holder wishes the certificate or certificates for the Common
Stock to be issued (which notice may be printed on the
reverse of the certificates for the shares of Series A
Preferred Stock). Unless the shares issuable on redemption
are to be issued in the same name as the name in which such
share of Series A Preferred Stock is registered, each share
surrendered for redemption shall be accompanied by
instruments of transfer, in form reasonably satisfactory to
the Corporation, duly executed by the holder or his duly
authorized attorney, and by an amount sufficient to pay any
transfer or similar tax. The Corporation shall pay all other
expenses in connection with the redemption and issuance of
Common Stock.
<PAGE>
(iv) Accrued Preferred Dividend. The holders of shares of Series
A Preferred Stock shall be entitled to receive any Accrued
Preferred Dividend payable with respect to such shares
calculated as of the Redemption Date in accordance with
Section C.2.(d)(i) and (ii) (based, however, on the Retained
Earnings of the Corporation as of the Redemption Date,
determined in accordance with the next sentence of this
Section C.2.(f)(iv), without the necessity of any action by
the Board of Directors. For purposes of this Section
C.2.(f), the consolidated Retained Earnings of the
Corporation as of the Redemption Date shall be the sum of
(A) the consolidated Retained Earnings of the Corporation
(1) if the Redemption Date occurs within the first quarter
of the Corporation's fiscal year, as of the end of the
immediately preceding fiscal year of the Corporation (based
on the Certified Financial Statements of the Corporation),
or (2) if the Redemption Date occurs within any of the last
three quarters of the Corporation's fiscal year, as of the
end of the Corporation's fiscal quarter immediately
preceding the quarter in which the Redemption Date occurs
(based on the Unaudited Financial Statements of such
immediately preceding quarter), plus or minus (B) the
product of (1) the number of days between the end of the
immediately preceding quarter and the Redemption Date, times
(2) the quotient of (I) the difference between the Retained
Earnings as of the end of the immediately preceding fiscal
quarter and the end of the second immediately preceding
quarter, divided by (II) the number of days in the first
immediately preceding quarter, provided, however, that in
the event that the Corporation delivers its Redemption
Notice within five business days following the date that the
Corporation's Certified Financial Statements or Unaudited
Financial Statements for the immediately preceding fiscal
quarter are published, the consolidated Retained Earnings
shall be determined as of the end of such immediately
preceding fiscal quarter and no adjustment shall be made
with respect to the period between the last day of such
immediately preceding fiscal quarter and the Redemption
Date. Except as provided above, the Corporation shall make
no payment or allowance for unpaid dividends, whether or not
in arrears, on redeemed shares or for dividends on the
shares of Common Stock issued upon such redemption.
<PAGE>
(v) Issuance of Common Stock and Payment of Accrued Preferred
Dividend. As promptly as practicable after the surrender of
the certificates for shares of Series A Preferred Stock as
aforesaid, the Corporation shall issue and shall deliver at
the office of any transfer agent for the Common Stock to
such holder, or according to such holder's written
instruction, (A) a certificate or certificates for the
number of full shares of Common Stock issuable upon the
redemption of such shares in accordance with the provisions
of this Section and (B) a certified or bank check in the
amount of the Accrued Preferred Dividend payable with
respect to such shares and any amount in lieu of fractional
shares. Any fractional interest in respect of a share of
Common Stock arising upon such redemption shall be settled
as provided in Section C.2.(f)(vi).
The redemption shall be deemed to have been effected
immediately prior to the close of business on the Redemption Date
and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such
redemption shall be deemed to have become the holder or holders of
record of the shares represented thereby at such time on such date.
All shares of Common Stock delivered upon redemption of the Series A
Preferred Stock will upon delivery be duly and validly issued and
fully paid and nonassessable, free of all liens and charges of the
Corporation and not subject to any preemptive rights.
(vi) Fractional Shares. No fractional shares or scrip
representing fractions of shares of Common Stock shall be
issued upon redemption of shares of Series A Preferred
Stock. Instead of any fractional interest in a share of
Common Stock that would otherwise be deliverable upon the
redemption of a share of Series A Preferred Stock, the
Corporation shall pay to the holder of such share of Series
A Preferred Stock an amount in cash (computed to the nearest
cent, with one-half cent being rounded upward) equal to the
Current Market Price of the Common Stock on the trading day
next preceding the day of Redemption Date multiplied by the
fraction of a share of Common Stock represented by such
fractional interest. If more than one share of Series A
Preferred Stock shall be surrendered for redemption at one
time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on
the basis of the aggregate number of the shares of Series A
Preferred Stock so surrendered.
(g) Liquidation Rights.
(i) Upon any voluntary or involuntary dissolution, liquidation
or winding up of the Corporation, the holders of Series A
Preferred Stock then outstanding shall be entitled to
receive and to be paid out of the assets of the Corporation
available for distribution to its shareholders, before any
payment or distribution shall be made on any class of Junior
Stock upon liquidation, an amount equal to $3,500,000,
together with any Accrued Preferred Dividend as of the date
of the distribution, determined in accordance with the
method set forth in Section C.2.(f)(iv). Notwithstanding the
foregoing, the holders of the shares of Series A Preferred
Stock shall have no direct claim on the assets of the
Corporation.
<PAGE>
(ii) After the payment to the holders of the shares of Series A
Preferred Stock of the full preferential amounts provided
for in this Section C.2.(g), the holders of Series A
Preferred Stock as such shall have no right or claim to any
of the remaining assets of the Corporation.
(iii) If, upon any voluntary or involuntary dissolution,
liquidation, or winding up of the Corporation, the amounts
payable with respect to the shares of Series A Preferred
Stock and any other shares of stock of the Corporation
ranking as to any such distribution on a parity with the
shares of Series A Preferred Stock are not paid in full, the
holders of the shares of Series A Preferred Stock and of
such other shares will share ratably in any such
distribution of assets of the Corporation in proportion to
the full respective preferential amounts to which they are
entitled.
(iv) Neither the sale of all or substantially all the property or
business of the Corporation, nor the merger or consolidation
of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or
with the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the
purposes of this Section C.2.(g).
(h) Books and Records. The Corporation shall assure that accurate books
and records are maintained by the Corporation and all its Affiliates
sufficient to permit the holders of Series A Preferred Stock and
their representatives to verify any amounts that are due to them,
the reports submitted to them by the Corporation and the occurrence
of the events which entitle them to increased voting rights,
dividends, conversion rights and other rights pursuant to this
Certificate, and will make available to the holders of Series A
Preferred Stock and their representatives, for inspection and
copying upon reasonable notice to the Corporation and during normal
business hours, such books, records and work papers as are
reasonably deemed by such holders and their representatives to be
necessary in order to verify the foregoing amounts, reports and
events, during regular business hours, at the holders' expense.
<PAGE>
(i) Dispute Resolution.
(i) If the holders of 25% or more of the then outstanding shares
of Series A Preferred Stock disagree with the Corporation's
calculations of any amounts that affect such holders' rights
with respect to such stock, including but not limited to,
the Conversion Ratio (and adjustments thereto), Net Income
and Net Revenues of the Corporation and its Affiliates, such
holders may, within 60 days after delivery of any disputed
amount, deliver a notice or notices to the Corporation
disagreeing with such calculation and setting forth those
items or amounts as to which they disagree.
(ii) If a notice or notices of disagreement shall be duly
delivered pursuant to Section C.2.(i)(i), such holders and
the Corporation shall, during the 15 days following such
delivery, use their best efforts to reach agreement on the
disputed items or amounts. If, during such period, such
holders and the Corporation are unable to reach such
agreement, they shall promptly thereafter mutually appoint
Arthur Andersen LLP (unless either such holders or the
Corporation object to such appointment, in which case they
shall mutually appoint other independent accountants of
nationally recognized standing who shall not have any
material relationship with the Corporation or its Affiliates
and who shall be satisfactory to both such holders and the
Corporation) who shall promptly review the disputed items or
amounts for the purpose of determining the correct amounts
in accordance with this Certificate. In making such
calculation, such independent accountants shall consider
only those items or amounts as to which such holders have
disagreed and the Corporation's calculation of such amounts
and the Corporation's and such holders' reasons therefor.
Such independent accountants shall deliver to such holders
and the Corporation, as promptly as practicable, a report
setting forth such calculation. In the absence of manifest
error, such report shall be final and binding upon such
holders and the Corporation. The cost of such review and
report shall be borne by such holders and the Corporation as
follows: if the amount resulting from the resolution of the
dispute results in a change of more than 5% of the amount
reported earlier, the Corporation shall bear 100% of the
cost, but if the change resulting from the resolution of the
dispute is less than 5% of the amount reported earlier, the
Corporation shall bear 50% of such cost and the disputing
holders shall bear the other 50% pro rata to the increase in
the amounts they receive upon such resolution.
<PAGE>
(j) Calculation of Relevant Amounts. As long as any shares of Series A
Preferred Stock are outstanding, the Corporation shall cause to be
prepared (at its expense) and delivered to each holder of record of
Series A Preferred Stock, not later than the date on which the
Corporation's audited consolidated financial statements are
published for each fiscal year and not later than the date on which
the Corporation's Form 10-Q is published for each fiscal quarter,
detailed statements setting forth all calculations that are relevant
for purposes of determining the rights and privileges incident to
the Series A Preferred Stock, including, but not limited to, Current
Market Price, Conversion Ratio, Maximum Number, Net Income, Net
Revenues and Accrued Preferred Dividends, based on the Certified
Financial Statements of the Corporation if the amounts relate to the
end of a fiscal year and the Unaudited Financial Statements if the
amounts relate to a fiscal quarter. Said calculations shall be
accompanied by a certification of both the chief financial officer
of the Corporation and a firm of independent certified public
accountants of nationally recognized standing (which may be the firm
regularly retained by the Corporation) to the effect that said
statements accurately reflect the items purported to be set forth
therein and were prepared in accordance with the terms of this
Certificate. Any disputes with respect to any of the calculations
referred to in this Section C.2.(j) shall be subject to the
provisions of Section C.2.(i) above with respect to Dispute
Resolution.
(k) Enforcement of Rights. Any holder of Series A Preferred Stock may
proceed to protect and enforce his rights and the rights of such
holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific
enforcement of any provision in this Certificate or in aid of the
exercise of any power granted herein, or to enforce any other proper
remedy.
(l) Series A Director. While any of the Series A 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 Series A
Preferred Stock, voting as a single class, to the exclusion of
holders of Junior Stock meaning any capital stock of the Corporation
ranking junior (either as to dividends, redemption or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, shall have the right to nominate one director for election to
the Board of Directors (the "Series A Director"). The Corporation
shall use its best efforts to cause each such nominee to be elected
as a member of its Board of Directors. The designee of the holders
of the Series A Preferred Stock on the Board of Directors may be
removed, and may only be removed, with or without cause, by the
holders of a majority of the outstanding shares of Series A
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 Series A Preferred Stock voting as a separate
class.
<PAGE>
FIFTH: Unless required by law or determined by the chairman of the
meeting to be advisable, the vote by stockholders on any matter, including
the election of directors, need not be by written ballot.
SIXTH:
A. The business and affairs of the corporation shall be managed by or
under the direction of the Board of Directors consisting of not less than five
nor more than nine directors, with the exact number of directors constituting
the entire Board of Directors to be determined from time to time by resolution
adopted by the affirmative vote of a majority of the entire Board of Directors.
For purposes of this Amended and Restated Certificate of Incorporation, "the
entire Board of Directors" shall mean the number of directors that would be in
office if there were no vacancies nor any unfilled newly created directorships.
B. The Board of Directors shall be divided into three classes, Class I,
Class II and Class III. Each class shall consist, as nearly as may be possible,
of one-third of the number of directors constituting the entire Board of
Directors. Class I directors shall be initially elected for a term expiring at
the first succeeding annual meeting of stockholders, Class II directors shall be
initially elected for a term expiring at the second succeeding annual meeting of
stockholders and Class III directors shall be initially elected for a term
expiring at the third succeeding annual meeting of stockholders. At each annual
meeting of stockholders following 1998, successors to the class of directors
whose term expires at that annual meeting shall be elected for a term expiring
at the third succeeding annual meeting of the stockholders. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a newly
created directorship resulting from an increase in such class shall hold office
for a term that shall coincide with the remaining term of that class, but in no
case shall a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board of Directors
that results from an increase in the number of directors may be filled by a
majority of the Board of Directors then in office, provided that a quorum is
present, and any other vacancy occurring in the Board of Directors may be filled
by a majority of the directors then in office, even if less than a quorum, or by
a sole remaining director. Directors chosen to fill any such vacancy shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires and until
such director's successor shall have been duly elected and qualified.
C. The Board of Directors shall be authorized to adopt, make, amend,
alter, change, add to or repeal the By-Laws of the Corporation, subject to the
power of the stockholders to amend, alter, change add or repeal the By-Laws made
by the Board of Directors.
SEVENTH: The Corporation reserves the right to increase or decrease its
authorized capital stock, or any class or series thereof, and to reclassify the
same, and to amend, alter, change or repeal any provision contained in the
Certificate of Incorporation under which the Corporation is organized or in any
amendment thereto, in the manner now or hereafter prescribed by law, and all
rights conferred upon stockholders in said Certificate of Incorporation or any
amendment thereto are granted subject to the aforementioned reservation.
<PAGE>
EIGHTH:
A. 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 office of
the Corporation or is or was serving or has agreed to serve at the request of
the Corporation 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
Corporation to the fullest extent authorized by the General Corporation Law of
the State of Delaware 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 Corporation within 30 days after the receipt by the
Corporation 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 Corporation 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.
B. The Corporation shall not be obligated to reimburse the costs of any
settlement to which it has not agreed.
C. No amendment, termination or repeal of this Article EIGHTH or any of
the relevant provisions of the General Corporation Law of the State of Delaware
or any other applicable laws shall in any way diminish the rights of any
director or officer of the Corporation to indemnification or to the advancement
of costs and expenses under the provisions of this Article EIGHTH 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.
D. If this Article EIGHTH or any portion thereof shall be invalidated on
any ground by any court of competent jurisdiction, the Corporation shall
nevertheless indemnify, and advance costs and expenses to, each director or
officer of the Corporation 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 this Article EIGHTH that shall not
have been invalidated and to the fullest extent permitted by law.
E. If the General Corporation Law of the State of Delaware is amended
after the filing of this Amended and Restated Certificate of Incorporation with
the Delaware Secretary of State to further expand the indemnification permitted
to directors and officers of the Corporation, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended.
<PAGE>
NINTH: No director of the Corporation shall be personally liable to the
Corporation 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 Corporation 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 General Corporation Law of the State of
Delaware; or (iv) or any transaction from which the director derived an improper
personal benefit. If the General Corporation Law of the State of Delaware is
amended after the initial filing of this Amended and Restated Certificate of
Incorporation to further eliminate or limit the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended. No amendment, termination or repeal of this
Article NINTH shall in any way diminish any right or protection of a director of
the Corporation that existed at the time of the final adoption of such
amendment, termination or repeal.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its Chairman and attested by its
Secretary, and has caused its corporate seal to be hereunto affixed, this ___
day of ______, 1998.
UNISTAR GAMING CORP.
By: _____________________________
Chairman
ATTEST:
By: _____________________________
Secretary
Exhibit 3.2
BYLAWS
OF
UNISTAR GAMING CORP.
(A Delaware Corporation)
ARTICLE I
Offices
SECTION 1. Registered office. The registered office of the Corporation in
the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. Additional offices. The Corporation may also have offices and
places of business at such other places, within and outside of the State of
Delaware, as the Board of Directors (the "Board") may from time to time
determine.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of meetings. All annual and special meetings of
stockholders shall be held at such place, within or outside of the State of
Delaware, as shall be designated from time to time by the Board and stated in
the notice of the meeting.
SECTION 2. Annual meetings. All regular meetings of the stockholders of
the Corporation for the election of Directors or for any purpose shall be held
annually (i) on the fourth Friday in April if not a legal holiday (and if a
legal holiday, then on the first day following that is not a legal holiday) at
10:00 A.M.; or (ii) at such other date and time as the Board may determine.
SECTION 3. Special meetings. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called only by the Chairman and
shall be called by the Secretary at the written request of a majority of the
total number of Directors of the Corporation would have if there were no
vacancies (the "Whole Board").
SECTION 4. Conduct of meetings. The Chairman or, in his or her absence,
the President or, in his or her absence, such person as may be designated by the
Board of Directors, shall call to order any meeting of the stockholders and act
as chairman of the meeting. Subject to Sections 13 and 14 of this Article II,
annual and special meetings of the stockholders shall be conducted in accordance
with the customary practices and procedures as determined by the chairman at the
meeting.
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SECTION 5. Notice of meetings. Written notice of every meeting of the
stockholders, stating the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than 10 nor more than 60 days before the date of the
meeting, either personally or by mail, by or at the direction of the officer
calling the meeting, to each stockholder entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
postage prepaid, addressed to the stockholder at his or her address as it
appears on the stock transfer books or records of the Corporation as of the
record date prescribed in Section 6 of this Article II. When any stockholders'
meeting, either annual or special, is adjourned for 30 days or more or if a new
record date is fixed, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give notice of the
time and place of any meeting adjourned for less than 30 days or the business to
be transacted at such adjourned meeting, other than an announcement at the
meeting at which such adjournment is taken. Any previously scheduled meeting of
the stockholders may be postponed and any special meeting of the stockholders
may be canceled, by resolution of the Board of Directors upon public notice
given prior to the date previously scheduled for such meeting of stockholders.
SECTION 6. Fixing of record date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or in order to make a determination of stockholders for any other purpose, the
Board shall fix in advance a date as the record date for any such determination
of stockholders. Such date in any case shall be not more than 60 days and, in
case of a meeting of stockholders, not less than 10 days prior to, the date on
which the particular action requiring such determination of stockholders is to
be taken. When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this Section 6, such determination
shall also apply to any adjournment of such meeting unless the Board, at its
discretion, fixes a new record date for the adjourned meeting.
SECTION 7. Voting lists.
(a) At least 10 days before each meeting of the stockholders, the officer
or agent having charge of the stock transfer books for shares of the Corporation
shall make a complete list of the stockholders entitled to vote at such meeting
or any adjournment thereof, arranged in alphabetical order with the address and
the number of shares held by each. This list of stockholders shall be open to
inspection by any stockholder, for any lawful purpose germane to such meeting,
at any time during usual business hours for a period of 10 days prior to such
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection by any stockholder during the entire time of the meeting.
(b) The Corporation may require any stockholder making a request for
inspection of the list of stockholders entitled to vote at a meeting to provide
a written representation as to the purpose for such request in order that the
Corporation may determine whether such purpose is lawful and germane to such
meeting. Such written representation shall also state that the list of
stockholders shall not be used for any purpose other than the purpose set forth
therein.
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(c) No stockholder who inspects the Corporation's list of stockholders
pursuant to this Section 7 or otherwise shall have the right to make copies or
prepare extracts of such list (unless and only to the extent the Corporation is
required by applicable law to allow the making of such copies or the preparation
of such extracts).
SECTION 8. Quorum. Except as may otherwise be required by law or the
Certificate of Incorporation, a majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present or represented, any business shall be transacted that might have been
transacted at the meeting as originally notified. The stockholders who are
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy in accordance with the applicable provisions of the General
Corporation Law of the State of Delaware.
SECTION 10. Voting. When a quorum is present at any meeting, unless the
question is one upon which pursuant to applicable law, the Certificate of
Incorporation, a certificate of designation of any series of preferred stock or
these By-Laws a different vote is required (in which case such express provision
shall govern and control the decision of such question), (i) a plurality of the
votes cast shall elect directors, and (ii) the vote of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the matter shall decide any question properly brought before such meeting.
SECTION 11. Nominations.
(a) No nominations for Directors except those made by the Board shall be
voted upon at an annual or special meeting of stockholders other than
nominations made by any stockholder entitled to vote in the election of
Directors who gives timely written notice of such stockholder's intent to make
such nomination or nominations, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation:
(1) with respect to an election to be held at an annual meeting of
stockholders, not less than 70 days nor more than 90 days in advance
of the first anniversary of the previous year's annual meeting of
stockholders; provided however, that in the event that the date of
the annual meeting is advanced by more than 20 days, or delayed by
more than 70 days, from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the
close of business on the later of the seventieth day prior to such
annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made; and
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(2) with respect to an election to be held at a special meeting of
stockholders for the election of Directors, not later than the close
of business on the tenth day following the day on which notice of
such meeting is first given to stockholders.
Each such notice of a stockholder's intent to make such nomination or
nominations shall set forth:
(1) the name and address of the stockholder who intends to make the
nomination or nominations and of the person or persons to be
nominated;
(2) a representation that the stockholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice, and a statement of the number of
shares owned by such stockholder, beneficially and of record;
(3) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or
nominations is or are to be made by the stockholder;
(4) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated or intended to be
nominated by the Board of Directors; and
(5) the written consent of each nominee to serve as a Director of the
Corporation if elected
The presiding officer of any meeting of the stockholders may refuse to
acknowledge the nomination of any person if not made in compliance with these
By-laws. Ballots bearing the names of all the persons so nominated by the Board
and by stockholders shall be provided for use at the annual meeting.
(b) No stockholder nomination for director shall be acknowledged at a
meeting of stockholders unless the stockholder who gave written notice of his or
her intent to make such nomination is present in person or by proxy at such
meeting and makes the nomination.
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SECTION 12. New business.
(a) The Board or any stockholder may make a proposal to be acted upon at
an annual meeting of stockholders, provided that any such proposal by a
stockholder is made in writing and delivered either by personal delivery or by
United States mail, postage prepaid, to the secretary of the Corporation not
less than 70 days nor more than 90 days in advance of the first anniversary of
the previous year's annual meeting of stockholders.
Each such stockholder proposal must set forth:
(1) the name and address of the stockholder making the proposal;
(2) a representation that the stockholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to move such proposal;
(3) a brief description of the proposal to be made; and
(4) a description of any material interest (other than proportionally as
a stockholder) of such stockholder in such proposal.
(b) Any such proposal may be deemed out of order and need not be
discussed, considered, acted or voted upon or laid over for action at any
meeting of stockholders if the Chairman (or such other officer of the
Corporation who shall preside at the relevant meeting of stockholders)
determines that such proposal was not delivered in compliance with these By-laws
on that such proposal deals with or relates to:
(1) any action or matter that, if taken or effectuated by the
Corporation, would be in violation of, or contrary to, any
applicable law or regulation or would result in a breach or
violation by the Corporation or any contractual obligation;
(2) any action or matter that is impossible or beyond the Corporation's
power to take or effectuate;
(3) any action or matter that is not a proper subject for action by the
stockholders of the Corporation;
(4) any action or matter involving or relating to the conduct of the
ordinary business of the company;
(5) any action or matter that is substantially duplicative of any
business or proposal that is to be considered at such meeting of
stockholders;
<PAGE>
(6) any action or matter that has been rendered moot; or
(7) the redress of a personal claim or grievance against the Corporation
or any other person or entity, or any action or matter that is
designated to result in a benefit to the stockholder or to further a
personal interest, which benefit or interest is not shared with the
other stockholders of the Corporation at large.
(c) No proposal from a stockholder shall be discussed, considered, acted
or voted upon or laid over for action at an annual or other meeting of
stockholders unless such stockholder is present in person or by proxy at such
annual or other meeting of stockholders.
(d) Only such business shall be acted upon at a special meeting of the
stockholders as shall have been brought before the meeting pursuant to a notice
of meeting which is given pursuant to the provisions of Section 5 of this
Article II.
SECTION 13. Compliance with Other Provisions. Notwithstanding the
provisions of Sections 11 and 12 hereof, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations thereunder, with respect to
the matters set forth in said Sections 11 and 12. Nothing contained herein shall
be deemed to affect any rights of stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
SECTION 14. Inspectors of Election. The Board of Directors by resolution
shall appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives, to act at the
meetings of stockholders and make a written report thereof. One or more persons
may be designated as alternative inspectors to replace any inspector who fails
to act. If no inspector or alternate has been appointed to act or is able to act
at a meeting of stockholders, the chairman of the meeting shall appoint one or
more inspectors to act at the meeting. Each inspector, before discharging his or
her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by the General
Corporation Law of the State of Delaware.
ARTICLE III
Board of Directors
SECTION 1. General powers. The business and affairs of the Corporation
shall be under the direction of its Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Certificate of Incorporation or these Bylaws directed or
required to be exercised or done by the stockholders.
<PAGE>
SECTION 2. Regular meetings. Regular meetings of the Board of Directors
may be held at such times and places as the Board shall from time to time
determine and no further notice shall be required to be given. By action of the
Board at any meeting, or with the written consent of the majority of the
Directors at the time in office, any regular meeting may be omitted.
SECTION 3. Special meetings. Special meetings may be called by the
Chairman on at least 24 hours' notice to each Director. Special meetings shall
be called by the Secretary on like notice within 5 days after receipt of the
written request of a majority of the Directors then in office. The persons
authorized to call special meetings of the Board may fix any place as the place
for holding any special meeting of the Board.
SECTION 4. Notice. Notice of any special meeting of Directors shall be
given to each Director at his business or residence in writing by hand delivery,
first-class or overnight mail or courier service, telegram, or facsimile
transmission, or orally by telephone. If mailed by first-class mail, such notice
shall be deemed adequately delivered when deposited in the United States mails
so addressed, with postage thereon prepaid, at least 4 days before such meeting.
If by telegram, overnight mail or courier service, such notice shall be deemed
adequately delivered when the telegram is delivered to the telegraph company, or
the notice is delivered to the overnight mail or courier service company, at
least 24 hours before such meeting. If by facsimile transmission, such notice
shall be deemed adequately delivered when the notice is transmitted at least 24
hours before such meeting. If by telephone or by hand delivery, the notice shall
be given at least 24 hours prior to the time set for the meeting.
Any Director may waive notice of any meeting by a writing filed with the
Secretary. The attendance of a Director at a meeting shall constitute a waiver
of notice of such meeting, except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Subject to the provisions of Article
XII, neither the business to be transacted at, nor the purpose of, any meeting
of the Board need be specified in the notice or waiver of notice of such
meeting.
SECTION 5. Quorum.
(a) A majority of the Directors then in office shall constitute a quorum
for the transaction of business at any meeting of the Board, but if less than
such majority is present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the manner prescribed by Section 4 of this Article III. The Directors
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough Directors to leave less
than a quorum.
SECTION 6. Manner of acting. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board,
unless a greater number is prescribed by law, the Certificate of Incorporation
or these Bylaws.
<PAGE>
SECTION 7. Action without a meeting. Any action required or permitted to
be taken by the Board or any committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed by
all the members of the Board or of such committee.
SECTION 8. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence at such meeting.
SECTION 9. Resignation. Any Director may resign from the Board or any
committee at any time by sending a written notice of such resignation to the
Corporation addressed to the Chairman or the Chief Executive Officer. Unless
otherwise specified in such notice, such resignation shall take effect upon
receipt by the Chairman or the Chief Executive Officer.
SECTION 10. Compensation. Directors, as such, may receive a stated salary
for their services and/or a reasonable fixed sum, and reasonable expenses of
attendance, if any, may be allowed for actual attendance at each regular or
special meeting of the Board or any committee of the Board. No such salary or
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation for his or her services.
SECTION 11. Removal of Directors. Except as may be otherwise required by
law or provided in a certificate of designation of any series of preferred
stock, any Director may be removed from office at any time, but only for cause
and only by a vote of the holders of a majority of the shares then entitled to
vote at an election of Directors.
ARTICLE IV
Committees of the Board
SECTION 1. Executive Committee. The Board of Directors may, by resolution
adopted by the affirmative vote of a majority of the Whole Board, designate 3 or
more of its members to constitute an Executive Committee. Except as may be
limited by the applicable provisions of law, the Executive Committee shall have
and may exercise all of the powers and authority of the Board in the management
of the business and affairs of the Corporation, including, without limitation,
the power and authority to declare a dividend, to authorize the issuance of
stock, to adopt a certificate of ownership and merger, and to indemnify
directors, and may authorize the seal of the Corporation to be affixed to all
papers which may require it, except that the Executive Committee shall not have
the power or authority to fill vacancies on the Board or on any committee of the
Board, including the Executive Committee. The Executive Committee shall serve at
the pleasure of the Board.
SECTION 2. Other Committees. The Board may, by resolution adopted by the
Whole Board, designate one or more other committees. Each such committee shall
consist of one or more of the Directors of the Corporation as shall be
designated by a majority of the Whole Board and shall have such lawfully
delegable powers and duties as the Board may confer. Each such committee shall
serve at the pleasure of the Board. Except as otherwise provided by law, any
such committee shall have and may exercise all of the powers and authority which
are specified in the designating resolution.
<PAGE>
SECTION 3. Manner of Acting. Unless otherwise prescribed by the Board, a
majority of the members of the Executive Committee or any other committee shall
constitute a quorum for the transaction of business, and the act of a majority
of the members present at a meeting at which there is a quorum shall be the act
of the Executive Committee or such other committee. The Executive Committee and
each such other committee may prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board, and shall keep a written record of all actions taken by it.
ARTICLE V
Waivers of Notice
SECTION 1. Waivers. Whenever any notice is required to be given by law or
under the provisions of the Certificate of Incorporation or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time of the event for which notice is to be
given, shall be deemed equivalent to such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
ARTICLE VI
Officers
SECTION 1. Positions. The officers of the Corporation shall be a Chairman,
a President, a Secretary and a Treasurer, each of whom shall be elected by the
Board. The Board may also elect one or more Vice Chairmen and/or Vice Presidents
and such other officers as the business of the Corporation may require. The
officers shall have such authority and perform such duties as the Board may from
time to time authorize or determine. In the absence of action by the Board, the
officers shall have such powers or duties as generally pertain to their
respective offices, subject to the specific provisions of this Article VI. Any
number of offices may be held by the same person.
SECTION 2. Election and term of office. The officers of the Corporation
shall be elected by the Board. Each officer shall hold office until a successor
shall have been duly elected and qualified or until the officer's death,
resignation or removal.
SECTION 3. Removal. Any officer may be removed by the Board (with or
without cause) whenever, in its judgment, the best interests of the Corporation
will be served thereby, but such removal, other than for cause, shall be without
prejudice to the rights, if any, of the person so removed under any employment
contract.
<PAGE>
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board.
SECTION 5. Remuneration. The remuneration of officers shall be fixed from
time to time by the Board.
SECTION 6. Duties of officers.
(a) The Chairman. The Chairman shall be the Chief Executive Officer of the
Corporation if he or she is so designated by the Board. The Chairman shall
preside at all meetings of the Board and at all meetings of the stockholders.
The Chairman shall have such other duties as may be assigned to him or her from
time to time by the Board.
(b) The President. The President shall be the Chief Operating Officer of
the Corporation if so designated by the Board. The President shall also perform
such other duties as may, from time to time, be assigned to him or her by the
Board or the Chairman.
(c) Secretary. The Secretary shall attend all meetings of the Board and
the stockholders as he or she may be requested by the Board to attend, and
record (or cause to be recorded) all votes and the minutes of all proceedings in
books to be kept for that purpose, and shall perform like duties for the
committees when required. He or she shall give, or cause to be given, notice of
all meetings of the stockholders and special meetings of the Board, and shall
perform such other duties as may be prescribed by the Board, the Chairman or the
President, under whose supervision he or she shall act. He or she shall keep in
safe custody the seal of the Corporation and, when authorized by the Board,
affix the seal to any instrument requiring it and, when so affixed, it shall be
attested by his or her signature or by the signature of the Treasurer or any
Assistant Secretary or Assistant Treasurer. He or she shall keep the minutes of
such meetings, and shall have such powers and perform such duties as usually
pertain to the office of Secretary. He or she shall also perform such other
duties as may from time to time be assigned to him or her by the Board or the
Chairman.
(d) Treasurer. The Treasurer, subject to the approval of the Board shall
have the management of the cash and securities of the Corporation and shall
perform all acts incident to the position of Treasurer and such other duties as
may from time to time be assigned to him or her by the Board or the Chairman.
(e) Other Officers. All other officers shall have such powers and perform
such duties as may be assigned to them by the Board or the Chief Executive
Officer.
<PAGE>
ARTICLE VII
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by law, and except as
otherwise prescribed by these Bylaws with respect to certificates for shares,
the Board may authorize any officer, employee or agent of the Corporation to
enter into any contract or loan, or to execute and deliver any instrument in the
name of and on behalf of the Corporation. Such authority may be general or
limited to specific instances.
SECTION 2. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by one or more officers, employees or agents of
the Corporation in such manner as shall from time to time be determined by the
Board.
SECTION 3. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the Board may select.
ARTICLE VIII
Certificates for Shares and Their Transfer
SECTION 1. Transfer of Shares. The interest of each stockholder of the
corporation shall be evidenced by certificates for shares of stock in such form
as the appropriate officers of the Corporation may from time to time prescribe.
The shares of the stock of the Corporation shall be transferred on the books of
the Corporation by the holder thereof in person or by his attorney, upon
surrender for cancellation of certificates for the same number of shares, with
an assignment and power of transfer endorsed thereon or attached thereto, duly
executed, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require.
SECTION 2. Certificates for Shares. The certificates of stock shall be
signed, countersigned and registered in such manner as the Board may by
resolution prescribe, which resolution may permit all or any of the signatures
on such certificates to be in facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
SECTION 3. Registered stockholders. The person in whose name shares of
capital stock stand on the books of the Corporation shall be deemed by the
Corporation to be the owner of such shares for all purposes.
<PAGE>
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall end on December 31 of each year.
ARTICLE X
Dividends and Reserve
SECTION 1. Dividends. Subject to applicable law and the terms of the
Certificate of Incorporation and any certificate of designation with respect to
a series of preferred stock, the Board may, from time to time, declare, and the
Corporation may pay, dividends on its outstanding shares of capital stock. Such
dividends may be paid in cash, in property, or in shares of the capital stock of
the Corporation.
ARTICLE XI
Corporate Seal
The Board of Directors shall adopt a corporate seal and use the same by
causing it or a facsimile thereof to be impressed or affixed or otherwise
reproduced.
ARTICLE XII
Amendments
These Bylaws may be amended, added to, rescinded or repealed at any
meeting of the Board or of the stockholders, provided that notice of the
proposed change was given in the notice of the meeting.
EXHIBIT 4.2
FORM OF RIGHTS CERTIFICATE
CONTROL NUMBER UNISTAR GAMING CORP. RIGHTS CERTIFICATE
FOR ________ SHARES
Expiration Date:__________ 1998 SUBSCRIPTION PRICE
U.S. $_____ PER SHARE
RIGHTS CERTIFICATE FOR SHARES OF COMMON STOCK
VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M. (NEW YORK
TIME) ON ___________, 1998, THE EXPIRATION DATE. THIS RIGHTS
CERTIFICATE IS TRANSFERABLE AND MAY BE COMBINED OR
DIVIDED (BUT ONLY INTO RIGHTS CERTIFICATES EVIDENCING A WHOLE
NUMBER OF RIGHTS) AT THE OFFICE OF THE RIGHTS AGENT.
THIS RIGHTS CERTIFICATE MAY BE USED TO SUBSCRIBE FOR SHARES OF COMMON STOCK OR
MAY BE ASSIGNED OR SOLD. FULL INSTRUCTIONS APPEAR ON THE BACK OF THIS
CERTIFICATE.
The registered owner of this Rights Certificate, named above, or assignee,
is entitled to the number of Rights to subscribe for shares of Common Stock, par
value $.01 per share, of Unistar Gaming Corp. shown above, in the ratio of one
share of Common Stock for each five (5) Rights held, upon the terms and
condition and at the price for each share of Common Stock specified in the
Prospectus dated __________, 1998.
If you subscribe for fewer than all the shares represented by this Rights
Certificate, the Rights Agent will issue a new Rights Certificate representing
the balance of the unsubscribed Rights, provided that the Rights Agent has
received your properly completed and executed Rights Certificate and payment
prior to 5:00 p.m., New York time, on ______________, 1998. No new Rights
Certificate will be issued after that date.
IMPORTANT: Complete appropriate form on reverse.
Date:__________________ UNISTAR GAMING CORP.
_____________________________ By: ____________________
Secretary President
<PAGE>
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
RIGHTS AGENT
By:______________________________
Authorized Signature
Expiration Date: _____________, 1998
By Overnight Courier:
By Mail: By Hand: American Stock Transfer
American Stock Transfer & American Stock Transfer & & Trust Company
Trust Company Trust Company 40 Wall Street, 46th
40 Wall Street 40 Wall Street, 46th Floor Floor
New York, New York 10005 New York, New York 10005 New York, New York 10005
Please check [X] below:
[__] A. Primary Subscription _______________/________ =
(Rights Exercised)
_________________.000 x $___________________ = $_____________________
(Shares Requested) (Subscription Price) (Amount Required)
Amount of Check Enclosed or Amount in Notice of Guaranteed
Deliver = $_____________.
Make check payable to the order of "Unistar Gaming Corp."
[__] B. Sell any remaining unexercised Rights
[__] C. Sell all of my Rights
- ------------------------------------
Signature of Subscriber(s)/Seller(s)
Please provide your telephone number: Day ( )
Evening ( )
Social Security Number or Tax ID Number: __________________________
<PAGE>
SECTION II: TO TRANSFER RIGHTS (except pursuant to B and C above)
For value received, ________ of the Rights represented by this Rights
Certificate are assigned to:
- ---------------------------------------------
Social Security Number or Tax ID Number of Assignee:
- ---------------------------------------------
(Print full name of Assignee)
- ---------------------------------------------
Signature of Assignor(s)
- ---------------------------------------------
(Print full address, including postal Zip Code)
The signature(s) must correspond with the names as written upon the face of this
Rights Certificate, in every particular, without alteration.
IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible
financial institution which is a participant in a recognized signature guarantee
program.
SIGNATURE GUARANTEED BY:
- --------------------------------------------
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFICATE U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE RIGHTS AGENT AND THE
SELLER IS NOT OTHERWISE SUBJECT TO BACKUP WITHHOLDING.
[__] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY TO THE RIGHTS AGENT PRIOR TO THE DATE HEREOF AND
COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER: _____________________________
WINDOW TICK NUMBER (IF ANY): _____________________________
DATE OF EXECUTION OF NOTICE
OF GUARANTEED DELIVERY: _____________________________
NAME OF INSTITUTION THAT
GUARANTEED DELIVERY: _____________________________
Exhibit 10.1
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT ("Agreement"), effective as of August
12, 1998, is made by and between EXECUTONE Information Systems, Inc., a Virginia
corporation ("Executone"), Unistar Gaming Corp., a Delaware corporation and
wholly-owned subsidiary of Executone ("Unistar"), and Watertone L.P., Cooper
Life Sciences, Inc., John C. Shaw, Richard Bartlett, Jerry M. Seslowe, 10-26 S.
William St. Associates, Louis K. Adler and Resource Holdings Associates
(together, the "Shareholders").
RECITALS
WHEREAS:
A. The Shareholders own all of the issued and 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") in the following amounts:
Shares of Executone Shares of Executone
Series A Preferred Series B Preferred
Name Stock Stock
- -------------------------- ------------------- -------------------
Watertone L.P. 154,520 61,807
Cooper Life Sciences, Inc. 78,819 31,528
John C. Shaw 3,830 1,532
Richard Bartlett 3,830 1,532
Jerry M. Seslowe 3,830 1,532
10-26 S. William St.
Associates 2,873 1,149
Louis K. Adler 1,436 575
Resource Holdings
Associates 862 345
B. Executone intends to terminate Executone's ownership of Unistar
by the exchange of its shares of common stock of Unistar (the "Unistar Common
Stock") for the Executone Preferred Stock pursuant to this Agreement and the
distribution (the "Rights Offering") to the holders of Executone common stock
(the "Executone Common Stock") of rights (the "Rights") to purchase 85% of the
outstanding shares of Unistar Common Stock.
C. The Shareholders wish to continue to participate in the growth of
Unistar, if any, following the Rights Offering, and Executone and Unistar
believe that it is in the best interests of each company to permit the
Shareholders to continue such participation.
D. Executone, Unistar and the Shareholders have agreed to a share
exchange whereby the Shareholders will exchange their shares of Executone
Preferred Stock for shares of Unistar Common Stock and shares of a series of
convertible preferred stock of Unistar to be created (the "Unistar Preferred
Stock"), pursuant to the terms and conditions of this Agreement.
<PAGE>
IN CONSIDERATION of the foregoing premises and the representations
and warranties and covenants contained in this Agreement, Executone, Unistar and
the Shareholders agree as follows:
ARTICLE I
DEFINITIONS
In addition to the terms defined in the preamble, which are
incorporated into this Article I, the following terms when used in this
Agreement shall have the meanings set forth below:
"Articles of Amendment" means the Articles of Amendment of the
Articles of Incorporation of Executone providing for the conversion of all
outstanding shares of Executone Cumulative Convertible Preferred Stock, Series
A, and Executone Cumulative Contingently Convertible Preferred Stock, Series B,
into shares of Unistar Common Stock and Unistar Preferred Stock as contemplated
by this Agreement.
"Certificate of Amendment" means a Certificate of Amendment of the
Certificate of Incorporation of Unistar substantially in the form attached as
Exhibit A hereto.
"Closing" shall have the meaning set forth in Section 3.2.
"Closing Date" shall have the meaning set forth in Section 3.2.
"Exchange" shall have the meaning set forth in Section 3.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executone Board" shall mean the Board of Directors of Executone.
"Governmental Authority" means the United States, any state or
municipality, the government of any foreign country, and subdivision of any of
the foregoing, or any authority, department, commission, board, bureau, agency,
court or instrumentality of any of the foregoing.
"Person" means an individual, corporation, partnership, joint
venture, trust, unincorporated organization or Governmental Authority.
"Registration Statement" means the Registration Statement with
respect to the Rights and the Unistar Common Stock that will be acquired upon
exercise of the Rights.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Unistar Advisory Board" shall have the meaning set forth in
Section 2.2.
<PAGE>
ARTICLE II
RIGHTS OFFERING
2.1. Mechanics of Separation.
(a) Executone agrees to consummate the Rights Offering in accordance
with the terms and subject to the conditions set forth in the Reorganization
Agreement between Executone and Unistar, a draft of which is attached as Exhibit
B hereto.
(b) The Rights Offering will take the form of a distribution to the
holders of Executone Common Stock of Rights to purchase shares of Unistar Common
Stock not delivered to the Shareholders pursuant to this Agreement with an
exercise price per Right of $0.05 to be paid to Unistar. Each five Rights shall
represent the right to acquire from Unistar one share of Unistar Common Stock.
Any shares of Unistar Common Stock underlying Rights not exercised at the end of
the exercise period will be purchased by Unistar Buying Group, LLC, a limited
liability company controlled by the Shareholders, as set forth in the Standby
Agreement between Unistar and Unistar Buying Group, LLC, a form of which is
attached hereto as Exhibit C (the "Standby Agreement").
2.2. Advisory Board.
In anticipation of the Rights Offering and the Exchange, Executone
agrees that Robert Berman, Jerry M. Seslowe, Stanley M. Blau, Alan Kessman,
Stanley J. Kabala and Michael W. Yacenda (the "Unistar Advisory Board"),
effective immediately, shall 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 National Indian Lottery, banking
and credit matters and general strategic planning.
ARTICLE III
EXCHANGE OF STOCK
3.1. Mechanics of Exchange.
(a) At the Closing, each Shareholder shall deliver to Executone all
certificates representing shares of Executone Preferred Stock owned by such
Shareholder properly endorsed to Executone, and in exchange therefor Executone
will proportionately transfer to the Shareholders (i) all of the outstanding
capital stock of Unistar, which shares, as of the date of closing (the
"Separation Date") of the Rights Offering, will represent or be converted into
15% of the outstanding shares of Unistar Common Stock (the "Original Issuance"),
exclusive of any shares acquired by the Shareholders pursuant to the Standby
Agreement, and (ii) all shares of Unistar Series A Preferred Stock (the
"Exchange"). No fractional shares of Unistar Common Stock or Unistar Preferred
Stock shall be issued. The Shareholders 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
Shareholders will own 34% of the Unistar Common Stock, including only the
Original Issuance and the Underlying Shares. The Unistar Common Stock and the
Unistar Preferred Stock will have the respective designations, relative rights,
preferences and limitations set forth in the Certificate of Amendment. All
shares of Executone Preferred Stock so exchanged shall be canceled.
<PAGE>
(b) In the event that a certificate representing shares of Executone
Preferred Stock shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Shareholder claiming such certificate to be lost,
stolen or destroyed, Unistar shall issue (and Executone shall cause Unistar to
issue) in exchange for such lost, stolen or destroyed certificate the
consideration deliverable in respect thereof as determined in accordance with
Section 3.1(a) hereof. When authorizing such exchange for any lost, stolen or
destroyed certificate, the Shareholder to whom the consideration is to be
delivered, as a condition precedent to the issuance thereof, shall give
Executone a bond satisfactory to Executone in such sum as it may direct or
otherwise indemnify Executone in a manner satisfactory to Executone against any
claim that may be made against Executone with respect to the certificate alleged
to have been lost, stolen or destroyed.
3.2. Closing.
Subject to the satisfaction or waiver of the conditions set forth in
this Agreement, the transactions described in Section 3.1 (the "Closing") shall
take place three business days prior to the consummation of the Rights Offering
(the "Closing Date").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1. Representations and Warranties of Unistar.
Unistar hereby represents and warrants to the Shareholders as
follows:
(a) Organization and Qualification. Unistar is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to conduct its
business as currently conducted.
(b) Capitalization. As of the Closing Date, Unistar will be
authorized to issue 26,000,000 shares of capital stock, consisting of 25,000,000
shares of Unistar Common Stock and 1,000,000 shares of Unistar Preferred Stock.
As of the date hereof, Executone owns all of the outstanding capital stock of
Unistar. Immediately after giving effect to the transactions contemplated by
this Agreement and to the Rights Offering, the Shareholders will own in the
aggregate fifteen percent (15%) of the issued and outstanding shares of Unistar
Common Stock, exclusive of any shares acquired pursuant to the Standby
Agreement, and 100% of the issued and outstanding shares of Unistar Preferred
Stock. The shares of Unistar Common Stock and Unistar Preferred Stock to be
issued in accordance with this Agreement will be duly authorized for issuance
and, when issued in accordance with the terms hereof, will be validly issued,
fully paid and non-assessable, and will not be subject to or issued in violation
of any preemptive rights. Except as disclosed in the Registration Statement,
Unistar does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations.
<PAGE>
(c) Capacity, Execution of Agreements. Unistar has full right, power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby, including the Rights Offering, and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement.
Upon execution and delivery of this Agreement, this Agreement will constitute a
valid and binding obligation of Unistar, enforceable in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors' and
contracting parties' rights generally, and except as enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(d) No Consents. No consent, approval, authorization or order of, or
any filing or declaration with, any governmental body is required for the
consummation by Unistar of the transactions contemplated herein.
(e) Offering Materials. Unistar has not distributed and will not
distribute prior to Closing any offering material in connection with the
Exchange other than the Registration Statement.
(f) Proceedings, Litigation, etc. Unistar is not (and will not be
after giving effect to the transactions contemplated by this Agreement and the
Registration Statement) (i) in violation of its Certificate of Incorporation or
Bylaws or (ii) in violation of any order of any court, arbitrator or
governmental body or subject to or party to any order of any court or
Governmental Authority arising out of any action, suit or proceeding under any
statute or other law which could reasonably be expected to materially and
adversely affect the ability of the parties hereto to consummate the
transactions contemplated hereby.
4.2. Representations and Warranties of Executone.
Executone hereby represents and warrants to the Shareholders as
follows:
(a) Organization and Qualification. Executone is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia.
(b) Capacity, Execution of Agreements. Executone has full right,
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby, including the Rights Offering, and has taken
all necessary action to authorize the execution, delivery and performance of
this Agreement. Upon execution and delivery of this Agreement, this Agreement
will constitute a valid and binding obligation of Executone, enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally, and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
<PAGE>
(c) No Consents. No consent, approval, authorization or order of, or
any filing or declaration with, any governmental body is required for the
consummation by Executone of the transactions contemplated herein.
(d) Offering Materials. Executone has not distributed and will not
distribute prior to Closing any offering material in connection with the
Exchange other than the Registration Statement.
4.3. Representations and Warranties of the Shareholders.
Each Shareholder hereby represents and warrants to Executone as
follows:
(a) Purpose. (i) Each Shareholder, taking into account the personnel
and resources that such Shareholder can practically bring to bear with regard to
the Exchange, is knowledgeable, sophisticated and experienced in making, and is
qualified to make, decisions with respect to investments in shares presenting an
investment decision like that involved in the Exchange, including investments in
securities issued by Unistar, and has requested, received, reviewed and
considered all information that it deems relevant in making an informed decision
to participate in the Exchange; (ii) each Shareholder is acquiring the shares of
the Unistar Common Stock and the Unistar Preferred Stock in the ordinary course
of its business and for its own account for Investment (as defined for purposes
of the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the regulations
thereunder) only and with no present intention of distributing any of such
shares or any arrangement or understanding with any other persons regarding the
distribution of such shares; (iii) each Shareholder has adequate net worth and
means of providing for his or its current needs and contingencies to sustain a
complete loss of his or its investment in Unistar and has no need for liquidity
in his or its investment; (iv) each Shareholder's overall commitment to
investments that are not readily marketable is not disproportionate to such
Shareholder's net worth and participation in the Exchange will not cause such
overall commitment to become excessive; (v) each Shareholder agrees not to,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any shares of the Unistar Common Stock or the Unistar Preferred Stock except
in compliance with the Securities Act and any applicable state securities or
blue sky laws; (vi) each Shareholder has, in connection with such Shareholder's
decision to participate in the Exchange, relied solely upon the Registration
Statement and the documents included therein and the representations and
warranties of Executone contained herein; and (vii) each Shareholder is an
"accredited investor" within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act.
(b) Authorization. Each Shareholder further represents and warrants
to Executone that: (i) such Shareholder has full right, power, authority and
capacity to enter into this Agreement and to consummate the transactions
contemplated hereby and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement, and (ii) upon the
execution and delivery of this Agreement, this Agreement shall constitute a
valid and binding obligation of such Shareholder, enforceable in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors' and
contracting parties rights generally and except as enforceability may be subject
to general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS OF THE PARTIES
5.1. Taking of Necessary Action.
Each of the parties hereto agrees to use all reasonable efforts
promptly to take or cause to be taken all action, and promptly to do or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
5.2. Tax Matters.
The parties agree to cooperate in structuring the Rights Offering
and the Exchange in a manner that will minimize the taxes to be incurred in
connection with such transactions by the Shareholders, Executone and the holders
of Executone Common Stock.
5.3. Execution by All Shareholders; Irrevocable Proxy.
(a) The parties hereto understand that the Exchange is conditioned
upon the participation of the holders of all of the issued and outstanding
shares of Executone Preferred Stock and that no partial Exchange shall be made.
Notwithstanding the foregoing, each Shareholder agrees that upon his or its and
Executone's execution of this Agreement and regardless of whether this Agreement
is executed by all of the Shareholders, such Shareholder intends to be and is
bound by this Section 5.3.
(b) If this Agreement is not executed by all of the Shareholders and
the Executone Board determines that it is in the best interests of Executone and
its shareholders to amend Executone's Articles of Incorporation in accordance
with the terms of the Articles of Amendment, each Shareholder that has executed
this Agreement agrees to cause all of the Executone Common Stock and Executone
Preferred Stock beneficially owned by such Shareholder to be voted in favor of
such amendment in any and all votes cast on such amendment. In furtherance of
such agreement and in exchange for the sum of $10.00, the receipt and
sufficiency of which is hereby acknowledged, each such Shareholder hereby
constitutes and appoints Robert Berman and Jerry M. Seslowe, his or its lawful
attorneys for and in the name, place and stead of such Shareholder, with full
power of substitution, for one (1) year from the date of such Shareholder's
execution of this Agreement to vote as such Shareholder's proxy all of his or
its shares of Executone Common Stock and Executone Preferred Stock for the
amendment set forth in the Articles of Amendment at any meetings, regular or
special, of the shareholders of Executone, or any adjournments thereof. Such
Shareholder understands that THIS PROXY IS COUPLED WITH AN INTEREST AND IS
IRREVOCABLE.
<PAGE>
5.4. Registration Rights.
As of the Closing Date, Unistar and the Shareholders will enter into
a Registration Rights Agreement pursuant to which the Shareholders will have
registration rights substantially similar to the registration rights the
Shareholders have as of the date of this Agreement with respect to the Executone
Preferred Stock.
5.5. Funding by Executone.
Executone will continue to fund Unistar until the Closing Date at a
rate not to exceed an average of $1.5 million per quarter (including certain
out-of-pocket expenses incurred to date by Watertone L.P. in furtherance of
Unistar's business and approved by the Unistar Advisory Board). If the legal and
lobbying expenses of Unistar are reduced from their current run rates, the level
of funding above will not be reduced but can be used by Unistar for the
prosecution of its business plan as approved by the Unistar Advisory Board.
5.6. Capital Contribution.
At the Closing Date, in addition to the funding provided under
Section 5.5 hereof, Executone (i) will provide Unistar with $3.0 million in cash
and (ii) will assume responsibility for, and pay when due, expenses incurred but
not yet paid, provided, however, that the maximum of such assumed liabilities
shall not exceed $500,000 based on Executone's undertaking to keep current on
Unistar's liabilities.
5.7. Unistar Board of Directors.
At the Separation Date, the Board of Directors of Unistar will
consist of Messrs. Berman, Blau, Kessman, Seslowe, Yacenda and two other members
to be recommended to the Executone Board by the Unistar Advisory Board, provided
that, in the business judgment of the Executone Board reasonably exercised, such
nominees are suitable candidates, and if such nominees are not so suitable, the
Executone Board may consider other nominees.
5.8 TRP Expenses Associated with Michael W. Yacenda and Robert
Hopwood.
The Shareholders are relying on the resignations of Michael W.
Yacenda and Robert Hopwood (collectively, the "Employees") from Executone and
the Employees' employment by Unistar shortly following the Separation Date.
While Executone cannot assure such employment, it is in Executone's interests
and the Shareholders' interests to create an incentive to Unistar's hiring the
Employees. The parties agree:
(a) The Employees will be offered the retention payment and loan
provisions of Executone's TRP Plan (the "Plan") by Executone on the same terms
and conditions as other Executone employees participating in the Plan, provided
that the Employees must pledge, in addition to shares of Executone capital stock
pledged under the Plan as of the Separation Date (the "Pledged Executone
Stock"), any equity interest in Unistar held by them as a result of the exercise
of Rights attributable to the Pledged Executone Stock to secure any loan
guaranteed by Executone. The provisions of the Plan other than the retention
payment and loan provisions shall be inapplicable to the Employees.
<PAGE>
(b) If either or both of the Employees resign from Executone and
become employed by Unistar within 30 days of the Separation Date, Executone
shall continue to provide benefits under the Plan to such Employee(s), provided
that no payments under the Plan shall be triggered by such resignations of the
Employee(s) from Executone. Executone shall have no liability for any interest
that accrues after the Separation Date on any loan of such Employee(s)
guaranteed by Executone under the Plan.
(c) If the Employees, or either of them, subsequently resign their
positions with Unistar, the Employee(s) shall be solely responsible for the
repayment of loans from third parties without benefits under the Plan, except as
may be provided by the Plan, and Unistar shall indemnify and hold Executone
harmless and pay fifty percent (50%) of any liability Executone may have to a
third party on loans made to the resigning Employee(s), including costs of
collection.
(d) If Unistar terminates either or both Employees for any reason,
or no reason, Unistar shall indemnify and save Executone harmless from all
liability, damages and costs associated with the Plan resulting from such
Employee(s) termination(s).
(e) If Executone voluntarily retires the loan obligations of the
Employees, or either of them, prior to maturity for any reason, such prepayment
shall be the sole expense of Executone.
(f) If either or both Employees remain employed with Executone and
subsequently Unistar for the full vesting period under the Plan, Unistar and
Executone will split any liability under the Plan, if any, equally.
ARTICLE VI
CONDITIONS
6.1. Obligations of Shareholders.
The obligations of the Shareholders to participate in the Exchange
are subject to satisfaction or waiver of the following conditions precedent: the
representations and warranties of Executone and Unistar contained in this
Agreement shall be true and correct in all material respects on and as of the
date of this Agreement and on and as of the Closing Date with the same effect as
though made on and as of such date, and Executone and Unistar shall have
performed all obligations and complied with all agreements, undertakings,
covenants and conditions required hereunder to be performed by Executone at or
prior to Closing.
<PAGE>
6.2. Obligations of Executone and Unistar.
The obligations of Executone and Unistar to participate in the
Exchange is subject to satisfaction or waiver of the following conditions
precedent: the representations and warranties of each Shareholder contained in
this Agreement shall be true and correct in all material respects on and as of
the date of this Agreement and on and as of the Closing Date with the same
effect as though made on and as of such dates, and each Shareholder shall have
performed all obligations and complied with all agreements, undertakings,
covenants and conditions required to be performed at or prior to Closing.
ARTICLE VII
TERMINATION
7.1. Termination.
This Agreement may be terminated on or any time prior to the
Closing:
(a) by the mutual written consent of the parties hereto; or
(b) by Executone if Arthur Anderson LLP, as independent public
accountants for Executone, does not deliver a "going concern opinion" with
respect to Unistar as of the Closing Date, notwithstanding Executone's best
efforts to obtain such opinion; or
(c) by any party hereto if the Closing shall not have occurred on or
prior to July 1, 1999, unless the failure of such occurrence shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
its agreements set forth herein required to be performed or observed by such
party on or before the Closing.
7.2. Effect of Termination.
In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall forthwith become void except for the
obligations set forth in Section 5.3 and in Article VIII hereof and there shall
be no liability or obligation on the part of the parties hereto except as
otherwise provided in this Agreement. The termination of this Agreement shall
not relieve either party of any liability for breach of this Agreement prior to
the date of termination.
ARTICLE VIII
MISCELLANEOUS
8.1. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified airmail, or nationally recognized overnight express
courier postage prepaid, and shall be deemed given when so mailed and shall be
delivered to the address set forth under each party's signature line, or to such
other address or addresses as may have been furnished in writing to the other
parties.
<PAGE>
8.2. Amendments: Entire Agreement. This Agreement may not be
modified or amended except pursuant to an instrument in writing signed by the
parties hereto. This Agreement sets forth the entire understanding of the
parties and supersedes all prior agreements, covenants, arrangements,
communications, representations or warranties, whether written or oral, made by
the parties or any agent or representative of the parties.
8.3. Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
8.4. Severability. In case any provision contained in this Agreement
should be held invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
8.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia without
regard to the conflicts of law principles thereof and the federal laws of the
United States of America.
8.6. Construction. For purposes of construing this Agreement, the
recitals hereto shall be deemed to be a substantive part of this Agreement. To
the extent of any conflict between any provision set forth in this Agreement and
any provision of any other Agreement referred to herein, the provisions set
forth in this Agreement shall be deemed controlling.
8.7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives.
EXECUTONE INFORMATION SYSTEMS, INC.
By: /s/ Stanley J. Kabala
----------------------------------
Name: Stanley J. Kabala
Title: President and Chief Executive
Officer
Date: August 12, 1998
Address: 478 Wheelers Farms Road
Milford, Connecticut 06460
UNISTAR GAMING CORP.
By: /s/ Stanley J. Kabala
------------------------------------
Name: Stanley J. Kabala
Title: President and Chief Executive
Officer
Date: August 12, 1998
Address: 478 Wheelers Farms Road
Milford, Connecticut 06460
WATERTONE L.P.
By: /s/ Robert A. Berman
------------------------------------
Name: Robert A. Berman
Title: Managing Director
Date: August 11, 1998
Address: 730 Fifth Avenue
New York, New York 10019
COOPER LIFE SCIENCES, INC.
By:
-----------------------------------
Name: Steven Rosenberg
Title:
Date: , 1998
Address: 160 Broadway
New York, New York 10038
<PAGE>
By: /s/ John C. Shaw
------------------------------------
Name: John C. Shaw
Date: August 11, 1998
Address: 8 Indian Drive
Old Greenwich, CT 06870
By: /s/ Richard Bartlett
------------------------------------
Name: Richard Bartlett
Date: August 11, 1998
Address: 15 West 81st Street
New York, New York
By: /s/ Jerry M. Seslowe
------------------------------------
Name: Jerry M. Seslowe
Date: August 12, 1998
Address: 2 Chanticlare Drive____________
Mannasset, NY 11030 _________
10-26 S. WILLIAM ST. ASSOCIATES
By:
-------------------------------------
Name: Steven Rosenberg
Title:
Date: , 1998
Address:
By:
-------------------------------------
Name: Louis K. Adler
Date: , 1998
Address: _______________________
-----------------------
<PAGE>
RESOURCE HOLDINGS ASSOCIATES
By: /s/ Jerry M. Seslowe
---------------------------------------
Name: Jerry M. Seslowe
Title: Managing Director
Date: August 12, 1998
Address: 520 Madison Avenue, 40th Floor
New York, New York 10022
<PAGE>
EXHIBIT A
Certificate of Amendment of the Certificate of Incorporation
of Unistar
<PAGE>
EXHIBIT B
Reorganization Agreement
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EXHIBIT C
Standby Agreement
Exhibit 10.2
REORGANIZATION AGREEMENT
BY AND BETWEEN
EXECUTONE INFORMATION SYSTEMS, INC.
AND
UNISTAR GAMING CORP.
<PAGE>
REORGANIZATION AGREEMENT
This REORGANIZATION (the "Agreement") is entered into as of September
__, 1998, by and between EXECUTONE INFORMATION SYSTEMS, INC., a Virginia
corporation ("Executone"), and its wholly-owned subsidiary, UNISTAR GAMING
CORP., a Delaware corporation ("Unistar").
WHEREAS, the Executone Board has determined it is appropriate and
desirable to separate Executone and Unistar, its wholly-owned subsidiary that,
through its wholly-owned subsidiary, UniStar Entertainment, Inc., an Idaho
corporation ("UEI"), conducts telephone and Internet-based national lotteries,
into two companies through the exchange of its shares of Unistar capital stock
for all of the outstanding shares of Preferred Stock of Executone and the
issuance (the "Rights Offering") to the holders of Executone common stock, $.01
par value per share (the "Executone Common Stock"), of transferable rights (the
"Rights") to purchase 85% of the outstanding shares of the common stock, $.01
par value per share, of Unistar (the "Unistar Common Stock"), all as set forth
herein; and
WHEREAS, Executone and Unistar have determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
such separation and the Rights Offering and to set forth other agreements that
will govern certain other matters following such transactions.
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the parties hereby agree as follows:
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ARTICLE I
DEFINITIONS
Section 1.01. General.
As used in this Agreement and the Ancillary Agreements, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
Action: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: as defined in Rule 405 promulgated under the Securities Act
of 1933, as amended, as such rule is in effect on the date hereof.
Ancillary Agreements: all of the agreements, instruments,
understandings, assignments or other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Exchange Agreement, the Services Agreement the Tax Sharing Agreement and the
Standby Agreement .
Code: the Internal Revenue Code of 1986, as amended, or any successor
legislation.
Commission: the Securities and Exchange Commission.
Excepted Liabilities: the Liabilities, subject to the limitations set
forth in Section 2.01(c), relating to any of the Unistar Businesses that accrue
before the Separation Date and are described on Schedule I.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Exchange Agreement: The Share Exchange Agreement dated August 12, 1998,
between Executone, Unistar and the Shareholders.
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Executone Board: the Board of Directors of Executone.
Executone Businesses: the businesses, assets and operations of
Executone as heretofore, currently or hereafter conducted (other than such
businesses, assets, operations and subsidiaries as will become part of the
Unistar Businesses hereunder), including, without limitation, all businesses,
assets or operations managed or operated by, or operationally related to, any of
such businesses, that have been sold or otherwise disposed of or discontinued
prior to the Separation Date.
Executone Liabilities: all of (i) the Liabilities of Executone under
this Agreement or any of the Ancillary Agreements to which Executone is or
becomes a party; (ii) the Liabilities relating to any of the Executone
Businesses accrued or unaccrued, whenever arising; (iii) the Liabilities
relating to any of the Unistar Businesses that arise and are accrued before the
Separation Date other than the Excepted Liabilities, provided, however, that
such Liabilities shall be subject to the limitations set forth in Section
2.01(c); and (iv) all costs arising out of or in connection with the Rights
Offering.
Executone Policies: all insurance policies or binders held by or on
behalf of, or providing coverage for, Executone (which coverage includes Unistar
for periods prior to the Separation Date) or any director, officer or other
employee thereof.
Executone Preferred Stock: the Cumulative Convertible Preferred Stock,
Series A, and the Cumulative Contingently Convertible Preferred Stock, Series B,
of Executone.
Expiration Date: close of business on the date upon which the
Executone Board determines that the exercise period for the Rights will expire.
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Form S-1: the registration statement on Form S-1 to be filed by Unistar
with the Commission to effect the registration of the Rights and the Unistar
Common Stock pursuant to the Securities Act.
Information: records, books, contracts, instruments, computer data and
other data and information.
Liabilities: any and all operating expenses, debts, liabilities and
obligations, including all costs and expenses relating thereto, and including,
without limitation, those debts, liabilities and obligations arising under
this Agreement, the Ancillary Agreements, any law, rule, regulation,
Action, threatened Action, order or consent decree of any governmental entity
or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.
Prospectus: the prospectus (included in Form S-1) to be sent to the
shareholders of Executone.
Record Date: the close of business on __________, 1998, or such other
date as is determined by the Executone Board as the record date for the Rights
Offering.
Rights Agent: the rights agent for the shareholders of Executone, as
appointed by Executone to distribute the Rights and conduct the Rights Offering.
Rights Closing Date: the date determined by the Executone Board as of
which the transactions constituting the Rights Offering will be closed.
Securities Act: the Securities Act of 1933, as amended.
Separation Date: the Rights Closing Date.
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Services Agreement: the Master Services Agreement, dated as of the
date of this Agreement, between Executone and Unistar, substantially in the form
of Exhibit A attached hereto.
Shareholders: Watertone Holdings L.P., Cooper Life Sciences, Inc.,
John C. Shaw, Richard Bartlett, Jerry M. Seslowe, 10-26 William St. Associates,
Louis K. Adler and Resource Holdings Associates, being all of the holders of
Executone Preferred Stock.
Standby Agreement: the Standby Agreement, dated as of the date hereof,
between Unistar and Unistar Buying Group, LLC, a limited liability company
controlled by certain of the Shareholders.
Subscription Price: the subscription price of $0.05 per Right for
which each holder of five Rights may purchase one share of Unistar Common Stock.
Subsidiaries: the term "subsidiaries" as used herein with respect to
any entity shall, unless otherwise indicated, be deemed to refer to both direct
and indirect subsidiaries of such entity.
Tax Sharing Agreement: the Tax Sharing Agreement, dated as of the date
hereof, between Unistar and Executone, substantially in the form of Exhibit B
attached hereto.
Unistar Assets: collectively, all of the assets of Executone to be
transferred to Unistar, as identified on Schedule II.
Unistar Board: the Board of Directors of Unistar.
Unistar Businesses: the businesses, assets and operations of Unistar
and UEI.
Unistar By-Laws: the By-Laws of Unistar, substantially in the form of
Exhibit C attached hereto, to be in effect at the Separation Date.
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Unistar Charter: the Amended and Restated Certificate of Incorporation
of Unistar to be in effect at the Separation Date.
Unistar Employee: any individual who, on or immediately prior to the
Separation Date, was employed by Unistar or UEI and who, on or after the
Separation Date, or otherwise in connection with the Rights Offering, is
employed by Unistar or UEI or in a Unistar Business.
Unistar Liabilities: all of (i) the Liabilities of Unistar under this
Agreement or any of the Ancillary Agreements to which Unistar is or becomes a
party; (ii) the Liabilities relating to any of the Unistar Businesses that arise
and are accrued after the Separation Date; (iii) the Liabilities described in
Section 2.01(c); (iv) the Liabilities of Unistar described in Section 5.8 of the
Exchange Agreement; (v) the Liabilities of Unistar pursuant to Paragraph 2 of
each of the Transition and Retention Plan dated _____________, 1998, among
Executone, Unistar and Michael W. Yacenda and the Transition and Retention Plan
dated _____________, 1998, among Executone, Unistar and Robert Hopwood; and (vi)
the Excepted Liabilities.
Unistar Policies: all insurance policies or binders held by or on
behalf of Unistar or UEI or any director, officer or other employee thereof.
Unistar Preferred Stock: the Series A Preferred Stock of Unistar
consisting of 75,000 shares, each share of which is convertible upon the
occurrence of certain events into that number of shares of Unistar Common Stock
(the "Underlying Shares") such that, when added to the shares of Unistar Common
Stock outstanding as of the Separation Date (the "Original Issuance"), the
Shareholders will own 34% of the outstanding Unistar Common Stock, including
only the Original Issuance and the Underlying Shares.
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Section 1.02. Exhibits, Etc.
Reference to an "Exhibit" or to a "Schedule" are, unless otherwise
specified, to one of the Exhibits or Schedules attached to this Agreement, and
references to a "Section" are, unless otherwise specified, to one of the
Sections of this Agreement.
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ARTICLE II
REORGANIZATION AND RELATED TRANSACTIONS
Section 2.01. Recapitalization of Unistar.
Effective as of the Separation Date, Executone will surrender to
Unistar all ______ shares of Unistar Common Stock held beneficially and of
record by Executone in exchange for ____ shares of Unistar Common Stock and
_______ shares of Unistar Preferred Stock.
Section 2.02. Financing.
(a) Cash Management and Intercompany Accounts After the Separation
Date. Executone and Unistar shall establish and maintain a separate cash
management system with respect to the Unistar Businesses effective immediately
after the Separation Date. After the Separation Date, checks payable to Unistar,
but received by Executone, will be forwarded promptly to Unistar. Checks payable
to Executone, but received by Unistar, will be forwarded promptly to Executone.
The proceeds of checks payable to, and received by, Executone but for the
benefit of a Unistar Business, shall be remitted promptly to Unistar. The
proceeds of a check payable to, and received by, Unistar, but for the benefit of
an Executone Business, shall be remitted promptly to Executone.
(b) Letter of Credit. Notwithstanding the foregoing, Executone will
continue to maintain and renew the letter of credit with Bank of America
Illinois currently expiring on October 1, 1998, for the benefit of Unistar for
12 months following the Separation Date.
(c) Capital Contribution. At the Separation Date, Executone (i) will
provide Unistar with $3.0 million in cash and (ii) will assume responsibility
for, and pay when due, Liabilities relating to any of the Unistar Businesses
that have arisen and were accrued before the Separation 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 Separation Date. All Liabilities described in subparagraph (ii) above that
exceed $500,000 shall become Unistar Liabilities.
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Section 2.03. Executone Preferred Stock.
[Prior to the Separation Date, all of the Shareholders shall have
executed the Exchange Agreement.] Pursuant to the Exchange Agreement, on the
Separation Date, the Executone Preferred Stock held as of the Separation Date
will be exchanged automatically on a pro rata basis for: (i) ______ shares of
Unistar Common Stock, which will constitute 15% of the outstanding shares of
Unistar Common Stock, exclusive of any shares acquired pursuant to the Standby
Agreement or through the Rights Offering; and (ii) _______ shares of Unistar
Preferred Stock, which will constitute all of the shares of Unistar Preferred
Stock. No fractional shares of Unistar Common Stock or Unistar Preferred Stock
shall be issued.
Section 2.04. Reorganization of Operations.
(a) Transfer of Unistar Assets. Executone shall transfer to Unistar in
accordance with Section 2.07 all of Executone's right, title and interest in the
Unistar Assets.
(b) Issuance of Rights. Unistar shall issue to the shareholders of
Executone, as of the Record Date, a number of Rights equal to the numbers of
shares of Executone Common Stock outstanding on the Record Date.
Section 2.05. Transfers Not Effected Prior to the Separation Date;
Transfers Deemed Effective as of the Separation Date.
To the extent that any transfers and assumptions contemplated by this
Article II and Article III shall not have been consummated prior to the
Separation Date, the parties shall cooperate to effect such transfers as
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promptly following the Separation Date as shall be practicable, it nonetheless
being agreed and understood by the parties that neither party shall be liable in
any manner to the other party for any failure of any of the transfers
contemplated by this Article II or Article III to be consummated prior to the
Separation Date. Nothing herein shall be deemed to require the transfer of any
assets or the assumption of any Liabilities that by their terms or operation of
law cannot be transferred or assumed; provided, however, that Executone and
Unistar and their respective subsidiaries shall cooperate to seek to obtain all
necessary consents and approvals for the transfer of all assets and Liabilities
contemplated to be transferred pursuant to this Article II and Article III. In
the event that any such transfer of assets or Liabilities has not been
consummated, effective as of and after the Separation Date, the party retaining
such asset or Liability shall thereafter hold such asset for the party entitled
thereto (at the expense of the party entitled thereto) and retain such Liability
for the account of the party by whom such Liability is to be assumed, and take
such other action as may be reasonably requested by the party to whom such asset
is to be transferred, or by whom such Liability is to be assumed, as the case
may be, in order to place such party insofar as reasonably possible, in the same
position as would have existed had such asset or Liability been transferred as
of the Separation Date. As and when any such asset or Liability becomes
transferable, such transfer immediately shall be effected. The parties agree
that, as of the Separation Date, each party hereto shall be deemed to have
assumed in accordance with the terms of this Agreement and the Ancillary
Agreements all of the Liabilities, and all duties, obligations and
responsibilities incident thereto that such party is required to assume pursuant
to the terms hereof and thereof.
Section 2.06. No Representations or Warranties; Consents.
Each party hereto understands and agrees that neither party hereto is,
in this Agreement or in any other agreement or document contemplated by this
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Agreement or otherwise, representing or warranting in any way (i) the value or
freedom from encumbrance of, or any other matter concerning, any assets of such
party or (ii) as to the legal sufficiency to convey title to any asset or the
execution, delivery and filing of this Agreement or any Ancillary Agreement,
including, without limitation, any conveyancing or assumption instruments, it
being agreed and understood that all such assets are to be transferred, "as is,
where is" and that the party to which such assets are being transferred
hereunder shall bear the economic and legal risk that any conveyances of such
assets shall prove to be insufficient or that such party or any of its
subsidiaries' title to any such assets shall be other than good and marketable
and free from encumbrances. Similarly, each party hereto understands and agrees
that neither party hereto is, in this Agreement or in any other agreement or
document contemplated by this Agreement or otherwise, representing or warranting
in any way that the obtaining of any consents or approvals, the execution and
delivery of any amendatory agreements and the making of any filings or
applications contemplated by this Agreement will satisfy the provisions of any
applicable laws or judgments, it being agreed and understood that the party to
which any assets are transferred shall bear the economic and legal risk that any
necessary consents or approvals are not obtained or any requirements of law or
judgments are not complied with. Notwithstanding the foregoing, the parties
shall use reasonable efforts to obtain all consents and approvals to enter into
all amendatory agreements and to make all filings and applications that may be
required for the consummation of the transactions contemplated by this
Agreement.
Section 2.07. Conveyancing and Assumption Instruments.
In connection with the transfers of assets and the assumptions of
Liabilities contemplated by this Agreement, the parties shall execute or cause
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to be executed by the appropriate entities conveyancing and assumption
instruments in such forms as the parties shall agree.
ARTICLE III
ASSUMPTION AND SATISFACTION OF LIABILITIES
Section 3.01. Liabilities.
Except as provided in the Ancillary Agreements and in the Exhibits
hereto, Unistar shall assume, pay, perform and discharge in accordance with
their terms all Unistar Liabilities, whether heretofore or hereafter arising or
incurred; and Executone shall pay, perform and discharge in accordance with
their terms all Executone Liabilities, whether heretofore or hereafter arising
or incurred.
ARTICLE IV
THE RIGHTS OFFERING
Section 4.01. Cooperation Prior to the Rights Offering
(a) Executone and Unistar shall prepare, and
Unistar shall mail to the holders of Executone Common Stock as of the Record
Date, the Prospectus, which shall set forth appropriate disclosure concerning
Unistar, the Rights Offering and any other matters. Executone and Unistar
shall also prepare, and Unistar shall file with the Commission, the Form S-1,
which shall include and incorporate by reference the Prospectus. Executone
and Unistar shall use reasonable efforts to cause the Form S-1 to become
effective under the Securities Act.
(b) Executone and Unistar shall cooperate in
preparing, filing with the Commission and causing to become effective any
registration statements or
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amendments thereof that are appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by this
Agreement.
(c) Executone and Unistar shall take all such action as
may be necessary or appropriate under the securities or blue sky laws of states
or other political subdivisions of the United States in connection with
the transactions contemplated by this Agreement and the Ancillary Agreements.
(d) Unistar shall prepare, and Unistar shall file and
pursue, an application to permit listing of the Unistar Common Stock on the
Nasdaq Stock Market.
Section 4.02. Executone Board Action; Conditions Precedent to the
Rights Offering.
The Executone Board shall, in its good faith business judgment,
establish the Record Date and the Separation Date and any appropriate procedures
in connection with the Rights Offering. In no event shall the Rights Offering
occur prior to such time as the following conditions shall have been satisfied:
(i) the transactions contemplated by
Sections 2.01, 2.02 and 2.03 shall have been consummated in all material
respects;
(ii) the Unistar Common Stock shall have
been approved for listing on the Nasdaq Stock Market subject to official notice
of issuance;
(iii) the Unistar Board shall have adopted
the Unistar Charter and Unistar By-laws and the Unistar Charter and Unistar
By-laws shall be in effect; and
(iv) the Form S-1 shall have been declared
effective by the Commission or become effective under the Securities Act;
provided, however, that the satisfaction of such conditions shall not create any
obligation on the part of Executone or any other party hereto to effect the
Rights Offering.
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Section 4.03. The Rights Offering.
(a) On the Record Date, subject to the conditions and
rights of termination set forth in this Agreement, Unistar shall deliver to
the Rights Agent a certificate representing all of the Rights and shall
instruct the Rights Agent to distribute, as soon as practicable following
the Record Date, certificates representing the Rights to holders of record of
Executone Common Stock on the Record Date. Each holder of Executone Common
Stock will receive one Right for each share of Executone Common Stock held.
Each Right will be transferable and each five Rights will entitle the holder to
acquire one share of Unistar Common Stock at the Subscription Price until the
Expiration Date.
(b) A holder of Executone Common Stock may exercise the
Rights by completing and signing the election to purchase form that appears
on the back of each Rights certificate. 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 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.
(c) The Rights Agent will issue certificates to each
Holder representing the Unistar Common Stock purchased through the
exercise of Rights on or about ______________, 1998. 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.
(d) Executone will decide all questions as to the
validity, form, eligibility (including times of receipt and beneficial
ownership) and acceptance of subscription forms.
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(e) A holder may transfer all or a portion of 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.
ARTICLE V
CERTAIN ADDITIONAL MATTERS
Section 5.01. The Unistar Board.
Unistar and Executone shall take all actions that may be required to
elect or otherwise appoint, as of the Separation Date, at least seven persons as
directors of Unistar. The directors 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 directors
of Unistar initially will include the following persons:
Name Class
---- -----
Robert Berman III
Jerry M. Seslowe II
Stanley M. Blau II
Alan Kessman I
Michael W. Yacenda III
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Two additional persons will constitute the additional Class I and Class
III directors, which persons shall be recommended to the Executone Board by the
Unistar Advisory Board; provided, however, that, in the business judgment of the
Executone Board reasonably exercised, such persons are suitable candidates, and
if such persons are not so suitable, the Executone Board may consider other
nominees.
Section 5.02. Resale Shelf.
Unistar will file, and use it best efforts to have declared effective
by the Commission, a Registration Statement on Form S-3 as soon as practicable
after the conditions for use of such form are satisfied to register the resale
of the shares of Unistar Common Stock received by the Shareholders pursuant to
the Exchange Agreement and the Underlying Shares.
Section 5.03. Resignations.
Unistar shall cause all Unistar Employees to resign, effective as of
the Separation Date, from all boards of directors or similar governing bodies of
Executone on which they serve, and from all positions as officers of Executone
in which they serve. Executone shall cause all of its employees and directors to
resign effective as of the Separation Date from all boards of directors or
similar governing bodies of Unistar or UEI on which they serve, and from all
positions as officers of Unistar or UEI in which they serve (other than Unistar
Employees and those directors of Executone who will continue to serve as
directors of Unistar pursuant to Section 5.01).
Section 5.04. Unistar Charter and By-Laws.
Prior to the Separation Date, the restatement and amendment of the
Unistar Charter and the amended Unistar By-Laws shall have been adopted and the
restatement and amendment of the Unistar Charter shall have been made effective
by the Secretary of State of the State of Delaware.
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Section 5.05. Use of Executone Name.
Any existing printed material, signs, graphics or Internet websites
displaying any affiliation or connection of Unistar or UEI with Executone may be
used by Unistar or UEI only so long as necessary but in no event after the date
more than six months after the Separation Date. On and after the Separation
Date, Unistar or UEI shall not otherwise represent to third parties that any of
them is affiliated with Executone.
ARTICLE VI
ACCESS TO INFORMATION AND SERVICES
Section 6.01. Access to Information.
From and after the Separation Date, each party hereto shall afford to
the other party and the other party's authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable efforts
to give access to persons or firms possessing information) and duplicating
rights during normal business hours to all Information within such party's
possession relating to the other party's businesses, insofar as such access is
reasonably required by the other party.
Section 6.02. Provision of Services.
In addition to any services contemplated to be provided following the
Separation Date by the Services Agreement or any subsidiary agreement thereto or
any other Ancillary Agreement (subject to the limitations regarding such
services set forth in such agreements), each party shall make available to the
other party during normal business hours and in a manner that will not
unreasonably interfere with such party's business, its administrative staff and
services (collectively, "Services") whenever and to the extent that they may be
reasonably required in connection with effecting an orderly transition following
the Rights Offering.
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Section 6.03. Reimbursement.
Except to the extent otherwise contemplated by the Services Agreement
or any other Ancillary Agreement, a party providing Information or Services to
the other party under this Article VI shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Information or Services.
Section 6.04. Retention of Records.
Except as otherwise required by law or agreed to in writing, each party
shall not destroy any Information relating to the other party (not transferred
to such other party) and the other party's subsidiaries without first offering
the Information to the other party or the other party's subsidiaries, as
applicable, and, if so requested, providing such party the reasonable
opportunity to retrieve such Information at its own expense.
Section 6.05. Confidentiality.
To the extent it can reasonably do so, Executone on the one hand, and
Unistar and UEI on the other hand, shall hold, and shall cause its consultants
and advisors to hold, in strict confidence, all Information concerning the other
in its possession or furnished by the other or the other's representatives
pursuant to this Agreement (except to the extent that such Information has been
(a) in the public domain through no fault of such party or (b) later lawfully
acquired from other sources by such party), and each party shall not release or
disclose such Information to any other person, except its auditors, attorneys,
financial advisors, bankers and other consultants and advisors, unless compelled
to disclose by judicial or administrative process or, as advised by its counsel,
by other requirements of law.
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ARTICLE VII
INSURANCE
Section 7.01. Claims and Insurance Policies.
The parties agree that (i) where any Unistar Liability is specifically
covered under an Executone Policy, then Unistar may claim under such Policy as
and to the extent such coverage is available; and (ii) where any Executone
Liability is specifically covered under a Unistar Policy, then Executone may
claim under such Policy as and to the extent such coverage is available.
Executone, for Executone Liabilities, and Unistar, for Unistar Liabilities, each
shall bear and be responsible for any deductible or retention or obligation to
indemnify any insurance carrier relating to any claims for which such party has
coverage. Executone's designated insurance representatives will continue to
manage all claims made under the Executone Policies in accordance with
Executone's customary practices. Unistar's designated insurance representatives
will manage all claims made under the Unistar Policies. As to claims made by one
party covered by insurance policies of the other party, each party shall, and
shall cause each of its Affiliates to, cooperate fully with the other party and
the other party's designated insurance representatives, including providing
necessary documentation, assistance and, where appropriate, testimony.
ARTICLE VIII
INDEMNIFICATION
Section 8.01. Indemnification by Executone.
Except as set forth in the Tax Sharing Agreement, Executone shall
indemnify, defend and hold harmless Unistar and each of its Affiliates, each of
their respective directors, officers, employees and agents and each of the
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heirs, executors, successors and assigns of any of the foregoing (the "Unistar
Indemnitees") from and against any and all losses, liabilities, claims, damages,
obligations, payments, costs and expenses, matured or not matured, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown
(including without limitation, the costs and expenses of any and all Actions,
threatened Actions, demands, assessments, judgments, settlements and compromises
relating thereto and attorneys' fees and any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any such
Actions or threatened Actions) (collectively, "Indemnifiable Losses" and,
individually, an "Indemnifiable Loss") of the Unistar Indemnitees arising out of
or due to the failure or alleged failure of Executone or any of its Affiliates
to pay, perform or otherwise discharge in due course any of the Executone
Liabilities.
Section 8.02. Indemnification by Unistar.
Except as set forth in the Tax Sharing Agreement, Unistar shall
indemnify, defend and hold harmless Executone and each of its Affiliates, each
of their respective directors, officers, employees and agents and each of the
heirs, executors, successors and assigns of any of the foregoing (the "Executone
Indemnitees") from and against any and all Indemnifiable Losses of the Executone
Indemnitees arising out of or due to the failure or alleged failure of Unistar
or any of its Affiliates to pay, perform or otherwise discharge in due course
any of the Unistar Liabilities.
Section 8.03. Notice of Third Party Claims.
Each party indemnified under Section 8.01 or 8.02, promptly following
the earlier of (i) receipt of notice of the commencement of any Action, or (ii)
receipt of information regarding the alleged existence of a claim against such
indemnitee with respect to which an indemnity may be sought pursuant to this
Agreement (a "Third Party Claim"), shall give the indemnifying party written
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notice thereof. The failure of any indemnitee to give notice as provided in this
Section 8.03 shall not relieve the indemnifying party of its obligations under
this Agreement, except to the extent that such indemnifying party is prejudiced
by such failure to give notice.
Section 8.04. Defense of Third Party Claims.
In case an Action shall be brought, or such an Action is threatened,
against any indemnitee and it shall notify promptly an indemnifying party of the
existence thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it may wish to assume the defense thereof,
engage counsel satisfactory to such indemnitee. If the indemnifying party so
assumes the defense thereof, it may not agree to any settlement of such Action
as the result of which, any remedy or relief, other than monetary damages for
which the indemnifying party shall be responsible hereunder, shall be applied to
or against the indemnitee, without the prior written consent of the indemnitee.
If the indemnifying party does not assume the defense thereof, it shall, to the
extent that it has any indemnification obligations with respect thereto, be
bound by any settlement to which the indemnitee agrees, irrespective of whether
the indemnifying party consents thereto; provided, however, if any settlement of
any claim is effected by the indemnitee prior to commencement of any Action
relating thereto, the indemnifying party shall be bound thereby only if it has
consented in writing thereto or has unreasonably withheld its consent. The
indemnitee shall have the right to employ its own counsel in any such case,
including circumstances in which the indemnitee shall have reasonably concluded
that there may be defenses available to it that are different from or in
21
<PAGE>
addition to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to direct any such different or
additional defense of such Action on behalf of the indemnitee, but the fees and
expenses of such counsel shall be at the expense of such indemnitee unless the
employment of such counsel shall have been authorized in writing in advance by
the indemnifying party in connection with the defense of such Action or the
indemnifying party shall not have employed counsel promptly to take charge of
the defense of such Action, in any of which events such fees and expenses shall
be borne by the indemnifying party). Except as expressly provided above, the
indemnifying party shall not be liable to any indemnitee for the costs of
investigating, preparing or defending against such Action subsequent to such
time as the indemnifying party assumes the defense of such Action, unless such
investigation, preparation or defense shall have been conducted at the request
of the indemnifying party, its counsel or the insurer. In the event that any
Actions could result in both parties being liable to the other under these
indemnification provisions, the parties shall endeavor, acting reasonably and in
good faith, to agree upon a manner of conducting the defense and/or settlement
of such Action with a view to minimizing the legal expenses and associated costs
that might otherwise be incurred by the parties under the provisions of this
Section 8.04. To the extent possible, the costs of such defense and/or
settlement shall be allocated by the parties on the basis of the eventual
determination of liability.
Section 8.05. Other Claims.
Any claim on account of an Indemnifiable Loss that does not result from
a Third Party Claim shall be asserted by written notice given by the indemnitee
to the indemnifying party within 60 days of the indemnitee's discovery of such
Indemnifiable Loss. Such indemnifying party shall have a period of 60 days after
the receipt of such notice within which to respond thereto. If such indemnifying
party does not respond within such 60-day period, such indemnifying party shall
be deemed to have accepted responsibility to make payment and shall have no
22
<PAGE>
further right to contest the validity of such claim. If such indemnifying party
does not respond within such 60-day period and rejects such claim in whole or in
part, such indemnitee shall be free to pursue such remedies as may be available
to such party under applicable law and this Agreement.
Section 8.06. Miscellaneous Provisions Relating to Indemnification.
The indemnification provided for in this Article VIII shall be subject
to the following provisions:
(a) any amounts payable from Executone to Unistar and from
Unistar to Executone shall be offset against each other; and
(b) the amounts for which the indemnifying party shall be liable under
this Article VIII shall be net of any insurance proceeds the benefits of which
the indemnitee has received in connection with the facts giving rise to the
rights of indemnification.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Complete Agreement; Construction.
This Agreement, including the Schedules and Exhibits and the Ancillary
Agreements and other agreements and documents referred to herein, shall
constitute the entire agreement among the parties with respect to the subject
matter hereof and shall supersede all previous negotiations, commitments and
writings with respect to such subject matter. Notwithstanding any other
provisions in this Agreement to the contrary, in the event and to the extent
that there shall be a conflict between the provisions of this Agreement and the
provisions of the Exchange Agreement, the Tax Sharing Agreement or the Services
Agreement, the Exchange Agreement, the Tax Sharing Agreement or the Services
Agreement, as the case may be, shall control.
23
<PAGE>
Section 9.02. Survival of Agreements.
Except as otherwise contemplated by this Agreement and the Ancillary
Agreements, all covenants and agreements of the parties contained in this
Agreement and in the Ancillary Agreements shall survive the Separation Date.
Section 9.03. Expenses.
Except as otherwise set forth in this Agreement or any Ancillary
Agreement, Executone shall bear all costs and expenses in connection with the
preparation, execution, delivery and implementation of this Agreement and the
Ancillary Agreements and with the consummation of the transactions contemplated
by this Agreement and the Ancillary Agreements.
Section 9.04. Governing Law.
This Agreement and the Ancillary Agreements shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the principles of conflicts of laws thereof.
Section 9.05. Notices.
All notices and other communications hereunder and under any of the
Ancillary Agreements shall be in writing and shall be delivered by hand or
mailed by registered or certified mail (return receipt requested) to the parties
at the following addresses (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received:
to Executone:
Executone Information Systems, Inc.
478 Wheelers Farms Road
Milford, Connecticut 06460
Attention: Barbara C. Anderson
24
<PAGE>
to Unistar:
Unistar Gaming Corp.
Attention:
Section 9.06. Amendments.
This Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties.
Section 9.07. Successors and Assigns.
This Agreement and the Ancillary Agreements and all of the provisions
hereof and thereof shall be binding upon and inure to the benefit of the parties
and their respective successors and assigns.
Section 9.08. Subsidiaries.
Each of the parties hereto shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
herein to be performed by any subsidiary of such party that is contemplated by
this Agreement and the Ancillary Agreements to be a subsidiary of such party on
and after the Separation Date.
Section 9.09. No Third Party Beneficiaries.
Except for the provisions of Article VIII of this Agreement relating to
Indemnitees (as defined therein) and Section 9.07 of this Agreement, this
Agreement and the Ancillary Agreements are solely for the benefit of the parties
hereto and their respective subsidiaries and their Affiliates and shall not be
deemed to confer upon third parties any remedy, claim, Liability, reimbursement,
claim of action or other right.
25
<PAGE>
Section 9.10. Titles and Headings.
Titles and headings to sections herein are inserted for the convenience
of reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement and the Ancillary Agreements.
Section 9.11. Exhibits and Schedules.
The Exhibits and Schedules shall be construed with and as an integral
part of this Agreement and the Ancillary Agreements to the same extent as if the
same had been set forth verbatim herein.
26
<PAGE>
IN WITNESS WHEREOF, Executone and Unistar have caused this Agreement to
be duly executed by their respective officers, each of whom is duly authorized,
as of the day and year first above written.
EXECUTONE INFORMATION SYSTEMS, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
UNISTAR GAMING CORP.
By: _____________________________
Name: ___________________________
Title: __________________________
27
<PAGE>
EXHIBITS
A. Services Agreement
B. Tax Sharing Agreement
C. Unistar Bylaws
SCHEDULES
I. Excepted Liabilities
II. Unistar Assets
28
<PAGE>
SCHEDULE I
Excepted Liabilities
All 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 or prior to the Separation Date in
connection with currently pending litigation to which Unistar or a subsidiary is
a party shall be Executone Liabilities.
29
<PAGE>
SCHEDULE II
Unistar Assets
30
<PAGE>
Exhibit A
Master Services Agreement
31
<PAGE>
Exhibit B
Tax Sharing Agreement
32
<PAGE>
Exhibit C
Unistar Bylaws
33
MASTER SERVICES AGREEMENT
BY AND BETWEEN
EXECUTONE INFORMATION SYSTEMS, INC.
AND
UNISTAR GAMING CORP.
<PAGE>
MASTER SERVICES AGREEMENT
THIS MASTER SERVICES AGREEMENT, dated as of ____________, 1998, between
EXECUTONE INFORMATION SYSTEMS, INC., a Virginia corporation ("Executone") and
its wholly owned subsidiary, UNISTAR GAMING CORP., a Delaware corporation
("Unistar"), is entered into in connection with a Reorganization Agreement dated
as of the date of this Agreement.
WHEREAS in the interest of orderly transition, Unistar wishes to continue
to receive certain services of Executone, as hereinafter specifically provided,
for a limited period after the date hereof; and the parties desire to set forth
herein the basis on which the services shall be made available to and paid for
by Unistar;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereby agree as follows:
1. The services to be rendered by Executone under this Agreement are set
forth in Exhibit A attached hereto and made a part hereof and are hereinafter
referred to as "the Services." The Services may be rendered by Executone, by
subsidiaries or affiliates of Executone or by third parties, as Executone shall
determine; provided, however, that before any Services that heretofore have been
rendered by Executone are contracted out to third parties, Executone shall so
notify Unistar and Unistar may discontinue such Services upon notice to
Executone in accordance with Section 3(b). The Services shall include a license
to Unistar to occupy and use the space (approximately 1500 square feet)
currently occupied by it at 478 Wheelers Farms Road, Milford, Connecticut;
together with the right to use the exterior sidewalks, grounds, entrance areas,
lobbies, hallways, lavatories, stairways, elevators, cafeteria, health club,
copy center, mailroom, parking spaces, and certain furniture, fixtures and
equipment located within the premises and neither owned by nor to be transferred
to Unistar pursuant to the Reorganization Agreement (the "Office Premises"), for
which Unistar shall pay the costs set forth in Exhibit A.
2. Unistar agrees to pay Executone for the Services during the term of
this Agreement in accordance with Exhibit A, and any other payment provisions of
this Agreement. Except as otherwise expressly provided in Exhibit A, Unistar
acknowledges and agrees that the payment to Executone for the Services hereunder
are intended to compensate Executone at least for its costs, including, without
limitation, out-of-pocket costs, expenses and disbursements (including the
salaries of the Executone employees allocable to their providing such Services)
and its allocable overhead. Unistar acknowledges and agrees that Executone may
adjust the prices set forth on Exhibit A each three months to reflect (i) what
Executone reasonably determines are its increased costs related thereto and (ii)
if a profit margin is included, an amount necessary to maintain that margin.
3. (a) The term of this Agreement shall commence on the day following
the date determined by the Executone Board as of which the transactions
constituting the Rights Offering will be closed (the "Rights Closing Date") and
end as provided herein. To the extent that any of the Services are rendered by
Executone after the date provided for termination of such Service herein, at the
request of Unistar as part of ongoing projects, the term of this Agreement shall
be deemed extended accordingly with respect to such Service only upon mutual
written consent of the parties.
<PAGE>
(b) If Unistar desires to discontinue one or more of the Services, or
a part of a particular Service set forth in Exhibit A hereto, during the term of
this Agreement, Unistar shall give Executone at least 30 days' prior written
notice requesting discontinuance of such Service or part thereof and specifying
the date of discontinuance. If the requested discontinuance would result in
Executone's incurring or absorbing expenses that Executone would not have
incurred or absorbed but for the discontinuance, Unistar shall reimburse
Executone for such reasonable expenses. Once so discontinued, a Service need not
again be rendered by Executone unless Executone, in its sole discretion, is
willing to do so upon terms and conditions to be agreed upon. If Unistar elects
to discontinue a Service in part, Executone may elect to discontinue such
Service in full.
(c) Executone may at any time in its sole discretion, upon not less
than 90 days' prior written notice to Unistar (immediately in the case of any
Services that Executone ceases to perform or render for itself and its
subsidiaries), terminate all the Services, and from time to time so terminate
any one or more of the Services or any part of a particular Service without
liability to Unistar or any other person for any loss, damage or expense
(including without limitation, lost profits or other consequential damage which
may result therefrom).
4. Unistar shall issue purchase orders to Executone for any specific
services it desires that are not specified in Exhibit A, and upon written
agreement of the parties such services will be governed by the terms and
conditions of this Agreement. Executone shall render to Unistar an invoice
within 30 days after the end of each calendar month, covering the Services
rendered under this Agreement during such calendar month, and Unistar shall
remit to Executone in cash the net amount thereof within 30 days after receipt
of invoice.
5. Executone shall determine Executone's corporate facilities and the
individuals by which the Services are rendered.
6. Nothing in this Agreement will require Executone to render any service
not provided for in this Agreement or excluded by Exhibit A, or to render
Services in quantities greater than the quantities taken by the operations of
Unistar and its subsidiaries during the three- month period ended September 30,
1998, or in a manner or methods different from the manner or methods employed
for the benefit of Executone, or, in performing the Services, to make any change
or addition that will require capital expenditures.
7. The duties of Executone under this Agreement are subject to
interruption or discontinuance by Executone at any time and from time to time,
without liability to Unistar or any other person for any loss, damage or expense
which may result therefrom, for force majeure or other causes beyond Executone's
control or, in the case of any particular Service, upon 30 days' prior written
notice if Executone reasonably determines that its performance of such Service
results in costs or liabilities to Executone materially greater than the payment
for such Service by Unistar hereunder, unless Unistar shall agree to pay such
higher costs or make provisions reasonably acceptable to Executone to cover such
liabilities, as the case may be.
<PAGE>
8. Executone will use reasonable efforts to make the Services available in
substantially the same manner as it makes the same Services available for its
own operations, but Executone shall not be liable to Unistar or any other person
for any loss, damage or expense that may result therefrom, for negligent
performance by Executone or from Executone changing its manner of rendering the
Services if Executone deems the same necessary or desirable in the conduct of
its own operations. If Executone for any reason ceases to make available any of
the Services, or any part of a particular Service, to or within its own
operations, which is the means by which Executone renders the Services covered
by this Agreement, Executone may, upon giving written notice to Unistar,
discontinue making available such Service or part to Unistar without liability
other than a reduction in amounts to be paid by Unistar commensurate with the
Service or part discontinued. To the extent that any Service is provided both to
Unistar and to Executone itself or one of its subsidiaries or affiliates (other
than Unistar) Executone shall be entitled to give priority to serving itself or
its subsidiary or affiliate.
9. No right of Unistar under this Agreement shall, without Executone's
prior written consent, be assignable or otherwise transferable by Unistar
voluntarily or by operation of law, whether by merger, sale of assets or
otherwise. If Unistar shall be subject to a change in control following which
one-third or more of the members of Unistar's Board of Directors shall be
replaced, Executone shall be entitled upon such change in control to terminate
this Agreement.
10. The Services hereunder shall be rendered by Executone as an
independent contractor.
<PAGE>
IN WITNESS WHEREOF, Executone and Unistar have caused this Agreement to be
duly executed by their respective officers, each of whom is duly authorized, all
as of the day and year first above written.
EXECUTONE INFORMATION SYSTEMS, INC.
By: ____________________________
Name ____________________________
Title:____________________________
UNISTAR GAMING CORP.
By: ____________________________
Name: ____________________________
Title:____________________________
<PAGE>
Exhibit A
Services To Be Provided by Executone
Legal Services
Contracts, Securities and Exchange Commission and stock exchange filings,
corporate secretary functions, and performance and supervision of related Legal
Services, including state corporation and business license filings, patent and
trademark services:
Term: 120 days from Rights Closing Date unless extended by mutual written
agreement.
$/Hour
Fees: In-house attorney services $ 95.00
In-house paralegal services $ 45.00
Litigation and other services Billed rate
provided by third parties (plus all
out-of-pocket
expenses paid to
third parties)
Payroll Services, Benefit and Human Resource Administration
Payroll Administration Services consist of the preparation and bulk
distribution of payrolls, preparation of regulatory and various tax reports,
benefits and other deduction reports, workmen's compensation and unemployment
filing and audits and miscellaneous payroll services. Benefit administration
services consist of the administration of pension (401k) and reporting, welfare
plans including life insurance, health insurance, disability coverage, savings
plans and regulatory report compliance and filings.
Term: 120 days from the Rights Closing Date unless extended month to month
by mutual written agreement.
Fees: $400 per month.
Office Premises
The license to use the Office Premises shall expire (unless extended in by
mutual written agreement of Executone and Unistar) at midnight 120 days from the
Rights Closing Date.
The charge for the use of the Office Premises shall be $1.67 per month per
occupied square foot of the Office Premises. The current three employees of
Unistar occupy approximately 859 square feet for a monthly rental of $1,434.53.
This fee will include payment for electric current for overhead lights and
outlets, telephone service charges, mail room and copy services, security
services, reception, maintenance of telephone and voice mail systems, facility
administration, office and kitchen supplies, janitorial services, extra HVAC
charges and miscellaneous building expenses.
<PAGE>
The costs of postage and labor for any Unistar bulk mailings will be billed to
Unistar separately as incurred. Unistar shall establish its own Federal Express
or other expedited delivery service accounts as required. Copy center charge
includes items covered in Executone's contract with the third party copy service
provider. Any special items or projects not included in the contract will be
billed separately to Unistar. Health Club billing will be based on membership
totals and will be a separate charge to Unistar.
Computer Services
Computer Services consist of the following:
1. Provide all processing services on the same calendar and daily time
schedule existing at the date of the Agreement for general ledger,
accounts payable and payroll processing interface.
2. Revise the processing schedule, when coordinated in a timely manner
and mutually agreed to.
3. Furnish the same backup service existing at date of Agreement (under
contract with third parties).
4. Continue all other current, regular, routine systems and maintenance
services on the same arrangements existing at the date of the
Agreement.
5. Take appropriate steps to ensure that application programs and
related data, or any portion of them are kept confidential.
Term: 120 days from the Rights Closing Date unless extended by mutual
written agreement.
Fees: $400 per month plus an hourly rate of $75 per hour for special
projects.
Finance Services
Finance Services consist of the General Ledger, Accounts Payable, Cash
Management and certain tax-related filings specified below.
Finance Services will include Unistar and National Indian Lottery ("NIL")
Closing and preparation of Financial Statements.
<PAGE>
1. NIL Closing and Financial Statements includes reconciliation to
Unistar and other account analysis being regularly performed at the
date of this Agreement.
2. Unistar Closing and Financial Statements includes account analysis
being regularly performed at the date of this Agreement.
3. The Finance Services will also include up to eight hours per month
of additional analysis and special accounting work that may be
required to adequately close the books.
Closing and Financial Statements Services include all journal entries, fixed
asset accounting and preparation of the Balance Sheets, Income Statements and
Cash Flow Statements along with supporting schedules for expenses.
Accounts Payable Services include invoice processing, filing and mailing of up
to 400 checks per month, preparation of vendor purchase summaries, accounts
payable, agings and transaction reports, and handling all related vendor
inquiries.
Cash Management Services include the following:
1. Print, match and reconcile merchant receipts to business system for
up to 3,000 transactions per month.
2. Match, review and notify player disbursement for processing for up
to 400 checks per month.
3. Maintain and reconcile bank accounts similar to the accounts
existing at the date of this Agreement.
4. Analyze and reconcile business reports to the General Ledger File
and review annual filings for W2-G's and Occupational Taxes.
Term: 120 days unless extended by mutual written agreement.
Fees: $6,667 monthly, plus Billable Manpower will be billed at a rate of
$75.00 per hour.
Billable Manpower includes time spent on special projects for Unistar,
not listed herein or in excess of the quantities stated herein, by
Executone employees and contractors that may be also assigned to various
tasks specifically associated with Executone.
Billable Manpower does not include any contract employees or consultants
hired specifically to perform custom development, modifications or
maintenance for Unistar systems, which will be billed to Unistar at
cost.
<PAGE>
Stockholder and Investor Relations Services
Stockholder and Investor Relations Services include responding to inquiries
regarding stockholder accounts, mailing of investor information packages and
discussion of public information with current and prospective stockholders and
investors.
Term: 120 days unless extended by mutual written agreement.
Fees: $500
Exhibit 10.4
TAX SHARING AGREEMENT
BY AND BETWEEN
EXECUTONE INFORMATION SERVICES, INC.
AND
UNISTAR GAMING CORP.
<PAGE>
TAX SHARING AGREEMENT
This Tax Sharing Agreement (the "Agreement"), dated as of _________
___, 1998, by and between EXECUTONE Information Systems, Inc., a Virginia
corporation ("Executone"), and Unistar Gaming Corp., a Delaware corporation
("Unistar"), is entered into in connection with a Reorganization Agreement (the
"Reorganization Agreement"), dated as of _____________ ___,
1998, by and between such parties.
WHEREAS, Executone, on behalf of itself and its present and future
subsidiaries other than Unistar and its present or future subsidiaries (the
"Executone Group"), and Unistar, on behalf of itself and its present and future
subsidiaries (the "Unistar Group"), have determined that it is necessary and
desirable to provide for allocation between the Executone Group and the Unistar
Group of all responsibilities, liabilities and benefits relating to taxes paid
or payable by either group for all taxable periods, whether beginning before, on
or after the Separation Date, and to provide for certain other matters;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, terms defined in the Reorganization
Agreement or the Share Exchange Agreement, dated August ___, 1998, between
Executone, Unistar and certain holders of Executone preferred stock (the "Share
Exchange Agreement"), but not defined herein shall have the meanings given in
the Reorganization Agreement or the Share Exchange Agreement, as applicable, and
the following terms shall have the following meanings (such meanings to be
<PAGE>
equally applicable to both the singular and plural forms of the terms defined):
Code: the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations issued thereunder.
Consolidated Return Year: with respect to any Unistar Group
member, any period for which it is included in a Consolidated Tax Return.
Consolidated Tax Return: any consolidated Federal Income Tax
Return filed by Executone, and any consolidated, unitary or combined State
Income Tax Return filed by any members of the Executone Group.
Federal Income Taxes: all United States federal income taxes,
and any interest, penalties and additions imposed with respect to such taxes.
[Foreign Income Taxes: all income taxes (and other taxes
measured by net income or net gain) imposed by any country other than the
United States or by any political subdivision of any such country, and any
interest, penalties and additions imposed with respect to such taxes.]
Income Taxes: all Federal Income Taxes, State Income Taxes [and
Foreign Income Taxes].
Post-Separation Period: any taxable period ending after the
Separation Date.
Pre-Separation Period: any taxable period ending on or before
the Separation Date.
Separate Return Tax Liability: the amount of any Income Tax for
which an entity (i) is liable if it files a Separate Tax Return or (ii) would be
liable if it filed a Separate Tax Return for a Consolidated Return Year.
<PAGE>
Separate Tax Return: any Income Tax Return other than a
Consolidated Tax Return.
State Income Taxes: all income taxes (and other taxes measured by
net income or net gain) imposed by any State of the United States (including any
political subdivision thereof) or the District of Columbia, and any interest,
penalties and additions imposed with respect to such taxes.
Tax Benefit: the Tax effect of any loss, deduction, credit or
other item that decreases Taxes paid or payable.
Tax Detriment: the Tax effect of any income, gain, recapture of
credit or other item that increases Taxes paid or payable.
Tax Returns: all returns, declarations, reports, claims for
refund, information returns, statements and other forms required to be filed
with respect to any Taxes, including any schedule or attachment thereto and
any amendments thereof.
Taxes: all taxes, however denominated, imposed by any government
or governmental entity, and any interest, penalties and additions imposed
with respect thereto.
ARTICLE II
FILING OF TAX RETURNS
Section 2.01. Pre-Separation Period Income Tax Returns.
(a) Consolidated Tax Returns. The income and other tax items of
each member of the Unistar Group for any Pre-Separation Period that is a
Consolidated Return Year shall be included in the Consolidated Tax Return.
Executone shall prepare and timely file all Consolidated Tax Returns for such
period.
<PAGE>
(b) Separate Tax Returns. Executone shall prepare and file (or cause
to be filed) any Separate Tax Return of a Unistar Group member due for a
Pre-Separation Period.
(c) Amendments. No Unistar Group member shall file an amended Tax
Return for any Pre-Separation Period without Executone's written consent. With
respect to any return that includes any Unistar Group member and for which
Executone has responsibility under this Section 2.01, Executone shall not file
(or cause to be filed) an amended Tax Return or change any tax accounting method
or election without Unistar's consent (which shall not be unreasonably withheld)
if such action would increase any Tax for which any Unistar Group member is
liable under this Agreement, unless (i) such action is required by law or is
necessary (in Executone's good-faith opinion) to avoid or reduce any penalty or
addition to Tax or (ii) Executone agrees to pay the amount of such increase.
Section 2.02. Post-Separation Income Tax Returns. Unistar shall
prepare and file (or cause to be prepared and filed) all Tax Returns for each
Unistar Group member for Post-Separation Periods. For all Post-Separation
Periods beginning before the Separation Date, each such Tax Return shall be
based on the same tax accounting methods and elections as used by the
appropriate Unistar Group member for the immediately preceding taxable period,
unless otherwise required by law or Executone consents in writing to each change
from such methods and elections.
Section 2.03. Other Tax Returns. All Tax Returns not covered by
Section 2.01 or 2.02 shall be prepared and filed by the corporation upon which
such obligation is imposed by law.
<PAGE>
ARTICLE III
PAYMENT OF TAXES
Section 3.01. Payment of Taxes in General. Except as otherwise
provided in this Article III, Executone shall pay, and shall indemnify and hold
each Unistar Group member harmless from and against, all Taxes attributable to
any member of the Executone Group, whether heretofore or hereafter arising or
incurred. Executone shall be entitled to any reduction in or refund of such
Taxes [(except any reduction in or refund of Taxes resulting from carrybacks of
any Unistar Group member described in Section 3.04)]. Except as otherwise
provided in this Article III, Unistar shall pay, and shall indemnify and hold
each Executone Group member harmless from and against, all Taxes attributable to
any member of the Unistar Group, whether heretofore or hereafter arising or
incurred. Unistar shall be entitled to any reduction in or refund of such Taxes.
If a member of the Executone Group or Unistar Group receives a refund of Taxes
to which the other group is entitled under this Article III, such member shall
remit such refund to the other group by promptly sending such refund to
Executone or Unistar, as appropriate; provided, however, that any amount payable
in respect of any such refund shall be reduced by the amount of any Taxes
incurred, and the present value (based on a discount rate of [6] percent) of any
Taxes to be incurred, by any Executone Group member or Unistar Group member, as
appropriate, as a result of the accrual or receipt of the refund.
Section 3.02. Payment of Certain Income Taxes. Executone shall
charge Unistar for and Unistar shall pay to Executone, upon demand, each Unistar
Group member's Separate Return Tax Liability that is not heretofore paid for any
Pre-Separation Period. Such liability shall include, without limitation, any
alternative minimum tax liability imposed under section 55 of the Code and any
environmental tax liability imposed under section 59A of the Code. To the
<PAGE>
extent not heretofore paid, Executone shall pay to Unistar any Tax Benefit
realized by Executone Group members from the use of losses or deductions of
Unistar Group members for any Pre-Separation Period ending before January 1,
1998 (thus, for example, Executone shall not pay for any such Tax Benefit
relating to any gain or other income arising in connection with the Exchange or
the Rights Offering).
Section 3.03. Adjustments to Tax. Except as otherwise provided
herein, Executone shall be responsible for, and shall indemnify and hold each
Unistar Group member harmless from and against, all adjustments to Taxes
attributable to any Executone Group member, whether heretofore or hereafter
arising or incurred; provided, however, that Executone shall not indemnify or
hold the Unistar Group harmless from any use of or reduction in net operating
losses, other losses or credits as a result of any adjustment to any tax items
of the Executone Group for any taxable period ending after December 31, 1997.
Executone shall be entitled to any Tax Benefit and shall bear any Tax Detriment
resulting from such adjustments [(except adjustments resulting from carrybacks
of any Unistar Group member from a Post-Separation Period)]. If an adjustment to
a tax item attributable to an Executone Group member reduces the Tax liability
of a Unistar Group member, Unistar shall pay promptly to Executone the amount of
the Tax Benefit realized by the Unistar Group. If an adjustment to a tax item
attributable to an Executone Group member for a Pre-Separation Period ending
before January 1, 1998 increases the Tax liability of a Unistar Group member,
Executone shall pay promptly to Unistar the amount of the Tax Detriment realized
by the Unistar Group upon receiving written notification from Unistar of such
amount.
Unistar shall be responsible for, and shall indemnify and hold
harmless each Executone Group member from and against, all adjustments to Taxes
<PAGE>
attributable to any Unistar Group member, whether heretofore or hereafter
arising or incurred. Unistar shall be entitled to any Tax Benefit (except as
otherwise provided herein) and shall bear any Tax Detriment resulting from such
adjustments. If an adjustment to a tax item attributable to any Unistar Group
member reduces the Tax liability of an Executone Group member, Executone shall
(except as otherwise provided herein) promptly pay to Unistar the amount of the
Tax Benefit realized by the Executone Group. If an adjustment to a tax item
attributable to any Unistar Group member increases the Tax liability of an
Executone Group member, Unistar shall promptly pay the amount of the Tax
Detriment incurred by the Executone Group upon receiving written notification
from Executone of such amount.
[Section 3.04. Carrybacks from Post-Separation Periods to
Pre-Separation Periods. Any loss, credit or other item attributable to any
Unistar Group member arising in a Post-Separation Period may be carried back to
a Consolidated Return Period, to the extent and as permitted under applicable
law. Executone shall cooperate with any Unistar Group member to the extent
reasonably necessary (including, without limitation, amending any Tax Return and
filing any claim for refund) for such member to realize the Tax Benefit of
carrying such loss, credit or other item back to such Pre-Separation Period.
Executone shall remit promptly to Unistar any refund or reduction in Tax
resulting from such carryback.]
ARTICLE IV
COOPERATION
Section 4.01. Cooperation in General. Each of Executone and Unistar
agrees to make available to the other party records in its custody and in the
custody of any member of its group, to furnish other information, and otherwise
to cooperate to the extent reasonably required for the filing of Tax Returns and
documents relating to the assets or businesses of such other party.
<PAGE>
Section 4.02. Notice, Defense, and Settlement of Tax Claims. If a
member of the Executone Group or Unistar Group receives written notice of a
deficiency, contest, audit or other proceeding with respect to a Tax liability
for which a member of the other group is liable under this Agreement (including
liability hereunder to indemnify or reimburse a member of the other group), then
the recipient shall notify the other group of such matter by promptly sending
written notice thereof to Executone or Unistar, as appropriate. Executone and
Unistar shall cooperate to contest and defend against any such proposed Tax
liability. The corporation that is legally liable for such Tax liability
(without regard to this Agreement) shall not settle, compromise or otherwise
agree to pay such liability without the consent of the corporation that is
liable for such Tax under this Agreement. Such consent shall not be unreasonably
withheld.
ARTICLE V
COMPLETE AGREEMENT; CONSTRUCTION
This Agreement shall constitute the entire agreement among the
parties with respect to the subject matter hereof and shall supersede all
previous negotiations, commit-ments and writings with respect to such subject
matter.
<PAGE>
IN WITNESS WHEREOF, Executone and Unistar have caused this Agreement
to be duly executed by their respective officers, each of whom is duly
authorized, as of the day and year first above written.
EXECUTONE INFORMATION SYSTEMS, INC.
By: ________________________________
Name: ________________________________
Title:________________________________
UNISTAR GAMING CORP.
By: ________________________________
Name: ________________________________
Title:________________________________
Exhibit 10.5
UNISTAR GAMING CORP.
STANDBY AGREEMENT
________ ____, 1998
Unistar Buying Group, LLC
_________________________
_________________________
Dear Sirs:
Unistar Gaming Corp., a Delaware corporation (the "Company"),
proposes to offer (the "Offering") to the holders of common stock of EXECUTONE
Information Systems, Inc. ("Executone"), rights (the "Rights") to purchase up to
_________ shares of common stock, $.01 par value per share (the "Common Stock"),
of the Company. Each Right (i) will entitle the holder to purchase one share of
Common Stock at a subscription price of [$0.05] per share (the "Subscription
Price") and (ii) will be exercisable through _________, 1998 (the "Expiration
Date").
The Company desires to make arrangements pursuant to which the
shares (the "Standby Shares") of Common Stock underlying Rights that are not
exercised by the close of business on the Expiration Date will be purchased from
the Company by Unistar Buying Group, LLC (the "Purchaser").
1. Sale and Purchase of the Standby Shares. The Company will sell to
the Purchaser, and the Purchaser will purchase from the Company, the Standby
Shares at a per share price equal to the Subscription Price.
2. Payment and Delivery. On the seventh business day after the
Expiration Date (the "Delivery Date"), the Purchaser will deliver to the Company
Federal (same-day) funds representing the purchase price payable under Section 1
for all of the Standby Shares.
The Company will deliver to the Purchaser a certificate in
definitive form, registered in the name of the Purchaser representing the
Standby Shares.
All deliveries of funds and stock certificates will take place at
____________.
<PAGE>
3. Open Market Transactions.
(a) Until the close of business on the third business day next
preceding the Expiration Date, the Purchaser may (but will not be obligated to)
purchase the Rights in the open market in such amounts and at such prices as the
Purchaser deems advisable. All Rights so purchased will be converted into Common
Stock pursuant to the terms of the Offering.
(b) The Purchaser will surrender for conversion into Common Stock
any Rights beneficially owned by it prior to the Expiration Date.
4. Registration Statement and Prospectus; Public Offering. The Company
has filed with the Securities and Exchange Commission (the "Commission"),
pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations adopted by the Commission thereunder (the "Rules"), a
registration statement on Form S-1, including a form of final prospectus,
relating to the Rights and the shares of Common Stock issuable on conversion of
the Rights. The Commission has declared the registration statement effective.
The Company proposes to file with the Commission pursuant to Rule 424(b) a final
prospectus, dated the date of this Agreement, in the form previously furnished
to the Purchaser. Such registration statement, including exhibits, when it
became effective (the "Effective Date"), is called the "Registration Statement,"
and the prospectus, as first filed with the Commission pursuant to Rule 424(b),
is called the "Prospectus." The terms "amend," "amendment" or "supplement" with
respect to the Registration Statement or the Prospectus include the filing of
any document under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), after the Effective Date or the date of the Prospectus and
incorporated by reference.
5. Representations of the Company. The Company represents to the
Purchaser as follows:
(a) On the Effective Date and when the Prospectus is first filed
with the Commission pursuant to Rule 424(b), when any post-effective amendment
to the Registration Statement becomes effective, when any supplement to the
Prospectus is filed with the Commission and on the Delivery Date, the
Registration Statement, the Prospectus and any such amendment or supplement will
comply in all material respects with the requirements of the Act and the Rules,
and no part of the Registration Statement, the Prospectus or any such amendment
or supplement will contain any 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, except that this representation does not
apply to statements or omissions made in reliance on and in conformity with
written information furnished in writing to the Company by the Purchaser
specifically for inclusion in the Registration Statement, Prospectus, amendment
or supplement.
(b) The Offering and the exercise of the Rights prior to the
Expiration Date have been duly authorized by the Company. The right to convert
the Rights into Common Stock expires on the close of business on the Expiration
Date.
<PAGE>
6. Agreements of the Company.
(a) The Company will promptly file the Prospectus with the
Commission under Rule 424(b).
(b) As soon as the Company is so advised, the Company will advise
the Purchaser of (1) the initiation or threatening by the Commission of any
proceedings for the issuance of any order suspending the effectiveness of the
Registration Statement and (2) receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission relating
to the Company, the Registration Statement or the Prospectus. The Company will
make every reasonable effort to prevent the issuance of an order suspending the
effectiveness of the Registration Statement and, if any such order is issued, to
obtain as soon as possible its lifting.
(c) The Company will pay, or reimburse if paid by the Purchaser,
whether or not the transactions contemplated by this Agreement are consummated
or this Agreement is terminated, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
those relating to (1) the preparation, printing and filing of the Registration
Statement and exhibits thereto, the Prospectus and all amendments and
supplements to the Registration Statement and the Prospectus, (2) the issuance
of the Standby Shares and the preparation and delivery of certificates
evidencing the Standby Shares, (3) the furnishing to the Purchaser of copies of
the Prospectus and all amendments or supplements to the Prospectus, including
costs of shipping and mailing, (4) all transfer taxes, if any, with respect to
the sale and delivery of the Standby Shares by the Company to the Purchaser, (5)
any listing of the Standby Shares on the __________ and (6) ____________, the
Right Agent.
7. Conditions of the Purchaser's Obligations. The obligation of the
Purchaser to purchase the Standby Shares is subject to the accuracy, on the date
of this Agreement and on the Delivery Date, of the representations of the
Company in this Agreement, to performance by the Company of its obligations
under this Agreement and to each of the following additional conditions:
(a) The Registration Statement must have become effective.
(b) No order suspending the effectiveness of the Registration
Statement may be in effect and no proceedings for such purpose may be pending
before or threatened by the Commission, and any requests for additional
information on the part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) must have been complied with to the
reasonable satisfaction of the Purchaser.
(c) The Company, Executone and certain affiliates of the Purchaser
shall have entered into a Share Exchange Agreement, dated as of even date
herewith (the "Share Exchange Agreement"), all representations and warranties of
the Company and Executone contained in the Share Exchange Agreement shall be
true and correct in all material respects as of the date hereof and Executone
and Unistar shall have performed all obligations and complied with all
<PAGE>
agreements, undertakings, covenants and conditions required under the Share
Exchange Agreement as of the date hereof.
(d) The Company and Executone shall have entered into the
Reorganization Agreement, as of even date herewith (the "Reorganization
Agreement"), and the Company and Executone shall have performed all obligations
and complied with all agreements, undertakings, covenants and conditions
required under the Reorganization Agreement as of the date hereof.
8. Conditions of Unistar's Obligations. The obligation of Unistar to
sell the Standby Shares is subject to performance by the Purchaser of its
obligations under this Agreement and to each of the following conditions:
(a) the Company, Executone and certain affiliates of the Purchaser
shall have entered into the Share Exchange Agreement, all representations and
warranties of the Shareholders (as defined in the Share Exchange Agreement)
shall be true and correct in all material respects as of the date hereof and the
Shareholders shall have performed all obligations and complied with all
agreements, undertakings, covenants and conditions required under the Share
Exchange Agreement as of the date hereof.
(b) The Company and Executone shall have entered into the
Reorganization Agreement and the Company and Executone shall have performed all
obligations and complied with all agreements, undertakings, covenants and
conditions required under the Reorganization Agreement as of the date hereof.
9. Termination.
(a) This Agreement may be terminated by the Purchaser by notifying
the Company as specified herein at any time at or before the Delivery Date, if
any of the conditions specified in Section 7 have not been fulfilled when and as
required by this Agreement.
(b) This Agreement may be terminated by the Company by notifying
the Purchaser as specified herein at any time at or before the Delivery Date, if
any of the conditions specified in Section 8 have not been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions
except as otherwise provided, the Company will not be under any liability to the
Purchaser and the Purchaser will not be under any liability to the Company,
except that the Purchaser, if it has failed or refused to purchase the Standby
Shares agreed to be purchased by it under this Agreement, without some reason
sufficient to justify cancellation or termination of its obligations pursuant to
this Agreement, will not be relieved of liability to the Company for damages
occasioned by its default.
<PAGE>
10. Miscellaneous.
This Agreement is for the benefit of the Purchaser and the Company
and their respective successors and assigns, and, to the extent expressed in
this Agreement, for the benefit of persons controlling the Purchaser or the
Company, and directors and officers of the Company and their respective
successors and assigns, and no other person, partnership, association or
corporation shall acquire or have any right under or by virtue of this
Agreement.
All notices and communications under this Agreement will be in
writing, effective only on receipt and mailed or delivered, by messenger,
facsimile transmission or otherwise, to the Purchaser, _______________, at
______________, and to the Company, ______________, at _________________.
This Agreement may be signed in multiple counterparts that taken as
a whole constitute one agreement.
This Agreement will be governed by and construed in accordance with
the laws of the State of __________________.
Please confirm that the foregoing correctly sets forth the agreement
between us.
Very truly yours,
UNISTAR GAMING CORP.
By ______________________________
Name: ______________________________
Title:______________________________
Confirmed:
UNISTAR BUYING GROUP, LLC
By ______________________________
Name: ______________________________
Title:______________________________
Exhibit 10.6
UNISTAR GAMING CORP.
STOCK OPTION PLAN
<PAGE>
ARTICLE I DEFINITIONS........................................................1
1.01. Affiliate........................................................1
1.02. Agreement........................................................1
1.03. Board............................................................1
1.04. Code.............................................................1
1.05. Committee........................................................1
1.06. Common Stock.....................................................1
1.07. Company..........................................................1
1.08. Fair Market Value................................................1
1.09. Option...........................................................2
1.10. Participant......................................................2
1.11. Plan.............................................................2
1.12. Ten Percent Stockholder..........................................2
ARTICLE II PURPOSES..........................................................2
ARTICLE III ADMINISTRATION...................................................3
ARTICLE IV ELIGIBILITY.......................................................3
ARTICLE V STOCK SUBJECT TO PLAN..............................................4
5.01. Shares Issued....................................................4
5.02. Aggregate Limit..................................................4
5.03. Reallocation of Shares...........................................4
ARTICLE VI OPTIONS...........................................................4
6.01. Award............................................................4
6.02. Option Price.....................................................4
6.03. Maximum Option Period............................................5
6.04. Nontransferability...............................................5
6.05. Employee Status..................................................5
6.06. Exercise.........................................................5
6.07. Payment..........................................................6
6.08. Stockholder Rights...............................................6
6.09. Disposition of Stock.............................................6
ARTICLE VII ADJUSTMENT UPON CHANGE IN COMMON STOCK..........................6
<PAGE>
ARTICLE VIII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES...........7
ARTICLE IX GENERAL PROVISIONS................................................7
9.01. Effect on Employment.............................................7
9.02. Unfunded Plan....................................................7
9.03. Rules of Construction............................................8
ARTICLE X AMENDMENT..........................................................8
ARTICLE XI DURATION OF PLAN..................................................8
ARTICLE XII EFFECTIVE DATE OF PLAN...........................................8
<PAGE>
UNISTAR GAMING CORP.
STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
1.01. Affiliate
Affiliate means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company.
1.02. Agreement
Agreement means a written agreement (including any amendment or supplement
thereto) between the Company and a Participant specifying the terms and
conditions of an Option.
1.03. Board
Board means the Board of Directors of the Company.
1.04. Code
Code means the Internal Revenue Code of 1986, and any amendments thereto.
1.05. Committee
Committee means the committee of the Board appointed to administer the
Plan.
1.06. Common Stock
Common Stock means the common stock of the Company.
1.07. Company
Company means Unistar Gaming Corp., a Delaware corporation.
1.08. Fair Market Value
Fair Market Value means, on any given date, the current fair market value
of a share of Common Stock which shall be determined as follows: If the Common
Stock is not listed on an established stock exchange, the Fair Market Value
shall be the average reported "closing" price of a share of Common Stock in the
over-the-counter market as reported by the National Association of Securities
Dealers, Inc. If the Common Stock is listed on an established stock exchange or
exchanges, Fair Market Value shall be the average closing price of a share of
Common Stock reported on that stock exchange or exchanges.
<PAGE>
1.09. Option
Option means a stock option that entitles the holder to purchase from the
Company a stated number of shares of Common Stock at the price set forth in an
Agreement.
1.10. Participant
Participant means an employee of the Company, including an employee who is
a member of the Board, who satisfies the requirements of Article IV and is
selected by the Committee to receive an Option.
1.11. Plan
Plan means the Unistar Gaming Corp. Stock Option Plan.
1.12. Ten Percent Stockholder
Ten Percent Stockholder means any individual owning more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of an Affiliate. An individual shall be considered to own any voting stock
owned (directly or indirectly) by or for his brothers, sisters, spouse,
ancestors or lineal descendants and shall be considered to own proportionately
any voting stock owned (directly or indirectly) by or for a corporation,
partnership, estate or trust of which such individual is a stockholder, partner
or beneficiary.
ARTICLE II
PURPOSES
The Plan is intended to assist the Company in recruiting and retaining
individuals with ability and initiative by enabling such persons to participate
in the future success of the Company and to associate their interests with those
of the Company and its stockholders. The Plan is intended to permit the grant of
Options qualifying under Section 422 of the Code (Incentive Stock Options), and
Options not so qualifying (Nonqualified Options). No Option that is intended to
be an Incentive Stock Option shall be invalid for failure to qualify as an
Incentive Stock Option. The proceeds received by the Company from the sale of
Common Stock pursuant to this Plan shall be used for general corporate purposes.
<PAGE>
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
authority to grant Options upon such terms (not inconsistent with the provisions
of this Plan) as the Committee may consider appropriate. Such terms may include
conditions (in addition to those contained in this Plan) on the exercisability
of all or any part of an Option. Notwithstanding any such conditions, the
Committee may, in its discretion, accelerate the time at which any Option may be
exercised. In addition, the Committee shall have complete authority to interpret
all provisions of this Plan; to prescribe the form of Agreements; to adopt,
amend, and rescind rules and regulations pertaining to the administration of the
Plan; and to make all other determinations necessary or advisable for the
administration of this Plan. The express grant in the Plan of any specific power
to the Committee shall not be construed as limiting any power or authority of
the Committee.
Any decision made, or action taken, by the Committee or in connection with
the administration of this Plan shall be final and conclusive. Neither the
Committee nor any member of the Committee shall be liable for any act done in
good faith with respect to this Plan or any Agreement or Option. All expenses of
administering this Plan shall be borne by the Company.
ARTICLE IV
ELIGIBILITY
Any employee of the Company or an Affiliate (including a company that
becomes an Affiliate after the adoption of this Plan), is eligible to
participate in this Plan if the Committee, in its sole discretion, determines
that such person has contributed significantly or can be expected to contribute
significantly to the profits or growth of the Company. Directors of the Company
who are employees of the Company may be selected to participate in this Plan.
<PAGE>
ARTICLE V
STOCK SUBJECT TO PLAN
5.01. Shares Issued
Shares Issued. Upon the exercise of any Option, the Company shall deliver
to the Participant (or the Participant's broker if the Participant so directs),
shares of Common Stock from its authorized but unissued Common Stock or treasury
stock.
5.02. Aggregate Limit
Aggregate Limit. The maximum aggregate number of shares of Common Stock
that may be issued under this Plan pursuant to the exercise of Options is
1,000,000 shares, subject to adjustment as provided in Article VII.
5.03. Reallocation of Shares
Reallocation of Shares. If an Option is terminated, in whole or in part,
for any reason other than its exercise, the number of shares of Common Stock
allocated to the Option or portion thereof may be reallocated to other Options
to be granted under this Plan.
ARTICLE VI
OPTIONS
6.01. Award
Award. In accordance with the provisions of Article IV, the Committee will
designate each individual to whom an Option is to be granted and will specify
the number of shares of Common Stock covered by such awards; provided, however,
that no individual may be granted Options in any calendar year covering more
than 200,000 shares of Common Stock.
6.02. Option Price
Option Price. The price per share for Common Stock purchased on the
exercise of an Option shall be determined by the Committee on the date of grant,
but shall not be less than the Fair Market Value on the date the Option is
granted if the Option is intended to be an Incentive Stock Option.
Notwithstanding the preceding sentence, the price per share for Common Stock
purchased on the exercise of any Option shall not be less than 110% of the Fair
Market Value on the date the Option is granted in the case of an Option that is
intended to be an Incentive Stock Option granted to an individual who is a Ten
Percent Stockholder on the date such Option is granted.
<PAGE>
6.03. Maximum Option Period
Maximum Option Period. The maximum period in which an Option may be
exercised shall be determined by the Committee on the date of grant, except that
no Option that is intended to be an Incentive Stock Option shall be exercisable
after the expiration of ten years from the date such Option was granted. In the
case of an Option that is intended to be an Incentive Stock Option that is
granted to a Participant who is a Ten Percent Stockholder on the date of grant,
such Option shall not be exercisable after the expiration of five years from the
date of grant. The terms of any Option that is intended to be an Incentive Stock
Option may provide that it is exercisable for a period less than such maximum
period.
6.04. Nontransferability
Nontransferability. Each Option granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom the Option is granted, the Option
may be exercised only by the Participant. No right or interest of a Participant
in any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
6.05. Employee Status
Employee Status. For purposes of determining the applicability of Section
422 of the Code (relating to Incentive Stock Options), or in the event that the
terms of any Option provide that it may be exercised only during employment or
within a specified period of time after termination of employment, the Committee
may decide to what extent leaves of absence for governmental or military
service, illness, temporary disability, or other reasons shall not be deemed
interruptions of continuous employment.
6.06. Exercise
Exercise. Subject to the provisions of this Plan and the applicable
Agreement, an Option may be exercised in whole at any time or in part from time
to time at such times and in compliance with such requirements as the Committee
shall determine; provided, however, that Options that are intended to be
Incentive Stock Options (granted under the Plan and all plans of the Company and
its Affiliates) may not be first exercisable in a calendar year for stock having
a Fair Market Value (determined as of the date an Option is granted) exceeding
$100,000. An Option granted under this Plan may be exercised with respect to any
number of whole shares less than the full number for which the Option could be
exercised. A partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan and the
applicable Agreement with respect to the remaining shares subject to the Option.
<PAGE>
6.07. Payment
Payment. Unless otherwise provided by the Agreement, payment of the Option
price shall be made in cash or a cash equivalent acceptable to the Committee. If
the Agreement provides, payment of all or part of the Option price may be made
by surrendering shares of Common Stock to the Company. If Common Stock is used
to pay all or part of the Option price, the sum of the cash and cash equivalent
and the Fair Market Value (determined as of the day preceding the date of
exercise) of the shares surrendered must not be less than the Option price of
the shares for which the Option is being exercised.
6.08. Stockholder Rights
Stockholder Rights. No Participant shall have any rights as a stockholder
with respect to shares subject to his Option until the date of exercise of such
Option.
6.09. Disposition of Stock
Disposition of Stock. A Participant shall notify the Company of any sale
or other disposition of Common Stock acquired pursuant to an Option that was
intended to be an Incentive Stock Option if such sale or disposition occurs (i)
within two years of the grant of an Option or (ii) within one year of the
issuance of the Common Stock to the Participant. Such notice shall be in writing
and directed to the Secretary of the Company.
ARTICLE VII
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares as to which Options may be granted under
this Plan, the individual limitation of Section 6.01 and the terms of
outstanding Options shall be adjusted as the Committee shall determine to be
equitably required in the event that (a) the Company (i) effects one or more
stock dividends, stock split-ups, subdivisions or consolidations of shares or
(ii) engages in a transaction to which Section 424 of the Code applies or (b)
there occurs any other event which in the judgment of the Committee necessitates
such action. Any determination made under this Article VII by the Committee
shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the maximum
number of shares as to which Options may be granted, the individual limitation
of Section 6.01 or the terms of outstanding Options.
<PAGE>
The Committee may grant Options in substitution for stock options or
similar awards held by an individual who becomes an employee of the Company or
an Affiliate in connection with a transaction described in the first paragraph
of this Article VII. Notwithstanding any provision of the Plan (other than the
limitation of Section 5.02), the terms of such substituted Option grants shall
be as the Committee, in its discretion, determines is appropriate.
ARTICLE VIII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be delivered, and no payment shall
be made under this Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's shares may be
listed. The Company shall have the right to rely on an opinion of its counsel as
to such compliance. Any share certificate issued to evidence Common Stock for
which an Option is exercised may bear such legends and statements as the
Committee may deem advisable to assure compliance with federal and state laws
and regulations. No Option shall be exercisable, no Common Stock shall be
issued, and no certificate for shares shall be delivered under this Plan until
the Company has obtained such consent or approval as the Committee may deem
advisable from regulatory bodies having jurisdiction over such matters.
ARTICLE IX
GENERAL PROVISIONS
9.01. Effect on Employment
Effect on Employment. Neither the adoption of this Plan, its operation,
nor any documents describing or referring to this Plan (or any part thereof)
shall confer upon any individual any right to continue in the employ of the
Company or in any way affect any right and power of the Company to terminate the
employment of any individual at any time with or without assigning a reason
therefor.
9.02. Unfunded Plan
Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such obligation of the Company shall be deemed to be secured by any
pledge of, or other encumbrance on, any property of the Company.
<PAGE>
9.03. Rules of Construction
Rules of Construction. Headings are given to the articles and sections of
this Plan solely as a convenience to facilitate reference. The reference to any
statute, regulation, or other provision of law shall be construed to refer to
any amendment to or successor of such provision of law.
ARTICLE X
AMENDMENT
The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until stockholder approval is
obtained if (i) the amendment increases the aggregate number of shares of Common
Stock that may be issued under the Plan (other than an adjustment as provided in
Article VII) or (ii) the amendment changes the class of individuals eligible to
become Participants. No amendment shall, without a Participant's consent,
adversely affect any rights of such Participant under any Option outstanding at
the time such amendment is made.
ARTICLE XI
DURATION OF PLAN
No Option may be granted under this Plan more than ten years after the
earlier of the date this Plan is adopted by the Board or the date this Plan is
approved by stockholders in accordance with Article XII. Options granted before
that date shall remain valid in accordance with their terms.
ARTICLE XII
EFFECTIVE DATE OF PLAN
Options may be granted under this Plan upon its adoption by the Board,
provided that no Option shall be effective or exercisable unless, within twelve
months of such adoption, this Plan is approved by the Company's stockholders by
their unanimous written consent or by a majority of the votes entitled to be
cast by the Company's stockholders, voting either in person or by proxy, at a
duly held stockholders' meeting.
UNISTAR GAMING CORP.
EMPLOYMENT AGREEMENT
Michael W. Yacenda
Exhibit 10.7
AGREEMENT made as of this 31st day of August 1998, by and between Unistar
Gaming Corp., a Delaware corporation with its principal executive offices at 478
Wheelers Farms Road, Milford, CT 06460 (the "Corporation"), and Michael W.
Yacenda, residing at 705 Hunting Ridge Road, Stamford Connecticut 06903
("Executive").
W I T N E S S E T H :
WHEREAS, Executive has heretofore been employed by the Corporation;
WHEREAS, the Corporation desires to continue to employ Executive, and
Executive is willing to undertake such employment, upon the terms and subject to
the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Employment of Executive. The Corporation hereby employs Executive as
its President, Chief Operating Officer and Acting Chief Executive Officer, to
perform the duties and responsibilities incident to such offices, subject at all
times to the normal control and direction of the Board of Directors of the
Corporation (the "Board of Directors") and the Chief Executive Officer when one
is appointed.
2. Acceptance of Employment; Time and Attention. Executive hereby accepts
such employment and agrees that throughout the Term (as hereinafter defined), he
will devote substantially his full time, attention, knowledge and skills,
faithfully, diligently and to the best of his ability, in furtherance of the
business of the Corporation, and will perform the duties assigned to him
pursuant to Section 1 hereof, subject, at all times, to the normal direction and
control of the Board of Directors.
Executive shall be the principal operating officer of the Corporation and
shall in general manage and control of the day-to-day operations of the
Corporation. Executive shall also perform such specific duties and shall
exercise such specific authority related to the management of the day-to-day
operations of the Corporation consistent with his position as President and
Chief Operating Officer as may be assigned to Executive from time to time by the
Board of Directors or the Chief Executive Officer.
Executive shall at all times be subject to, observe and carry out such
rules, regulations, policies, directions and restrictions as the Corporation
shall from time to time establish. During the Term, Executive shall not, without
the written approval of the Board of Directors first had and obtained in each
instance, directly or indirectly, accept employment or compensation from, or
perform services of any nature for, any business enterprise other than the
Corporation and its subsidiaries. Notwithstanding the foregoing but subject to
Section 9 hereof, Executive shall be permitted to (i) serve as a director on the
boards of directors of other corporations and retain any compensation paid
therefor, provided that such other interests do not materially interfere with
the performance by Executive of his obligations hereunder, and (ii) engage in
business affairs outside the business of the Corporation provided that such
other interests do not materially interfere with his obligations hereunder.
During the Term, Executive shall not be entitled to additional compensation for
rendering employment services to subsidiaries of the Company or for serving in
any office of the Corporation or any of its subsidiaries to which he is elected
or appointed. The Board shall have the right to review board memberships to
avoid any potential conflict of interest.
<PAGE>
3. Term. Except as otherwise provided herein, Executive's employment
hereunder shall be for a three (3) year term commencing as of the effective date
(the "Effective Date")of the separation of the Corporation from EXECUTONE
Information Systems, Inc., expected to occur in December 1998 (the "Initial
Term"), which may be renewed for such one (1) year periods as the Corporation
and Executive may mutually agree during the ninety (90) day period immediately
prior to the expiration of the Initial Term or any renewal thereof (the Initial
Term and any such renewal thereof are hereinafter collectively referred to as
the "Term").
4. Compensation. The Corporation shall pay to the Executive, commencing as
of the Effective Date for the first year of his employment, compensation at the
rate of Two Hundred Sixty Two Thousand Four Hundred Dollars ($262,400) per year
("Base Salary"). For each year thereafter, the Base Salary shall be such higher
amount as shall be determined by the Board of Directors. Such compensation shall
be payable in equal biweekly installments. In addition, Executive shall be
entitled to receive from the Corporation an annual bonus (the "Bonus") equal to
50% of Base Salary and will be earned 50% based upon the achievement of specific
management objectives set in the beginning of the year and 50% based upon
achieving annual PBT or other quantitative financial goals approved by the Board
of Directors. All compensation paid to Executive shall be subject to withholding
and other employment taxes imposed by applicable law.
5. Additional Benefits.
(a) In addition to such Base Salary, he (and his family) shall be entitled
to participate, to the extent he is (and they are) eligible under the terms and
conditions thereof, in any profit-sharing, pension, retirement, hospitalization,
insurance, disability, medical service, stock option, bonus or other employee
benefit plan generally available to the executive officers of the Corporation
that may be in effect from time to time during the Term, as well as any
discretionary bonus pool of the Corporation. The Corporation shall be under no
obligation to institute or continue the existence of any such employee benefit
plan.
(b) The Corporation shall obtain and maintain in full force and effect
during the Term, at the Corporation's sole cost and expense, the life insurance
policies on the life of Executive currently being maintained by EXECUTONE
Information Systems, Inc. Executive shall submit to any physical examinations
necessary to obtain such policies and shall otherwise cooperate with the
Corporation in obtaining such insurance coverage. Any insurance policy
maintained by the Corporation on the life of Executive pursuant to this Section
5(b) shall be made payable to such beneficiary or beneficiaries as Executive may
designate by written notice to the Corporation and the Corporation agrees,
promptly upon receipt of such notice, to take all such action as may be
necessary so as to notify the appropriate insurance company of any change of
beneficiary.
<PAGE>
(c ) Rights Exercise. The Corporation will pay on behalf of Executive
the $.05 per share ($17,500) to exercise the rights to acquire shares of Unistar
stock being issued in conjunction with the separation applicable to the 350,000
Executone shares under the Executive Stock Incentive Plan stock loan.
(d ) Stock Options.
(i) The Corporation will issue stock options for 150,000 shares of
Stock at an exercise price of the estimated fair market value determined in the
Corporation's Registration Statement on Form S-1 of $1.28 per share. Vesting
will be 1/3 of the shares on September 1, 1999 and 8.33% at the end of each
calendar quarter thereafter.
(ii) The Corporation will issue stock options for an additional 25,000
shares of Stock at an exercise price of the estimated fair market value
determined in the Corporation's Form S-1 Registration Statement of $1.28 per
share. Immediate vesting of the additional option granted pursuant to this
subparagraph will occur if and only if the Corporation attains $5 million in
revenue in calendar 1999.
(iii) The Corporation will issue stock options for an additional
25,000 shares of Stock at an exercise price of the estimated fair market value
determined in the Corporations' Registration Statement on Form S-1 of $1.28 per
share. Immediate vesting of the additional options granted pursuant to this
subparagraph will occur if and only if the Corporation attains $10 million in
revenue in calendar year 1999.
(iv) In addition, Executive shall be entitled to receive from the
Corporation additional stock options as the Board of Directors shall in its sole
discretion determine.
(v) In the event of a Change in Control (as defined herein), all
options referenced in Section 5(d)(i) above shall become fully vested and
immediately exercisable. "Change of Control" shall be deemed to have taken place
if: (i) any person, including a group, becomes the beneficial owner of shares of
the Corporation sufficient in manner to control the election of directors of the
Corporation; or (ii) there occurs any cash tender or exchange offer for shares
of the Corporation, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, and as a
result of or in connection with any such event persons who were directors of the
Corporation before the event shall cease to constitute a majority of the Board
of Directors of the Corporation or any successor to the Corporation. As used
herein, the terms "person" and "beneficial owner" have the same meaning as such
terms under Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations hereunder.
<PAGE>
6. Reimbursement of Expenses. The Corporation shall reimburse Executive in
accordance with applicable policies of the Corporation for all expenses
reasonably incurred by Executive in connection with the performance of his
duties hereunder and the business of the Corporation, including expenses
relating to the operation and maintenance of a motor vehicle (including, but not
limited to, vehicle loan and lease payments, insurance premiums, parking,
gasoline and repair expenditures) upon the submission to the Corporation of
appropriate receipts or vouchers.
7. Facilities and Personnel. Executive shall be provided a private office,
secretarial services and such other facilities, supplies, personnel and services
as shall be required or reasonably requested for the performance of his duties
hereunder.
8. Vacation. Executive shall be entitled to four (4) weeks' paid vacation
in respect of each twelve (12) month period during the Term, such vacation to be
taken at times mutually agreeable to Executive and the Board of Directors and in
accordance with the Corporation's vacation policy.
9. Restrictive Covenant. In consideration of the Corporation's entering
into this Agreement, Executive agrees that during the Term, and for a period of
eighteen (18) months thereafter he will not (i) directly or indirectly own,
manage, operate, join, control, participate in, invest in, or otherwise be
connected with, in any manner, whether as an officer, director, employee,
partner, investor or otherwise, any business entity that is engaged in the
lottery or casino business or any other business which the corporation is then
engaged in, (ii) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation for the purpose
of soliciting, diverting or taking away any customer from the Corporation, or
(iii) induce, influence, or seek to induce or influence, any person engaged as
an employee, representative, agent, independent contractor or otherwise by the
Corporation, to terminate his or her relationship with the Corporation. Nothing
herein contained shall be deemed to prohibit Executive from investing his funds
in securities of an issuer if the securities of such issuer are listed for
trading on a national securities exchange or are traded in the over-the-counter
market and Executive's holdings therein represent less than 1% of the total
number of shares or principal amount of the securities of such issuer
outstanding.
Executive acknowledges that the provisions of this Section 9 are
reasonable and necessary for the protection of the Corporation, and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the activities specified herein are, and are intended
to be, divisible. If any provision of this Section 9, including any sentence,
clause or part hereof, shall be deemed contrary to law or invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions shall not be affected, but shall, subject to the discretion of such
court, remain in full force and effect and any invalid and unenforceable
provisions shall be deemed, without further action on the part of the parties
hereto, modified, amended and limited to the extent necessary to render the same
valid and enforceable.
<PAGE>
10. Confidential Information. Executive shall hold in a fiduciary capacity
for the benefit of the Corporation all information, knowledge and data relating
to or concerned with its operations, sales, business and affairs, and he shall
not, at any time for a period of one year after termination of his employment
hereunder, use, disclose or divulge any such information, knowledge or data to
any person, firm or corporation (unless the Corporation no longer treats such
information as confidential) other than to the Corporation or its designees and
employees or except as may otherwise be required in connection with the business
and affairs of the Corporation; provided, however, that Executive may disclose
or divulge such information, knowledge or data that: (i) was known to Executive
at the commencement of his employment with the Corporation; (ii) is or becomes
generally available to the public through no wrongful act on Executive's part;
or (iii) becomes available to Executive from a person or entity other than the
Corporation, except nothing in this Agreement shall be deemed to permit
Executive's disclosure or use of any confidential or proprietary information of
EXECUTONE Information Systems, Inc.; and provided, further, that the provisions
of this Section 10 shall not apply to Executive's know-how to the extent
utilized by him in subsequent employment otherwise than in breach of this
Agreement.
11. Intellectual Property. Any idea, invention, design, written material,
manual, system, procedure, improvement, development or discovery, developed,
created or made by Executive alone or with others, during the Term and
applicable to the business of the Corporation, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation.
Executive shall disclose the same promptly and completely to the Corporation and
shall, during the Term and at any time and from time to time hereafter (i)
execute all documents requested by the Corporation for vesting in the
Corporation the entire right, title and interest in and to the same, (ii)
execute all documents requested by the Corporation for filing and prosecuting
such applications for patents, trademarks, service marks and/or copyrights as
the Corporation, in its sole discretion, may desire to prosecute, and (iii) give
the Corporation all assistance it reasonably requires, including the giving of
testimony in any suit, action or proceeding, in order to obtain, maintain and
protect the Corporation's right therein and thereto.
12. Equitable Relief. The parties hereto acknowledge that Executive's
services are unique and that, in the event of a breach or a threatened breach by
Executive of any of his obligations under this Agreement, the Corporation shall
not have an adequate remedy at law. Accordingly, in the event of any such breach
or threatened breach by Executive, the Corporation shall be entitled to such
equitable and injunctive relief as may be available to restrain Executive and
any business, firm, partnership, individual, corporation or entity participating
in such breach or threatened breach from the violation of the provisions hereof.
Nothing herein shall be construed as prohibiting the Corporation from pursuing
any other remedies available at law or in equity for such breach or threatened
breach, including the recovery of damages and the immediate termination of the
employment of Executive hereunder.
13. Termination for Cause.
(a) The Corporation may at any time dismiss Executive for "Cause." For
purposes of this Agreement, the following shall constitute "Cause:" (i) the
death of Executive; (ii) the failure of Executive, as a result of illness,
physical or mental disability or other incapacity to render the services
provided in this Agreement for a period of one hundred eighty (180) consecutive
days or one hundred eighty (180) days during any one (1) year period
("Disability"); or (iii) the breach by Executive of a fiduciary duty in the
performance of his duties hereunder or a breach of a material term of this
Agreement, including (x) theft, embezzlement, fraud, misappropriation of funds,
other acts of dishonesty or the violation of any law relating to Executive's
employment; (y) Executive shall have entered a plea of guilty or nolo contender
to, or have been found by a court of competent jurisdiction to be guilty of a
felony or other crime involving moral turpitude; and (z) the breach by Executive
of any other material provision of this Agreement, which breach is not cured to
the Corporation's reasonable satisfaction within thirty (30) days after written
notice thereof.
<PAGE>
(b) In the event of Executive's Disability, he shall be entitled to
receive the Base Salary payments due under Section 4 hereof during the period of
his Disability and for a period of eighteen (18) months thereafter.
(c) In the event of termination of Executive's employment hereunder by
reason of his death, the Corporation shall pay a benefit (the "Benefit Payment")
to such person or persons as Executive shall, at his option, from time to time
designate by written instrument delivered to the Corporation, each subsequent
designation to revoke all prior designations, or if no such designation is made,
to Executive's estate (the "Payment Beneficiary"). The Benefit Payment shall be
in an amount equal to one and one-half times Executive's then current Base
Salary, and shall be payable to the Payment Beneficiary in equal quarterly
installments over a period of one and one-half years; provided that if the
Corporation then maintains a life insurance policy on the life of Executive
under which it is the beneficiary, the amount of the death benefit payable
thereunder, to a maximum amount equal to the Benefit Payment, less installments
of the Benefit Payment theretofore paid, shall be paid to the Payment
Beneficiary on the Benefit Payment installment payment date next succeeding the
date on which the Corporation receives such death benefit proceeds, and the
remainder of the Benefit Payment, if any, shall be paid in equal quarterly
installments as provided above.
14. Separation Payments. If prior to termination of this Agreement, there
should be the occurrence of any of the following: (i) Executive's services
should be terminated for any reason other than Executive's voluntary withdrawal
for Cause; (ii) Executive is placed in any position of lesser stature than that
of a senior executive officer of the Corporation; is assigned duties
inconsistent with a senior executive officer or duties which, if performed,
would result in a significant change in the nature or scope of powers,
authority, functions or duties inherent in such position on the date hereof; is
assigned performance requirements or working conditions which are at variance
with the performance requirements and working conditions in effect on the date
hereof; or is accorded treatment on a general basis that is in derogation of his
status as a senior executive officer; (iii) any breach of Sections 4 through 8,
inclusive, of this Agreement; (iv) any requirement of the Corporation that the
location at which Executive performs his principal duties for the Corporation be
outside of Connecticut without provision for a senior executive level relocation
package.
<PAGE>
In such event, upon the Executive's termination of his employment as
provided in this Section 14, the Corporation will, on or before Executive's last
day of providing service hereunder, pay to Executive, as liquidated damages, a
lump sum cash payment equal to the Factor time Base Salary (unless the Factor
times Base Salary is greater than the "base amount" of Executive's compensation,
in which case the amount paid to Executive hereunder shall be the "base amount"
of Executive's compensation). For purposes hereof, "base amount" shall have the
meaning provided in Section 280G(b)(3)(A) of the Internal Revenue Code of 1986,
as amended, and the Proposed Regulations thereunder. The "Factor" will be 2.99
for the first 12 months of the Agreement; 2.00 for the second 12 months of the
Agreement; and 1.00 for the remainder of the term of the Agreement. The
Corporation will also continue to provide, for the remaining term of the
Agreement, participation in the same or comparable employee benefits in which
the Executive was participating on the date of termination, on the same basis as
the Executive was then participating.
15. Insurance Policies. The Corporation shall have the right from time to
time to purchase, increase, modify or terminate insurance policies on the life
of Executive for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may deem necessary or
desirable.
16. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties hereto, and any prior agreement between the Corporation
and Executive is hereby superseded and terminated effective immediately and
shall be without further force or effect. No amendment or modification shall be
valid or binding unless made in writing and signed by the party against whom
enforcement thereof is sought.
17. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or by
responsible overnight delivery service or sent by certified mail, return receipt
requested, postage and fees prepaid as follows:
If to the Corporation, at its address set forth above,
with copies to:
----------------------------
----------------------------
----------------------------
If to Executive, at his address set forth above. Either of the parties
hereto may at any time and from time to time change the address to which notice
shall be sent hereunder by notice to the other party given under this Section
18. The date of the giving of any notice hand delivered or delivered by
responsible overnight carrier shall be the date of its delivery and of any
notice sent by mail shall be the date five days after the date of the posting of
the mail.
18. No Assignment; Binding Effect. Neither this Agreement, nor the right
to receive any payments hereunder, may be assigned by Executive. This Agreement
shall be binding upon Executive, his heirs, executors and administrators and
upon the Corporation, its successors and assigns.
<PAGE>
19. Waivers. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
20. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York, except that body
of law relating to choice of laws.
21. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
22. Further Assurances. Each of the parties shall execute such documents
and take such other actions as may be reasonably requested by the other party to
carry out the provisions and purposes of this Agreement in accordance with its
terms.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed as of the day and year first above written.
UNISTAR GAMING CORP.
By: ________________________
Stanley J. Kabala
Title: Chairman of the Board,
Executone
------------------------
Michael W. Yacenda
Title: President, Chief Operating
Officer
and Acting Chief Executive Officer
UNISTAR GAMING CORP.
EMPLOYMENT AGREEMENT
Robert Hopwood
Exhibit 10.8
AGREEMENT made as of this 31st day of August 1998, by and between Unistar
Gaming Corp., a Delaware corporation with its principal executive offices at 478
Wheelers Farms Road, Milford, CT 06460 (the "Corporation"), and Robert Hopwood,
residing at 48 Harbor View Place, Stratford, CT 06497 ("Executive").
W I T N E S S E T H :
WHEREAS, Executive has heretofore been employed by the Corporation;
WHEREAS, the Corporation desires to continue to employ Executive, and
Executive is willing to undertake such employment, upon the terms and subject to
the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Employment of Executive. The Corporation hereby employs Executive as
its Vice President, Operations and Customer Service, to perform the duties and
responsibilities incident to such office subject at all times to the normal
control and direction of the Board of Directors of the Corporation (the "Board
of Directors") and the Chief Executive Officer when one is appointed.
2. Acceptance of Employment; Time and Attention. Executive hereby accepts
such employment and agrees that throughout the Term (as hereinafter defined), he
will devote substantially his full time, attention, knowledge and skills,
faithfully, diligently and to the best of his ability, in furtherance of the
business of the Corporation, and will perform the duties assigned to him
pursuant to Section 1 hereof, subject, at all times, to the normal direction and
control of the Board of Directors.
Executive shall be the executive officer responsible for the day to day
development, installation, and maintenance of the Corporation's systems and
customer service. Executive shall also perform such specific duties and shall
exercise such specific authority related to the management of the day-to-day
operations of the Corporation consistent with his position as Vice President,
Operations and Customer Service as may be assigned to Executive from time to
time by the President or Board of Directors.
Executive shall at all times be subject to, observe and carry out such
rules, regulations, policies, directions and restrictions as the Corporation
shall from time to time establish. During the Term, Executive shall not, without
the written approval of the Board of Directors first had and obtained in each
instance, directly or indirectly, accept employment or compensation from, or
perform services of any nature for, any business enterprise other than the
Corporation and its subsidiaries. Notwithstanding the foregoing but subject to
Section 9 hereof, Executive shall be permitted to (i) serve as a director on the
boards of directors of other corporations and retain any compensation paid
therefor, provided that such other interests do not materially interfere with
the performance by Executive of his obligations hereunder and (ii) engage in
business affairs outside the business of the Corporation provided that such
other interests do not materially interfere with his obligations hereunder.
During the Term, Executive shall not be entitled to additional compensation for
rendering employment services to subsidiaries of the Corporation or for serving
in any office of the Corporation or any of its subsidiaries to which he is
elected or appointed. The Board shall have the right to review board memberships
to avoid any potential conflict of interest.
<PAGE>
3. Term. Except as otherwise provided herein, Executive's employment
hereunder shall be for a three (3) year term commencing as of the effective date
(the "Effective Date") of the separation of the Corporation from EXECUTONE
Information Systems, Inc. expected to occur in December, 1998 (the "Initial
Term"), which may be renewed for such one (1) year periods as the Corporation
and Executive may mutually agree during the ninety (90) day period immediately
prior to the expiration of the Initial Term or any renewal thereof (the Initial
Term and any such renewal thereof are hereinafter collectively referred to as
the "Term").
4. Compensation. The Corporation shall pay to the Executive, commencing as
of the Effective Date for the first year of his employment, compensation at the
rate of one hundred fifty thousand dollars ($150,000) per year ("Base Salary").
For each year thereafter, the Base Salary shall be such higher amount as shall
be determined by the President or Board of Directors. Such compensation shall be
payable in equal biweekly installments. In addition, Executive shall be entitled
to receive from the Corporation a bonus (the "Bonus") equal to 35% of his Base
Salary and to be earned 50% based upon the achievement of specific management
objectives set in the beginning of the year and 50% based upon achieving annual
PBT or other quantitative financial goals approved by the Board of Directors.
All compensation paid to Executive shall be subject to withholding and other
employment taxes imposed by applicable law.
5. Additional Benefits.
(a) In addition to such Base Salary, he (and his family) shall be
entitled to participate, to the extent he is (and they are) eligible under the
terms and conditions thereof, in any profit-sharing, pension, retirement,
hospitalization, insurance, disability, medical service, stock option, bonus or
other employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the Term, as well as
any discretionary bonus pool of the Corporation. The Corporation shall be under
no obligation to institute or continue the existence of any such employee
benefit plan.
(b) The Corporation shall obtain and maintain in full force and
effect during the Term, at the Corporation's sole cost and expense, the life
insurance policies on the life of Executive currently being maintained by
EXECUTONE Information System, Inc. Executive shall submit to any physical
examinations necessary to obtain such policies and shall otherwise cooperate
with the Corporation in obtaining such insurance coverage. Any insurance policy
maintained by the Corporation on the life of Executive pursuant to this Section
5(b) shall be made payable to such beneficiary or beneficiaries as Executive may
designate by written notice to the Corporation and the Corporation agrees,
promptly upon receipt of such notice, to take all such action as may be
necessary so as to notify the appropriate insurance company of any change of
beneficiary.
<PAGE>
(c) Rights Exercise. The Corporation will pay on behalf of
Executive the $.05 per share ($5,000) to exercise the rights to acquire shares
of Unistar stock being issued in conjunction with the separation applicable to
the 100,000 Executone shares under the stock loan.
(d) Stock Options.
(i) The Corporation will issue stock options for 50,000 shares of
Stock at an exercise price of the fair market value determined in the
Corporation's Registration Statement on Form S-1 of $1.28 per share. Vesting
will be 1/3 of the shares on September 1, 1999 and 8.33% at the end of each
calendar quarter thereafter.
(ii) In addition, Executive shall be entitled to receive from the
Corporation additional stock options as the Board of Directors shall in its sole
discretion determine.
(iii) In the event of a Change in Control (as defined herein), all
options referenced in Section 5(d)(i) above shall become fully vested and
immediately exercisable. "Change of Control" shall be deemed to have taken place
if: (i) any person, including a group, becomes the beneficial owner of shares of
the Corporation sufficient in manner to control the election of directors of the
Corporation; or (ii) there occurs any cash tender or exchange offer for shares
of the Corporation, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, and as a
result of or in connection with any such event persons who were directors of the
Corporation before the event shall cease to constitute a majority of the Board
of Directors of the Corporation or any successor to the Corporation. As used
herein, the terms "person" and "beneficial owner" have the same meaning as such
terms under Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations hereunder.
6. Reimbursement of Expenses. The Corporation shall reimburse Executive in
accordance with applicable policies of the Corporation for all expenses
reasonably incurred by Executive in connection with the performance of his
duties hereunder and the business of the Corporation, including expenses
relating to the operation and maintenance of a motor vehicle (including, but not
limited to, vehicle loan and lease payments, insurance premiums, parking,
gasoline and repair expenditures) upon the submission to the Corporation of
appropriate receipts or vouchers.
<PAGE>
7. Facilities and Personnel. Executive shall be provided a private office,
secretarial services and such other facilities, supplies, personnel and services
as shall be required or reasonably requested for the performance of his duties
hereunder.
8. Vacation. Executive shall be entitled to four (4) weeks' paid vacation
in respect of each twelve (12) month period during the Term, such vacation to be
taken at times mutually agreeable to Executive and the Board of Directors and in
accordance with the Corporation's vacation policy.
9. Restrictive Covenant. In consideration of the Corporation's entering
into this Agreement, Executive agrees that during the Term, and for a period of
eighteen (18) months thereafter he will not: (i) directly or indirectly own,
manage, operate, join, control, participate in, invest in, or otherwise be
connected with, in any manner, whether as an officer, director, employee,
partner, investor or otherwise, any business entity that is engaged in the
lottery or casino business or any other business which the corporation is then
engaged in; (ii) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation for the purpose
of soliciting, diverting or taking away any customer from the Corporation; or
(iii) induce, influence, or seek to induce or influence, any person engaged as
an employee, representative, agent, independent contractor or otherwise by the
Corporation, to terminate his or her relationship with the Corporation. Nothing
herein contained shall be deemed to prohibit Executive from investing his funds
in securities of an issuer if the securities of such issuer are listed for
trading on a national securities exchange or are traded in the over-the-counter
market and Executive's holdings therein represent less than 1% of the total
number of shares or principal amount of the securities of such issuer
outstanding.
Executive acknowledges that the provisions of this Section 9 are
reasonable and necessary for the protection of the Corporation, and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the activities specified herein are, and are intended
to be, divisible. If any provision of this Section 9, including any sentence,
clause or part hereof, shall be deemed contrary to law or invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions shall not be affected, but shall, subject to the discretion of such
court, remain in full force and effect and any invalid and unenforceable
provisions shall be deemed, without further action on the part of the parties
hereto, modified, amended and limited to the extent necessary to render the same
valid and enforceable.
10. Confidential Information. Executive shall hold in a fiduciary capacity
for the benefit of the Corporation all information, knowledge and data relating
to or concerned with its operations, sales, business and affairs, and he shall
not, at any time for a period of one year after termination of his employment
hereunder, use, disclose or divulge any such information, knowledge or data to
any person, firm or corporation (unless the Corporation no longer treats such
information as confidential) other than to the Corporation or its designees and
employees or except as may otherwise be required in connection with the business
and affairs of the Corporation; provided, however, that Executive may disclose
or divulge such information, knowledge or data that: (i) was known to Executive
at the commencement of his employment with the Corporation; (ii) is or becomes
generally available to the public through no wrongful act on Executive's part;
or (iii) becomes available to Executive from a person or entity other than the
Corporation, except nothing in this Agreement shall be deemed to permit
Executive's disclosure or use of any confidential or proprietary information of
EXECUTONE Information Systems, Inc.; and provided, further, that the provisions
of this Section 10 shall not apply to Executive's know-how to the extent
utilized by him in subsequent employment otherwise than in breach of this
Agreement.
<PAGE>
11. Intellectual Property. Any idea, invention, design, written material,
manual, system, procedure, improvement, development or discovery, developed,
created or made by Executive alone or with others, during the Term and
applicable to the business of the Corporation, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation.
Executive shall disclose the same promptly and completely to the Corporation and
shall, during the Term and at any time and from time to time hereafter: (i)
execute all documents requested by the Corporation for vesting in the
Corporation the entire right, title and interest in and to the same; (ii)
execute all documents requested by the Corporation for filing and prosecuting
such applications for patents, trademarks, service marks and/or copyrights as
the Corporation, in its sole discretion, may desire to prosecute; and (iii) give
the Corporation all assistance it reasonably requires, including the giving of
testimony in any suit, action or proceeding, in order to obtain, maintain and
protect the Corporation's right therein and thereto.
12. Equitable Relief. The parties hereto acknowledge that Executive's
services are unique and that, in the event of a breach or a threatened breach by
Executive of any of his obligations under this Agreement, the Corporation shall
not have an adequate remedy at law. Accordingly, in the event of any such breach
or threatened breach by Executive, the Corporation shall be entitled to such
equitable and injunctive relief as may be available to restrain Executive and
any business, firm, partnership, individual, corporation or entity participating
in such breach or threatened breach from the violation of the provisions hereof.
Nothing herein shall be construed as prohibiting the Corporation from pursuing
any other remedies available at law or in equity for such breach or threatened
breach, including the recovery of damages and the immediate termination of the
employment of Executive hereunder.
13. Termination for Cause.
(a) The Corporation may at any time dismiss Executive for "Cause."
For purposes of this Agreement, the following shall constitute "Cause:" (i) the
death of Executive; (ii) the failure of Executive, as a result of illness,
physical or mental disability or other incapacity to render the services
provided in this Agreement for a period of one hundred eighty (180) consecutive
days or one hundred eighty (180) days during any one (1) year period
("Disability"); and (iii) the breach by Executive of a fiduciary duty in the
performance of his duties hereunder or a breach of a material term of this
Agreement, including (x) theft, embezzlement, fraud, misappropriation of funds,
other acts of dishonesty or the violation of any law relating to Executive's
employment, (y) Executive shall have entered a plea of guilty or nolo contender
to, or have been found by a court of competent jurisdiction to be guilty of a
felony or other crime involving moral turpitude and (z) the breach by Executive
of any other material provision of this Agreement, which breach is not cured to
the Corporation's reasonable satisfaction within thirty (30) days after written
notice thereof.
<PAGE>
(b) In the event of Executive's Disability, he shall be entitled to
receive the Base Salary payments due under Section 4 hereof during the period of
his Disability and for a period of eighteen (18) months thereafter.
(c) In the event of termination of Executive's employment hereunder
by reason of his death, the Corporation shall pay a benefit (the "Benefit
Payment") to such person or persons as Executive shall, at his option, from time
to time designate by written instrument delivered to the Corporation, each
subsequent designation to revoke all prior designations, or if no such
designation is made, to Executive's estate (the "Payment Beneficiary"). The
Benefit Payment shall be in an amount equal to one and one-half times
Executive's then current Base Salary, and shall be payable to the Payment
Beneficiary in equal quarterly installments over a period of one and one-half
years; provided that if the Corporation then maintains a life insurance policy
on the life of Executive under which it is the beneficiary, the amount of the
death benefit payable thereunder, to a maximum amount equal to the Benefit
Payment, less installments of the Benefit Payment theretofore paid, shall be
paid to the Payment Beneficiary on the Benefit Payment installment payment date
next succeeding the date on which the Corporation receives such death benefit
proceeds, and the remainder of the Benefit Payment, if any, shall be paid in
equal quarterly installments as provided above.
14. Separation Payments. If prior to termination of this Agreement, there
should be the occurrence of any of the following: (i) Executive's services
should be terminated for any reason other than Executive's voluntary withdrawal
for Cause; (ii) Executive is placed in any position of lesser stature than that
of a senior executive officer of the Corporation; is assigned duties
inconsistent with a senior executive officer or duties which, if performed,
would result in a significant change in the nature or scope of powers,
authority, functions or duties inherent in such position on the date hereof; is
assigned performance requirements or working conditions which are at variance
with the performance requirements and working conditions in effect on the date
hereof; or is accorded treatment on a general basis that is in derogation of his
status as a senior executive officer; (iii) any breach of Sections 4 through 8,
inclusive, of this Agreement; or (iv) any requirement of the Corporation that
the location at which Executive performs his principal duties for the
Corporation be outside of Connecticut without provision for a senior executive
level relocation package.
In such event, upon the Executive's termination of his employment as
provided in this Section 14, the Corporation will, on or before Executive's last
day of providing service hereunder, pay to Executive, as liquidated damages, a
lump sum cash payment equal to the Factor time Base Salary (unless the Factor
times Base Salary is greater than the "base amount" of Executive's compensation,
in which case the amount paid to Executive hereunder shall be the "base amount"
of Executive's compensation). For purposes hereof, "base amount" shall have the
meaning provided in Section 280G(b)(3)(A) of the Internal Revenue Code of 1986,
as amended, and the Proposed Regulations thereunder. The "Factor" will be 2.99
for the first 12 months of the Agreement; 2.00 for the second 12 months of the
Agreement; and 1.00 for the remainder of the term of the Agreement. The
Corporation will also continue to provide, for the remaining term of the
Agreement, participation in the same or comparable employee benefits in which
Executive was participating on the date of termination, on the same basis as the
Executive was then participating.
<PAGE>
15. Insurance Policies. The Corporation shall have the right from time to
time to purchase, increase, modify or terminate insurance policies on the life
of Executive for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may deem necessary or
desirable.
16. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties hereto, and any prior agreement between the Corporation
and Executive is hereby superseded and terminated effective immediately and
shall be without further force or effect. No amendment or modification shall be
valid or binding unless made in writing and signed by the party against whom
enforcement thereof is sought.
17. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or by
responsible overnight delivery service or sent by certified mail, return receipt
requested, postage and fees prepaid as follows:
If to the Corporation, at its address set forth above,
with copies to:
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------------------------
------------------------
If to Executive, at his address set forth above. Either of the parties
hereto may at any time and from time to time change the address to which notice
shall be sent hereunder by notice to the other party given under this Section
18. The date of the giving of any notice hand delivered or delivered by
responsible overnight carrier shall be the date of its delivery and of any
notice sent by mail shall be the date five days after the date of the posting of
the mail.
18. No Assignment; Binding Effect. Neither this Agreement, nor the right
to receive any payments hereunder, may be assigned by Executive. This Agreement
shall be binding upon Executive, his heirs, executors and administrators and
upon the Corporation, its successors and assigns.
19. Waivers. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
<PAGE>
20. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York, except that body
of law relating to choice of laws.
21. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
22. Further Assurances. Each of the parties shall execute such documents
and take such other actions as may be reasonably requested by the other party to
carry out the provisions and purposes of this Agreement in accordance with its
terms.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed as of the day and year first above written.
UNISTAR GAMING CORP.
By: ________________________
Stanley J. Kabala
Title: Chairman of the Board,
Executone
------------------------
Robert Hopwood
Title: Vice President, Operations
and Customer Service
UNISTAR GAMING CORP.
EMPLOYMENT AGREEMENT
Charles A. Degliomini
Exhibit 10.9
AGREEMENT made as of this 31st day of August 1998, by and
between Unistar Gaming Corp., a Delaware corporation with its principal office
at 478 Wheelers Farms Road (the "Corporation"), and Charles A. Degliomini,
residing at 12 Fox Hollow Lane; Old West Bury, NY 11568 ("Executive").
W I T N E S S E T H :
WHEREAS, Executive has heretofore been employed by the
Corporation;
WHEREAS, the Corporation desires to continue to employ
Executive, and Executive is willing to undertake such employment, upon the terms
and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants Hereinafter set forth, the parties hereto agree as follows:
1. Employment of Executive. The Corporation hereby employs
Executive as its Vice President, Sales and Marketing--Governmental Lotteries to
perform the duties and responsibilities incident to such office, subject at all
times to the normal control and direction of the President and Board of
Directors of the Corporation (the "Board of Directors").
2. Acceptance of Employment; Time and Attention. Executive
hereby accepts such employment and agrees that throughout the Term (as
hereinafter defined), he will devote substantially his full time, attention,
knowledge and skills, faithfully, diligently and to the best of his ability, in
furtherance of the business of the Corporation, and will perform the duties
assigned to him pursuant to Section 1 hereof, subject, at all times, to the
normal direction and control of the President and the Board of Directors.
Executive shall be the executive officer responsible for the day to day
sales and marketing of the Corporation's products and services to the various
lotteries operated by governmental agencies. Executive shall also perform such
specific duties and shall exercise such specific authority related to the
management of the day-to-day operations of the Corporation consistent with his
position as Vice President, Sales and Marketing--Governmental Lotteries as may
be assigned to Executive from time to time by the President or Board of
Directors.
Executive shall at all times be subject to, observe and carry out such
rules, regulations, policies, directions and restrictions as the Corporation
shall from time to time establish. During the Term, Executive shall not, without
the written approval of the President or Board of Directors first had and
obtained in each instance, directly or indirectly, accept employment or
compensation from, or perform services of any nature for, any business
enterprise other than the Corporation and its subsidiaries. Notwithstanding the
foregoing but subject to Section 9 hereof, Executive shall be permitted to (i)
serve as a director on the boards of directors of other corporations and retain
any compensation paid therefor, provided that such other interests do not
materially interfere with the performance by Executive of his obligations
hereunder and (ii) engage in business affairs outside the business of the
Corporation provided that such other interests do not materially interfere with
his obligations hereunder. During the Term, Executive shall not be entitled to
additional compensation for rendering employment services to subsidiaries of the
Company or for serving in any office of the Corporation or any of its
subsidiaries to which he is elected or appointed. The Board shall have the right
to renew board memberships to avoid any potential conflict of interest.
Executive shall be permitted to establish a geographic base from which to
perform his duties hereunder.
<PAGE>
3. Term. Except as otherwise provided herein, Executive's employment
hereunder shall be for a three (3) year term commencing as of from the effective
date (the "Effective Date") of the separation of the Corporation from EXECUTONE
Information Systems, Inc. expected to occur in December 1998 (the "Initial
Term"), which may be renewed for such one (1) year periods as the Corporation
and Executive may mutually agree during the ninety (90) day period immediately
prior to the expiration of the Initial Term or any renewal thereof (the Initial
Term and any such renewal thereof are hereinafter collectively referred to as
the "Term").
4. Compensation. The Corporation shall pay to the Executive, commencing as
of the Effective Date for the first year of his employment, compensation at the
rate of one hundred fifty thousand dollars ($150,000) per year ("Base Salary").
For each year thereafter, the Base Salary shall be such higher amount as shall
be determined by the President or Board of Directors. Such compensation shall be
payable in equal biweekly installments. In addition, Executive shall be entitled
to receive from the Corporation such bonus (the "Bonus") equal to 35% of Base
Salary to be earned 50% based upon the achievement of specific management
objectives set in the beginning of the year and 50% based upon achieving annual
PBT or other quantitative financial goals approved by the Board of Directors.
All compensation paid to Executive shall be subject to withholding and other
employment taxes imposed by applicable law.
5. Additional Benefits.
(a) In addition to such Base Salary, he (and his family) shall be
entitled to participate, to the extent he is (and they are) eligible under the
terms and conditions thereof, in any profit-sharing, pension, retirement,
hospitalization, insurance, disability, medical service, stock option, bonus or
other employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the Term, as well as
any discretionary bonus pool of the Corporation. The Corporation shall be under
no obligation to institute or continue the existence of any such employee
benefit plan.
<PAGE>
(b) Stock Options.
(i) The Corporation will issue stock options for 50,000 shares of
Stock at an exercise price of the fair market value determined in the
Corporation's Registration Statement on Form S-1 of $1.28 per share. Vesting
will be 1/3 of the shares on September 1, 1999 and 8.33% at the end of each
calendar quarter thereafter.
(ii) In addition, Executive shall be entitled to receive from the
Corporation additional stock options as the Board of Directors shall in its sole
discretion determine.
(iii) In the event of a Change in Control (as defined herein),
all options referenced in Section 5(d)(i) above shall become fully vested and
immediately exercisable. "Change of Control" shall be deemed to have taken place
if: (i) any person, including a group, becomes the beneficial owner of shares of
the Corporation sufficient in manner to control the election of directors of the
Corporation; or (ii) there occurs any cash tender or exchange offer for shares
of the Corporation, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, and as a
result of or in connection with any such event persons who were directors of the
Corporation before the event shall cease to constitute a majority of the Board
of Directors of the Corporation or any successor to the Corporation. As used
herein, the terms "person" and "beneficial owner" have the same meaning as such
terms under Section 13(d) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations hereunder.
6. Reimbursement of Expenses. The Corporation shall reimburse Executive in
accordance with applicable policies of the Corporation for all expenses
reasonably incurred by Executive in connection with the performance of his
duties hereunder and the business of the Corporation, including expenses
relating to the operation and maintenance of a motor vehicle (including, but not
limited to, vehicle loan and lease payments, insurance premiums, parking,
gasoline and repair expenditures) upon the submission to the Corporation of
appropriate receipts or vouchers.
7. Facilities and Personnel. Executive shall be provided a private office,
secretarial services and such other facilities, supplies, personnel and services
as shall be required or reasonably requested for the performance of his duties
hereunder.
8. Vacation. Executive shall be entitled to four (4) weeks' paid vacation
in respect of each twelve (12) month period during the Term, such vacation to be
taken at times mutually agreeable to Executive and the Board of Directors and in
accordance with the Corporation's vacation policy.
9. Restrictive Covenant. In consideration of the Corporation's entering
into this Agreement, Executive agrees that during the Term, and for a period of
eighteen (18) months thereafter he will not: (i) directly or indirectly own,
manage, operate, join, control, participate in, invest in, or otherwise be
connected with, in any manner, whether as an officer, director, employee,
partner, investor or otherwise, any business entity that is engaged in the
lottery or casino business or any other business which the corporation is then
engaged in; (ii) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation for the purpose
of soliciting, diverting or taking away any customer from the Corporation; or
(iii) induce, influence, or seek to induce or influence, any person engaged as
an employee, representative, agent, independent contractor or otherwise by the
Corporation, to terminate his or her relationship with the Corporation. Nothing
herein contained shall be deemed to prohibit Executive from investing his funds
in securities of an issuer if the securities of such issuer are listed for
trading on a national securities exchange or are traded in the over-the-counter
market and Executive's holdings therein represent less than 1% of the total
number of shares or principal amount of the securities of such issuer
outstanding.
<PAGE>
Executive acknowledges that the provisions of this Section 9 are
reasonable and necessary for the protection of the Corporation, and that each
provision, and the period or periods of time, geographic areas and types and
scope of restrictions on the activities specified herein are, and are intended
to be, divisible. If any provision of this Section 9, including any sentence,
clause or part hereof, shall be deemed contrary to law or invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions shall not be affected, but shall, subject to the discretion of such
court, remain in full force and effect and any invalid and unenforceable
provisions shall be deemed, without further action on the part of the parties
hereto, modified, amended and limited to the extent necessary to render the same
valid and enforceable.
10. Confidential Information. Executive shall hold in a fiduciary capacity
for the benefit of the Corporation all information, knowledge and data relating
to or concerned with its operations, sales, business and affairs, and he shall
not, at any time for a period of one year after termination of his employment
hereunder, use, disclose or divulge any such information, knowledge or data to
any person, firm or corporation (unless the Corporation no longer treats such
information as confidential) other than to the Corporation or its designees and
employees or except as may otherwise be required in connection with the business
and affairs of the Corporation; provided, however, that Executive may disclose
or divulge such information, knowledge or data that: (i) was known to Executive
at the commencement of his employment with the Corporation; (ii) is or becomes
generally available to the public through no wrongful act on Executive's part;
or (iii) becomes available to Executive from a person or entity other than the
Corporation, except nothing in this Agreement shall be deemed to permit
Executive's disclosure or use of any confidential or proprietary information of
EXECUTONE Information Systems, Inc.; and provided, further, that the provisions
of this Section 10 shall not apply to Executive's know-how to the extent
utilized by him in subsequent employment otherwise than in breach of this
Agreement.
11. Intellectual Property. Any idea, invention, design, written material,
manual, system, procedure, improvement, development or discovery, developed,
created or made by Executive alone or with others, during the Term and
applicable to the business of the Corporation, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation.
Executive shall disclose the same promptly and completely to the Corporation and
shall, during the Term and at any time and from time to time hereafter: (i)
execute all documents requested by the Corporation for vesting in the
Corporation the entire right, title and interest in and to the same; (ii)
execute all documents requested by the Corporation for filing and prosecuting
such applications for patents, trademarks, service marks and/or copyrights as
the Corporation, in its sole discretion, may desire to prosecute; and (iii) give
the Corporation all assistance it reasonably requires, including the giving of
testimony in any suit, action or proceeding, in order to obtain, maintain and
protect the Corporation's right therein and thereto.
<PAGE>
12. Equitable Relief. The parties hereto acknowledge that Executive's
services are unique and that, in the event of a breach or a threatened breach by
Executive of any of his obligations under this Agreement, the Corporation shall
not have an adequate remedy at law. Accordingly, in the event of any such breach
or threatened breach by Executive, the Corporation shall be entitled to such
equitable and injunctive relief as may be available to restrain Executive and
any business, firm, partnership, individual, corporation or entity participating
in such breach or threatened breach from the violation of the provisions hereof.
Nothing herein shall be construed as prohibiting the Corporation from pursuing
any other remedies available at law or in equity for such breach or threatened
breach, including the recovery of damages and the immediate termination of the
employment of Executive hereunder.
13. Termination for Cause.
(a) The Corporation may at any time dismiss Executive for "Cause."
For purposes of this Agreement, the following shall constitute "Cause:" (i) the
death of Executive; (ii) the failure of Executive, as a result of illness,
physical or mental disability or other incapacity to render the services
provided in this Agreement for a period of one hundred eighty (180) consecutive
days or one hundred eighty (180) days during any one (1) year period
("Disability"); or (iii) the breach by Executive of a fiduciary duty in the
performance of his duties hereunder or a breach of a material term of this
Agreement, including (x) theft, embezzlement, fraud, misappropriation of funds,
other acts of dishonesty or the violation of any law relating to Executive's
employment; (y) Executive shall have entered a plea of guilty or nolo contender
to, or have been found by a court of competent jurisdiction to be guilty of a
felony or other crime involving moral turpitude; and (z) the breach by Executive
of any other material provision of this Agreement, which breach is not cured to
the Corporation's reasonable satisfaction within thirty (30) days after written
notice thereof.
(b) In the event of Executive's Disability, he shall be entitled to
receive the Base Salary payments due under Section 4 hereof during the period of
his Disability and for a period of eighteen (18) months thereafter.
(c) In the event of termination of Executive's employment
hereunder by reason of his death, the Corporation shall pay a benefit (the
"Benefit Payment") to such person or persons as Executive shall, at his option,
from time to time designate by written instrument delivered to the Corporation,
each subsequent designation to revoke all prior designations, or if no such
designation is made, to Executive's estate (the "Payment Beneficiary"). The
Benefit Payment shall be in an amount equal to one and one-half times
Executive's then current Base Salary, and shall be payable to the Payment
Beneficiary in equal quarterly installments over a period of one and one-half
years; provided that if the Corporation then maintains a life insurance policy
on the life of Executive under which it is the beneficiary, the amount of the
death benefit payable thereunder, to a maximum amount equal to the Benefit
Payment, less installments of the Benefit Payment theretofore paid, shall be
paid to the Payment Beneficiary on the Benefit Payment installment payment date
next succeeding the date on which the Corporation receives such death benefit
proceeds, and the remainder of the Benefit Payment, if any, shall be paid in
equal quarterly installments as provided above.
<PAGE>
14. Separation Payments. If prior to termination of this Agreement, there
should be the occurrence of any of the following: (i) Executive's services
should be terminated for any reason other than Executive's voluntary withdrawal
or Cause; (ii) Executive is placed in any position of lesser stature than that
of a senior executive officer of the Corporation; is assigned duties
inconsistent with a senior executive officer or duties which, if performed,
would result in a significant change in the nature or scope of powers,
authority, functions or duties inherent in such position on the date hereof; is
assigned performance requirements or working conditions which are at variance
with the performance requirements and working conditions in effect on the date
hereof; or is accorded treatment on a general basis that is in derogation of his
status as a senior executive officer; or (iii) any breach of Sections 4 through
8, inclusive, of this Agreement.
In such event, upon the Executive's termination of his employment as
provided in this Section 14, the Corporation will, on or before Executive's last
day of providing service hereunder, pay to Executive, as liquidated damages, a
lump sum cash payment equal to the Factor time Base Salary (unless the Factor
times Base Salary is greater than the "base amount" of Executive's compensation,
in which case the amount paid to Executive hereunder shall be the "base amount"
of Executive's compensation). For purposes hereof, "base amount" shall have the
meaning provided in Section 280G(b)(3)(A) of the Internal Revenue Code of 1986,
as amended, and the Proposed Regulations thereunder. The "Factor" will be 2.99
for the first 12 months of the Agreement; 2.00 for the second 12 months of the
Agreement; and 1.00 for the remainder of the term of the Agreement. The
Corporation will also continue to provide, for the remaining term of the
Agreement, participation in the same or comparable employee benefits in which
Executive was participating on the date of termination, on the same basis as the
Executive was then participating.
15. Insurance Policies. The Corporation shall have the right from time to
time to purchase, increase, modify or terminate insurance policies on the life
of Executive for the benefit of the Corporation, in such amounts as the
Corporation shall determine in its sole discretion. In connection therewith,
Executive shall, at such time or times and at such place or places as the
Corporation may reasonably direct, submit himself to such physical examinations
and execute and deliver such documents as the Corporation may deem necessary or
desirable.
16. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties hereto, and any prior agreement between the Corporation
and Executive is hereby superseded and terminated effective immediately and
shall be without further force or effect. No amendment or modification shall be
valid or binding unless made in writing and signed by the party against whom
enforcement thereof is sought.
<PAGE>
17. Notices. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or by
responsible overnight delivery service or sent by certified mail, return receipt
requested, postage and fees prepaid as follows:
If to the Corporation, at its address set forth above,
with copies to:
-----------------------
-----------------------
-----------------------
If to Executive, at his address set forth above. Either of the parties
hereto may at any time and from time to time change the address to which notice
shall be sent hereunder by notice to the other party given under this Section
18. The date of the giving of any notice hand delivered or delivered by
responsible overnight carrier shall be the date of its delivery and of any
notice sent by mail shall be the date five days after the date of the posting of
the mail.
18. No Assignment; Binding Effect. Neither this Agreement, nor the right
to receive any payments hereunder, may be assigned by Executive. This Agreement
shall be binding upon Executive, his heirs, executors and administrators and
upon the Corporation, its successors and assigns.
19. Waivers. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
20. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of New York, except that body
of law relating to choice of laws.
21. Invalidity. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
22. Further Assurances. Each of the parties shall execute such documents
and take such other actions as may be reasonably requested by the other party to
carry out the provisions and purposes of this Agreement in accordance with its
terms.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed as of the day and year first above written.
UNISTAR GAMING CORP.
By: ________________________
Stanley J. Kabala
Title: Chairman of the Board,
Executone
------------------------
Charles A. Degliomini
Title: Vice President, Sales and
Marketing--Government Lotteries
Exhibit 10.10
EXECUTONE Information Systems, Inc.
Transition and Retention Plan
Michael W. Yacenda
The Boards of Directors of EXECUTONE Information Systems, Inc.
("Executone," which together with its subsidiaries, including Unistar Gaming
Corp. ("Unistar"), is herein referred to as the "Company"), and of Unistar
recognize the current uncertainty associated with the succession in chief
executive leadership in the Company and the Executone Board's announced
consideration of a possible corporate restructuring that would be intended to
(1) enhance shareholder value, (2) more efficiently allocate corporate resources
and (3) channel management focus. The Executone Board also recognizes that
senior management of the Company has made a significant, debt-financed financial
investment in the Company and its future through the EXECUTONE 1994 Executive
Stock Incentive Plan (the "Stock Plan") and that management expects, and is
committed to, playing a leadership role in implementing the Company's business
plans in order to protect and enhance the value of their investment in the
Company and that of all shareholders.
The Executone Board and the Unistar Board have determined, due to the
substantial changes in the Company's business plan and focus since the date the
Stock Plan was adopted and due to the further substantial changes currently
being considered for the Company's business focus and leadership, including the
separation of Unistar from Executone (the "Separation"), to offer a retention
and incentive program ("Transition and Retention Plan") to Michael W. Yacenda
("Participating Employee") who is currently participating in the Stock Plan.
1. Employment Commitment. Participating Employee will become entitled to
the benefits described below as they vest according to the terms of this Plan
provided he discharges his employment duties diligently in support of the
business plans, unity and harmony of the Company, and, after the Separation,
Unistar.
2. Extension of Loan Maturity Date. The maturity date on the Participating
Employee's Loan (as defined in the following section) will be the earlier of
March 31, 2001 or the date the Participating Employee ceases to be employed by
Unistar, but shall not occur upon the Separation. All interest due under a Loan
will accrue but will not be payable by the Participating Employee until the
maturity date of the Loan. Unistar shall pay such interest as it becomes due.
Participating Employee acknowledges and agrees that Unistar shall be solely
responsible for the current payment of interest accruing after the Separation.
3. Free Transferability. Shares of Executone purchased by Participating
Employees under the Stock Plan and shares of Unistar purchased upon exercise of
rights distributed to the Participating Employee in connection with the
Separation (collectively, "Plan Shares") will be freely transferable, subject to
applicable securities laws, Company or Unistar policy and the pledge of such
shares to Executone as collateral for Executone's guarantee of the employee's
loan ("Loan") from Bank of America National Trust and Savings Association (the
"Bank") and the advance of interest on the Loan by Executone prior to the
Separation for the Participating Employee's benefit. (The collective amount owed
<PAGE>
to the Bank, Executone and Unistar for principal and interest outstanding on a
Loan at any given time is referred to hereafter as the "Loan Balance.") Any
shortfall between the portion of a Loan attributable to any Plan Shares that are
sold and the application of the net sales proceeds against the Loan Balance will
continue to be an outstanding obligation of the Participating Employee, subject
to being offset by a Retention Payment as described in paragraph 5 below.
4. Purchase Option. Executone [or Unistar] will have the right, but not
the obligation, to purchase Plan Shares from the Participating Employee, at the
market price therefor, at any time on or before March 31, 2001 if the market
price of a share of Executone Common Stock, plus after the Separation one-fifth
of a share of Unistar Common Stock, is greater than $3.00 per share. The
purchase price will be paid in each case by first offsetting any Loan Balance,
with any remaining proceeds being delivered to the Participating Employee. To
the extent the net proceeds from the exercise of such purchase option are not
sufficient to offset fully the Loan Balance, the Participating Employee will
remain liable for the Loan Balance under the Loan (which will continue to have
the same maturity date and other provisions described herein), subject to the
right to earn a Retention Payment and the other provisions of this plan.
5. Retention Payment. The Participating Employee will earn a Retention
Payment, as defined below. A Retention Payment will be deemed earned and vested
ratably on a quarterly basis from March 31, 1999 until March 31, 2001, through
continued employment by either Executone Information Systems, Inc. or by UniStar
Gaming Corp. of the Participating Employee as provided herein, as follows: on
March 31, 1999, 33 1/3%; and 8.333% at the end of each calendar quarter
thereafter until March 31, 2001. The Retention Payment earned by a Participating
Employee will be paid in one installment on the maturity date (as defined in
paragraph 2 above) of the Participating Employee's Loan.
6. Determination of Retention Payment Amount. The Retention Payment shall
be that amount as shall be equal to 110% of the excess of the Loan Balance of
the Participating Employee's Loan over (1) the purchase price paid for the
Participating Employee's Plan Shares if Executone or Unistar exercises its
option under paragraph 4 and purchases any or all of the Participating
Employee's Plan Shares, and/or (2) the closing market price of the Participating
Employee's Plan Shares still owned as of the maturity date of the Participating
Employee's Loan (either March 31, 2001, or as of the date of an earlier
termination of employment as provided herein). The Retention Payment will be
applied against a Participating Employee's Loan Balance, and any excess after
the Loan Balance has been paid in full will be paid in cash, subject to any
applicable withholding requirements, at the time the Retention Payment is paid.
7. Acceleration of Vesting. A Retention Payment will be deemed fully
earned, vested and payable prior to March 31, 2001, if the Participating
Employee has remained continuously employed by the Company or Unistar since the
date of this Plan and dies, becomes incapacitated, is terminated without cause
by either the Company or Unistar, or if a "change in control" of the Company
(prior to the Separation) or Unistar (after the Separation) occurs. In each
case, the Retention Payment will be deemed fully earned, vested and payable as
of the date of the qualifying occurrence.
<PAGE>
For purposes of this plan, a "change in control" shall be deemed to have
occurred if, (i) any person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of
all or substantially all of the Company's assets or of Company securities having
50% or more of the combined voting power of the then outstanding Company
securities that may be cast for the election of the Company's directors (other
than as a result of an issuance of securities initiated by the Company, or open
market purchases approved by the Board, as long as the majority of the Board of
Directors approving the purchases is the majority at the time the purchases are
made); or (ii) as the direct or indirect result of, or in connection with, a
cash tender or exchange offer, a merger or other business combination, a sale of
assets, a contested election or any combination of these transactions, the
persons who were directors of the Company before such transactions cease to
constitute a majority of the Company's Board, or any successor's board, within
one year of the last of such transactions. For purpose of this Plan, the Control
Change Date is the date on which an event described in (i) or (ii) occurs. If a
Change in Control occurs on account of a series of transactions, the Control
Change Date is the date of the last of such transactions. Neither the Separation
of Unistar, nor the sale of all or a portion of the assets of the Company's
Healthcare division, nor the combination of those two events, shall constitute a
Change in Control for the purposes of this plan.
8. Application of Proceeds. The net proceeds from any sales of Plan
Shares, whether a full or partial sale in the market or a full or partial
purchase by Executone or Unistar under paragraph 4, and any Retention Payment
earned by a Participating Employee will in each case be applied first against
any Loan Balance then due the Bank or Executone, then against any Loan Balance
due to Unistar, with any excess proceeds or remaining Retention Payment being
payable to the Participating Employee. The 10% will be paid to the employee.
Unlike under the Stock Plan, employees participating in the Transition and
Retention Plan will not be required to apply 25% of any bonus earned toward
repayment of the Loan Balance.
9. Examples. The following examples illustrate the application of the
Retention Payment in certain cases. These examples are given for illustrative
purposes only and reflect a few, but not all, potential circumstances. The
actual definition of the Retention Payment set forth above, as interpreted by
the Board of Directors of Executone, shall determine the computation and
application of a Retention Payment in each specific case.
Example (a). Assume Participating Employee works for Unistar until March
31, 2001; the Participating Employee's Loan comes due on March 31, 2001; the
Participating Employee's Plan Shares are contemporaneously sold in the market
for $2.50 a share with the net proceeds delivered to the Bank, Executone and
Unistar; the Loan Balance equals $4.90 a share on the date the Plan Shares are
sold and the proceeds delivered to the Bank, Executone and/or the Company, as
the case may be.
<PAGE>
The Retention Payment is $2.64 [1.10 x ($4.90-2.50)] a share. The
Participating Employee would have discharged fully his or her liability to the
Company and the Bank on the Loan and would receive $0.24 [($4.90-$2.50)*10%] a
share in cash.
Example (b). Participating Employee voluntarily quits on July 1, 1999; the
Participating Employee's Loan comes due on the date employment is terminated;
the Participating Employee's Plan Shares are sold in the market for $2.50 a
share and the proceeds applied against the Loan Balance to the Bank, Executone
and Unistar; the Loan Balance equals $4.37 a share at the time of sale and
delivery of proceeds. The Participating Employee is 41.67% vested in the maximum
Retention Payment.
The Retention Payment is $0.86 [($4.37 - $2.50) x 1. 10 x .41671 a
share. The Participating Employee remains liable for the remaining Loan
Balance of $ 1.01 a share ($4.37 - $2.50 - $0.86), which is then due and
payable.
Example (c). The Participating Employee sells Plan Shares on December 15,
1998 for $3.00 a share and continues to be employed; the Loan Balance at the
time of sale and delivery of proceeds equals $4.05 a share; the sales proceeds
are applied against the Loan Balance.
No Retention Payment is yet due and payable. The Retention Payment that can
be earned, as determined by the difference between the Loan Balance and the net
sales proceeds of the Plan Shares that were sold, is $1.16(1) a share [1.10 x
$1.05] for each share sold. The Retention Payment is still subject to being
earned and vested for the Participating Employee's account as the Participating
Employee's employment continues. So, for example, the Participating Employee
continues to be obligated for $1.05(1) a share plus interest, but that amount
will be offset and reduced ratably to zero, and the Participating Employee will
become entitled to receive any excess by the vesting of the Retention Payment as
each quarter passes towards March 31, 2001.
Example (d). A Participating Employee sells Plan Shares on June 15, 1999
for $5.00 a share and continues to be employed; the Loan Balance at the time of
sale and delivery of proceeds equals $4.37 a share; the sales proceeds fully
liquidates the Loan Balance to the Bank, Executone and Unistar.
The Participating Employee retains $0.63 a share and receives no Retention
Payment under the plan.
10. Separation Payment and Benefits. The Participating Employee is
expected to execute a 3-year Employment Agreement with Unistar. Separation
payments and related benefits will be covered solely by that agreement.
- -----------------
(1) These amounts will be increased by any interest that continues to
accrue on the Loan Balance, or is imputed for federal income tax purposes.
<PAGE>
For purposes of the Transition and Retention Plan, Cause shall be defined
as defined in the Participating Employee's Employment Agreement with Unistar. A
termination otherwise without Cause that results from a change in control or a
downsizing shall be considered a termination without Cause. If Participating
Employee is offered comparable employment with a purchaser of all or part of the
Company's or Unistar's business or with Unistar, he shall not be considered to
have been terminated for purposes of this plan.
11. Distributions on Plan Shares. Plan Shares, as used herein, shall
include any shares of Unistar or other property that may be distributed with
respect to Plan Shares. Any dividends or other distributions with respect to
Plan Shares will be first applied against any Loan Balance.
12. General. The grant of the payment rights and options proposed by this
plan will be in lieu of (a) any and all other rights or claims a Participating
Employee may have prior hereto for incentive, retention, separation or similar
payments or rights, whether relating to the Stock Plan, Loans, the change in
leadership of the Company, any proposed restructuring of the Company, or
otherwise, as well as (b) all claims arising from the employee's employment
prior to the effective date of the Plan, and shall be so confirmed as the
Company requires; provided, however, that this plan will not (i) affect options
already granted and outstanding or written incentive plans already issued; or
(ii) preclude the grant of other options or performance and incentive awards
from time to time as part of any other key employee option or incentive program
the Company may adopt in the future. Participating Employee shall be responsible
for any and all income taxes attributable to any of the payments or benefits
received or receivable by him hereunder. Participation in this program will be
solely for incentive purposes and will not be deemed an entitlement to
employment for a minimum term or otherwise change the at-will nature of each
Participating Employee's employment. All rights and obligations hereunder, as
well as those set forth in the accompanying Transition Plan Acknowledgment and
Waiver, are subject to obtaining the Bank's consent to implement the plan. This
plan shall be binding upon Unistar after the Separation.
Dated: _______________ EXECUTONE INFORMATION SYSTEMS, INC.
By:___________________________________
Stanley Kabala, Chief Executive Officer
UNISTAR GAMING CORP.
By: _______________________________
Michael W. Yacenda, President
_______________________________
Michael W. Yacenda
<PAGE>
Acknowledgment of Participation and Waiver of Claims
I, Michael W. Yacenda, hereby acknowledge my voluntary participation in
the Transition and Retention Plan ("TRP"). I agree that the TRP provides me with
consideration over and above that which I am due under any existing benefit plan
offered by EXECUTONE or under any contract or agreement which I have with, or
have been promised by, EXECUTONE. I further acknowledge that the EXECUTONE
benefits to which I am entitled under the TRP shall be determined exclusively by
the TRP plan document attached hereto, and that severance or retention payments
made to others at levels or amounts different than set forth in the TRP plan
document shall not entitle me to additional payments or benefits.
In exchange for the consideration provided me by the TRP, subject to its
approval by the Bank (see TRP 14), I agree to waive, release, and covenant not
to sue with respect to any and all claims I now have or may have against
EXECUTONE which arise from events taking place prior to my signature on this
form. This waiver of claims shall include but not be limited to: claims related
to my employment with EXECUTONE; claims related to the EXECUTONE Executive Stock
Incentive Plan, my participation in that plan, or any loans incurred in
connection with that plan; claims for salary, bonuses, or other compensation or
benefits not provided to me in writing by the TRP or other Company-authored
document; any claim under the Age Discrimination in Employment Act, 29 U.S.C.
623 et seq.; and any claim under the Employee Retirement Income Security Act of
1974, 29 U.S.C. 1001 et seq. The Company agrees that by signing this form I do
not waive any rights to the following: 1) compensation due to me under the 1998
Compensation Plan set forth in a memo from Alan Kessman dated May 11, 1998, and
2) any benefits due to me under an "employee benefit plan" as defined in section
3(3) of ERISA.
I acknowledge that I have read the TRP plan document and this
Acknowledgment of Participation and Waiver of Claims ("Acknowledgment and
Waiver"), and that I have been given up to twenty-one (21) days to consider
their terms and consult with an attorney if I so choose. I agree that the TRP
plan document and this Acknowledgment and Waiver constitute the only agreement
between me and EXECUTONE concerning severance or retention payments, and that
any prior offer or representation made to me, orally or in writing, is rendered
null and void by the TRP plan document and this Acknowledgment and Waiver. By
signing below, I indicate that I understand the terms of the TRP and this
Acknowledgment and Waiver, am satisfied with them and agree to be bound by them.
I understand that this Acknowledgment and Waiver shall become effective
and enforceable seven (7) days after the date I sign it, and that I have the
right to revoke this Acknowledgment and Waiver at any time within that seven (7)
day period.
- ----------------- -----------------------------------
Date Participating Employee
- --------------------
Company Witness
Exhibit 10.11
EXECUTONE Information Systems, Inc.
Transition and Retention Plan
Robert Hopwood
The Boards of Directors of EXECUTONE Information Systems, Inc.
("Executone," which together with its subsidiaries, including Unistar Gaming
Corp. ("Unistar"), is herein referred to as the "Company"), and of Unistar
recognize the current uncertainty associated with the succession in chief
executive leadership in the Company and the Executone Board's announced
consideration of a possible corporate restructuring that would be intended to
(1) enhance shareholder value, (2) more efficiently allocate corporate resources
and (3) channel management focus. The Executone Board also recognizes that
senior management of the Company has made a significant, debt-financed financial
investment in the Company and its future through the EXECUTONE 1994 Executive
Stock Incentive Plan (the "Stock Plan") and that management expects, and is
committed to, playing a leadership role in implementing the Company's business
plans in order to protect and enhance the value of their investment in the
Company and that of all shareholders.
The Executone Board and the Unistar Board have determined, due to the
substantial changes in the Company's business plan and focus since the date the
Stock Plan was adopted and due to the further substantial changes currently
being considered for the Company's business focus and leadership, including the
separation of Unistar from Executone (the "Separation"), to offer a retention
and incentive program ("Transition and Retention Plan") to Robert Hopwood
("Participating Employee") who is currently participating in the Stock Plan.
1. Employment Commitment. Participating Employee will become entitled to
the benefits described below as they vest according to the terms of this Plan,
provided he discharges his employment duties diligently in support of the
business plans, unity and harmony of the Company, and, after the Separation,
Unistar.
2. Extension of Loan Maturity Date. The maturity date on the Participating
Employee's Loan (as defined in the following section) will be the earlier of
March 31, 2001 or the date the Participating Employee ceases to be employed by
Unistar, but shall not occur upon the Separation. All interest due under a Loan
will accrue but will not be payable by the Participating Employee until the
maturity date of the Loan. Unistar shall pay such interest as it becomes due.
Participating Employee acknowledges and agrees that Unistar shall be solely
responsible for the current payment of interest accruing after the Separation.
3. Free Transferability. Shares of Executone purchased by Participating
Employees under the Stock Plan and shares of Unistar purchased upon exercise of
rights distributed to the Participating Employee in connection with the
Separation (collectively, "Plan Shares") will be freely transferable, subject to
applicable securities laws, Company or Unistar policy and the pledge of such
shares to Executone as collateral for Executone's guarantee of the employee's
loan ("Loan") from Bank of America National Trust and Savings Association (the
"Bank") and the advance of interest on the Loan by Executone prior to the
Separation for the Participating Employee's benefit. (The collective amount owed
to the Bank, Executone and Unistar for principal and interest outstanding on a
Loan at any given time is referred to hereafter as the "Loan Balance.") Any
shortfall between the portion of a Loan attributable to any Plan Shares that are
sold and the application of the net sales proceeds against the Loan Balance will
continue to be an outstanding obligation of the Participating Employee, subject
to being offset by a Retention Payment as described in paragraph 5 below.
<PAGE>
4. Purchase Option. Executone [or Unistar] will have the right, but not
the obligation, to purchase Plan Shares from the Participating Employee, at the
market price therefor, at any time on or before March 31, 2001 if the market
price of a share of Executone Common Stock, plus after the Separation one-fifth
of a share of Unistar Common Stock is greater than $3.00 per share. The purchase
price will be paid in each case by first offsetting any Loan Balance, with any
remaining proceeds being delivered to the Participating Employee. To the extent
the net proceeds from the exercise of such purchase option are not sufficient to
offset fully the Loan Balance, the Participating Employee will remain liable for
the Loan Balance under the Loan (which will continue to have the same maturity
date and other provisions described herein), subject to the right to earn a
Retention Payment and the other provisions of this plan.
5. Retention Payment. The Participating Employee will earn a Retention
Payment, as defined below. A Retention Payment will be deemed earned and vested
ratably on a quarterly basis from March 31, 1999 until March 31, 2001, through
continued employment by either Executone Information Systems, Inc. or by UniStar
Gaming Corp. of the Participating Employee as provided herein, as follows: on
March 31, 1999, 33 1/3%; and 8.333% at the end of each calendar quarter
thereafter until March 31, 2001. The Retention Payment earned by a Participating
Employee will be paid in one installment on the maturity date (as defined in
paragraph 2 above) of the Participating Employee's Loan.
6. Determination of Retention Payment Amount. The Retention Payment shall
be that amount as shall be equal to 110% of the excess of the Loan Balance of
the Participating Employee's Loan over (1) the purchase price paid for the
Participating Employee's Plan Shares if Executone or Unistar exercises its
option under paragraph 4 and purchases any or all of the Participating
Employee's Plan Shares, and/or (2) the closing market price of the Participating
Employee's Plan Shares still owned as of the maturity date of the Participating
Employee's Loan (either March 31, 2001, or as of the date of an earlier
termination of employment as provided herein). The Retention Payment will be
applied against a Participating Employee's Loan Balance, and any excess after
the Loan Balance has been paid in full will be paid in cash, subject to any
applicable withholding requirements, at the time the Retention Payment is paid.
7. Acceleration of Vesting. A Retention Payment will be deemed fully
earned, vested and payable prior to March 31, 2001, if the Participating
Employee has remained continuously employed by the Company or Unistar since the
date of this Plan and dies, becomes incapacitated, is terminated without cause
by either the Company or Unistar, or if a "change in control" of the Company
(prior to the Separation) or Unistar (after the Separation) occurs. In each
case, the Retention Payment will be deemed fully earned, vested and payable as
of the date of the qualifying occurrence.
<PAGE>
For purposes of this plan, a "change in control" shall be deemed to have
occurred if, (i) any person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of
all or substantially all of the Company's assets or of Company securities having
50% or more of the combined voting power of the then outstanding Company
securities that may be cast for the election of the Company's directors (other
than as a result of an issuance of securities initiated by the Company, or open
market purchases approved by the Board, as long as the majority of the Board of
Directors approving the purchases is the majority at the time the purchases are
made); or (ii) as the direct or indirect result of, or in connection with, a
cash tender or exchange offer, a merger or other business combination, a sale of
assets, a contested election or any combination of these transactions, the
persons who were directors of the Company before such transactions cease to
constitute a majority of the Company's Board, or any successor's board, within
one year of the last of such transactions. For purpose of this Plan, the Control
Change Date is the date on which an event described in (i) or (ii) occurs. If a
Change in Control occurs on account of a series of transactions, the Control
Change Date is the date of the last of such transactions. Neither the Separation
of Unistar, nor the sale of all or a portion of the assets of the Company's
Healthcare division, nor the combination of those two events, shall constitute a
Change in Control for the purposes of this plan.
8. Application of Proceeds. The net proceeds from any sales of Plan
Shares, whether a full or partial sale in the market or a full or partial
purchase by Executone or Unistar under paragraph 4, and any Retention Payment
earned by a Participating Employee will in each case be applied first against
any Loan Balance then due the Bank or Executone, then against any Loan Balance
due to Unistar, with any excess proceeds or remaining Retention Payment being
payable to the Participating Employee. The 10% will be paid to the employee.
Unlike under the Stock Plan, employees participating in the Transition and
Retention Plan will not be required to apply 25% of any bonus earned toward
repayment of the Loan Balance.
9. Examples. The following examples illustrate the application of the
Retention Payment in certain cases. These examples are given for illustrative
purposes only and reflect a few, but not all, potential circumstances. The
actual definition of the Retention Payment set forth above, as interpreted by
the Board of Directors of Executone, shall determine the computation and
application of a Retention Payment in each specific case.
Example (a). Assume Participating Employee works for Unistar until
March 31, 2001; the Participating Employee's Loan comes due on March 31, 2001;
the Participating Employee's Plan Shares are contemporaneously sold in the
market for $2.50 a share with the net proceeds delivered to the Bank,
Executone and Unistar; the Loan Balance equals $4.90 a share on the date the
Plan Shares are sold and the proceeds delivered to the Bank, Executone and/or
the Company, as the case may be.
<PAGE>
The Retention Payment is $2.64 [1.10 x ($4.90-2.50)] a share. The
Participating Employee would have discharged fully his or her liability to the
Company and the Bank on the Loan and would receive $0.24 [($4.90-$2.50)*10%] a
share in cash.
Example (b). Participating Employee voluntarily quits on July 1,
1999; the Participating Employee's Loan comes due on the date employment is
terminated; the Participating Employee's Plan Shares are sold in the market
for $2.50 a share and the proceeds applied against the Loan Balance to the
Bank, Executone and Unistar; the Loan Balance equals $4.37 a share at the time
of sale and delivery of proceeds. The Participating Employee is 41.67% vested
in the maximum Retention Payment.
The Retention Payment is $0.86 [($4.37 - $2.50) x 1. 10 x .41671
a share. The Participating Employee remains liable for the remaining Loan
Balance of $ 1.01 a share ($4.37 - $2.50 - $0.86), which is then due and
payable.
Example (c). The Participating Employee sells Plan Shares on
December 15, 1998 for $3.00 a share and continues to be employed; the Loan
Balance at the time of sale and delivery of proceeds equals $4.05 a share; the
sales proceeds are applied against the Loan Balance.
No Retention Payment is yet due and payable. The Retention Payment
that can be earned, as determined by the difference between the Loan Balance and
the net sales proceeds of the Plan Shares that were sold, is $1.16(1) a share
[1.10 x $1.05] for each share sold. The Retention Payment is still subject to
being earned and vested for the Participating Employee's account as the
Participating Employee's employment continues. So, for example, the
Participating Employee continues to be obligated for $1.05(1) a share plus
interest, but that amount will be offset and reduced ratably to zero, and the
Participating Employee will become entitled to receive any excess by the vesting
of the Retention Payment as each quarter passes towards March 31, 2001.
Example (d). A Participating Employee sells Plan Shares on June 15,
1999 for $5.00 a share and continues to be employed; the Loan Balance at the
time of sale and delivery of proceeds equals $4.37 a share; the sales proceeds
fully liquidates the Loan Balance to the Bank, Executone and Unistar.
The Participating Employee retains $0.63 a share and receives no
Retention Payment under the plan.
10. Separation Payment and Benefits. The Participating Employee is
expected to execute a 3-year Employment Agreement with Unistar. Separation
payments and related benefits will be covered solely by that agreement.
- --------
(1) These amounts will be increased by any interest that continues to
accrue on the Loan Balance, or is imputed for federal income tax purposes.
<PAGE>
For purposes of the Transition and Retention Plan, Cause shall be defined
as defined in the Participating Employee's Employment Agreement with Unistar. A
termination otherwise without Cause that results from a change in control or a
downsizing shall be considered a termination without Cause. If Participating
Employee is offered comparable employment with a purchaser of all or part of the
Company's or Unistar's business or with Unistar, he shall not be considered to
have been terminated for purposes of this plan.
11. Distributions on Plan Shares. Plan Shares, as used herein, shall
include any shares of Unistar or other property that may be distributed with
respect to Plan Shares. Any dividends or other distributions with respect to
Plan Shares will be first applied against any Loan Balance.
12. General. The grant of the payment rights and options proposed by this
plan will be in lieu of (a) any and all other rights or claims a Participating
Employee may have prior hereto for incentive, retention, separation or similar
payments or rights, whether relating to the Stock Plan, Loans, the change in
leadership of the Company, any proposed restructuring of the Company, or
otherwise, as well as (b) all claims arising from the employee's employment
prior to the effective date of the Plan, and shall be so confirmed as the
Company requires; provided, however, that this plan will not (i) affect options
already granted and outstanding or written incentive plans already issued; or
(ii) preclude the grant of other options or performance and incentive awards
from time to time as part of any other key employee option or incentive program
the Company may adopt in the future. Participating Employee shall be responsible
for any and all income taxes attributable to any of the payments or benefits
received or receivable by him hereunder. Participation in this program will be
solely for incentive purposes and will not be deemed an entitlement to
employment for a minimum term or otherwise change the at-will nature of each
Participating Employee's employment. All rights and obligations hereunder, as
well as those set forth in the accompanying Transition Plan Acknowledgment and
Waiver, are subject to obtaining the Bank's consent to implement the plan. This
plan shall be binding upon Unistar after the Separation.
Dated: ____________ EXECUTONE INFORMATION SYSTEMS, INC.
By:__________________________________
Stanley Kabala, Chief Executive Officer
UNISTAR GAMING CORP.
By: ________________________________
Michael W. Yacenda, President
-------------------------------------
Robert Hopwood
<PAGE>
Acknowledgment of Participation and Waiver of Claims
I, Robert Hopwood, hereby acknowledge my voluntary participation in the
Transition and Retention Plan ("TRP"). I agree that the TRP provides me with
consideration over and above that which I am due under any existing benefit plan
offered by EXECUTONE or under any contract or agreement which I have with, or
have been promised by, EXECUTONE. I further acknowledge that the EXECUTONE
benefits to which I am entitled under the TRP shall be determined exclusively by
the TRP plan document attached hereto, and that severance or retention payments
made to others at levels or amounts different than set forth in the TRP plan
document shall not entitle me to additional payments or benefits.
In exchange for the consideration provided me by the TRP, subject to its
approval by the Bank (see TRP 14), I agree to waive, release, and covenant not
to sue with respect to any and all claims I now have or may have against
EXECUTONE which arise from events taking place prior to my signature on this
form. This waiver of claims shall include but not be limited to: claims related
to my employment with EXECUTONE; claims related to the EXECUTONE Executive Stock
Incentive Plan, my participation in that plan, or any loans incurred in
connection with that plan; claims for salary, bonuses, or other compensation or
benefits not provided to me in writing by the TRP or other Company-authored
document; any claim under the Age Discrimination in Employment Act, 29 U.S.C.
623 et seq.; and any claim under the Employee Retirement Income Security Act of
1974, 29 U.S.C. 1001 et seq. The Company agrees that by signing this form I do
not waive any rights to any benefits due to me under an "employee benefit plan"
as defined in section 3(3) of ERISA.
I acknowledge that I have read the TRP plan document and this
Acknowledgment of Participation and Waiver of Claims ("Acknowledgment and
Waiver"), and that I have been given up to twenty-one (21) days to consider
their terms and consult with an attorney if I so choose. I agree that the TRP
plan document and this Acknowledgment and Waiver constitute the only agreement
between me and EXECUTONE concerning severance or retention payments, and that
any prior offer or representation made to me, orally or in writing, is rendered
null and void by the TRP plan document and this Acknowledgment and Waiver. By
signing below, I indicate that I understand the terms of the TRP and this
Acknowledgment and Waiver, am satisfied with them and agree to be bound by them.
I understand that this Acknowledgment and Waiver shall become effective
and enforceable seven (7) days after the date I sign it, and that I have the
right to revoke this Acknowledgment and Waiver at any time within that seven (7)
day period.
- ------------------- ------------------------------
Date Participating Employee
- -----------------------
Company Witness
EXHIBIT 10.12
MANAGEMENT AGREEMENT
FOR THE NATIONAL INDIAN LOTTERY
PREAMBLE
This Management Agreement is made and entered into by and between the
Coeur d'Alene Tribe, a federally recognized Indian Tribe ("CDA" or "Owner"), and
UNISTAR Entertainment, Inc., a corporation organized under the laws of the State
of Colorado ("UNISTAR" or "Contract Manager"), for the formation of a
self-sustaining tele-lottery gaming enterprise to be known as the National
Indian Lottery (the "NIL"), pursuant to the Indian Gaining Regulatory Act of
1988 ("IGRA"), the 1992 Class III Gaming Compact by and between CDA and the
State of Idaho and the Coeur d'Alene Tribal Charitable Gaming Code, Chapter 30
1.01 - 14.01.
In consideration of the mutual promises and covenants contained herein,
the parties hereto agree as follows:
ARTICLE 1. Title
This Management Agreement for the National Indian Lottery may
hereinafter be referred to as "Management Agreement," or "Contract."
ARTICLE 2. Recitals
WHEREAS, the Coeur d'Alene Tribe is a federally recognized Indian Tribe
possessing sovereign powers of self government over the Coeur d'Alene Indian
Reservation; and
WHEREAS, CDA desires to establish a self-sustaining tele-lottery
enterprise known as "National Indian Lottery" (NIL) to increase CDA's revenues
for the purpose of enhancing CDA's economic self-sufficiency and self-government
and to promote the health, education and welfare of the members of the Coeur
d'Alene Tribe; and
WHEREAS, CDA is seeking financial and technical assistance for the
development and management of the NIL in order to obtain the revenues necessary
to provide essential governmental services and long-term employment for Tribal
members; and
WHEREAS, CDA lacks the related experience necessary to unilaterally
develop and operate the NIL and CDA has determined that it must obtain the
necessary additional capital, management, and operational skills by hiring
UNISTAR as Contract-Manager for a period of FIVE (5) YEARS to assist in securing
financing and to implement management of the operation of the NIL and to provide
the necessary training and oversight necessary to employ Tribal personnel; and
<PAGE>
WHEREAS, UNISTAR is the developer of existing software systems and the
unique gaming program presented to CDA as "Tele-Lottery," and this lottery is a
unique and previously non-existent application of the concepts advanced under
IGRA and the Charity Games Clarification Act; and
WHEREAS, UNISTAR has agreed to secure financing for and manage the CDA
NIL with CDA for a period of FIVE (5) YEARS in return for which UNISTAR would
receive a management fee paid entirely and exclusively out of the net revenue of
the NIL at the rate of THIRTY PER CENT (30%) of net revenue per year over the
FIVE (5) YEAR term of this Contract; and
WHEREAS, CDA has determined that the structure, duration, and fees
provided for in this Contract represent the best means to accomplish CDA's
objectives.
ARTICLE 3. Purpose
3.1 The purpose of this Contract is to establish and operate a
Tele-Lottery Enterprise known as "National Indian Lottery" or "NIL" on the Coeur
d'Alene Indian Reservation ("the Reservation") for the benefit of the Coeur
d'Alene Tribe and its members thereof
3.2 UNISTAR is in the business of providing technical, financial and
other services required for the conduct of "NIL Operation." CDA and UNISTAR
agree that CDA shall engage in and conduct lottery games under this Agreement,
and that UNISTAR shall provide technical services and financing for the "NIL."
3.3 The parties understand and agree that the "lottery games" to be
conducted at the Reservation under this Agreement shall be a series of "lottery
games" as defined herein.
ARTICLE 4. Definitions
4.1 "Act" or "IGRA," shall refer to the Indian Gaming Regulatory
Act, (25 USC, Section 2701 et
seq.).
4.2 "CDA" or "Tribe," means the Coeur d'Alene Tribe, its authorized
officials, agents, and representatives.
4.3 "Compact," means the 1992 Class III Gaming Compact by and between
the Coeur d'Alene Tribe and the State of Idaho approved by the Department of
Interior as published in Federal Register, Vol. 58, No. 28, Friday, February 12,
1993, Notices.
4.4 "Computer System Network," means the unique Tele-Lottery software
and hardware telecommunications-system that is the proprietary property of
UNISTAR.
<PAGE>
4.5 "Director of Gaming," means the individual selected by CDA to
oversee and be in charge of all CDA gaming activities including NIL.
4.6 "External Audit," means the annual audit to be conducted by an
independent CPA firm selected by the CDA.
4.7 "Financial Procedures," shall refer to the Lottery Games Procedures
which establish and define the cash management system defined in Articles 6.6;
6.7; 6.1 1; 6.14; and Article 7 and the methods used to provide the protection
against price duplication and to guarantee payment of prizes won.
4.8 "GAAP" means generally accepted accounting procedures.
4.9 "Games," shall refer to Lottery Games and on-line games.
4.10 "Game Parameters," shall refer to game procedures which
establishes and define the prize structure: game rules and other parameters.
4.11 "Gaming Board," means the Coeur d'Alene Tribal Charitable
Gaming Board.
4.12 "Indian Lands," means those lands as defined in 25 USC 2703(4)
and 25 CFR 502.12.
4.13 "Internal Audit," means the quarterly audit to be conducted by a
mutually agreed upon auditor.
4.14 "Lottery Games," means those games traditionally identified as
non-casino type lottery games (not to be confused with pari-mutuel sports
betting or bingo), including games authorized pursuant to Article 4.19.2 of the
Compact and as conducted under this Management Agreement.
4.15 "Management," means the arrangement between CDA and UNISTAR for
management of the NIL as contained in this Contract.
4.16 "Management Fee," shall be the contract manager's 30% of the net
revenue paid for entirely and exclusively out of the net revenue.
4.17 "Net Revenue," means gross revenues of the Lottery Games less
amounts paid for prizes and total gaming related operating expenses.
4.18 "NIGC," means National Indian Gaming Commission.
4.19 "NIL," means National Indian Lottery, the gaming enterprise
operated under this Management Agreement and solely owned by CDA.
<PAGE>
4.20 "UNISTAR," refers to UNISTAR Entertainment, Inc., a Colorado
Corporation or its predecessor or successor entities, which is the Management
Contractor under this Agreement.
4.21 "Reservation," means Indian lands.
4.22 "Reservation Operation Center," means the NIL command and control
center located on the Coeur d'Alene Reservation.
4.23 "TERO," means the Tribal Employment Rights Office of the Coeur
d'Alene Tribe. Its purpose is to regulate tribal employment under the authority
of the TERO Code, Tribal Employment Rights adopted and enforced by the Coeur
d'Alene Tribe Resolution #172(0'3) Amended 7-21-93.
4.24 "Tribal Council," means the elected Tribal Council of the Coeur
d'Alene Tribe.
4.25 "Tribal Gaming Code," is used to reference the Coeur d'Alene
Tribal Charitable Gaming Code adopted and approved by the Coeur d'Alene Tribal
Council by Resolution #2 (89), its purpose and intent is to provide a
comprehensive scheme of regulations of Tribal or Indian owned gaming on the
Coeur d'Alene Indian Reservation.
4.26 "Tribal Lottery Coordinator" ("TLC"), means a CDA Tribal Member
selected by the Director of Gaming to carry out assigned duties regarding day to
day operations of the NIL. TLC shall act as liaison for the Tribe with the
UNISTAR Account Executives of NIL Operations and Executives of UNISTAR.
4.27 Subsequent capitalized terms not defined heretofore are defined in
the specific sections in which they are referenced.
ARTICLE 5. Authority
5.1 Each party warrants to the other that it has full authority to
execute this Contract.
5.2 UNISTAR and its employees shall at all times conduct NIL operations
in accordance with IGRA and other applicable federal statutes, all applicable
federal regulations, the Tribal Gaming Code, the Compact and this Contract.
5.2.1 Mr. James W. Spencer shall be the first person
designated by UNISTAR to be the UNISTAR Account Executive of NIL
Operations. Should Mr. Spencer resign or be removed for cause agreed
upon by CDA and UNISTAR, subsequent UNISTAR Account Executives of NIL
Operations shall be selected at large from a national search of
personnel with related experience, integrity, and national reputation.
The final selection of any successor(s) shall be agreed upon by UNISTAR
and CDA. For purposes of this Article, the term "removed for cause"
shall mean:
<PAGE>
a) Mr. Spencer's inability to perform his duties
hereunder on a full-time basis for a period of one hundred
twenty (120) consecutive days as a result of his incapacity
due to a physical, mental, or emotional illness
("Disability"), the determination of such Disability to be in
UNISTAR's reasonable discretion and based upon independent
medical and other professional advice appropriate to the
circumstances; or
b) The death of Mr. Spencer; or
C) The conviction of Mr. Spencer for commission of
a felony; or
d) Action by Mr. Spencer involving willful
malfeasance, or gross negligence or failure to act by Mr.
Spencer involving material nonfeasance, which, at the time of
such willful malfeasance or gross negligence or material
nonfeasance, has a materially adverse effect (monetarily or
otherwise) on NIL; or
e) Conduct involving demonstrated moral turpitude,
including habitual use of alcohol or drugs;
f) Failure to comply with any written directive of
the Director of Gaming of the Coeur d'Alene Tribe, any conduct
in violation of or contrary to approved statutes, policies, or
procedures, of the Coeur d'Alene Tribe, the Gaming Board or
any representation, conduct or actions deemed by the Gaming
Board to be offensive or harmful to the Coeur d'Alene Tribe,
provided written notice that such (i) failure to comply, or
(ii) conduct or actions has been given to Mr. Spencer and he
has failed to cure within ten (10) days of receipt of such
notice.
5.3 For the term of this Contract, the parties shall use best
efforts to accomplish the objectives
hereof.
5.4 The Director of Gaming shall have direct management oversight
authority over the Contract Manager and UNISTAR Account Executive of NIL
Operations. The Director of Gaming shall authorize all official reports, and
shall review fiscal transactions on behalf of the CDA. The Director of Gaming
shall approve or disapprove all contracts or subcontracts entered into for the
purposes of operating the National Indian Lottery. The Director of Gaming shall
approve or disapprove all budgets as they relate to the startup and/or operation
of the National Indian Lottery. Approval by the Director of Gaming of a budget
is required prior to any funds released from any NIL account for that period.
CDA and the Contract Manager will agree to a financial institution in which NIL
will maintain its bank accounts. Two signatures will be required for
disbursements in excess of $10,000.00, one signature of each duly authorized
representative of the CDA and UNISTAR. Amounts less than $10,000.00 can be paid
with one signature of the Contract Manager so long as said disbursement is in
accordance with a previously approved budget as set forth herein.
<PAGE>
ARTICLE 6. Responsibilities
CDA hereby retains and engages UNISTAR to finance, assist in the
development, and provide management of the NIL.
6.1. Maintenance And Improvement of Facilities
6.1.1 The Lottery Games shall be conducted from the
Reservation Operation Center. The Reservation Operation Center shall
provide adequate, operational and office space for UNISTAR to conduct
business. Development and construction costs of the Reservation
Operation Center shall be funded by UNISTAR. UNISTAR shall employ all
reasonable measures for managing the Reservation Operation Center in a
professional, safe, orderly, and attractive manner. The maintenance of
the Reservation Operation Center will be at the expense of the NIL.
6.1.2 Day to day maintenance will be conducted by a qualified
maintenance staff supervised under the authority of UNISTAR.
6.1.3 UNISTAR intends to use state of the art facilities in
the daily operation of the NIL. Capital improvements shall be itemized
in the annual budget as agreed between UNISTAR and CDA.
6.1.4 CDA shall provide a mutually acceptable location where
all lottery drawings shall take place before a public audience. Said
location shall provide for public viewing of the lottery drawing and
necessary power for television operations as required. This site shall
also contain a secure location in which lottery drawing equipment may
be stored. The Contract Manager shall be responsible for securing and
safeguarding that portion of the premises related to NIL operations.
Maintenance of lottery drawing equipment will be provided by the
Contract Manager. Improvements, including equipment upgrades, shall be
provided as new technology requires provided however, that any upgrades
or capital improvements to the UNISTAR communications system network
shall be done at UNISTAR's expense.
6.2 Operational Capital
6.2.1 UNISTAR agrees to invest not less than $12,500,000 to
launch the NIL. Of such sum invested (per Article 6.2.3) the
approximate amount of $8,500,000 shall constitute operating capital, as
more fully set forth in the proforma attached hereto and a minimum of
an additional $4,000,000 shall constitute an advance by UNISTAR to the
NIL to secure the initial jackpot. The entire investment shall be
non-reimbursable except for the $4,000,000 advanced to the NIL jackpot
reserve account. The $4,000,000 will be returned to UNISTAR solely from
NIL net revenue in five (5) equal annual installments without interest
during the term of the Contract. These installments will be paid
seventy (70%) percent by CDA and thirty (30%) by UNISTAR from their
respective shares of net revenue. CDA shall have no obligation to repay
the $4,000,000 advanced to the NIL jackpot reserve account (or any
portion thereof) if net revenue is insufficient to return such amount
to UNISTAR. However, the guaranteed payment of $25,000.00 to CDA will
have priority over the return of the jackpot reserve.
<PAGE>
6.2.2 Initial start-up costs and capital purchases will be
specified in the development budget. The development budget shall be
approved by both CDA and UNISTAR before it shall be effective for any
purpose. No modifications to the development budget shall occur without
the written approval of both CDA and UNISTAR. No expenditures outside
the budget may be made without the written approval of the Director of
Gaming.
6.2.3 Within 14 Days of written request from the CDA to
UNISTAR after the occurrence of. (a) written approval by the NIGC of
the Management Agreement, and (b) upon CDA's approval of the background
investigations of the principles of UNISTAR, UNISTAR shall provide CDA
a guaranty in form and substance acceptable to the Director of Gaming
that $12,500,000 will be funded to the NIL in accordance with the
development budget as set forth in paragraph 6.2.2. Upon acceptance by
the Director of Gaming in writing of the guaranty, UNISTAR will
immediately fund the NIL the first two (2) months requirements under
said budget. Thereafter each and every thirty (30) days UNISTAR will
fund the next month's requirement under the development budget.
6.2.4 Funds which have not been expended as provided for under
6.2.2 or 6.2.3 shall be transferred to the jackpot reserve account as
an increase in such account and that such transferred funds shall not
be subject to repayment as set out in 6.2.1.
6.3. Operating Days and Hours
Except as may otherwise be mutually agreed in writing by the parties
hereto and absent any technical difficulties on the part of UNISTAR, the games
will be conducted at the Reservation Operation Center; twenty-four (24) hours
per day, seven (7) days per week, three hundred and sixty five (365) days per
year. In addition, lottery drawings shall be conducted at a time mutually agreed
upon by CDA and UNISTAR.
6.4. Hiring, Firing, Training, And Promoting
6.4.1 It is a formalized policy of the CDA to create and
provide meaningful employment for its members. In accordance with
established Tribal policy, the NIL through its contracted manager,
UNISTAR, will have exclusive authority for any and all employment and
personnel matters. Every attempt will be made to give first preference
to qualified members of the Coeur d'Alene Tribe for recruitment,
training, employment and promotions into management and supervisory
positions. A uniform employee wage classification system shall be
developed in accordance with the accepted industry standard for
employee pay. Its subsequent implementation will be subject to CDA and
UNISTAR approval.
<PAGE>
6.4.2 CDA shall provide names of qualified applicants and
coordinate their employee interviews with the NIL's Contract Manager
who shall review all Tribal recommendations for employment interviews
with the NIL. UNISTAR shall make final employment decisions on all
employees under the NIL. All management and supervisory employees, as
required, shall be licensed by the CDA Gaming Board in accordance with
the Compact and Tribal Gaming Code.
6.5. Books and Records
6.5.1 The Contract Manager shall prepare and maintain full and
accurate books and records on all accounts at its office on the
Reservation. These books and records shall be prepared and maintained
in such a manner to allow for the preparation by the Contract Manager
of financial statements in accordance with GAAP. To the extent any
provisions of this Management Agreement are inconsistent with GAAP,
GAAP shall supersede those provisions.
6.5.2 CDA shall at all times have full and complete access to
all Contract Manager's books and records relating to NIL operations all
of which shall be kept on the Reservation at all times and shall not be
removed by the Contract Manager.
6.6. Financial Statements And Reports
The Contract Manager will be responsible for preparing all financial
statements and financial reports including, but not limited to, quarterly
reviews, reconciliations, and disbursements of funds for all NIL operations. The
Contract Manager shall provide the Director of the Gaming all financial
statements and reports prepared and requested by the Director of Gaming, which
shall include daily, weekly, monthly and other reports as designated below: The
Contract Manager shall supply financial statements and reports to the Director
of Gaming within the time period listed unless the Director of Gaming; upon
specific request, allows an extension of time because of exceptional
circumstances.
6.6.1 The Daily Financial Summary shall be provided the
following work day.
6.6.2 The Weekly Financial Summary shall be provided within
one (1) week of the week in question and shall include:
.i Credit Card Revenue Summary;
.ii Prize Pool Revenue Distribution;
.iii Operating Expenses;
.iv Deferred Revenue;
.v Order Transaction Log; and
<PAGE>
.vi Drawing History.
6.6.3 The Lottery Drawing Report shall be provided within five
(5) work days of each drawing of the Lottery Games and shall calculate
and report the revenues of the Lottery Games for that drawing.
6.6.4 Monthly Financial statements, summaries, and reports
shall be provided no later than forty (40) days after the end of the
month in question and shall include:
.i Local bank statements - all operations accounts;
.ii National bank statements - all operations
accounts;
.iii National bank statements - all prize pool
accounts;
.iv 800 vendor monthly statements;
.v Credit card bank monthly statements - all
accounts;
.vi 900 vendor monthly statements; and
.vii Detailed expense report with variance.
6.6.5 Quarterly financial statements will be provided
forty-five (45) days following the end of the quarter.
6.6.6 Annual financial statements and the External Audit shall
be provided one hundred twenty (120) days following the end of the
year.
6.7. Auditor Selection and Payment
6.7.1 CDA and UNISTAR shall confer and mutually agree upon the
selection of internal auditors to conduct quarterly audits of NIL
financial transactions, which audits will include a complete review of
all NIL financial records. Any reported discrepancies will be
reconciled by the Contract Manager prior to the issuance of the
Internal Audit described in 6.6.5 above provided that the Director of
Gaming shall be provided a report of all such adjusting entries and
reconciliations. The internal auditors will be responsible for the
certification of the capital investment accounts, and including
construction/development installment payments, and calculation of the
net revenue split resulting in the Contract Manager's management fee
payment. The cost of these internal auditing services shall be an
operating expense of NIL.
<PAGE>
6.7.2 An external national CPA firm selected by CDA shall be
engaged to conduct an independent annual audit of the Games and the
financial statements, and to perform a Management Information Systems
(MIS) audit to provide an extra check and balance for Game integrity.
Such firm shall provide its findings to the CDA and UNISTAR. The cost
of these services shall be an operating expense of NIL.
6.7.3 CDA and UNISTAR shall also mutually agree on the
selection of legal counsel to represent NIL which shall be a NIL
operating expense. To the extent that such mutually agreed upon legal
counsel is other than the CDA Tribe's general legal counsel, all costs
and fees incurred by CDA for work performed by its general legal
counsel relating to the NIL shall also be a NIL operating expense.
UNISTAR retains the right to employ separate legal counsel to represent
its individual interests at its own expense. CDA and UNISTAR shall
mutually agree upon local banks, national banks and credit card banks
to be utilized by the NIL.
6.8. Security
6.8.1 This section shall constitute the security plan pursuant
to the requirements of Article 6.4.
6.8.2 UNISTAR shall hire and supervise security personnel
pursuant to the requirements of Article 6.4.
6.8.3 Participation
i. No person who is less than eighteen (18) years of
age may purchase a lottery ticket, however, this shall not
prohibit the purchase of a lottery ticket for the purpose of
making a gift to a minor.
ii. No officer or employee of NIL or the Contract
Manager or any relative living in the same household with such
officer or employee may purchase a lottery ticket.
iii. No officer or employee of any vendor under
contract with the NIL or Contract Manager relative living in
the same household with such officer or employee, immediate
supervisor or such officer or employee may purchase a lottery
ticket if the officer or employee is involved in the direct
provision of goods or services to NIL or Contract Manager or
has access to confidential information relating to NIL
operations.
6.8.4 The Computer System Network and system security shall
include, but not be limited to Computer System Network reliability and
system integrity. The network design shall include an environment with
redundancy, duplication capability and independence capability.
6.8.5 Backup
<PAGE>
The Computer System Network shall contain a backup system. Any
increased frequency of backups shall be a function of the increased
number of records in the database and degree of acceptable risk. Backup
tapes shall be removed from the host/server location and stored
separately, off-site, in a secure, fireproof environment. Backups shall
be rotated on a seven (7) day basis, providing coverage on one week's
data at any given time.
6.8.6 Detail Operation Security shall include but not be
limited to:
.i Access. Access shall be limited to
authorized retailers working in the area.
.ii Processing. Hard copy order flow, from mail
opening through order entry, batching, shipping and storage
shall be coordinated and controlled.
6.8.7 Telecommunications Tampering, Hacks, and Intruders. The
Computer System Network shall not be accessible by modem. Intruders to
the system at the workstation level shall be prevented by utilizing
network password/code assignment(s), group assignment(s), file
restriction(s), intruder lockout routines, transaction tracking and
oversight by the network supervisor.
6.8.8 Network, Database, and Software Security shall provide:
i Logging On/Passwords - limiting access to the
system to specifically designated personnel and work stations.
ii Rights security - controlling information that
various users can access in the system.
iii Attributes security - controlling what users can
do with files in the system.
iv Network server security - controlling and limiting
personnel who can perform tasks at the file server level.
v Software security - controlling and limiting
personnel who can perform tasks in the Tele-Lottery System.
vi Database integrity/security - controlling and
limiting personnel who can perform tasks in the database
system.
6.8.9 Prize Payout and Verification of Winners For all prizes
of over $599.00 the winner validation system will be instituted. Such
security measures shall be developed and implemented prior to the flat
drawing.
<PAGE>
6.8.10 Ticket Security
Each ticket shall be created with a unique number subject to a
coding digital during the imprint process. Tickets shall be issued in
varying series, each indelibly identified during the printing process.
6.8.11 Site Security
Access to all server/host computer and processing areas shall
be controlled by batching. In accordance with the Compact,
identification badges shall be issued by the Director of Gaming. Access
to all monitors, consoles, and work stations shall be limited by
login/password, function, and workstation. Security systems shall be
installed and at least one (1) security guard shall be on site at the
server/host computer location at all times. There shall be a guard on
site at any NIL facility when it is unoccupied. The drawing equipment
shall be secured under lock and key when not in use. The Director of
Gaming and the UNISTAR Account Executive of NIL Operations shall
control access to such equipment for weekly drawings. Each shall have a
key to one (1) of the two (2) locks securing the area in which the
drawing equipment is stored. Both keys shall be required for access.
6.8.12 Background Checks
See Article 21.
6.8.13 Lottery Drawing Procedure
All drawings of the Lottery Games shall be held on the
Reservation in public view and recorded an video tape, a copy of which
shall be retained by UNISTAR. The televised drawing procedure shall
allow for at least three (3) practice drawings to be conducted to
verify the drawing equipment prior to the scheduled drawing. Depending
on the equipment selected for drawings for the Lottery Games, a
procedure shall be agreed upon by CDA and the Contract Manager to
verify, to the greatest extent possible, that each winning number is
selected randomly. The Contract Manager shall designate one(1)of its
NIL employees to be present at every drawing for the Lottery Games.
6.9. Fire Protection
The NIL shall comply with the applicable Tribal Code. Additionally, any
computer operations site shall include a fireproof closet or vault for storage
of media and backup tapes. CDA Tribe will provide initial fire protection. CDA
will enter into a backup fire protection agreement with the appropriate fire
district. Any fees incurred for fire protection services will be NIL operational
expense,
6.10. Advertising
<PAGE>
6.10.1 Subject to the provisions of Article 5.4 and this
Article, the responsibility for setting the advertising budget, placing
of advertising and making advertising and marketing decisions rests
with the Contract Manager. However, no ad shall be placed without its
content first being approved by the Director of Gaming. The Contract
Manager shall, subject to allocation of funds, place advertising with
those agencies contracted with the NIL for NIL advertising and public
relation advertisements. The overall advertising/promotional theme,
ad/promo strategy, ad/promo mix and plan shall not be implemented
without the prior consent of the tribal Director of Gaming.
6.10.2 CDA and UNISTAR shall agree upon the selection of the
TV spokesperson(s) for the NIL and the selection of advertising and
public relations agencies.
6.10.3 All advertising shall advise that participants must
be at least eighteen (18) years of
age.
6.11. Bills And Expenses
6.11.1 The Contract Manager shall prepare an operating budget
and present it to the Coeur d'Alene Tribe for approval prior to start
up and annually at least thirty (30) days prior to start of the new
fiscal year. No modifications to the budget shall occur without Coeur
d'Alene Tribe approval and no expenditures outside the budget may occur
without the approval of the Director of Gaming. Any and all expenses of
the NIL may be reviewed by the Director of Gaming and denied as an
operating expense charge of NIL. UNISTAR shall be responsible for all
expenditures from the NIL operations account and the Prize Pool
Account. The Coeur d'Alene Tribe shall be solely responsible for
expenditures from the guaranteed Tribal Payment Account.
6.11.2. Taxes As a tribal government enterprise, no tribal tax
or other charge shall be imposed upon UNISTAR, upon NIL operations, or
upon any assets used in association with the NIL. CDA shall grant a
waiver to UNISTAR for any new laws, ordinances, or taxes to be enacted
by CDA, or any agency or body of CDA, during the term of this Contract
or any extensions hereof, which would have an adverse effect on UNISTAR
revenues, expenses, or the conditions under which UNISTAR manages NIL
operations. Adverse effect shall be deemed to include any laws or
ordinances enacted by CDA which either prevents UNISTAR from carrying
out the terms of this Contract or impose taxes on activities
contemplated hereunder. Any federal law or federal tax that imposes a
tax on the Contract Manager's share of net revenues, shall be the
responsibility of the Contract Manager. Nothing in this section shall
be deemed to limit or restrict CDA's gaming regulatory authority.
6.12. Employment Practices The NIL will adopt Tribal preference
provisions in all employment practices. The NIL through its Contract Manager
will develop Employment Policies and Procedures Manuals including grievance and
hearing procedures, a uniform employee classification wage scale system. UNISTAR
shall develop training manuals to ensure that Tribal members are trained to be
the best extent possible for all management positions. UNISTAR, as the Contract
Manager has exclusive management/supervisory authority over all NIL employees.
<PAGE>
6.13. Insurance
6.13.1 The Contract Manager shall secure and maintain public
liability, bonding and full property loss and damage insurance on all
operations. The exact nature and extent of such coverage shall be
agreed upon by the parties. Both CDA and UNISTAR shall be named as the
insured in all policies. The costs of said coverage shall be part of
the cost of NIL operations. In the event any portions of the NIL
facilities are destroyed, the insurance proceeds shall be used to
reconstruct the facilities and commence operations.
6.11.2 CDA and UNISTAR shall mutually indemnify and hold each
other free and harmless from and against all liabilities resulting
directly or indirectly from the management and operation of the NIL,
provided that said liabilities, injury, or death does not result from
the willful misconduct, negligent act or omission of both parties or
its members.
6.14. Internal Revenue (IRS) Code Compliance
6.14.1 It shall be the responsibility of UNISTAR to insure
that NIL complies with all the provisions of the Internal Revenue Code
of 1986, as amended, (including but not limited to (delta)1441,
(delta)3402(q), (delta)6041, (delta)6051, and Chapter 35 of said Code).
6.14.2 IRS requires that twenty-eight percent (28%) of
winnings of any single prize/jackpot of five thousand dollars ($5,000)
or more must be withheld. UNISTAR shall require customer service
personnel to acquire the social security number of such winning
players. The computer system shall include a database of these winners
and their social security numbers. This data shall be batched in the
medium requested by the IRS. Funds dedicated to this purpose shall be
identified by system software and amounts required shall be deposited
from the Prize Pool Account into the IRS Withholding Account after each
lottery drawing.
6.15. Public Safety
The Contract Manager of the NIL shall pay all costs of any increased
public safety services necessary for NIL operations. Such public safety services
costs shall be treated as a NIL operating expense.
6.16. NEPA Compliance CDA shall provide the National Indian Gaming
Commission (NIGC) with all information necessary for the Commission to determine
compliance with the National Environmental Policy Act (NEPA).
<PAGE>
6.17. Tribal Lottery Coordinator (TLC) The TLC shall carry out all
duties assigned by the Director of Gaming, including any internal audit
functions assigned. The Director of Gaming shall set the TLC's salary which
shall be paid as a NIL operating expense.
ARTICLE 7. Accounting
7.1 Accounting and Banking Procedures
7.1.1 Fiduciary Entity. Accounting. and Books of Account CDA
and UNISTAR shall agree upon the selection of fiduciary entities to
control and distribute revenues to accounts according to the
predetermined percentages as provided in this Agreement. Said fiduciary
entities may be a national bank, financial institution, accounting
firm, or combination of these entities.
7.1.2 Banking, Account Allocation CDA and UNISTAR shall agree
on all banks for the deposit and maintenance of revenue and shall
establish seven (7) categories of accounts. Fifty Percent (50%) of
gross revenue shall be deposited into the Prize Pool Account, unless
CDA and UNISTAR agree to change the allocation to the Prize Pool
Account. Separate allocation accounts shall be established, including,
but not limited to, those noted below:
.i Prize Pool Account
.ii Guaranteed Tribal Payment Account
.iii CDA Tribal Reserve Account
.iv UNISTAR investor/Management Fee Account
.v Operations Account (based on an annual
approved budget)
.vi Unclaimed Prize Account
.vii IRS Withholding Account
.Viii Charge Back Revenue Account
7.1.3 Prize Pool Accounts Fifty percent (50%) of gross
revenues shall be deposited to the Prize Pool Account. Expenses for the
Prize Pool Account shall, as required, include, but not be limited to:
prize payout to winners, IRS withholding account, and payments of
rollover funds returned to the jackpot according to game procedures as
mutually agreed upon by CDA and UNISTAR.
7.1.4 IRS Withholding Account
An IRS Withholding Account shall be established in which the
amounts withheld are from the amounts won, and deposits from prize pool
revenues shall be deposited according to prize payout, as determined by
the weekly Prize Pool Revenue Distribution Report. The funds deposited
in the IRS Withholding Account shall be paid to the IRS as required,
and winners in whose name the amounts were withheld shall be identified
by NIL to the IRS in accordance with the database of social security
numbers maintained as provided in Article 6.14.2.
<PAGE>
7.1.5 Charge Back Revenue Account
A Charge Back Revenue Account shall be established in which
2.5% of each transaction amount shall be deposited for purposes of
reimbursement of customer credit card claims. Reimbursement shall occur
within one hundred twenty (120) days of the customer invoice date if
the claim is confirmed. All claims shall be reconciled in the External
Audit and monies remaining in the Charge Back Revenue Account shall be
disbursed in accordance with Article 13.
7.1.6 The Chairman of the Tribal Council of CDA or his
designee and the UNISTAR Account Executive of NIL Operation shall each
sign each winner's check and such signatures shall be supplied for
imprinting on these checks. Such checks shall be debited weekly against
the Prize Pool Account.
7.1.7 Subject to agreement by UNISTAR and CDA on the annual
approved budget UNISTAR shall issue all checks from the Operations
Account. Access to all accounts shall be limited by customary
protective procedures, including the requirement of dual signatures
subject to the approvals described in this Management Agreement.
Accounting shall be on an accrual basis in accordance with GAAP.
7.2. Accounting Controls
7.2.1 All money instrument proceeds from NIL operation shall
be transferred (swept) by electronic fund transfer to fiduciary entity
accounts immediately upon daily termination of business. Adequate
security shall be provided in transmitting funds to such fiduciary
entity. UNISTAR shall provide CDA with Daily Financial Summary revenue
activity reports as described in Article 6.6.1, which shall list all
revenue flow activity by time, batch, job number, dollar amount and
source. An internal financial procedures control manual will be
established by UNISTAR and the internal CPA firm and will identify all
the checks and balances to safeguard against waste, theft and fraud.
7.2.2 Under no circumstances shall the Contract Manager pay
expenses which are not within the approved budget or not connected with
NIL operations and the Lottery Games as specified in this Management
Agreement unless it has received prior written approval of the Director
of Gaming, which shall not be unreasonably withheld or delayed. The
Director of Gaming shall have authority to review any and all expenses
and deny such charge to NIL if deemed appropriate.
7.2.3 No other expenses other than those specified in this
Agreement can be claimed by UNISTAR. Should extenuating circumstances
cause additional expenses, no payment can be made without prior written
authorization of the CDA and UNISTAR and the approval of the Chairman
of the NIGC.
<PAGE>
7.2.4 The CDA Tribe will be responsible for the expense
incurred by the Gaming Board. The internal governmental operations of
the Tribe, and any and all expenses incurred by the Tribe for the
regulation and promulgation of gaming will be provided for by the
guaranteed payments to the Tribe by the Contract Manager.
7.3. Financial Statements
The Internal auditors and external CPA firms shall prepare quarterly
and annual financial statements in support of the annual audit report due each
year. These results shall be made available to CDA and UNISTAR in accordance
with Article 6.6. The accounting firm shall report any discrepancies and provide
a report of any differences in the account allocations, providing for the
appropriate reconciliation of differences. After accounts have been reconciled
the CPA firm will certify the correct balances. The certified report will serve
as the basis for the net revenue calculation and subsequent quarterly
disbursement.
7.4. Audits
As provided in Article 6.7 an annual audit of all accounting records
shall be conducted by a national accounting firm.
7.5. No Class II Annual Gaming Fee
The gaming conducted under this Agreement is Class III gaming, not
Class 11. Consequently, the Class 11 annual fee pursuant to 25 CFR 514.1 is not
applicable.
7.6. Permit The Calculation Of The Manager Fee
7.6.1 As Contract Manager, UNISTAR shall receive a fee of
thirty percent (30%@ of the net revenue of the NIL for the 5 year term
of this Contract. As owner CDA shall receive seventy percent (70%) of
the net revenue of the NIL for the term of this Contract. Such amounts
shall be paid quarterly or as otherwise agreed upon by the UNISTAR and
CDA.
7.7. Allocation of Operating Expenses: The operating expenses
of the NIL shall include but not be
limited to the following:
Overhead Expenses:
* Salaries/Commissions/Benefits
* Insurance
* Utilities
* Advertising/Promotions
* Legal/Accounting/Building Maintenance
* Supplies
* Interest Expense
<PAGE>
* Service Contract Expense
* Office Equipment Rental Expense
* Depreciation and Amortization
* Retailer Commission
* Contingency
* Other GAAP defined expenses
7.8 Maintenance of Accounting Systems and Procedures Consistent with
the foregoing, UNISTAR shall establish and maintain accounting systems and
procedures in accordance with 25 C.F.R. 531.1(c) which (a) include an adequate
system of internal accounting controls, (b) are ready to audit, (c) permit the
calculation and payment of the Contract Manager's Fee, and (d) provide for the
allocation of shared activity expenses all in accordance with GAAP.
ARTICLE 8. Reporting and Confidentiality
8.1 Reporting
UNISTAR shall provide CDA such reports in accordance with Article 6.6.
This requirement is satisfied by the reporting procedures set out in Article
6.6.
8.2 Confidentiality
All financial information, reports, proprietary concepts, ideas, plans,
methods, data, developments, inventions or other information developed during
the tenure of this contract regarding the NIL operations shall be deemed
confidential and proprietary information of the CDA and shall be protected from
third party or public disclosure without the express written approval of the
CDA. In the event any person, entity, or government requests confidential
information described in this Article, by judicial process or otherwise, UNISTAR
shall immediately notify CDA and provide copies of all such requests to CDA,
provided, however that no such information will be provided without CDA
approval.
ARTICLE 9. Access
UNISTAR and NIL shall provide CDA immediate access upon request to the
gaming operation including its books and records. This shall include the right
to verify daily gross revenues and income from the gaming operation and access
to any other gaming related information the Tribe deems appropriate. The
Director of Gaming, or his designees shall examine and/or monitor the physical
receipts, deposits of all gross receipts, accounting, and any other element of
the NIL operation to assure compliance with the Gaming Code, Compact and this
Contract.
ARTICLE 10. Guaranteed Payment
10.1.1. UNISTAR shall provide a guaranteed payment to CDA in a sum
certain of twenty-five thousand dollars ($25,000.00) per month. This payment is
<PAGE>
due on the first month of operations, and monthly thereafter, by the 5th day of
the month and shall be deducted from CDA's share of net revenue or future net
revenue allocation. The guaranteed payment(s) shall have preference over the
retirement of development and construction costs.
ARTICLE 11. Development and Construction
A Reservation Operation Center suitable for conducting all elements of
the Lottery Games shall be constructed on the Reservation by NIL on an
accessible road network with utility hook-ups. This Reservation Operation Center
shall be constructed in compliance with industry standards for computer
operations, including environmental controls, backup electrical power,
uninterruptible, continuous power protection, virus protection, and security.
Total construction and development costs shall not exceed seven hundred fifty
thousand dollars ($750,000.00) unless the budget is modified and approved in
accordance with 5.4 and 6.2.2. In addition, UNISTAR shall furnish a
telecommunications system in support of the Lottery Games.
ARTICLE 12. Term & Exclusivity
12. 1.1 The term of this Contract shall be for FIVE (5) YEARS from the
date gaming activities under this Agreement begin, unless extended for an
additional two (2) years with the formal approval of the Chairman of the NIGC.
12.1.2 At any time during the fourth year of this Contract, CDA must
notify UNISTAR in writing of its intent whether or not to extend this contract
as allowed in 12.1.3 upon the expiration of this Contract. Failure to so notify
in writing shall be deemed to be a decision by CDA to extend the Contract,
provided that such extension shall only become effective if approved by the
Chairman of the NIGC upon a future request by the Tribe and UNISTAR.
12.1.3 Extension of Contract
CDA may extend the terms of this contract with UNISTAR for a period of
two (2) years, but at a management fee of not more than thirty percent (30%) of
net revenue in the second term. The parties acknowledge that the actual
percentage of the management fee for any extended term is subject to the
approval of the Chairman of the NIGC at the time the request for extended term
is sought.
ARTICLE 13. Compensation
13.1.1 CDA shall receive seventy percent (70%) of the Net Revenue
from NIL operations for the first
FIVE (5) YEARS of the Contract.
13.1.2 UNISTAR shall receive thirty percent (30%) of the Net
Revenue from NIL operations for the first
FIVE (5) YEARS of the Contract.
ARTICLE 14. Modification and Termination
<PAGE>
14. 1. Modification
The parties agree to modify this contract as may be required for
approval by the Chairman of the National Indian Gaming Commission (Chairman).
Once approved by the Chairman this contract may be modified only with the
consent of CDA and UNISTAR and approval of the modifications by the Chairman.
14.2.1 Termination CDA may terminate this Agreement in the
event that UNISTAR commits, or knowingly allows any theft or
embezzlement. Either party may terminate this Contract if the other
commits, or allows to be committed, any material breach of this
Contract. A material breach of this Contract shall include, but not be
limited to, failure of either parry to perform any duty or obligation
on its part for any twenty (20) consecutive days within the 365 day
period. Neither party may terminate this Contract on grounds of
material breach unless it has provided written notice to the other
party and the defaulting party fails to cure, or take steps to
substantially cure, the default within twenty (20) days of receipt of
such notice. The timely discontinuance or correction of the material
breach shall constitute a cure thereof.
14.2.2 In the event of termination due to the fault of
UNISTAR, CDA shall be paid all sums owed to CDA as of the date of the
termination, and UNISTAR shall indemnify CDA for any damages resulting
from the breach of UNISTAR. If CDA is at fault UNISTAR and CDA shall
retain all moneys paid to them and UNISTAR shall be compensated for
equipment and start-up costs not related to UNISTAR's Computer System
Network to the extent that funds are available in NIL and such costs
have not previously been paid. Any funds remaining in NIL shall be
divided in accordance with the net revenue distribution provisions of
this Contract.
14.2.3 It is the understanding and the intent of the parties
that the establishment and operation of the NIL complies with all
applicable laws. In the event this Contract is determined by a court of
competent jurisdiction to no longer be lawful, the obligations of the
parties shall cease, and this Contract shall be null and void. CDA and
UNISTAR shall execute the appropriate releases, holding CDA harmless
and indemnifying CDA for any and all claims, notices, demands,
liability, liens, mechanic liens, stop notices, and similar
contingencies which may follow such termination.
14.2.4 Termination of this Contract shall not require the
approval of the Chairman of the National Indian Gaming Commission.
ARTICLE 15. Dispute Resolution
15.1 Disputes between Management Contractor and Customers Good
relations with the customers is of utmost importance to Management Contractor.
All disputes between customers and UNISTAR will be resolved by the UNISTAR
Account Executive of NIL Operation or his designees after affording the
aggrieved customer an opportunity to be heard and consultation with the Director
of Gaming.
<PAGE>
15.2 Disputes between Management Contractor and the Coeur d'Alene
Tribe
15.2.1 In the event of a dispute with regard to the
interpretation of this Contract, or with respect to any consent or
approval required by either party wherein it is stated that such
approval shall not be unreasonably withheld, the matter shall be
referred to arbitration conducted in accordance with the Rules of the
American Arbitration Association, 135 W. 51st Street, New York City,
New York 10020. The Arbitration shall take place on the Reservation in
the State of Idaho. The decision of the arbitrator shall be enforced
the same as a decree of a court having competent jurisdiction.
15.2.2 If this Contract is referred to arbitration by the
parties, arbitration costs shall be borne equally by the parties;
provided, however, the arbitrators shall have the authority to assess
such costs disproportionately or assess all costs to one party if
arbitration is required because of unreasonableness or bad faith on the
part of such party. Should any party refuse arbitration, any
controversy or claim resulting in litigation including, but not limited
to, an action to compel arbitration and such litigation results in a
judgment against the party refusing to arbitrate, such refusing party
shall be liable and obligated to pay all costs of such litigation,
including reasonable attorney fees and costs of trial and appeal.
15.2.3 This Contract does not constitute, nor should it be
construed as a waiver of sovereign immunity of the Coeur d'Alene Tribe,
except as necessary to interpret this Contract and enforce an
arbitration decision as provided in this Article. Any claim for money
damages against CDA shall be limited to and payable only from CDA's
share of the net revenue from NIL operations and UNISTAR's unrecovered
capital investment.
15.3 Disputes Between Management Contractor and the Gaming Operation
Employees Good relations with the employees is essential to an efficient
operation of NIL. Disputes between UNISTAR and gaming operations employees will
be resolved through a grievance procedure established in the Employment Policies
and Procedures Manual, which shall afford the employees notice and an
opportunity to be heard.
ARTICLE 16. Assignment and Subcontracting
16.1 This Contract may not be assigned without the written consent of
the other party, which consent shall not be unreasonably withheld, and no
assignment of this Contract shall be valid without the written approval of the
Chairman of the NIGC. All proposed assignments shall include information
regarding shareholders, directors, officers, investors and management personnel,
as required by the Compact or the NIGC for the purpose of performing background
checks.
16.2 CDA and UNISTAR agree that UNISTAR may engage subcontractors to
supply certain necessary services in connection with the efficient operation and
security of the NIL, and each agreement to be entered into with any
<PAGE>
subcontractor shall provide, among other items, that the agreement will be
subject to the operative provisions of IGRA and the rules of the NIGC, and shall
be approved by the Director of Gaming. Neither UNISTAR nor any of its officers,
directors or shareholders shall have any financial interest in or receive any
compensation from any subcontractor engaged by UNISTAR.
ARTICLE 17. Ownership Interests
CDA is the sole owner of the NIL. Upon termination of this Contract,
all equipment, Reservation facilities, mailing lists or other assets developed
or purchased with NIL proceeds shall become the sole property of CDA. UNISTAR
shall retain ownership of its unique Tele-Lottery Enterprise concept and related
software programs. Any change or changes which separately or cumulatively result
in a change of five percent (5%) or more in the ownership of UNISTAR shall
require the advance written approval of the CDA, which approval shall not be
unreasonably withheld. At no time shall UNISTAR acquire any ownership in any
real property or lottery games owned by the CDA. Coeur d'Alene shall have the
right, subject to NIGC requirements and approvals to continue using the UNISTAR
Computer System Network after termination of the Management Agreement (whether
after five (5) years or seven (7) years for an indefinite period, provided than
an annual royalty payment be made to UNISTAR in a percentage of net revenue for
use of the system to be mutually agreed upon by UNISTAR and CDA and approved by
the Chairman of NIGC of not more than five percent (5%). Should CDA elect not to
utilize the UNISTAR Computer System Network at the expiration of the initial or
extended term of this contract, or during the royalty payment period, CDA shall
give UNISTAR six (6) months notice thereof wherein UNISTAR shall make every
effort to accommodate the design and development of a new NIL system that may
operate parallel to the UNISTAR system during transition.
ARTICLE 18. No Conveyances or Transfers
This Contract is not a lease and does not convey any interest in land
or other real property.
ARTICLE 19. Entire Contract
This Contract, constitutes the entire agreement. There are no other
understandings between the parties other than those contained herein. The
parties expressly reserve all rights not granted, recognized, or settled by this
Contract.
ARTICLE 20. Conflict of Interest
20.1 No member of the Coeur d'Alene Tribal Council or Coeur d'Alene
Tribal Charitable Gaming Board, nor any spouse or other with whom they are
living in a similar way, may be employed by UNISTAR nor may they hold any
financial interest in UNISTAR.
20.2 No payment or other value has been or will be offered by UNISTAR
or any employee or agent of UNISTAR, to any member of the Tribal government of
<PAGE>
CDA, to any relative of any Tribal official, or to any Tribal government
employee, for the purpose of obtaining any special privilege, gain, advantage,
or consideration for UNISTAR in this Contract.
20.3 UNISTAR shall not directly or indirectly interfere with, become
involved in, or attempt to influence, the internal affairs of CDA. Any attempt
by UNISTAR, its officers, agents, or employees, to influence any member of CDA
to circulate or vote on any initiative or recall petition shall constitute an
interference in Tribal affairs and shall be grounds for termination of this
Contract as provided in Article 14.
20.4 UNISTAR shall devote its best efforts to the fulfillment of its
duties in this Contract. UNISTAR agrees that during the term of this Contract,
neither UNISTAR nor any person or entity having any substantial ownership or
controlling interest in UNISTAR, shall be engaged directly or indirectly in any
form, fashion, or manner, as partner, officer, director, stockholder,
shareholder, investor, advisor, or in any other form or capacity, in any lottery
similar to the one described herein, without the written approval of CDA. CDA
agrees to allow UNISTAR the exclusive right to manage the NIL during the term
and any authorized extension of this Contract.
ARTICLE 21. Background Investigations
Background investigations shall be conducted in accordance with Article
10 of the Compact and the Management Contract Requirements and Procedures under
IGRA; 25 C.F.R., 502.17, 502.18, 502.19 and 537. All individuals handling money
instruments shall be bonded prior to working for the NIL.
ARTICLE 22. Approval
22.1 The signatures below constitute approval of the terms of this
document.
22.2 This contract shall be considered fully executed within the
meaning of 25 CFR 533.2 only after the Coeur d'Alene Tribal Council has reviewed
and given its final approval by Resolution to the required background
investigations and to this Management Agreement.
22.3 Prior to submission of this Contract to the National Indian Gaming
Commission (NIGC) for approval, UNISTAR shall submit to CDA, a detailed Business
Plan for management of the NIL. The Business Plan shall include, but not be
limited to the following mandatory elements: goals, objectives, financial plans,
and related matters.
22.4 UNISTAR certifies that it has provided CDA with a complete list of
all names, addresses, telephone numbers, occupations, social security numbers,
and background check information required by 25 CFR 537.1 regarding all persons
and entities as set out in 25 CFR 502.17, 502.18 or 502.19 including, but not
limited to:
<PAGE>
.1 All of UNISTAR management level personnel, corporate
officers and directors.
.2 All persons owning a beneficial interest in UNISTAR and in
any corporations holding such interests, whether direct or indirect.
.3 All persons who shall be directly or indirectly
investors of NIL.
.4 Those persons who shall sign the Contract on behalf
of UNISTAR.
.5 All employees who shall have day-to-day
responsibilities for NIL.
22.5 UNISTAR shall pay the cost of all background
investigations and all fees required by 25 CFR 537.3.
22.6 UNISTAR warrants that every person whose name will appear
on the list is of good moral character, never convicted of any felony,
nor any misdemeanor involving moral turpitude. The list shall be
updated by UNISTAR on a monthly basis.
22.7 This Contract shall be submitted to the NIGC for its
review and approval immediately upon final approval by CDA Council
Resolution and signing. The parties agree to make any changes requested
by the Commission.
ARTICLE 23. Duplicate Originals
This Contract is being executed in eight (8) duplicate originals, one
to be retained by NIGC, three (3) to be retained by UNISTAR, and four (4) to be
retained by CDA. All are equally valid.
ARTICLE 24. Notices
Any notice required to be given pursuant to this Contract shall be
delivered by certified mail, return receipt requested, delivery prepaid, and
addressed to:
CDA: Ernest L. Stensgar, Chairman
Coeur d'Alene Tribe Tribal Headquarters
Plummer, Idaho 83851
UNISTAR: Jim Spencer
Unistar Entertainment, Inc.
6000 Greenwood Plaza Boulevard, Suite 202
Englewood, Colorado 80111
ARTICLE 25. Effective Date
<PAGE>
This Contract shall not be effective unless and until it is approved by
the Chairman of the National Indian Gaming Commission, dates of the signatures
of the parties notwithstanding. Provided however, that the five (5) year term of
this Contract shall not begin to run until the gaming authorized by this
Contract has actually begun.
COEUR D'ALENE TRIBE
DATED: 1/16/95
BY: Ernest L. Stensgar, Chairman
Coeur d'Alene Tribe
Tribal Headquarters
Plummer, Idaho 83851
Attested Hereto: Marjorie E. Zarate Secretary
Exhibit 23.1
CONSENT OF HUNTON & WILLIAMS
September 16, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, CT 06460
Unistar Gaming Corp.
Registration Statement on Form S-1
Gentlemen:
This firm has reviewed the information set forth in the seventh paragraph under
the section entitled "Risk Factors--Legal Matters" of the Registration Statement
on Form S-1 (the "Registration Statement") of Unistar Gaming Corp., a Delaware
corporation (the "Company"), and the information contained in the eighth
paragraph of the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Six Months Ended June 30, 1998
and 1997--Legal Market and Other Risks" of the Registration Statement. 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
Registration Statement on Form S-1.
Very truly yours,
/s/ Hunton & Williams
- ------------------------------
HUNTON & WILLIAMS
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ Arthur Anderson LLP
Stamford, Connecticut
September 16, 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> 28,916,978
<CURRENT-LIABILITIES> 254,686
<BONDS> 372,156
0
0
<COMMON> 0
<OTHER-SE> 26,116,921
<TOTAL-LIABILITY-AND-EQUITY> 28,916,978
<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>
<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 YEAR
ENDED DECEMBER 31, 1997 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,326
<DEPRECIATION> 6,326
<TOTAL-ASSETS> 24,090,424
<CURRENT-LIABILITIES> 912,862
<BONDS> 433,068
0
0
<COMMON> 0
<OTHER-SE> 22,744,494
<TOTAL-LIABILITY-AND-EQUITY> 24,090,424
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 807,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (810,187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (810,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (810,187)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit 99.1
Consent of Robert A. Berman to be Named as Director Nominee
September 8, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
Registration Statement on Form S-1
9,953,251 Shares of Common Stock
Gentlemen:
I, Robert A. Berman, hereby consent to be named as a director nominee of
Unistar Gaming Corp., a Delaware corporation (the "Company"), in the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, in connection with the
Company's registration of 9,953,251 shares of common stock, $0.01 par value, of
the Company and 49,766,255 rights to acquire up to 9,953,251 of such shares.
Very truly yours,
/s/ Robert A. Berman
Robert A. Berman
Exhibit 99.2
Consent of Stanley M. Blau to be Named as Director Nominee
September 9, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
Registration Statement on Form S-1
9,953,251 Shares of Common Stock
Gentlemen:
I, Stanley M. Blau, hereby consent to be named as a director nominee of
Unistar Gaming Corp., a Delaware corporation (the "Company"), in the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, in connection with the
Company's registration of 9,953,251 shares of common stock, $0.01 par value, of
the Company and 49,766,255 rights to acquire up to 9,953,251 of such shares.
Very truly yours,
/s/ Stanley M. Blau
Stanley M. Blau
Exhibit 99.3
Consent of Alan Kessman to be Named as Director Nominee
September 8, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
Registration Statement on Form S-1
9,953,251 Shares of Common Stock
Gentlemen:
I, Alan Kessman, hereby consent to be named as a director nominee of
Unistar Gaming Corp., a Delaware corporation (the "Company"), in the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, in connection with the
Company's registration of 9,953,251 shares of common stock, $0.01 par value, of
the Company and 49,766,255 rights to acquire up to 9,953,251 of such shares.
Very truly yours,
/s/ Alan Kessman
Alan Kessman
Exhibit 99.4
Consent of Jerry M. Seslowe to be Named as Director Nominee
September 8, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
Registration Statement on Form S-1
9,953,251 Shares of Common Stock
Gentlemen:
I, Jerry M. Seslowe, hereby consent to be named as a director nominee of
Unistar Gaming Corp., a Delaware corporation (the "Company"), in the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, in connection with the
Company's registration of 9,953,251 shares of common stock, $0.01 par value, of
the Company and 49,766,255 rights to acquire up to 9,953,251 of such shares.
Very truly yours,
/s/ Jerry M. Seslowe
Jerry M. Seslowe
Exhibit 99.5
Consent of Michael W. Yacenda to be Named as Director Nominee
September 8, 1998
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
Registration Statement on Form S-1
9,953,251 Shares of Common Stock
Gentlemen:
I, Michael W. Yacenda, hereby consent to be named as a director nominee of
Unistar Gaming Corp., a Delaware corporation (the "Company"), in the Company's
Registration Statement on Form S-1 to be filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, in connection with the
Company's registration of 9,953,251 shares of common stock, $0.01 par value, of
the Company and 49,766,255 rights to acquire up to 9,953,251 of such shares.
Very truly yours,
/s/ Michael W. Yacenda
Michael W. Yacenda
