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)
DELAWARE 7999 13-3808625
--------------------------------- ------------------------------------------- -------------------
(State or other jurisdiction (Primary Standard Industrial Classification (I.R.S. Employer
of incorporation or organization) Code No.) Identification No.)
------------
478 Wheelers Farms Road
Milford, CT 06460
203-876-7600
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Michael W. Yacenda
Unistar Gaming Corp.
478 Wheelers Farms Road
Milford, Connecticut 06460
(203) 876-7600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
COPIES OF ALL COMMUNICATIONS TO:
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
------------
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.
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
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
(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.
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.
(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-
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)
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)
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
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
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 _____
2
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)
---------
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
------------- ------------- ---- ---- ------- ---- ----
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)
(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
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)
---------
Three Months Ended
---------------------------------------------------------------------
June 30, 1998 March 31, 1998 December 31, 1997 September 30, 1997
------------- -------------- ----------------- ------------------
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)
4
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
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."
6
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
7
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."
8
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
9
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.
10
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:
By Mail: By Hand: By Overnight Courier:
- ------------------------------- ------------------------------- -------------------------------
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
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
11
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.
12
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.
13
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.
14
CAPITALIZATION
The following table sets forth the unaudited historical and pro forma
capitalization of Unistar as of June 30, 1998, assuming the closing of the
Offering at that date.
The table should be read in conjunction with Unistar's financial statements
and the notes thereto and the unaudited pro forma consolidated financial
information and notes thereto included elsewhere herein. The unaudited pro
forma information set forth below does not necessarily reflect the
capitalization of Unistar in the future.
June 30, 1998
(Unaudited)
------------------------------------------
Historical Adjustments Pro Forma
---------- ----------- ---------
Stockholders' Equity:
Investment in Unistar $28,095,688 $(28,095,688) $ -
Common Stock of $.01 par value
Authorized 25,000,000 shares;
Issued and Outstanding 11,700,000 shares - 117,000 117,000
Preferred Stock of $.01 par value
Authorized 1,000,000 shares;
Issued and Outstanding 75,000 shares - 750 750
Additional Paid-in Capital - 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
=========== ============ ============
15
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
Unistar Gaming Corp. and Subsidiary
Consolidated Pro Forma Balance Sheet
(Unaudited)
Pro Forma Pro Forma
June 30, 1998 Adjustments June 30, 1998
------------- ----------- -------------
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
=========== ============ ============
17
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
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)
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
------------- ------------- ---- ---- ------- ---- ----
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)
(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
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
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
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
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
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
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.
25
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.
26
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.
27
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.
28
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.
29
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.
30
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
31
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
32
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.
33
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
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:
Name Age Position Class
- ---- --- -------- -----
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
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
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
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) $1,000 for each Board meeting
attended plus out-of pocket expenses incurred in attending meetings of the
Unistar Board. The stock option awards described in (i) and (ii) above shall be
priced at 110% of the market price for the Unistar Common Stock at the time of
the grant, equaling the average closing price for the prior 20 trading days on
the Nasdaq Stock Market or other national exchange on which the Unistar Common
Stock is traded or, if the Unistar Common Stock is not traded on a national
exchange, at a price determined in the sole discretion of the Unistar Board. For
those options granted prior to the Closing Date, the relevant 20 trading days
shall be the first 20 trading days after the Unistar Common Stock commences
trading on the Nasdaq Stock Market.
Directors who are employees of Unistar will not be paid any additional
remuneration for services as members of the Unistar Board or any committee
thereof.
37
Compensation of Executive Officers
The following table summarizes compensation paid to all of Unistar's
Executive Officers for services rendered to Unistar. The principal positions
listed in the footnotes to the table are those that will be held by the Named
Executive Officers with Unistar as of the Closing Date.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation Securities
Name and ------------------- Underlying All Other
Principal Position Year Salary($) Bonus($) Options(#) Compensation($)(3)
------------------ ---- -------- -------- ---------- ------------------
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)
(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 $1,869) in 1997, 1996 and 1995,
respectively.
38
Option Grants
Each of the following option grants relates to grants of options to acquire
shares of Unistar Common Stock as of the Closing Date.
OPTION GRANTS AS OF THE CLOSING DATE
Individual Grants
- ---------------------------------------------------------------------------
Percent of Potential Realizable
Number of Total Options Value at Assumed
Securities Granted to Annuals Rates of
Underlying Employees as Exercise Stock Price
Option Grants of the Closing Price Expiration Appreciation
------------------
Name (#) Date ($/Share) Date 5%($) 10%($)
- ------------------------------------------------------------------------------------------------
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
(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
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
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
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.
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
- ----------------- -------------------- ---------- -------------------- -------------
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%
* Denotes less than 1% beneficial ownership.
(1) Owned by Watertone Holdings L.P., an entity controlled by Mr. Berman.
42
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.
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
- ------------------------ -------------------- ---------- -------------------- ------------
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
43
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
44
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
45
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
46
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
47
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.
48
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
49
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.
50
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.
51
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
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
Unistar Gaming Corp. and Subsidiary
Consolidated Balance Sheets
December 31,
------------------------
1997 1996
---- ----
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
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Operations
Post-acquisition Pre-acquisition
---------------------------------------
Year-Ended Year-Ended
December 31, December 31,
1997 1996 1995
-------- --------- -------
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)
========= ========= ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Cash Flows
Post-acquisition Pre-acquisition
Year-Ended Year-Ended
---------------------------------------
December 31, December 31,
1997 1996 1995
-------- ---------- -------
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
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
Unistar Gaming Corp. and Subsidiary
Consolidated Statements of Divisional Control
Investment Accumulated
in Unistar Deficit Total
--------------------------------------
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
========================================
(*) 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
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
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
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
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
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
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
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
Unistar Gaming Corp and Subsidiary
Consolidated Balance Sheets
(Unaudited)
June 30,
------------------------
1998 1997
--------- -------
ASSETS
Current Assets
Prepaids and other current assets $ 1,625 $ -
----------- -----------
Total Current Assets 1,625 -
Property & Equipment, net 3,915,000 14,000
Intangible Assets 13,002,580 15,841,000
Advances to NIL 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
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-14
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Six-Month Periods Ended
June 30,
--------------------------
1998 1997
--------- -------
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)
========= =========
The accompanying notes are an integral part of these consolidated statements.
F-15
Unistar Gaming Corp and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six-Month Periods Ended
June 30,
--------------------------
1998 1997
---------- ---------
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 $ - $ -
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-16
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
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
National Indian Lottery
Balance Sheets
September 30, June 30,
1997 1998
------------- -----------
(Unaudited)
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
=========== ============
The accompanying notes are an integral part of these balance sheets.
F-19
National Indian Lottery
Statements of Operations and Accumulated Deficit
Inception Nine-Month Cumulative From
(Jan. 16, 1995) to Period Ended Inception Through
Sept. 30, 1997 June 30, 1998 June 30, 1998
-------------- ------------- -------------
(Unaudited) (Unaudited)
Revenues $ 537,645 $ 7,747,009 $ 8,284,654
Cost of Revenues 455,915 6,913,516 7,369,431
----------- ------------ ------------
Gross Profit 81,730 833,493 915,223
----------- ------------ ------------
Costs and Expenses:
Payroll and payroll-related 218,946 492,227 711,173
Travel and entertainment 271,374 5,646 277,020
Professional fees 2,565,858 968,208 3,534,066
Legal and audit fees 1,113,054 1,276,998 2,390,052
Shared activities 1,396,086 701,081 2,097,167
Advertising & promotions 433,903 1,382,978 1,816,881
CDA Payment 128,001 - 128,001
Depreciation - 42,600 42,600
Other 214,043 386,048 600,091
----------- ------------ ------------
6,341,265 5,255,786 11,597,051
----------- ------------ ------------
Net Loss (6,259,535) (4,422,293) (10,681,828)
Accumulated Deficit, beginning of period - (7,059,535) -
Guaranteed Distributions to CDA (800,000) (225,000) (1,025,000)
----------- ------------ ------------
Accumulated Deficit, end of period $(7,059,535) $(11,706,828) $(11,706,828)
=========== ============ ============
The accompanying notes are an integral part of these statements.
F-20
National Indian Lottery
Statement of Cash Flows
Inception Nine-Month Cumulative From
(Jan. 16, 1995) to Period Ended Inception To
Sept. 30, 1997 June 30, 1998 June 30, 1998
-------------- ------------- -------------
(Unaudited) (Unaudited)
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
=========== =========== ============
The accompanying notes are an integral part of these statements.
F-21
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
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
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:
NIL Statements September 30, 1997 June 30, 1998
- -------------- ------------------ -------------
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
============= =============
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
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
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
================================================================================
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
================================================================================
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
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
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
Exhibit
Number Description
------ -----------
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
- ------------
*Filed herewith.
II-3
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
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
EXHIBIT INDEX
Exhibit Document
------- --------
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
- ------------
*Filed herewith.
II-6