Prime Gaming Philippines, Inc. Corporate Disclosure

April 28, 1998 PSE CIRCULAR FOR BROKERS NO. 853-98 SUBJECT : Prime Gaming Philippines, Inc. Corporate Disclosure Attached is a corporate disclosure from Prime Gaming Philippines, Inc. on the following items: 1. Corporate Restructuring 2. Financial Highlights of Prime Gaming Philippines, Inc. 3. Share-for-Share Swap with the Stockholders of Philippine Gaming Management Corporation 4. Financial Highlights of Philippine Gaming Management Corporation 5. Debt-to-Equity Conversion of Beckford Trade & Finance Ltd. 6. Debt-to-Equity Conversion of Berjaya Lottery Management (HK) Ltd. For your information and guidance. (SGD.) REYNOLD P. ONG Vice-President, Listings and Disclosure Group COMPREHENSIVE CORPORATE DISCLOSURE PRIME GAMING PHILIPPINES, INC . Prime Gaming Philippines, Inc. ("Prime Gaming" or the "Company") was formerly known as "Central Azucarera de Pilar". It was incorporated in the Philippines on November 12, 1924 and had been operating as a manufacturer of sugar and molasses until recently. In July 1996, Beckford Trade & Finance Ltd. ("Beckford") and Premier Equity Limited ("Premier") acquired seventy percent (70%) and twenty percent (20%), respectively, of the issued shares of the Company. Beckford is an investments holding company organized and existing under the laws of the British Virgin Islands. Premier is an investments holding corporation organized and existing under the laws of the Cayman Islands. aisadc The Company had been inactive prior to its restructuring. Corporate Restructuring On October 16, 1996, the stockholders of the Company approved a number of changes in Prime Gaming's corporate structure as part of a strategic restructuring scheme. These changes, as summarized below, were approved by the Securities and Exchange Commission ("SEC') on December 2, 1997. (a) the acceptance of the change in the Company's name from "Central Azucarera de Pilar" to "Prime Gaming Management Corporation"; (b) the change in the Company's primary purpose to that of an investments holding company; (c) a decrease in the authorized capital stock of the Company from Sixty Million Pesos (P60,000,000) to Forty Seven Million Pesos (P47,000,000) through the elimination of preferred shares of stock; (d) an increase in the authorized capital stock of the Company from Forty Seven Million Pesos (P47,000,000) to One Billion Pesos (P1,000,000,000); and (e) the denial of pre-emptive rights of stockholders. On March 19, 1998, the SEC approved the change of name of the Company to its present name of "Prime Gaming Philippines, Inc." from "Prime Gaming Management Corporation". The abovedescribed changes in the primary purpose and capital structure of the Company were also the result of the Company's acquisition of the entire outstanding capital stock of Philippine Gaming Management Corporation ("PGMC"), a company that leases systems and technology for the on-line lottery operation of the Philippine Charity Sweepstakes Office ("PCSO"). The acquisition involved the issuance of the Company's shares in exchange for PGMC shares. Out of the increased capital stock of the Company, the Company will issue Fifty Two Million (52,000,000) shares with par value of Ten Pesos (P10) per share in exchange for Two Hundred Fifty Thousand (250,000) shares of PGMC for a total consideration of Five Hundred Twenty Million Pesos (P520,000,000). Said consideration is equivalent to an exchange ratio of Two Hundred Eight (208) Company shares for One (1) PGMC share. The purchase consideration was arrived at after a valuation of PGMC shares was conducted by independent professionals based on management's assumptions. LLpr In addition, the Company will issue Thirty Two Million Nine Hundred Forty Eight Thousand Five Hundred Fifty Eight (32,948,558) shares in favor of Berjaya Lottery Management (HK) Ltd. ("Berjaya") in exchange for the assignment by Berjaya in favor of the Company of all its rights and interests to certain advances made by Berjaya in favor of PGMC. Also, the Company will issue Ten Million Five Hundred Eighty Two Thousand Three Hundred Fourteen (10,582,314) shares in favor of Beckford as payment for the Company's indebtedness. The Company's capital structure before and after the abovedescribed restructuring is as follows: Shareholder Number of Shares Pre-restructuring Equity Percentage % Number of shares Post-restructuring Equity Percentage % Berjaya Lottery Management (HK) Ltd. 295,434 7.4 54,043,992 54.3 Alfredo C. Ramos 15,600,000 15.7 Beckford Trade & Finance, Ltd. 2,800,000 70.0 13,382,314 13.4 George T. Yang 8,840,000 8.9 Rodolfo N. De Leon 3,120,000 3.1 First Abacus Financial Holdings Corporation 1,872,000 1.9 Raul S. Manglapus 1,560,000 1.6 Premier Equity, Ltd. 800,000 20.0 800,000 .8 Jerry C. Angping 208,000 .2 Individual shareholders 104,566 2.6 104,566 .1 Capital Stock 4,000,000 100.0 99,530,872 100.0 Selected Financial Data Audited Balance Sheet of Prime Gaming Audited as at: June 30, 1996 June 30, 1997 Balance Sheet Data Cash P723 P651,858 Other deposits and prepayments Other current assets 412,516 Land Total Assets 723 1,064,374 Total Liabilities 106,000,178 110,806,076 Capital Deficiency 105,999,455 109,741,702 Proforma Consolidated Balance Sheet Audited Balance Sheet of Prime Gaming as of June 30, 1997 Audited Balance Sheet of PGMC as of April 30, 1997 Proforma Consolidated Balance Sheet Data Total Assets P1,064,374 P446,780,743 P900,079,539 Total Liabilities 110,806,076 379,015,165 54,512,510 Capital Stock 40,000,000 25,000,000 995,308,731 Retained Earnings (149,741,702) 42,765,578 (149,741,702) Stockholders' Equity (109,741,702) 67,765,578 845,567,029 Notes: A. The Proforma Consolidated Balance Sheet of Prime Gaming has been prepared for illustrative purposes only and based on accounting policies consistent with those previously adopted by Prime Gaming in the preparation of the audited financial statements. This illustrates the effects of the corporate restructuring on the assumption that it has been completed as of June 30, 1997: 1. Issuance of 52 million unissued common shares of Prime Gaming to the stockholders of PGMC in exchange for shares of stock of PGMC at a ratio of 208 common shares of the Company for one share of PGMC; 2. Issuance of 10,582,314 unissued common shares of stock of the Company as complete settlement of the Company's loans payable to Beckford amounting to P105,823,143. 3. Issuance of 32,948,588 unissued common shares of stock of the Company as part settlement of PGMC's existing liabilities to Berjaya. B. Total assets includes goodwill equivalent to P452,234,422 which was computed based on the difference between the price consideration of P520,000,000 and the book value of PGMC's net assets at the time of the acquisition of P67,765,578. As internally generated goodwill is not identifiable until the business is being disposed, the recognition of the goodwill inherent in the business of PGMC is not accounted for in the books of PGMC although it has the following exclusive properties: 1. Exclusive rights conferred by the Equipment Lease Agreement dated 25 January 1995 as the sole lessor of terminals to Philippine Charity Sweepstakes Office (PCSO) in Luzon for an 8-year duration 2. The exclusive right to be the technical partner of PCSO via the Maintenance and Operation Agreement entered on 1 December 1995 for the provision of technical know-how and support system of the lotto operations by PCSO. 3. PGMC has built a relationship with PCSO which may not be easily matched by other entrants in the lotto industry. This is proven by the fact that the recommendation of PGMC for the introduction of another game known as Mega Lotto 6/45 was implemented by PCSO in May 1997 and was introduced in August 1997. prLL 4. PGMC has a group of dedicated employees, mostly Filipino, who are trained experts in providing the services required in support of the lotto business. The Company believes that its affiliation with Berjaya Group of Companies in Malaysia, which is the majority shareholder of International Lottery & Totalizator Systems, Inc. USA (ILTS), a dealer of lotto terminals and a company listed in NASDAQ, has enhanced its ability to adopt state-of-the-art technology that allows it to provide the best possible service to the PCSO. The Share-for-Share Swap Part of the restructuring of the Company was the acquisition of PGMC. The acquisition involved the issuance of the shares of the Company in exchange for shares of PGMC. Under the Deeds of Exchange executed by the Company and Berjaya, Alfredo C. Ramos, George T. Yang, Rodolfo N. De Leon and Raul S. Manglapus; the Company and First Abacus Financial Holdings Corporation; and the Company and Jerry Angping, the Company agreed to issue an aggregate of Fifty Two Million (52,000,000) shares in exchange for the assignment by the aforementioned corporations and individuals of an aggregate of Two Hundred Fifty Thousand (250,000) PGMC shares in favor of the Company. The transfer value assigned to each share of stock of PGMC was Two Thousand Eighty Pesos (P2,080) or an aggregate transfer value of Five Hundred Twenty Million Pesos (P520,000,000). The said transfer value was based on the financial forecast of PGMC as reviewed by Punongbayan & Araullo on October 1, 1996. LLphil PGMC's financial forecast is summarized as follows: In Thousand Pesos 1997 1998 1999 2000 2001 Revenues 169,826 203,877 228,342 251,178 273,782 Net Income 38,756 57,806 80,053 96,388 117,070 Total Assets 438,183 499,941 590,420 687,692 805,802 Said forecast was based on the following assumptions: 1997 1998 1999 2000 2001 No. of Terminals at year end 935 1,295 1,655 2,000 2,000 No. of draws per year 105 104 104 104 104 Growth Rate - 20% 12% 10% 9% Lotto Sales (P million) 3,739 4,581 5,131 5,644 6,152 Agency Commission 4.45% 4.45% 4.45% 4.45% 4.45% The Company expects the sales volume to grow by twenty percent (20%) for the fiscal year 1998 after the installation of new terminals in preparation for the introduction of new games which will create new customer interest in lotto. Thereafter the Company expects sales volume to increase by twelve percent (12%) for the fiscal year 1999, ten percent (10%) for the fiscal year 2000 and nine percent (9%) for the fiscal year 2001. The valuation of the PGMC shares that was agreed between willing buyer and willing seller (the Company and the PGMC shareholders) was Five Hundred Twenty Million Pesos (P520,000,000), derived from a net price-earnings (P/E) multiple of 8.0 times net income after tax based on estimated average earnings of Sixty Five Million Pesos (P65,000,000). The professional valuation computation covers a range of P476.6 million to P552.5 million. LexLib Based on the assumptions and projections of PGMC and the report of Punongbayan & Araullo on the Forecasted Financial Statements of PGMC, SGV concurred with the valuation of PGMC shares using two valuation methods: (a) Capitalized Net Earnings Using the Capitalized Net Earnings method, the estimated average earnings of PGMC was computed by assigning weights to the projected net income for each year of a five year projection period. A higher weighting is assigned to the earliest projection year because it is believed to be more accurate than future years' projections. Thereafter, the computed estimated average earnings is multiplied by a range of P/E multiples to compute the estimated capitalized earnings values. The range of P/E multiples used was from 7.5 to 8.5x. The resulting estimated range of values are as follows: Estimated Range of Estimated Average Estimated Capitalized P/E Multiples Earnings Earnings Values 7.5 P65.0 P487.5 8.0 P65.0 P520.0 8.5 P65.0 P552.5 (b) Discounted Cash Flow: Using the Discounted Cash Flow method, the valuation of the PGMC shares is computed by discounting PGMC's projected income stream to present terms using a discount rate that incorporates current borrowing rate and the anticipated project risk premium. The discount rate range used was from 20% to 22%. The resulting estimated values are as follows: Discount Rates Amount P million 20% P541.8 21% P507.2 22% P476.6 Based on the price consideration of Five Hundred Twenty Million Pesos (P520,000,000), the Company reflected in its books of accounts "Goodwill" equivalent to Four Hundred Fifty Two Million Two Hundred Thirty Four Thousand Four Hundred Twenty Two Pesos (P452,234,422) based on the aforesaid price consideration less the book value of PGMC's net assets at the time of the acquisition of Sixty Seven Million Seven Hundred Sixty Five Thousand Five Hundred Seventy Eight Pesos (P67,765,578). On December 2, 1997, the SEC approved the valuation of PGMC shares on the condition that the Fifty Two Million (52,000,000) shares that will be issued by the Company in exchange for Two Hundred Fifty Thousand (250,000) shares of PGMC shall be locked-up for a period of two (2) years from the date of the issuance thereof and that the present majority stockholder of PGMC, Berjaya, which will eventually own at least 51% of the outstanding capital stock of the Company, will execute a written undertaking that it shall continue participating in the management of PGMC for the period up to financial year 30 April 2001. cdlex The aforesaid conditions had been complied with. On January 14, 1998 Berjaya submitted to the SEC the required undertaking. On April 15, 1998, all the parties to the abovementioned Deeds of Exchange executed a Lock-Up Agreement. The audited financial statements of PGMC for the fiscal year 1997 show a variance between the actual and the forecasted revenues and income. A comparative analysis of the actual audited revenues and income PGMC for the fiscal year 1997 and the forecasted revenue and income is shown herein below: In Thousand Pesos 1997 Forecast 1997 Audited Revenues 169,826 171,736 Net Income 38,756 22,745 Total Assets 438,183 446,781 The variance is mainly attributed to the delay in the completion of the acquisition of PGMC by the Company which resulted in additional interest charges on outstanding debt. PGMC is confident that it will achieve the projected earnings due to the recent introduction of three new games, namely, MegaLotto 6/45, 4-Digit game and 6-Digit game. The MegaLotto, which links up Luzon with Visayas and Mindanao, have clearly boosted the Company's earnings prospects. Only recently, the game registered a P161 million jackpot, the highest-ever since the introduction of the lotto in the country. cdll Background Information on the Parties to the Share-for-Share Swap a. PGMC PGMC was incorporated in the Philippines on April 14, 1993 and is engaged in the leasing of on-line lottery equipment and accessories. PGMC has an authorized capital of One Hundred Million Pesos (P100,000,000) divided into One Million (1,000,000) shares with a par value of One Hundred Pesos (P100) per share, of which Two Hundred Fifty Thousand (250,000) shares are issued and outstanding. Of the said issued and outstanding shares of PGMC, the Berjaya Group of Companies of Malaysia holds forty percent (40%), while sixty percent (60%) is held by Filipinos. Berjaya Group of Companies is one of the top ten largest Malaysian conglomerates listed in the Kuala Lumpur Stock Exchange with diverse interests in industrial, property development and investment, retail marketing, financial services, and leisure and gaming in Malaysia, North America, Canada, United Kingdom and the Asia-Pacific region. The gaming operations is operated by Berjaya Sports Toto Bhd, a subsidiary of Berjaya Group Bhd, its ultimate holding company, which has been in existence since 1969. It has been and remains to be the only national operator of lotto and digit games in Malaysia. Berjaya is also the largest shareholder in International Lottery and Totalizator Systems, Inc. ("ILTS") of the United States of America, a company listed in the US Nasdaq. ILTS is a leading supplier of gaming equipment, expertise, and software. It has customers in twenty countries and supplies the equipment for Malaysia, the Hong Kong Jockey Club, and the Australian and European horseracing circuits. On January 25, 1995, PGMC entered into an Equipment Lease Agreement ("ELA") with the PCSO covering the lease of PGMC's on-line lottery equipment to PCSO for a period of eight (8) years. PGMC started commercial operations in February 1995. Under the agreement, PGMC is entitled to a rental fee equivalent to 4.3% of the gross amount of ticket sales from all the PCSO's on-line lottery operations in Metro Manila and other parts of the island of Luzon. On February 16, 1995, Lotto went on sale at on-line agencies throughout Metropolitan Manila. On December 1, 1995, PGMC also entered into an agreement with the PCSO for the repair and maintenance service of the equipment covered by the ELA. Under this agreement, PGMC is entitled to a repair and maintenance service fee equivalent to .15% of the gross sales. The revenues from lease of lottery equipment comprise 96.63% of the total revenues of PGMC while the revenues from repair and maintenance services comprise only 3.37%. The contributions of the revenues from lease of lottery equipment and the revenues from repair and maintenance services to the total net income of PGMC are not substantially different from their contributions to the total net income of PGMC. PGMC's ownership structure is as follows: Shareholder Number of Shares (P100.00 Par) % Nationality Berjaya Lottery Management (HK) Ltd. 100,000 40.0 Foreign Alfredo C. Ramos 75,000 30.0 Filipino George T. Yang 42,500 17.0 Filipino Rodolfo N. De Leon 15,000 6.0 Filipino Raul S. Manglapus 7,500 3.0 Filipino First Abacus Financial Holdings Corporation 9,000 3.6 Filipino Jerry C. Angping 1,000 .4 Filipino 250,000 100.0% After the Company's restructuring shall have been fully implemented, PGMC will become One Hundred Percent (100%) owned by the Company. prLL Selected Financial Data of PGMC Audited as at: 30 April 1996 30 April 1997 Balance Sheet Data Cash P62,959,814 P83,639,618 Property & Equipment 240,255,190 226,200,712 Other Assets 81,868,110 72,017,877 Total Assets 450,132,302 446,780,743 Total Liabilities 405,112,048 379,015,165 Stockholders' Equity 45,020,254 67,765,578 Audited as at: Audited as at: 30 April 1996 30 April 1997 Income Statement Data Revenues P193,261,133 P171,735,877 Expenses 166,478,396 139,589,632 Net Income 14,452,914 22,745,324 Retained Earnings, beg. 5,567,340 20,020,254 Retained Earnings, end 20,020,254 42,765,578 Net Cash Flow 57,117,301 20,679,804 Cash, beg. 5,842,513 62,959,814 Cash, end 62,959,814 83,639,618 b. Berjaya Berjaya was incorporated in Hong Kong on July 16, 1992 as an investment holdings company. It has an authorized capital of One Hundred Twenty Six Million Dollars (HK$126,000,000) divided into One Hundred Twenty Six Million (126,000,000) shares with a par value of One Dollar (HK$1.00) per share, all of which have been fully subscribed and paid for by Berjaya Group (Cayman) Ltd. and Berjaya Sports Toto (Cayman) Ltd. Berjaya's other investments are as follows: Name of Company % of Equity Interest Principal Activity International Lottery & Totalizator Systems, Inc. (U.S.A.) 38.42% Manufacturing and Distribution of computerized lottery system Philippine Gaming Management Corporation 40.00% Leasing of on-line lottery equipment and accessories U-Luck Information Systems Limited (Taiwan) 48.00% Provision of management consultancy services to lottery operations The Debt-to-Equity Conversion of Beckford Part of the Company's restructuring is the conversion of the Company's indebtedness to Beckford into equity of the Company. Under the Agreement executed between Beckford and the Company, the indebtedness of the Company amounting to an aggregate of One Hundred Five Million Eight Hundred Twenty Three Thousand One Hundred Forty Three Pesos (P105,823,143) shall be applied in full payment to the subscription of Beckford to Ten Million Five Hundred Eighty Two Thousand Three Hundred Fourteen (10,582,314) shares from the increase in authorized capital stock of the Company. Beckford became a creditor of the Company by virtue of a "Deed of Assignment of Credits" whereby Corporate Investments Philippines, Inc. ("CIPI") assigned in favor of Beckford credits of the Company in the aggregate amount of One Hundred Five Million Eight Hundred Twenty Three Thousand One Hundred Forty Three Pesos (P105,823,143). CIPI, in turn, became the creditor of the Company by virtue of a "Deed of Assignment of Credits" whereby Elizalde Holdings Corporation, the former parent company of Prime Gaming ("Elizalde Holdings"), assigned in favor of CIPI credits of the Company amounting to an aggregate of One Hundred Five Million Eight Hundred Twenty Three Thousand One Hundred Forty Three Pesos (P105,823,143) arising from two (2) loan agreements executed between Elizalde Holdings and the Company. cdlex The first loan agreement between Elizalde Holdings and the Company dated November 15, 1995 was for an amount of Fifty Two Million Nine Hundred Thousand and Forty Two Pesos (P52,900,042). Said amount represents advances and payments made Elizalde Holdings for the account of the Company and includes other payables of the Company which were transferred to or absorbed by Elizalde Holdings. The second loan agreement between Elizalde Holdings and the Company dated November 16, 1997 was for an amount of Fifty Two Million Nine Hundred Twenty Three Thousand One Hundred One Pesos (P52,923,101). Said amount represents outstanding trade payables of the Company amounting to Eleven Million Six Hundred Sixty Three Thousand Two Hundred Thirty Eight Pesos (P11,663,238) as principal and the amount of Five Million Two Hundred Fifty One Thousand Eight Hundred Ninety One Pesos (P5,251,891) as interests, and an outstanding loan in favor of Republic Planters Bank amounting to Sixteen Million Seventy One Thousand Five Hundred Seventy Nine Pesos (P16,071,579) as principal and the amount of Nineteen Million Nine Hundred Thirty Six Thousand Three Hundred Ninety Three Pesos (P19,936,393) as interests. Background Information on Beckford Beckford was incorporated in the British Virgin Islands on September 12, 1995 as an investments holding company. It has an authorized capital of Fifty Thousand Dollars (US$50,000) divided into Fifty Thousand (50,000) shares with a par value of One Dollar (US$1.00) per share. Of the authorized capital stock, Twenty Five Thousand (25,000) shares have been issued and fully paid for. LexLib Background information on Elizalde Holdings Elizalde Holdings is a holding company with an authorized capital stock of Five Hundred Thousand Pesos (P500,000) divided into Thirty Million (30,000,000) shares of common stock with par value of Ten Centavos (P.10) per share and Twenty Million (20,000,000) preferred shares with par value of Ten Centavos (P.10) per share. It has a subscribed capital of One Hundred Twenty Five Thousand Pesos (P125,000). On September 11, 1996, the stockholders and members of the Board of Directors of Elizalde Holdings approved the increase of its authorized capital from Five Hundred Thousand Pesos (P500,000) to One Hundred Million Pesos (100,000,000) divided into Ninety Nine Million Eight Hundred Thousand (99,800,000) Class "A" common shares with par value of One Peso (P1.00) per share and Two Hundred Thousand (200,000) Class "B" preferred shares with par value of One Peso (P1.00) per share. Of the said increase, 24,875,000 Class "A" common shares were subscribed and the amount of P24,875,000 had been paid thereon. Background information on CIPI CIPI is a licensed investment house. Its equity is privately held and is unlisted. Its President, Vicente C. Atilano, and Vice President, Wilfrido O. Gamboa are directors of the Company. The Debt-to-Equity Conversion of Berjaya Lottery Management (HK) Ltd . Part of the restructuring of the Company is the issuance of shares by the Company to Berjaya in exchange for the assignment by Berjaya of all its rights and interests to certain advances extended by it to PGMC in favor of the Company. On December 23, 1996, Berjaya and the Company executed an Agreement covering the assignment by Berjaya of all its rights and interests to certain advances extended by Berjaya to PGMC amounting to an aggregate of Three Hundred Twenty Nine Million Four Hundred Eighty Five Thousand Five Hundred Eighty Pesos (P329,485,580) in favor of the Company in exchange for a total of Thirty Two Million Nine Hundred Forty Eight Thousand Five Hundred Fifty Eight (32,948,558) shares of the Company with an aggregate par value of Three Hundred Twenty Nine Million Four Hundred Eighty Five Thousand Five Hundred Eighty Pesos (P329,485,580) to be taken out of the increase in authorized capital stock of the Company. cdll