LOTO - Pacific Online Systems Corporation

In 1995, the Philippine Charity Sweepstakes Office (PCSO) launched the very first on-line lottery, better known as the lotto, in the Philippines. Prior to the said launch, the PCSO decided to outsource the provision of the on-line facility for its Luzon and VisMin operations, and as a result, conducted a bid selection process among interested gaming corporations, including the Company. After the bidding process, the Company’s proposal to provide the PCSO the facility for its on-line lottery operations in VisMin was accepted.

The Company was incorporated in the Philippines and was registered with the SEC on November 11, 1993. As of December 31, 2006, the Company had an authorized capital stock of 500,000,000 Common Shares, each with a par value of P1.00, of which 125,250,000 Common Shares have been issued and outstanding. On February 9, 2007 the Company issued an additional 54,000,000 shares from its authorized capital stock thus increasing the issued and outstanding shares to 179,250,000. On March 27, 2007 the Company offered an initial public offering (IPO) consisting of 11,800,000 common shares and a secondary offer of 28,000,000 common shares. Thus increasing the total number of common shares outstanding to 191,050,000.

The Company is engaged in the development, design and management of on-line computer systems, terminals and software for the Philippine gaming industry. It brokers technology from leading global suppliers of integrated gaming systems and leases to the PCSO the Equipment needed for its on-line lottery operations in the VisMin regions under the terms of an eight-year Equipment Lease Agreement (ELA), which was entered into on November 25, 1995. The Company also provides the PCSO the necessary technical support through a Maintenance Repair Agreement (MRA) that is coterminous with the ELA.

The ELA, which was last amended on February 13, 2004, allows the Company to deploy a total of 1,800 on-line terminals around its covered regions. General terms of the amended ELA and MRA stipulate a 10 per cent share by the Company of all PCSO sales from the conduct of on-line lottery and digit games in the VisMin area and a term of eight (8) years commencing from the date of commercial operations of the Company. Commercial operation, as amended, was defined to be the operation of not less than 800 terminals. However, commercial operation was formally effected on April 1, 2005, setting the term of the Company’s ELA up to 2013, even if the PCSO had actually begun operations of the Company’s on-line terminals since 1996. Major reasons for the delay in the deployment of the required number of terminals to constitute commercial operation were mainly due to strong opposition from church leaders and certain Local Government Unit (LGU) officials experienced during the introductory phase and due to the absence of telecommunications service in some areas particularly in Mindanao. As of December 31, 2006, the Company had already deployed 980 on-line terminals around the VisMin territory.

From 1995 to 2005, the Company had provided the PCSO a single integrated system for its on-line lottery operations. On February 15, 2005, the Company, having assessed the obsolescence of its previous infrastructure, entered into a Supply and Service Contract with Scientific Games International (Scientific Games), a global marketing and technology leader in the lottery, pari-mutuel, and telecommunications industries, for the provision of a new system, AEGIS^TM. On November 21, 2005, the Company implemented the migration from the traditional Legacy lottery system provided by GTECH, a leading gaming technology and systems corporation, into the new AEGIS^TM System. On March 13, 2006, the Company entered into another Contract with Intralot, a company duly existing and organized under the laws of Greece and a leading supplier of integrated gaming and transaction processing systems, for the provision of another new system using the LOTOS® application software. As of December 31, 2006, the Company had provided the PCSO a two-network system for its VisMin on-line lottery operations.

The Contracts for the supply of on-line lottery system entered into by the Company with Scientific Games and Intralot in 2005 and 2006, respectively, contain a lease that should be accounted for as a finance lease. The change resulted in the recognition of lottery equipment and obligations under a finance lease amounting to 202.0 million. This also resulted in the reclassification of certain accounts in the 2005 statement of income. Both Contracts are coterminous with the Company’s ELA with the PCSO.

The area covered by the Company’s ELA with the PCSO encompasses 61 cities and 853 municipalities in the VisMin regions, including the provinces of PaMaRo. As of the end of 2006, the Company’s total terminal deployment covered 56 cities and 276 municipalities.

For the year ended December 31, 2006, the Company generated P471.8 million of revenues primarily through equipment rentals and maintenance and repair fees charged to PCSO, and posted P50.5 million of net income. As of the same date, the Company had total assets of P394.9 million and shareholders’ equity of P122.0 million.

In addition to its core gaming operations, the Company, on April 13, 2004, purchased 50 per cent of the outstanding capital stock of Innovative Solutions Consultancy Group, Corp. (Synergy), a joint stock company incorporated to manage enterprises engaged in the gaming business. Moreover, on May 31, 2004, Synergy acquired 80 per cent of the outstanding capital stock of Total Gaming Technologies, Inc. (TGTI), a domestic corporation founded in October 2002 to develop new games for the Philippine gaming industry and to provide consultancy service and state-of-the-art equipments to the local gaming operators through its strategic partnership with Intralot. TGTI has a distinct ELA with the PCSO for the nationwide operation of the Fast Keno game. A Shareholders’ Agreement was executed whereby Synergy shall provide management counsel and expertise to TGTI to ensure proper execution of the Fast Keno game, among others.

Recent Developments

Introduction of a new system. On March 13, 2006, the Company entered into a Contract with Intralot for the provision of another on-line lottery system. The introduction of this new system, together with the already existing system supplied by Scientific Games, will address the Company’s need for a bigger terminal roll-out considering the number of identified untapped areas in VisMin and the list of newly approved agents awaiting installation. As of December 31, 2006, total terminal roll-out has grown by approximately 32 per cent from year-end 2005.

Increase of coverage area. On March 29, 2006, Board Resolution 156 was passed, increasing the covered territory regions of the PCSO’s VisMin operations by approximately seven (7) per cent, through the inclusion of the provinces of Palawan, Masbate and Romblon (PaMaRo).

Redesign of game formats. On June 13, 2006, the PCSO started the second midday draw for the Suertres Lotto and on August 14, 2006, revised the 4D fixed payout back to pari-mutuel payout.

Introduction of a new digit game. EZ2 or the 2-digit game is the latest game to be played in a VisMin covered territory on a daily draw frequency. Its introduction however, is currently limited only to the newly connected agents in the territory. Its soft opening on December 8, 2006 contributed P141 thousand of the month’s sales.

Approval of new agents. There are 87 newly approved agents as advised by PCSO on February 15, 2007. As of the same date, 59 of the newly approved agents had been connected.

Termination of consultancy contracts. All consultancy contracts held by the Company, except for the new contract with Goldenlink Consultancy Group, Inc. (“Goldenlink”), the consultants for the launch of the EZ2 and for the on-line lottery operations in the provinces of PaMaRo, were terminated effective December 31, 2006, mainly due to the in-house capability of the Company to now sustain, manage, and develop the PCSO’s VisMin operations.