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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
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Act of 1934 for the fiscal year ended December 31, 1996 or
Transition Report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the transition period from to
Commission file number 0-19322
VIDEO LOTTERY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 81-0470853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2311 South Seventh Avenue
Bozeman, Montana 59715
(Address of principal executive offices) (Zip Code)
(406) 585-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 1, 1997, was approximately $34,050,000 (based on the last
sale price of such stock as reported by NASDAQ National Market System on such
date). (See Item 12 for a discussion of certain of the assumptions underlying
this computation.)
The number of shares outstanding of the registrant's common stock, $.01 par
value, as of March 1, 1997, was 10,318,730. (See Item 12 for a discussion of
other outstanding equity securities.)
THE EXHIBIT INDEX APPEARS ON PAGE 75.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Business 4
ITEM 2. Properties 31
ITEM 3. Legal Proceedings 31
ITEM 4. Submission of Matters to a Vote of Security Holders 32
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters 32
ITEM 6. Selected Financial Data 33
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
ITEM 8. Financial Statements and Supplementary Data 42
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 63
PART III
ITEM 10. Directors and Executive Officers of the Registrant 63
ITEM 11. Executive Compensation 67
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 71
ITEM 13. Certain Relationships and Related Transactions 73
PART IV
ITEM 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 75
Signatures 77
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Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competitive factors in the industry,
including additional competition from existing competitors or future entrants to
the industry; social and economic conditions; local, state and federal
regulations; changes in business strategy or development plans; the Company's
indebtedness; quality of management; availability, terms and deployment of
capital; business abilities and judgment of personnel; availability of qualified
personnel; and other factors.
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PART I
ITEM 1. BUSINESS
Video Lottery Technologies, Inc. (the "Company") was incorporated in
Delaware in May 1991. The Company acts as a holding company for eleven active
corporations. Unless the context otherwise requires, references in the form 10-K
for fiscal year ended 1996 ("Form 10-K") to the "Company" or "VLT" refer to
Video Lottery Technologies, Inc. and its subsidiaries; references to "AWI" refer
to Automated Wagering International, Inc., one of the Company's three principal
operating subsidiaries, which provides on-line lottery systems and services
primarily to governmental lottery authorities; references to "VLC" refer to
Video Lottery Consultants, Inc., another of the Company's three principal
operating subsidiaries, which designs, manufactures and markets casino and video
lottery gaming machines and central control systems; references to "UWS" or
"United Tote" refer to United Wagering Systems, Inc., the Company's third
principal operating subsidiary whose operating units provide computerized
pari-mutuel wagering systems for horse and greyhound racetracks, off-track
betting facilities and jai alai frontons. The Company also owns and operates a
racetrack facility in Sunland Park, New Mexico, which is accounted for as part
of the UWS operating segment. References to the "Subsidiaries" refer to AWI,
VLC, UWS and the other subsidiaries of the Company. The Company's principal
executive offices are located at 2311 South Seventh Avenue, Bozeman, Montana
59715, and its telephone number is (406) 585-6600.
Certain Recent Developments
On March 21 the New Mexico legislature voted to allow casino gaming at
pari-mutuel racetracks in New Mexico, including the Company's racetrack in
Sunland Park, New Mexico. The bill, which is anticipated to be signed by the
state's Governor, allows, among other things, the operation of up to 300 video
gaming machines per pari-mutuel racetrack facility for up to twelve hours per
day. The implementation of gaming is subject to the timing and satisfaction of
conditions of the legislation, including the state's formation of a separate
commission to oversee the gaming and other regulatory matters (including the
grant of necessary licenses to the Company). Consequently, the Company does not
anticipate that any revenues will be generated from the approved gaming until
late 1997 or early 1998.
On January 30, 1997 the Company and Electronic Data Systems Corporation
("EDS") reached an agreement to settle all claims against each other and
transition all services and employees back to the Company. In January 1994, EDS
purchased 545,454 shares of the Company's Common Stock and 1,912,728 shares of
the Company's preferred stock (the "Preferred Stock"). The Company and EDS also
effected a ten year agreement which, among other things, called for EDS to
provide to the Company enhanced computing, communications, system and
engineering and field maintenance services primarily related to AWI. In early
1996 the Company withheld payments to EDS primarily due to performance issues
and related on-line lottery customer disputes. The terms of the settlement
include the receipt by the Company of all of the Common and Preferred Stock
shares owned by EDS, certain property and equipment used by EDS in the provision
of services to the Company and the extinguishment of approximately $38 million
of outstanding fees in return for a $26 million note payable, by the Company,
which matures in 2004. As a result of the redemption of the EDS shares, EDS no
longer has a right to representation on the Company's Board of Directors. The
transition of services and related employees to the Company is anticipated to be
completed in the second quarter of 1997. (See Note 16 to the Company's
Consolidated Financial Statements.)
In 1996, AWI experienced a number of both positive and negative events. As
noted above, AWI had disputes with on-line lottery customers primarily due to
performance issues with EDS. The Arizona Lottery terminated its contract with
AWI in July 1996 and the Minnesota Lottery notified the Company of its intent
not to extend the current contract with AWI past the expiration date of August
1997. The Minnesota Lottery initiated the competitive bid process for a new
five-year contract and in December 1996 AWI was selected as the low bidder, and
is currently in negotiations with the Minnesota Lottery for the new contract. In
September 1996, AWI and the Kentucky Lottery agreed to terminate discussions
regarding a new contract to provide on-line lottery services due to the
uncertainties of strategic discussions the Company was having with EDS and other
parties. In November 1996, the Company announced that AWI had been selected for
the award of a new long-term contract to continue operating Florida's lottery
system. A competitor of the Company, GTECH, has protested the award. If the
award is upheld, AWI will begin negotiations with the Florida Lottery for the
new long-term contract. The administrative appeal process is anticipated to be
completed in the second quarter 1997. The Company cannot reasonably predict the
final results of the protest. AWI was also successful in extending its contract
term with the Montana Lottery from November 1996 to November 1998. The
California State Lottery ordered in excess of 2,000
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instant ticket validation terminals from the Company which were delivered in the
fourth quarter of 1996. Perhaps the largest success of the Company's on-line
lottery subsidiary in 1996 was the implementation and start-up of the Company's
most advanced version of its central site MasterLinkTM Advanced Gaming System
("MasterLinkTM system") in Maryland. While the start-up date was extended from
the original date by fewer than 30 days as a result of factors beyond the
control of AWI, the Company believes the complexity of the instantaneous
start-up of all the on-line lottery modules of the MasterLinkTM system,
inclusive of five-minute keno to be a very positive reflection of the
advancement of the Company's technology.
The Company's gaming machine subsidiary, VLC, started 1996 with the
installation of video gaming machines in a Nevada casino on a field trial. The
field trial was successful and the Nevada Gaming Commission approved the
Company's gaming machine for sales in Nevada under the Company's temporary
license, expiring in April 1997. The Company has applied for and is currently
proceeding with the application for a permanent license to replace the expiring
temporary license. The Company's gaming machine segment placed in excess of 400
gaming machines in Nevada in 1996 under trial programs and sales. As the
Company's video gaming machines gain market recognition in Nevada, the Company
expects sales levels to increase. The ultimate success of the Company in the
Nevada market cannot be reasonably predicted.
The Company's gaming machine segment was successful in gaining approval and
licenses to sell video gaming machines in a number of other jurisdictions with
varying forms of video gaming programs in 1996, including; New Jersey,
Minnesota, Wisconsin, Connecticut and Arizona. Significant sales in any of these
new jurisdictions cannot be reasonably assured but the Company believes that its
state of the art video gaming machine technology and product performance will be
positively recognized by customers in these markets. The Company is currently
licensed to sell gaming machines in 43 jurisdictions.
In the third quarter of 1996, the Company decided to no longer actively
pursue the disposal of the wagering systems segment. In 1995, the Company had
decided to sell the wagering systems and racetrack operations segment, excluding
the racetrack operations in Sunland Park, New Mexico and entered into a
non-binding letter of intent for the sale of the segment. The transaction was
subsequently abandoned because final terms could not be negotiated. The Company
continued to review other alternative disposal opportunities into the third
quarter 1996, however, due to operational improvements and industry and market
conditions, the Company decided to retain the segment and no longer actively
pursue the disposal of it. In conjunction with the decision to retain the
segment, the Company effected a restructuring of the segment and relocated the
manufacturing operations from Shepherd, Montana to the Company's primary
manufacturing facility in Bozeman, Montana. (See Note 2 to the Consolidated
Financial Statements.)
General
Video Lottery Technologies, Inc.
The Company conducts its operations primarily through three wholly-owned
subsidiaries, AWI, VLC and UWS (the latter more commonly known by the trade name
of its principal subsidiary, United Tote). The Company sells, designs,
manufactures, markets and operates lottery systems in the on-line lottery, video
lottery and casino gaming industry markets, as well as provides computerized
pari-mutuel wagering systems for horse and greyhound racetracks, off-track
wagering facilities and jai alai frontons, and owns and operates a racetrack
facility.
Automated Wagering International, Inc.
AWI designs, manufactures, assembles, installs, operates and maintains
on-line, computer-based networks for state lotteries in Delaware, Florida,
Maryland, Minnesota, Montana, Pennsylvania and South Dakota. An on-line lottery
network consists of lottery terminals located in numerous retail outlets, a
central computer system, computer software and communications equipment. In the
United States, AWI's products and services are typically marketed to lottery
authorities through long-term contracts, awarded through a competitive bidding
process, pursuant to which AWI maintains ownership of the lottery network and
operates it for the state in return for a percentage of ticket sales. In foreign
jurisdictions, lottery equipment is often sold and related software is often
licensed to lottery authorities for a fixed price. In February 1991, AWI entered
into an equipment sales contract with Norsk Tipping, the national lottery and
soccer pool organization for the Kingdom of Norway. The contract called for the
sale of terminals, communication equipment, a central control system, software
and knowledge transfer. The central system was installed in May 1992. AWI has,
through December 31, 1996, provided approximately 4,200 on-line terminals to
Norsk Tipping.
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Video Lottery Consultants, Inc.
VLC designs, manufactures and markets video gaming machines, central
control system software and related services for the gaming machine industry.
The gaming machine industry includes both video lottery operations and casino
gaming. Video lottery gaming is the use of video gaming machines to provide low
stakes entertainment gaming to enhance revenue for states and other
jurisdictions. The machines, offering games including poker, blackjack, bingo
and keno, as well as spinning reel games, are generally located in
age-controlled establishments such as bars, taverns and restaurants. This
segment of the industry is subject to governmental regulation and taxation which
may be controlled by a centralized computer system. Both VLC and AWI market
these centralized computer systems, with AWI concentrating on those systems that
also run the jurisdiction's on-line lottery. Video lottery gaming programs
provide substantial incremental sources of revenue to the governmental
jurisdictions without increasing general taxation. Currently seven states in the
U. S., five states in Australia, eight Canadian provinces, Iceland, Norway,
Sweden and South Africa have authorized video lottery gaming on a
jurisdiction-wide basis.
In addition, VLC sells its Winning Touch(R) video gaming machines to
land-based, riverboat and Native American casinos. The Company holds licenses to
sell gaming machines in Nevada, Mississippi and New Jersey, the three largest
casino markets in the U. S., as well as in all other major casino jurisdictions.
United Wagering Systems, Inc.
UWS designs, manufactures, operates and sells computerized pari-mutuel
wagering systems commonly referred to as "totalisators" for horse and greyhound
racetracks, off-track wagering facilities and jai alai frontons in North
America, South America, Spain, the Caribbean and the Philippines. A totalisator
system supports pari-mutuel wagering by controlling the acceptance of wagers,
calculating odds and payout, cashing winning tickets, and performing assorted
management, accounting and reporting functions. Each system consists of central
processing computers and peripherals, betting terminals, proprietary software,
tote boards and other displays and color video generation equipment. The
products and services of UWS are typically marketed to domestic facilities under
long-term service contracts. Compensation is usually based on a minimum fee plus
a percentage of the wagering volume of the facility. Foreign users typically
purchase the hardware and license the software for systems operations.
UWS also provides wagering terminals for use in casino race/sportsbooks. In
many jurisdictions, UWS is subject to extensive state regulatory and licensing
requirements similar to the other business segments of the Company.
The racetrack operation located in Sunland Park, New Mexico, typically
hosts live racing from late fall until May of each year. Additionally, the
racetrack facility participates in an inter-track wagering network with other
racetracks in the state for the entire year, either as a host track during live
racing or as a guest track when the live racing is located at another track.
Revenue from the racetrack operations accounts for less than four percent of the
Company's consolidated revenues.
Business of the Company
Traditional Lottery Industry Overview
Traditional lottery systems are operated by state, local and foreign
governmental authorities and their licensees in approximately 80 countries.
Governments have authorized traditional lotteries, such as lotto, numbers and
keno, primarily as a means of generating non-tax revenues. In the United States,
lottery revenues are frequently designated for particular purposes, such as
education, economic development, conservation, transportation and aid to the
elderly. The use of traditional lottery systems in the United States has grown
dramatically over the past two decades. Many states have become increasingly
dependent on their lotteries, as revenues from lottery ticket sales have become
a significant source of funding for designated programs. In fiscal 1970, only
two states had authorized traditional lotteries, selling an aggregate of $49.2
million in tickets. As of the end of 1996, 38 jurisdictions in the United States
were operating on-line lottery systems, with aggregate lottery sales in excess
of $34 billion. Worldwide lottery sales, excluding North America, exceeded $81
billion in 1996. The level of ticket sales in certain jurisdictions has tended
to level off or decrease in the last few years. The Company believes any such
trend may increase the attractiveness of video gaming machine systems to states
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seeking to supplement traditional lottery revenues; however, there can be no
assurance that this will prove to be the case.
As described below, although there are many types of lotteries in the
world, it is possible to categorize government authorized traditional lottery
systems into two principal groups: "on-line" and "off-line."
An on-line lottery system is generally used to conduct games such as lotto,
sports pools, daily numbers and keno in which players make their own selections.
Various games of chance are offered involving the selection of numbers from a
field of possibilities. A customer requests the particular game desired, selects
the desired numbers and determines the amount to be wagered from a
clerk-activated terminal provided to participating retailers by the lottery
vendor. The amount wagered per transaction is determined by lottery authorities
and is usually $.50 to $1.00 per wager. The network's terminals are typically
located in high-traffic retail outlets, such as newsstands, convenience stores,
gas stations, food stores, tobacco shops and liquor stores, which are selected
by the lottery authorities and sell tickets on the jurisdiction's behalf. The
data is entered either manually by keyboard or automatically through a card
reader. The wager is then transmitted via dedicated communication lines to the
central computer system where the information is verified, recorded and stored.
Winners are able to claim their prizes within minutes of the drawing of the
winning number for the game selected.
Off-line lotteries feature games which are not computerized and
typically feature instant ticket games in which players remove coatings from
pre-printed tickets ("scratchers"), which account for substantially all of the
off-line lottery sales in the United States. Outside of the United States,
off-line lotteries also include traditional on-line games (numbers, lotto, etc.)
which are offered through a manual, off-line system. Players' selections are
accumulated and delivered to a central processing location where the bets are
entered into the computer.
All of the United States jurisdictions operating traditional lotteries
currently include on-line lottery as part of their operations. Outside the
United States, many countries have government-operated or privately licensed
lotteries, most of which have historically been off-line. Approximately 85
foreign lottery authorities have implemented on-line lottery systems. A number
of other foreign jurisdictions, primarily in South America, Europe and Asia, are
currently considering the implementation of on-line lotteries. However, it is
difficult to predict which jurisdictions will implement a lottery system and the
effect, if any, on the Company.
There are several advantages to on-line lotteries as compared to off-line
lotteries. Most importantly, wagers can be accepted and processed by an on-line
lottery system until minutes before a drawing. In cases where a large prize has
attracted substantial wagering interest, the extended sales period increases the
potential for higher lottery revenue. Unlike instant games or scratchers, where
the number of winning tickets and amount of awards must be determined in
advance, on-line lotteries allow for the rollover of jackpots. In addition,
on-line lottery systems provide greater reliability and security than either
off-line numbers games or scratchers, allow a wider variety of games to be
offered, and automate accounting and administrative procedures which are
otherwise performed manually. Instant ticket game revenues have been growing at
a faster rate than total domestic U. S. lottery revenues because of relatively
higher payout percentages and the automation of instant ticket validation and
accounting systems. Such games compete with the on-line games provided on the
Company's systems.
Approximately 50% of the gross revenues of a domestic on-line lottery is
returned to the players in the form of prizes. Approximately 15% is used to fund
the operations of the lottery, including the expenses of the lottery authority,
costs of advertising, payments to point-of-purchase retailers and payments to
vendors such as AWI. The remaining amount, approximately 35%, is available to
the state to support specific public programs or as a contribution to the
state's general fund.
In the United States, products and services are typically marketed to
lottery authorities through long-term facilities management contracts, awarded
through a competitive bidding process pursuant to which the lottery vendor
supplies, installs and operates the lottery network for the state or
jurisdiction in return for a percentage of ticket sales. The vendor generally
retains title to the lottery system. Once a contract is awarded to a lottery
vendor, that vendor is typically the sole provider of on-line lottery services
and operations to that jurisdiction for a specified time period within a defined
geographic territory.
The international market, as well as a minority of United States
jurisdictions, is typically characterized by equipment sales contracts instead
of facility management contracts. The vendor sells the equipment, develops and
installs the software, designs the communication network and trains lottery
personnel in the operation of the
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system for a fixed fee. Other services, such as equipment maintenance and ticket
stock production, may be available under separate contracts.
Lottery Contracts
United States. The table below sets forth the lottery authorities in the
United States with which AWI presently has facilities management lottery
contracts. The table also sets forth information regarding the term of each
contract and, as of December 31, 1996, the approximate number of retail
terminals installed in each jurisdiction, and the revenues generated by the
lottery operations.
<TABLE>
<CAPTION>
Total On-Line Total
Date of Com- Expiration Lottery Lottery Revenues
mencement Date of Authority Revenues per Terminal
of Current Current Extension Terminals in 1996(1) in 1996
Jurisdiction Contract Contract(5) Options Operating (in millions) (in thousands)
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<S> <C> <C> <C> <C> <C> <C>
Delaware 10/94 9/99 3 one-year 353 $ 87.7 $ 248.4
Florida(2) 4/88 6/96 -- 8,207 1,510.2 184.0
Maryland 7/96 7/01 1 three-year
plus 2 one-year 3,800 930.4 244.8
Minnesota(4) 5/90 8/97 -- 1,925 106.2 55.2
Montana 11/96 11/98 -- 334 25.5 76.3
Pennsylvania(3) 1/89 12/98 -- 4,585 1,285.4 280.3
South Dakota 7/90 11/97 1 two-year 373 15.2 40.8
</TABLE>
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(1) Total sales of on-line tickets for fiscal year ended June 30, 1996.
(2) The Florida State Lottery accounted for 34% of AWI's total revenue during
1996. In November 1996, the Company announced that its on-line lottery
subsidiary had been selected for the award of a new five-year contract to
continue operating Florida's lottery system. A competitor of the Company,
GTECH, has protested the award. If the award is upheld, the Company will
begin negotiations with the Florida Lottery for the new five-year contract.
The administratiave appeal process is anticipated to be completed in the
early part of the second quarter 1997. The Company will continue to operate
the lottery system until the implementation of the new contract.
(3) The Pennsylvania State Lottery accounted for 24.1% of AWI's total revenues
during 1995.
(4) In December 1996 the Company was selected as the low bidder, and is
currently in negotiations with the Minnesota Lottery for the new contract.
(5) Expiration dates do not reflect the exercise of the lottery authority's
extension options.
Foreign Operations. In February 1991, AWI entered into an equipment sale
contract with Norsk Tipping, the national lottery and soccer pool organization
for the Kingdom of Norway. The contract included the initial sale of 1,800
terminals, communication equipment, a central control system, software and
knowledge transfer. The central system was installed in May 1992 and the initial
installation of AWI terminals was completed in 1993. Norsk Tipping has ordered
and AWI has provided approximately 2,400 additional on-line terminals through
December 31, 1996.
Facility Management Contracts. All of AWI's current domestic lottery
contracts are facilities management contracts under which AWI installs, operates
and maintains a lottery network while retaining ownership or control of the
lottery terminal network. The facilities management contracts typically have an
initial term of approximately five years, and generally contain one or more
options permitting the lottery authority to extend the initial contract term for
additional periods of up to five years in total. Prior to the expiration of the
initial or extended term, a lottery authority is generally required by law to
commence a competitive bidding process for a new lottery contract. There can be
no assurance that AWI will win a new contract in connection with this process.
The collection of lottery monies, the selection of winning lottery numbers
and the qualification of retail sales agents are usually the sole responsibility
of the lottery authority in each jurisdiction in which the Company operates a
lottery system. Further, the Company bears no financial responsibility for the
payment of lottery prizes.
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Facilities management contracts generally require sizable capital
expenditures by the vendor before the generation of revenues. These contracts
generally provide for periodic payments over the life of the contract directly
from the lottery authority to AWI, based on a percentage of on-line lottery
ticket sales. The level of lottery ticket sales within a given jurisdiction is
determined by many factors, including the population density, economic
conditions, the types of games played, the number of terminals, the size and
frequency of prizes, the nature of the lottery's marketing efforts and the
length of time the lottery system has been in operation. Established, on-line
lotteries have recently experienced a decline in growth rates or in some cases a
leveling or decrease of annual amounts wagered due, among other things, to
maturation of existing lottery games, instant games and economic conditions as
well as the growth of land-based, riverboat, and Native American-owned casinos,
which compete indirectly with on-line lotteries. The level of on-line lottery
ticket sales may also be affected by the growth of instant ticket lottery games,
which also compete with on-line lotteries.
The process for awarding contracts in new U. S. jurisdictions involves
enabling legislation in jurisdictions without an already authorized on-line
lottery followed by a competitive bid process. Lottery authorities generally
commence the contract award process by issuing a request for proposals, inviting
bids and proposals from various lottery vendors. The request for proposals
usually indicates certain requirements specific to the jurisdiction, such as
particular games which will be required, particular pricing mechanisms, the
experience required of the vendor and the amount of any performance bonds that
must be furnished. After the lottery authority has evaluated the bids and
accepted a particular vendor's bid, the lottery authority and the vendor
generally negotiate a contract in more detailed terms. Upon the finalization of
the contract, the vendor begins to install the lottery system. After the
expiration of the initial contract term and all extensions thereof, a lottery
authority in the United States may either negotiate further extensions or
commence a new competitive bidding process. Internationally, lottery authorities
do not typically utilize as formal a bidding process, but rather negotiate
proposals with one or more potential vendors. Marketing of the Company's lottery
products and services to lottery authorities outside of the United States may be
performed in conjunction with licensees and consultants with whom the Company
contracts for representation in specific market areas. Although neither a
condition of their contracts with the Company nor a condition of their contracts
with the lottery authorities, such licensees and consultants often agree with
the Company to provide on-site services after installation of the on-line
lottery system.
AWI installs and commences operations of a lottery network generally within
six to twelve months after being awarded a new lottery contract and, following
the start-up of the lottery network, is responsible for all aspects of the
network's operations. AWI operates lottery networks in each jurisdiction with
two or more central computer systems. In addition, AWI employs a dedicated work
force in each jurisdiction, consisting of a site manager, computer and hotline
operators, customer service and terminal replacement and repair technicians.
The equipment used in any jurisdiction must typically comply with
specifications established by that jurisdiction. New contracts typically require
new equipment of recent manufacture. Terminal equipment is typically depreciated
over the term of the related contract, including extensions upon their exercise,
by the lottery authority.
Under certain of AWI's facility management contracts, the lottery authority
has the option to purchase AWI's lottery system during the contract term at a
predetermined price. AWI's role with respect to the continued operation of a
lottery system in the event of the exercise of such purchase option is defined
as part of the purchase option with fees and services included with the original
bid. Exercise of such an option could substantially change the anticipated
profitability of the contract to AWI.
Under many of AWI's facilities management contracts, the lottery authority
has the option to require AWI to install additional terminals and/or add new
lottery games. Such installation may require significant capital expenditures by
AWI. However, since AWI's revenues from such contracts generally depend on the
level of lottery ticket sales, and such sales are generally increased by the
addition of new retail outlets and games, such expenditures have generally been
recovered through the revenues generated by the additional equipment or games
and revenues from existing equipment, although there is no assurance this will
continue to be the case. The potential additional terminals and new games are
agreed to in the bidding process and as such are taken into consideration when
determining the vendor's fee in the original bid.
AWI's contracts with the state lotteries contain provisions for assertion
of liquidated damages against AWI for failure to meet certain performance
standards. These conditions include aggressive implementation schedules and
ongoing performance standards and failure to perform may result in substantial
monetary liquidated damages, as well as contract termination. Liquidated damages
ranging from $5,000 to $250,000 per day for late system start-up and from $1,700
to $15,000 per minute for system downtime beyond a stipulated grace period are
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common to the domestic market. Although the actual liquidated damages imposed
are generally subject to negotiation, such provisions present an ongoing
potential for substantial expense. Damages, if assessed, are usually due within
30 days or may be deducted from revenues otherwise earned from the lottery.
Failure to repair terminals within a specified time period may be subject to
damages. The Company maintains errors and omissions coverage under risk
management policies which would cover certain but not all claims.
Typically, state lottery contracts also reserve the right to terminate the
contract for cause (i.e., failure of the vendor to substantially perform any
material requirement) after notice and a cure period. The state also reserves
the right to cancel a contract if the state enacts a statute which removes the
authority or ability of the state to conduct a lottery. The state may also
terminate a contract without cause or for the convenience of the lottery,
typically with at least 12 months prior written notice. Reasonable costs,
excluding anticipatory profits, will be reimbursed to the vendor for all
terminations except for a material breach.
Lottery contracts generally require the vendor to post a substantial bond
securing its performance. The terms of such bonds may require significant
collateral in the form of cash, cash equivalents or lines of credit.
Products and Services
In 1971, AWI designed and installed, for the New Jersey State Lottery, the
country's first on-line lottery system. Since that time, AWI has developed and
installed many system and service features that have subsequently become common
in the lottery industry, such as the internal control system, down-line loading
for terminals, the cathode ray tube terminal operator display, microfiche data
storage for lottery records, instant game accounting and integrated computerized
terminal maintenance control. AWI developed and installed systems for the
Florida, Washington, South Dakota, Montana and Pennsylvania State Lotteries to
provide instant on-line verification of off-line "scratcher" game winners
through dial-up devices and through the on-line terminal network.
In September 1993, the Company introduced its MasterLinkTM system. The
Company's first U. S. application of the MasterLinkTM system was to the Delaware
Lottery which awarded a five-year contract to AWI in January 1994. The express
purpose of the MasterLinkTM system is the management of an organization's
lottery and gaming machines. These gaming machines might include
teller-activated lottery ticket terminals, video lottery gaming machines,
player-activated sports betting terminals, instant ticket vending machines and
other electronic gaming-related devices. The MasterLinkTM system allows an
organization to monitor the status and performance of the gaming machines within
its jurisdiction, conduct accounting of and billing on the revenue from the
gaming machines, and control their configuration and operations. The
MasterLinkTM system is intended to be a flexible, cost-effective means of
providing these capabilities.
The lottery network marketed by AWI consists of the following principal
elements:
o Terminals. AWI designs the terminals used in its networks. The
terminals are designed for maximum security, minimum processing time
and flexibility to allow for customization of application functions to
each lottery's specifications.
o Software. AWI designs and provides all application software for its
lottery networks. AWI's software is designed to provide the following
network characteristics: rapid processing, storage and retrieval of
transaction data in high volumes; the ability to down-line load, i.e.,
to reprogram the lottery terminals from the central computer
installation via the communications network to add new games and
feature a high degree of security and redundancy to guard against
unauthorized access and tampering and to ensure continued operations
without data loss; and a comprehensive management information and
control system.
o Central Computers. Each of AWI's lottery networks contain one or more
central computer installations to which the lottery terminals are
connected. AWI's prior generation central control system is designed to
run on the Cyber 930, but the MasterLinkTM system is designed to run on
UNIX-based central computer systems such as IBM RS/6000 systems,
instead of the proprietary Cyber-series computers. The specifications
for the configuration of AWI's central computer installations are
designed to provide continuous availability, high data handling
capability and maximum security.
o Communications. AWI's lottery terminals are typically connected to
the central computer installations by dedicated telephone lines owned
or leased by the jurisdiction in which the network is located in
conjunction with proprietary network communications controllers and
monitored by a proprietary network
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<PAGE>
management system. Due to the varying nature of telecommunications
services available in lottery jurisdictions, AWI has developed the
capability to interface with a wide range of communications networks.
AWI also has the expertise to provide and integrate alternate
technologies, such as microwave and radio transmission, integrated
services digital networking (ISDN), and data over voice.
o Game Design. An important factor in maintaining and increasing public
interest in lottery games is innovation in game design. AWI, in
conjunction with lottery authorities, utilizes principles of
demographics, sociology, psychology, mathematics and computer
technology to recommend to lottery authorities customized lottery games
which are intended to appeal to the populations served by its lottery
systems. The principal characteristics of game design include frequency
of drawing, types of prizes, cost per play and setting of appropriate
odds. The Company's MasterLinkTM system and OvationTM line of terminals
are designed to efficiently permit the development and rapid deployment
of new games and targeted on-line game-related promotions. The Company
believes that these capabilities should enhance the ability of the
lottery authority to increase on-line ticket sales, and result in more
revenue for the Company. These capabilities should also enhance the
Company's success rate in competing for domestic lottery contracts.
There can be no assurance, however, that either will happen.
The Company believes its systems are state-of-the-art in terms of
technology and performance. In 1996, AWI spent $16.0 million on product support
and development, as compared to $14.9 million in 1995 and $17.6 million in 1994.
Pursuant to the Company's terminated (see Note 16 to the Consolidated Financial
Statements) agreement with EDS, primarily all of AWI's research and product
development during 1996, 1995 and 1994 was performed by EDS personnel.
Gaming Machine Industry Overview
Video and slot machine gaming constitutes one of the fastest growing
sectors in the gaming industry in the 1990s. The installed video and slot
machine equipment base has expanded from approximately 153,000 units in 1990 to
over 450,000 units at the end of 1996. On average, approximately 100,000 new
machines, or $580-$600 million in total sales volume at retail prices, are
estimated to be sold to the North American market each year over the next 2-3
years. Broadly, the market can be divided between the government systems market
(video lottery gaming) and the casino market (including traditional casinos,
riverboats and Native American casinos).
Video lottery gaming is the use of video gaming machines to provide low
stakes entertainment gaming, such as video spinning reels, poker, blackjack,
bingo and keno to enhance revenue for states and other jurisdictions. Since the
state of Montana legalized stand-alone video gaming machines in the mid-1980s,
six additional states have expanded into video gaming. Video lottery offers an
alternative source of revenue without increasing general taxation. In
particular, video lottery provides an opportunity to enhance overall lottery
revenues, which may be especially attractive to jurisdictions with
well-established traditional lotteries. Thirty-seven out of fifty states
currently have some form of video or on-line lottery program.
Currently seven U. S. states, five states in Australia, eight Canadian
provinces, Iceland, Norway, Sweden and South Africa have authorized video
lottery gaming on at least a limited basis. While there can be no assurance that
other jurisdictions will introduce video lottery systems or that existing
jurisdictions will continue operations, based on its current market share, VLC
should continue to be a significant supplier of machines and central control
systems to this segment of the industry.
The video lottery gaming market is different from the casino market and the
traditional lottery market. Unlike video gaming machines designed for the casino
market, most video lottery gaming machines are located in places where gaming is
not the principal attraction (i.e., bars and restaurants). The stakes on video
lottery gaming machines typically range from $0.25 to $2.50 per play, and
payoffs typically are capped at $100 to $1000. In addition, in most
jurisdictions, the payment of jackpots differs as compared to traditional gaming
machines. After inserting money into a video lottery machine, the player is
issued credit and plays the machine like a traditional video gaming machine.
Player losses are deducted from the credit and winnings are added to the credit,
instead of coins being dropped into a tray. When the player is finished, the
video lottery machine prints out a ticket showing the remaining amount of
credit. The ticket is redeemable for cash at the establishment's register. More
recently, some video lottery jurisdictions, like Delaware, have moved into the
more traditional casino environment with state-owned casinos at pari-mutuel
facilities (primarily racetracks). The machines in these locations pay out in
coins from a hopper. Compared to most traditional lottery games, video lottery
provides a higher level of entertainment and instant gratification for winners.
Video lottery offers players a payback percentage of 80% to
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94%, which is lower than most traditional casino games, but greater than
traditional state lotteries where payback is typically 50%.
There are three basic regulatory ownership structures in which video
lottery can be implemented. Under private sector ownership, the gaming machines
may be owned either by the owners of the establishments in which the gaming
machines are placed, by the operators of coin-operated machine routes or by
distributorships who contract with location owners to install, service and
maintain the gaming machines. This ownership structure has been adopted in
Montana, South Dakota, Louisiana, West Virginia, New Brunswick, Prince Edward
Island and South Australia. A variation of this system involving two
government-authorized operators between which the market is divided has been
adopted in Victoria, Australia. Alternatively, the government can own the
machines. This is the form of ownership adopted in Alberta, Saskatchewan,
Newfoundland, Nova Scotia and Quebec in Canada and in the Northern Territories,
Australia. In Oregon, the government has leased rather than purchased the gaming
machines. In Delaware and Rhode Island, the contractor shares in the revenue
stream with the state while maintaining ownership. Third, a "sole-source"
private sector entity can own the machines and operate them through a turn-key
arrangement with the government in exchange for a participation in the lottery
revenues. This system has not been adopted by any jurisdiction; however, states
may explore this alternative as a means to more efficiently operate their video
lottery.
In 1996 and 1997 certain jurisdictions, most notably Louisiana and Alberta,
Canada, have allowed voters to decide on the continued operation of video
lottery locations and casinos in their cities and counties. In Louisiana, voters
in approximately one-half of the state's parishes voted to ban video lottery
operations. Existing locations will be allowed to operate for approximately two
years before the machines must be removed. In Alberta, only one small city has
voted to date, and voters there have given the local casino seven days to remove
machines. More cities in Alberta are expected to hold elections in the spring.
The approval of gaming in new land-based casino jurisdictions, riverboat
gaming, Native American casino gaming and networked video lottery systems has
driven gaming equipment demand growth during the 1990s. The construction of
large scale destination resorts in Las Vegas in recent years has contributed to
this demand. In Las Vegas, Mississippi and Atlantic City additional expansion
projects are scheduled for completion in 1997. In the United States, casino
video gaming is permitted in Colorado, Illinois, Indiana, Iowa, Louisiana,
Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota, as well as
on Native American lands in several additional states including Arizona,
Connecticut, Iowa, Michigan, Minnesota, North Dakota, Oregon, South Dakota,
Washington and Wisconsin. Outside the United States, legalized gaming is still
in its nascency. Canada, Australia and France are the most developed, but Asia,
South Africa and South and Central America are all expanding or exploring gaming
operations. While 20-30% of the demand for casino gaming machines relates to
replacement sales, most of the growth stems from the development of new casinos.
Casino gaming is considered a subset of consumer entertainment
expenditure. Its contribution is significant with $44.4 billion in U.S. gaming
industry revenue in 1995. This figure dwarfs the $5.5 billion spent on movies,
the $12.2 billion spent on recorded music, the $14 billion spent at theme parks
and other amusement activities and the $13.3 billion spent on spectator sports
and other live events. With this evidence for the intrinsic demand for gaming,
the expected growth drivers for the industry are twofold -- a strong consumer
appetite for the product coupled with a desire by state governments to find
alternative revenue sources. These dual forces, with a strengthening consumer
acceptance of gaming, point toward a continued expansion of casino style gaming,
although there can be no assurance that this trend will continue.
Although a significant percentage of Nevada's current machine mix consists
of video gaming machines, the Company will still be competing for casino floor
space with traditional slots. Most of the existing video machines are video
poker machines and do not offer multiple games as the Company's machines do.
Market Overview
Replacement product demand for gaming machines is anticipated to accelerate
in 1997. This creates an opportunity for the Company to introduce new games and
capitalize on its superior machine performance and advanced technology. Future
replacement demand will accelerate as gaming equipment in markets opened in 1991
gradually reach replacement age. It is estimated that the base slot machine
replacement market should reach 82,000 units in the United States by the end of
the decade. Adding 17,000 government systems machine replacements brings the
total gaming machine replacement demand to an estimated 95,000-100,000 units by
the year 2000.
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<PAGE>
Australia continues to show strong growth potential. Victoria, Australia,
authorized private sector placement of 5,000 terminals when operations commenced
in August 1992. In addition, the Victoria Government lifted its moratorium on
gaming machine placements, raising the level of permissible terminals from
20,000 to 27,000 for 1996. The Company entered into technology agreements with
Datacraft Technologies Pty Ltd which will terminate in April 1997, pertaining to
the manufacturing of the Company's gaming machines for use in Australia. The
Company plans to distribute its own gaming machines in Australia. Additional
growth is expected in Norway, Sweden and South Africa. There can be no
assurance, however, as to any such growth prospects.
The Company commenced sales of its gaming machines to state-licensed
casinos in Colorado in the third quarter of 1994. In June 1994, the Company
entered into a technology transfer agreement with Datacraft Technologies Pty
Ltd, for the manufacture and sale of the Company's gaming machines to a licensed
casino in Victoria, Australia. The Company began selling machines in the Nevada
market in May 1996. Additionally, the Company began selling gaming machines in
New Jersey in July 1996 through a distribution arrangement with Surfside Casino
Products. The Company has entered the riverboat market in Iowa, Indiana,
Louisiana and Mississippi.
In the Native American market, the Company has entered into a distributor
agreement with Lieberman Gaming Company to market video gaming machines to
casinos in Iowa, Michigan, Minnesota, North Dakota, South Dakota and Wisconsin.
The Company has placed additional machines at Native American casinos in
Arizona, Mississippi and Oregon.
The Company believes gaming at racetracks may expand as more jurisdictions
pass enabling legislation. The Company plans to leverage the relationships
developed with the tracks through United Tote to attempt to gain entrance into
these new markets. On March 21 the New Mexico legislature voted to allow casino
gaming at pari-mutuel racetracks in New Mexico, including the Company's
racetrack in Sunland Park, New Mexico. The bill, which is anticipated to be
signed by the state's Governor, allows, among other things, the operation of up
to 300 video gaming machines per pari-mutuel racetrack facility for up to twelve
hours per day. The implementation of gaming is subject to the timing and
satisfaction of conditions of the legislation, including the state's formation
of a separate commission to oversee the gaming and other regulatory matters
(including the grant of necessary licenses to the Company). Consequently, the
Company does not anticipate that any revenues will be generated from the
approved gaming until late 1997 or early 1998.
Video Lottery Markets
The following table, as of December 31, 1996, sets forth certain
information concerning the number of Company (through its subsidiary VLC) and
non-Company video lottery gaming machines in operation in the jurisdictions that
currently have video lottery operations:
<TABLE>
<CAPTION>
Central VLC Share
Commencement Ownership Control Number of -------------------
Jurisdiction(1) Date Structure System Terminals(2) Terminals(3) %
- ------------- ------------ ------------------ ------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Montana(4) 1985 Private(5) None 17,775 4,070 22.4%
South Dakota(6) 1989 Private VLC 7,985 7,346 92.0%
Atlantic Canada(7) 1990 Private/Government VLC 9,799 3,763 38.4%
Saskatchewan 1993 Government GTECH 3,566 1,148 32.2%
Quebec 1994 Government VLC 14,636 4,919 33.6%
Oregon8 1992 Government IGT9 8,804 4,974 56.5%
Louisiana 1992 Private IGT 15,719 8,719 55.5%
Alberta, Canada 1992 Government GTECH 5,792 3,833 66.2%
Iceland 1991 Charitable VLC 1,000 430 43.0%
Rhode Island10 1992 Government GTECH 1,635 440 26.9%
South Australia 1994 Private VLC 10,000 1,000 10.0%
Victoria, Australia11 1995 Private VLC 3,500 1,400 40.0%
Victoria, Australia11 1995 Trust VLC 11,000 5,000 45.5%
Delaware12 1995 Government AWI 335 275 82.1%
Northern Territory 1996 Government VLC 700 80 11.4%
------- ------
Total 112,246 47,397 42.2%
======= ====== =====
</TABLE>
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<PAGE>
(1) Excludes several other jurisdictions where test operations are in progress.
Excludes Manitoba, which currently has authorized video lottery operations
in rural areas and Winnipeg hotels and lounges only. Approximately 530
video gaming machines are in operation in this jurisdiction. Excludes
Norway where machines are run independently by various charitable
organizations. In 1996 the Norwegian Red Cross installed a VLC central
system that currently is operating with 300 VLC machines. Excludes Sweden
where a program using an IGT central system installed in 1996 is just
beginning operations. VLC does not participate in this market.
(2) In operation as of October 1996.
(3) Number of VLC gaming machines sold may vary from number in operation.
(4) Total number of video lottery gaming machines and number of VLC gaming
machines based on number of gaming machines licensed, according to the
Montana Gambling Control Division and VLC shipment reports. The Company
commenced selling its gaming machines in Montana in May 1988. At March 31,
1988, the estimated number of gaming machines in operation in Montana was
7,303.
(5) Private includes coin Operators and/or Location owners.
(6) Total number of gaming machines based on information provided by the South
Dakota Lottery. Number of VLC gaming machines based on VLC shipment
reports.
(7) Total number of gaming machines and number of VLC gaming machines based on
information provided by Atlantic Lotto. Atlantic Canada encompasses the
provinces of New Brunswick, Newfoundland, Nova Scotia and Prince Edward
Island. New Brunswick and Prince Edward Island have adopted a private
ownership structure, while in the provinces of Newfoundland and Nova
Scotia, the gaming machines are owned by the government or its appointed
agent.
(8) Total number of gaming machines and number of VLC gaming machines based on
contract with Oregon State Lottery.
(9) International Game Technology. In 1995, the system contract was awarded to
GTECH. Transition of the central system operation to GTECH is anticipated
during 1997.
(10) Video lottery operations are authorized at only two pari-mutuel facilities
of which the Company is one of four suppliers.
(11) Tattersall Sweep Consultation (the lottery) and TABCORP (the off-track
racing association) are the two approved operators in the state of
Victoria.
(12) VLC supplies video machines to Dover Downs (120) and Delaware Park (155).
IGT supplies video machines to Harrington Midway (60). There are also 2,163
mechanical spinning reel games at the three tracks.
Casino Gaming Markets
In the past few years, casino gaming has benefited from the significant
expansion of legalized gaming, primarily in the Midwestern, Native American and
International markets. Additionally, the success of both riverboat and Native
American gaming is enhancing the desire of some states to authorize casino
gaming. The combination of fiscal budget pressures, neighboring state
competition, and strong consumer acceptance may sustain new jurisdiction
approvals in the future.
Revenues in all casino segments increased in 1996. In "traditional" casino
markets, Nevada recorded a 0.8% annual gain in casino revenues, reaching the
$7.4 billion mark for fiscal 1996. Despite the increasing competition around the
New Jersey market, casinos in Atlantic City posted $3.8 billion in revenue in
1996, slightly higher than 1995 revenues. Various casino expansions and new
projects increased the number of gaming positions in casinos in these two
markets at year-end 1996 by 3%.
Existing riverboat casino markets in Louisiana, Mississippi, and Iowa
continue to generate increasing revenues, while new markets, such as Indiana
appear to be performing well. Riverboat casinos continue to provide gaming
equipment manufacturers with excellent replacement and new machine placement
opportunities.
At the end of 1996, there were an estimated 100 legal compacted Native
American casinos offering slot machines and/or table games to patrons in 21
states. As a whole, revenue performance of Native American casinos continues to
increase. This market continues to be very viable for video gaming equipment
manufacturers.
International markets outside of Australia and Europe are less developed.
Most opportunities will require strong diplomatic approaches and partnerships
with local interests.
Over the past decade, advancements in gaming machine technology have
attracted a greater number of North American players to slot and video gaming
machines due primarily to higher jackpots and enhanced player
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<PAGE>
appeal. For casino operators, video gaming machines are a less expensive,
revenue-generating alternative to table games, which require significant labor
to operate.
The installed gaming machine equipment base in domestic markets exceeded
450,000 units in 1996. An additional 75,000 machines will likely be integrated
into the base market by the end of 1999.
Gaming Machines
The Company seeks to capture a significant portion of the market for its
gaming machines by offering a technologically advanced and reliable machine to
the operator, and a fun, fast, easy game to the player. The Company's current
generation of gaming machines incorporates interactive touchscreen control
technology on a multi-color video display. Each gaming machine is capable of
storing over 100 different games in memory, based on the games' memory
requirements. The machine can present up to twelve different games selected
through a menu format, such as video spinning reel games, poker, joker poker,
keno, bingo, beano and blackjack. The player can vary the amount of each wager.
The number of games that may be offered on a gaming machine, the specific games
and the amount that a player can wager are determined by the regulating
authority in each jurisdiction.
The gaming machines also incorporate a variety of menu-driven internal
accounting, security and diagnostic features, such as on screen accounting,
audit and game statistics. The machines have redundant and self-correcting
memory and self diagnostic circuitry designed for effectiveness in widely
dispersed locations. The gaming machines are manufactured with a set of custom
components that can interface with various peripheral devices (such as coin and
bill acceptors, coin hoppers, printers and ticket dispensers) in a modular
design for ease of maintenance and flexibility of configuration.
The Company recently introduced its Winning Touch(R) Power SeriesTM, an
enhanced graphics version of its Winning Touch(R) gaming machine. Besides
offering an enhanced graphics engine and improved sound capabilities, this
machine's design provides greater flexibility, capacity and more efficient
software development capabilities than its predecessor. The Power SeriesTM has
been submitted to Nevada regulators for testing. The Company expects to receive
final approval in the third or fourth quarter of 1997. The Company's video
gaming machines typically sell for between $4,500 and $7,900, depending on the
configuration and generation of the machine.
The innovative graphics and advanced technology that have been key
contributors to VLC's success in the video lottery market will benefit the
Company as it seeks to gain market share in the casino marketplace. The games,
the players, and the operator's needs such as enhanced reliability and revenue
generation, are the same for both industries. The knowledge and experience
acquired through its video lottery operations should enable VLC to further
enhance the superior playability and appeal of its machines in the casino
markets.
Marketing and Distribution
The Company must obtain a license and machine approval before it can sell
machines in either the casino or video lottery markets. The following chart
shows the jurisdictions where VLC currently is licensed and what license
applications have been filed for which approval is pending.
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<PAGE>
<TABLE>
<CAPTION>
CURRENT JURISDICTIONS IN WHICH VLC IS LICENSED TO CONDUCT BUSINESS
- -------------------------------------------------------------------------------------------
UNITED STATES INTERNATIONAL
- --------------------------------------------------------------------
Native American
Video Lottery Casino/Riverboat Charitable Market
- ------------- ---------------- ---------- --------------- ---------------------
<S> <C> <C> <C> <C>
Delaware Colorado (casino) Mississippi Arizona Australia
Louisiana Indiana (riverboat) Ak-Chin South Australia
Montana Louisiana (casino) Fort McDowell Western Australia
Oregon Louisiana (riverboat) Gila River Tasmania
Rhode Island Mississippi (riverboat) Tonto Apache Victoria
South Dakota Nevada (casino - White Mountain Northern Territory
temporary) Apache Canada
New Jersey (casino) Yavapai-Apache Alberta
Deadwood, South Connecticut New Brunswick
Dakota (casino) Kansas Newfoundland
Iowa (riverboat) Sac & Fox Nova Scotia
Missouri (riverboat - Louisiana Prince Edward Island
temporary) Tunica-Biloxi Quebec
Michigan Saskatchewan
Bay Hills Iceland
Minnesota Norway
Mississippi Peru
Choctaw LICENSING
Oregon APPLICATIONS FILED:
Coquille Nevada Gaming
Umatilla Commission and State
Warm Springs Gaming Control Board
Wisconsin New South Wales
Mpumalanga, South
Africa
Ontario, Canada
West Virginia
</TABLE>
VLC began its sales efforts at casinos in Colorado, a predominantly
"locals" environment. Colorado is geographically close to VLC headquarters
allowing for better service and monitoring. VLC then entered the Louisiana
market because of the success of its Winning Touch(R) gaming machine in the
video lottery market. In 1995, VLC placed games in the Mississippi casino market
in both riverboat and Native American casinos. The Company's temporary license,
which expires in April 1997, was issued by the Nevada Gaming Commission in April
1995. The application for a gaming license up for consideration this year by the
Nevada Gaming Commission is discussed under "Nevada Regulatory Matters." (See
"Government Regulations - Nevada Regulatory Matters.") In 1996 VLC opened
offices in Las Vegas and Reno, Nevada, hiring local sales staff and technicians.
The Company finalized field trials and began selling machines into the Nevada
market in May 1996.
The marketing and distribution of gaming machines is controlled to some
extent by the statutory and regulatory structure adopted in each jurisdiction.
The Company markets its gaming machines both through a direct sales force and
distributors. Currently, sales are made through a distributor in Louisiana,
South Australia, New Jersey and the Native American markets of the mid-western
United States. The Company also plans to use a distributor for the Connecticut
market. In deciding whether to use a distributor in a new jurisdiction, the
Company will consider a variety of factors, including existing relationships
with operators and location owners, the ability of a distributor to service the
market after the sale, the distributor's financial condition, any regulatory
constraints and the long-term economics to the Company of direct sales as
opposed to sales to distributors.
The Company does not have standard credit terms for the sale of gaming
machines. The terms on which the Company typically sells depend in part on the
market into which the gaming machines are sold. Due to intense competition, the
Company has provided flexible credit terms and has supplied gaming machines on
an operating lease basis.
- 16 -
<PAGE>
The Company's gaming machines are typically covered by a 90-day parts and
labor warranty. The Company provides after-market parts and service to coin
operators and other servicing agents. These after-market parts and services
include technical repair and hardware and software upgrades and enhancements.
The Company's maintenance staff also provides follow-up services with respect to
updates to hardware and software on the Company's gaming machines. The Company
expects these updates to provide an increasing portion of the Company's revenue
in the future as customers request a more varied library of games and increased
reporting features. Once a new game is developed, the ease with which the
Company's video machine software can be changed is an attractive selling point.
Central Control Systems
The Company derives revenues from its central control system software
through the grant of licenses to use the software and by providing installation
and maintenance services with respect to the software.
Video lottery gaming machines can be operated either through a central
control system controlled by a governmental authority or on a stand-alone basis.
In every video lottery gaming jurisdiction except Montana, the gaming machines
are connected to a central control system. The Company believes that the greater
control and monitoring ability offered through central control systems will
cause any new jurisdictions to adopt such systems. Similar technology can also
be used by casinos for machines on its floor, as monitoring ability and the use
of progressives become increasingly important. The Company's central control
systems are designed with features intended to appeal to the concerns of the
operator, including:
o Security. To ensure security of communications, VLC's machines have
sophisticated features, including encryption, sequencing and timing of
data transmissions.
o Control. Each gaming machine on the system must be enabled by a call
from the central site before it is capable of displaying a playable
game and can be disabled by the central control system at any time.
o Compatibility. The Company's central control system allows gaming
machines made by other manufacturers to run on the system.
o Economy of Operation. The Company's central control system can be
operated in a dial-up format which is economical to install and
operate compared to either a traditional on-line lottery system (using
dedicated lines) or a stand-alone system of non-communicating video
gaming machines. However, the system can run in a real-time
environment (on-line) should a jurisdiction require this feature.
o Reports and Audits. The central site receives on-demand reports from
each gaming machine on the system and automatically audits the
programming of every machine on a daily basis.
o Electronic Fund Transfer. The central control system is capable of
processing EFT functions which translate to easier and quicker funds
collection.
o Flexibility. The system is designed to be flexible so as to meet the
needs of various sized markets, to accommodate regulatory changes and
to adapt to new game designs and features.
The Company's central control system software is marketed through the
Company's direct sales force. The marketing efforts for a video lottery central
control system typically begin when a legislative body is considering the
adoption of video lottery enabling legislation. Once enabling legislation
calling for a central control system is adopted, the selection of the central
control system is normally accomplished through a formal bid process that
involves submittal of proposals followed by a competitive evaluation period. The
Company's marketing efforts for its lottery products and services also
frequently involve top management in addition to the Company's marketing staff.
The Company also retains persons who are registered as lobbyists in a given
jurisdiction.
The Company designed and installed software for the video lottery central
control systems in South Dakota, Loto Quebec, the Atlantic Lottery Commission's
("ALC," the regulatory body governing lotteries in eastern Canada)
multi-jurisdictional system now covering four provinces in eastern Canada,
Tattersalls and TABCORP in Victoria, Australia, Independent Gaming Corporation
in South Australia and the Northern Territory Racing & Gaming Authority of
Northern Territory, Australia and the Norwegian Red Cross. The Company's
MasterLinkTM system is
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<PAGE>
state-of-the-art technology, utilizing an IBM UNIX platform or DEC ALPHA
platform as is the case with ALC, and offers customers the opportunity to
operate on-line lottery functions and video lottery terminals from a single
central system.
The first video gaming machine application of the MasterLinkTM system
running concurrently with the traditional on-line lottery application became
operational in Delaware in December 1995, when the gaming facilities licensed by
the Delaware State Lottery at two of the state's pari-mutuel tracks opened. The
system is successfully reporting data from both video gaming machines and
spinning reel slot machines as well as the on-line lottery.
The video gaming application of the MasterLinkTM system is being marketed
as a stand-alone system under the name Advanced Gaming System. This system is
modular in design and provides for the addition of expansion modules to allow
for progressives, player tracking, casino management systems and slot accounting
systems.
Product Research and Development
Video gaming customers look for a variety of features in video gaming
products. The technology in current machines will develop and improve over time,
forcing manufacturers to invest in ongoing game development. VLC's Winning
Touch(R) gaming machine contains libraries with numerous game variations and
allows for swift reprogramming to provide the newest games. In addition to
offering expansive product lines, casinos require customized services for
specific requests, including video graphics, game development and floor space
design.
As video gaming becomes more widespread and players become accustomed to
the ever-improving graphics and interactive features of video games, the Company
believes that video gaming machines will make up a larger segment of the gaming
environment. Because of this, the focus of research and development is shifting
toward more emphasis on software development. The same shift is happening on the
central systems side as both video lottery jurisdictions and casinos demand more
reporting features, downloadable games and additional forms of jackpotting and
linked progressives. The Company expensed approximately $3,143,000, $2,358,000
and $2,305,000 for costs incurred in the support, development and enhancements
of new and existing video products for the years ended December 31, 1996, 1995
and 1994, respectively.
Route Operations
Through three of its subsidiaries, VLT owns, operates and maintains video
lottery and amusement machines in business establishments located in three areas
in southern Montana. The Company believes its route operations, in addition to
generating recurring revenue and predictable operating profit, enable the
Company to understand the needs and preferences of players and coin operators by
providing testing grounds for new hardware and software concepts. This research
enables the Company to observe player response to various terminal
configurations and to use this data to improve its terminal design.
As of December 31, 1996, the Company operated 1,128 video lottery gaming
machines and 822 amusement machines in approximately 170 locations in Montana.
The Company's route operations primarily utilize coin-operated video poker and
video keno machines. The amusement machines consist principally of coin-operated
video machines, pinball machines, pool tables, CD players and juke boxes. Based
on its familiarity with the relatively small number of competitors of its route
operations and its familiarity with substantially all of the potential locations
for video lottery machines in the market areas, the Company believes that its
route operations have a significant share of the video lottery machine market.
During the year ended December 31, 1996, the route operations generated
approximately $16.5 million or 9.4% of the Company's consolidated revenues.
The Company enters into agreements with owners of business establishments
to install video lottery and amusement machines at their businesses. The number
of machines per location is determined by available space, customer base,
competition, preference of the owner of the establishment, and, in the case of
video lottery gaming machines, licensing limitations. The agreements typically
provide for revenue sharing with the location owner based upon a percentage of
the net revenues generated by the Company's machines. In certain instances, the
Company or one of its subsidiaries may assist the location owner with obtaining
financing relating to the location, including providing a guaranty of such
financing. The agreements require the Company to install, maintain and service
machines installed at the location.
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Pari-Mutuel Wagering Systems Industry Overview
The market for pari-mutuel wagering systems in North America includes horse
and greyhound racetracks, a growing number of off-track betting (OTB) facilities
and jai alai frontons. Pari-mutuel wagering is authorized in 43 states in the
United States, all provinces in Canada, and many foreign countries. Pari-mutuel
wagering is a form of wagering in which patrons bet against each other in
separate pools, rather than against the operator of the facility or with preset
odds. As a result, wagering odds are determined by the size of the pools and the
distribution of dollars established by the patrons' wagers. The odds change
continually until betting closes at the start of a race or event. The odds and
payout information are conveyed to the public and updated frequently on display
boards and on video monitors located at various places throughout the facility.
The facility operator administers the pool and is compensated by a percentage of
the gross monies wagered at the facility (the "handle"). There are approximately
400 pari-mutuel wagering facilities in North America and numerous others
worldwide.
While on-track attendance and handle from pari-mutuel wagering in the
United States has markedly decreased over the last decade as jurisdictions have
legalized other forms of gaming, there has also been a substantial increase in
simulcast and off-track wagering handle during the same period. Due to the
significant increase of alternate forms of gaming during the last several years,
there can be no assurance that such historical patterns will remain the same in
the future, nor can the Company predict the magnitude of any resulting net
economic effects on this segment of its business.
Computerized pari-mutuel wagering systems, commonly referred to as
totalisators, support pari-mutuel wagering by accepting wagers, calculating odds
and payouts, distributing such data to display systems, verifying and cashing
winning tickets, and performing assorted management, accounting and reporting
functions. Totalisator systems can be used to serve on-track, off-track and
inter-track wagering. On-track wagering is conducted on the premises of a
racetrack while the live race is taking place. Off-track wagering takes place
somewhere other than at a racetrack, most commonly at off-track betting
facilities, most of which televise the event taking place. OTB systems generally
combine or commingle wagers from the remote locations into common pari-mutuel
pools maintained at the host track. Inter-track wagering is similar to off-track
wagering in that it entails the combination of wagering pools from different
locations into a common pool at the host track, the significant difference being
the location where the wagering occurs. Inter-track wagering occurs at one
racetrack when it accepts bets on a live racing event occurring at another
track. An event is televised from the host track where the race is transmitted
to one or more "guest" tracks and the wagers from the guest tracks are then
transmitted to the host track's computer system and combined with the host
track's pari-mutuel pool. The host track's central computer calculates the
merged or combined pool and returns that information to the guest tracks. As a
result, betting patrons at the guest tracks are in the pari-mutuel pool of the
host track and they may in some instances receive the same payout for winning
wagers as they would have received had they attended the live racing event at
the host track.
The most common form of totalisator system used in North America is the
computerized "sell/cash" system that allows patrons to place bets and to cash
winning tickets at the same window. A typical sell/cash system consists of a
central computer, as many as several hundred electronic ticket issuing
terminals, display equipment and associated peripheral equipment. The system
also includes proprietary software to carry out the complex, high speed wagering
functions required by modern pari-mutuel betting. The totalisator terminal is
the interface between the system and pari-mutuel customer. The terminals are
most commonly operated by pari-mutuel tellers employed by the racetrack although
in recent years a growing number of terminals are now operated directly by the
patrons or accept pre-marked betting slips the patrons have prepared. After the
terminal accepts the wagering information, the terminal transmits it to a
central computer system consisting of one or more central processing units
("CPUs") which perform the bulk of the computer calculations for the system
along with generating management reports.
The CPUs authorize the issuance of a printed ticket, aggregate the wagers
into pools and calculate the resulting odds. The CPUs communicate the calculated
odds for display on video monitors or totalisator boards and calculate the final
odds and payout amounts when the racing event is complete and the results are
official. The winning patrons present their tickets to the pari-mutuel tellers
or self-service terminals. The terminals read and then communicate the ticket
number from the winning tickets to the CPUs, which calculate and display the
payout amount to the clerk who pays the patron or on a self-service terminal
which can issue a credit voucher to the patron that may be cashed at a teller
window or utilized in a self-service terminal. Off-track betting systems
typically include terminals at several different OTB facilities or racetracks
and a CPU which communicates with the wagering systems at the on-track locations
via telephone lines.
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Contracts
Domestic. United Tote provides pari-mutuel wagering services to most North
American customer facilities under long-term service contracts, typically with
5-7 year terms under which the Company provides the pari-mutuel wagering
computer system, as well as the operations, maintenance and supervisory
personnel necessary to operate the system, while the mutuel clerks who issue
tickets on the teller-operated terminals to the patrons of the facility are
employed by the facility. Under such service contracts, the Company at all times
retains ownership of the equipment and is entitled to liquidated damages in the
event a customer cancels without cause.
Service contract revenues received by United Tote from the operation of its
pari-mutuel wagering systems are generally based upon a percentage of the
handle, subject in most instances to minimum fees. Minimum fees under the
service contracts are generally based on the number of days the facility
operates, as well as other factors, including the type of system and number of
terminals installed at the facility and the reliability of the predicted number
of racing days to occur during the term of the contract.
United Tote makes certain warranties regarding the operation and
reliability of its wagering systems. In the event of system failure, United Tote
is generally responsible for certain liquidated damages, subject to a maximum
daily and/or annual amount. In some instances, United Tote may be liable for
tickets paid in error or for counterfeit tickets. Liquidated damages paid or
accrued by United Tote with respect to its pari-mutuel contracts during the year
ended December 31, 1996 were less than 0.3% of its revenues for fiscal 1996.
With the growth of simulcasting, many of United Tote's racetrack customers
and most of its OTB customers operate throughout the year. Facilities which are
seasonal, generally contract for services only during their operating season,
allowing United Tote to move its equipment and personnel to other facilities at
the close of an operating season at a seasonal facility, forming "circuits"
among such facilities.
United Tote has acquired approximately 23% of the pari-mutuel wagering
systems market in the United States and Canada since introducing its first
computerized wagering system in 1980. As of December 31, 1996, United Tote had
wagering systems contracts with 124 pari-mutuel customers in North America and
internationally. The installed base of its terminals was approximately 8,400 at
December 31, 1996.
In some limited instances, North American facilities purchase a pari-mutuel
wagering system from United Tote. In such cases, the Company usually enters into
separate service and maintenance agreements for the system.
Until recent years, United Tote had historically focused on providing
services to small and medium-sized racetracks; however, since the addition of
contracts with all of the Kentucky thoroughbred racetracks and the Kentucky
statewide OTB network in 1994, United Tote has demonstrated its ability to
perform at large customer facilities. The capabilities of United Tote's Horizon
System were again demonstrated by handling the record-setting 122nd running of
the Kentucky Derby at Churchill Downs in 1996, where $16.7 million was wagered
at the track; an additional $50.9 million was wagered through hubs throughout
the country for another North American single-day record of $67.6 million total
combined system handle (an increase of $25.9 million over 1995); and an all-time
high of $40.2 million was wagered on a single race.
In recent years United Tote has developed several regional networks of
large and smaller sized racetracks or off-track networks rather than just single
facility operations. The networks allow the Company to achieve economies of
scale by more efficiently utilizing computer hardware and centralizing its
service operations. In addition, when linked to other regional and national
networks, these networks afford the Company's customers with access to new
markets and revenue sources by increasing the number and variety of wagering
opportunities that customers can offer their patrons. During 1996 United Tote
operated pari-mutuel wagering networks in Alabama, Delaware, Kentucky, Maine,
Michigan, Montana and New Mexico, with several more anticipated to go on-line in
1997.
In 1996 United Tote commenced providing services to a simulcast pavilion
constructed for Lone Star Park in Grand Prairie, Texas, a suburb of the
Dallas-Fort Worth metroplex. In mid-April 1997, construction of the racetrack
itself will be completed and United Tote will commence providing services for
live racing at what is anticipated to be one of the premier racetracks in North
America.
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Sports/racebook wagering is authorized in several foreign countries
including Mexico, and one state (Nevada) in the United States. Sports/race book
wagering is a form of wagering in which patrons bet on the outcome of horse and
greyhound racing, on various sporting events such as football, basketball,
baseball, hockey, boxing and golf, and on other betting propositions. In sports
wagering, patrons bet against the operator of the facility or with preset odds
rather than against each other.
In 1996 United Tote commenced sales of its terminals to two Nevada vendors
which provide wagering equipment and services to the casino industry for
sports/racebook wagering as well as for pari-mutuel wagering applications in
other jurisdictions.
Foreign Sales. United Tote has customers in international marketplaces,
including Jamaica, Spain, Mexico, Argentina, Ecuador and the Philippines.
Internationally, there has been growth in the utilization of on-line wagering
systems in established markets. As economic and political situations improve,
new market opportunities open up for U.S. suppliers in less developed countries
where there is an increasing demand for advanced technology.
Wagering systems for facilities outside of North America have historically
been sold rather than operated pursuant to service contracts. Such sales have
been made on a direct sale basis with payments to the Company generally made in
U. S. dollars. Upon the sale of a system, United Tote also charges the purchaser
a license fee for use of the Company's proprietary system software and provides
technical assistance and support. The personnel of the Company participate in
the installation and commissioning of these systems but typically the systems
are thereafter operated by the personnel of the customers who are trained at
United Tote serviced facilities.
During 1996 United Tote sold upgraded computer hardware and additional
wagering terminals to several of its existing international customers and
renewed software license agreements for its customers in Jamaica and Spain.
Additionally, during 1996 United Tote sold a number of VERSA and other
terminals to a third party value-added reseller in Australia for use in a
non-pari-mutuel video game product, simulating horse racing, it markets to
casinos, racetracks and cruise ships worldwide.
Products
United Tote introduced its System 1000 in 1981 and over the years has
expanded its presence throughout the United States and Canada. Through
incorporating new technology and utilizing more efficient hardware, United Tote
continues to offer the wagering industry an affordable sell/cash system to both
small and medium-sized tracks. With approximately 2,500 System 1000 terminals in
service at customer locations throughout the world, the System 1000 terminal has
proven to be extremely durable in the racetrack environment with a minimum life
expectancy of about 7 years. Inspection and maintenance services are performed
at the Montana headquarters of the Company.
The newest wagering system developed by United Tote, the Horizon System,
first introduced in 1993, features the dual-purpose VERSA terminal, which has
both a self-service and teller-operated mode, allowing the racetrack to make
full use of all terminals, even on slow race days. The VERSA terminal thus
allows for significant labor savings and flexibility and versatility. Other
terminals in the Horizon System family are the portable wireless ULTIMA; the
cashless account-betting PROFILE; and a bill-accepting module to convert a VERSA
into a touch-screen, self-service terminal. Approximately 5,900 VERSA terminals
are presently in service at customer locations. In 1995, an enhanced version of
the VERSA as well as a color version were developed. Those new model terminals
were produced in 1996 and are in service at customer locations.
United Tote engages in development of new and existing wagering products
and proprietary software, including enhancements to its existing products. The
Company expensed approximately $843,000 and $755,000 in development and
enhancement of its products in 1996 and 1995, respectively.
Since the inception of its computer-based totalisator system in 1980 United
Tote has exclusively used central processor, peripheral units and basic
operating system products of the Hewlett-Packard Company. Over the last three
years United Tote has completed a review of its system design and has decided to
migrate to a platform based on current technology. During 1996 the Company's
software team converted the existing tote system application software to the "C"
programming language and is now in the process of making the software
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platform independent. The design team is also finalizing selection and testing
of the basic operating system and new platform hardware. In late 1997 United
Tote anticipates that the platform migration will be complete and that existing
operations focused on regional networks of racetracks in North America will be
enhanced in scope.
United Tote believes that its ability to attract new and retain existing
wagering system customers depends in part on the continuous incorporation of
innovative technological advances to improve its products lines. The Company
maintains a development program directed toward new products and the improvement
and refinement of its present products to expand their uses and applications.
Manufacturing
The Company's gaming machines are manufactured at its principal facility in
Bozeman, Montana. The Company has experienced low turnover among its work force,
high quality of finished goods, and low labor costs. The Company's manufacturing
operations consist primarily of assembly and testing of its on-line lottery,
video gaming and pari-mutuel wagering systems machines. The Company purchases
most of the parts, components and subassemblies (some of which are designed by
the Company) from outside sources and then assembles them into finished
products. The Company generally uses standard parts and components that are
available from multiple sources. The Company has contracted with third parties
for the assembly of gaming machines, which the Company utilizes when demand
exceeds the capacity of its Bozeman facility as well as when contractually
required. The Company also has contracted with outside sources for the
manufacture of some of its components.
Competition
On-line Lottery
The on-line lottery business is highly competitive and it is not unusual in
the United States for contract awards to be challenged by unsuccessful vendors.
Competition is intense in the traditional on-line lottery business both in
the United States and abroad. Although a growing number of jurisdictions permit
lotteries, relatively few new or rebid contracts are awarded each year. Although
price is a significant competitive factor, other important competitive factors
are the ability to optimize lottery revenues through game design; customer
marketing support; the dependability, security, technological sophistication and
upgrade capability of the network; and the experience and reputation of the
vendor.
AWI's principal competitor in the on-line lottery business, GTECH, is
significantly larger, having supplied lottery systems to 27 of the 37 United
States on-line lottery jurisdictions. This competitor also has a substantial
international presence. The market dominance of this competitor further enhances
its competitive position. Other competitors include International Lottery and
Totalizer Systems, Inc., Scientific Games, Inc., Autotote Corporation,
International des Jeux (Lotto France), Essnet/Alcatel and several other
companies.
In jurisdictions with on-line and video lottery gaming products, the
products may compete with each other for entertainment dollars spent on
wagering.
Video Gaming and Route Operations
The Company competes with domestic and foreign manufacturers of video
gaming equipment and providers of traditional on-line lottery systems and
casino-based gaming systems in the sale of its gaming machines and central
control system software. Many of the Company's competitors have greater
financial and other resources than the Company. The Company faces competition
from companies marketing complete video lottery gaming systems and from
companies marketing only video lottery gaming machines as well as increasing
competition in the casino gaming market. Among the Company's competitors are
International Game Technology, Inc., Bally Gaming, Spielo Gaming International,
WMS Industries, Casino Data Systems, Aristocrat and GTECH.
Significant factors which influence the purchase of video gaming machines
and central control systems include price, reliability, technical capability,
security, overall earnings power of the product and the experience, financial
condition and reputation of the manufacturer and distributor. In addition,
gaming authorities may impose other qualifications and requirements on the
Company and its competitors in the supply of video gaming products and services
and may also consider the performance record and reputation for integrity of the
vendor.
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The Company's route operations compete directly with other machine route
businesses, including numerous small route operators and several route operators
similar in size to the Company's route operations, and with companies selling
video lottery gaming machines directly to location owners. The principal factors
of competition for route operations are the reputation of the route operator and
the quality and earnings potential of the machines offered by the route
operator, the service provided by the route operator and the terms of its
agreement with the location owner.
Wagering Systems and Racetrack Operations
Because of the highly regulated nature of the pari-mutuel industry and
critical functions of the products supplied, vendors must meet thresholds of
reliability, customer service and reputation ahead of product design and price.
Unexpected shutdown of a wagering system could result in significant loss of
revenues so customers will typically only utilize wagering systems from
suppliers with proven abilities at similar size wagering facilities (both in
terms of number of terminals and total handle).
United Tote competes with several companies in North America. Its principal
competitor is publicly held Autotote Corporation ("Autotote") which is
significantly larger than United Tote, in terms of assets, revenues and net
worth. Autotote provides equipment to a large number of wagering facilities,
especially pari-mutuel racetracks with large wagering volumes that may be
connected to other racetrack facilities within a region. United Tote also
competes with privately held AmTote International, Inc. ("AmTote") and, at some
facilities, with a limited number of other smaller local or regional companies.
Competition outside of North America is more fragmented, with competition
being provided by several international and regional companies. No single
company maintains a dominant market position internationally, although certain
companies possess regional strengths.
The racetrack operation of United Tote, Sunland Park, is located in Sunland
Park, New Mexico, directly across the border from El Paso, Texas. Sunland Park
does not have direct competition for horse racing in the El Paso area, although
there is an operating greyhound racing facility in Juarez, Mexico which also
offers sports/race wagering on simulcast racing events and sporting events.
Ruidoso Downs, a horse racing facility in Ruidoso Downs, New Mexico, competes in
the same general market as Sunland Park, but currently the racing dates at the
two tracks do not conflict. Also, The Downs at Albuquerque, New Mexico,
historically has competed to some extent against Sunland Park, commencing in
January and continuing through the end of Sunland Park's season. If the racing
dates or schedules of either other track are expended or altered so that a
direct conflict between Sunland Park and the others occurs, it is likely that
there would be a significant effect on operations and revenues of Sunland Park.
While Texas permits pari-mutuel wagering, there are no pari-mutuel
racetracks in direct competition with Sunland Park's geographic area, although
there has been some effect upon the number and quality of horses available to
run at Sunland Park. Sunland Park also competes against other forms of
entertainment, including sporting events. The States of New Mexico and Texas
currently authorize limited forms of gambling, such as a state lottery, bingo,
and Native American casinos, all of which compete for the leisure dollar and
which have had a significant negative effect on attendance and handle at Sunland
Park in recent years. On March 21 the New Mexico legislature voted to allow
casino gaming at pari-mutuel racetracks in New Mexico, including the Company's
racetrack in Sunland Park, New Mexico. The bill, which is anticipated to be
signed by the state's Governor, allows, among other things, the operation of up
to 300 video gaming machines per pari-mutuel racetrack facility for up to twelve
hours per day. The implementation of gaming is subject to the timing and
satisfaction of conditions of the legislation, including the state's formation
of a separate commission to oversee the gaming and other regulatory matters
(including the grant of necessary licenses to the Company). Consequently, the
Company does not anticipate that any revenues will be generated from the
approved gaming until late 1997 or early 1998.
Intellectual Property
The Company may seek and, in some cases, has sought, patents on some of the
technology used in its products. No assurance can be given that any patent
applications filed will be granted, that the patents will not be infringed or
that other parties will not develop similar technology that will not violate the
patents. The Company believes that its technical know-how, trade secrets and the
creative skills of its personnel are more important to its success than any
benefit which patent protection may afford. The Company typically requires
persons such as customers, employees, licensees and subcontractors who have
access to proprietary information concerning
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its products to sign non-disclosure agreements, which prohibit the use of this
information other than for the specific purpose for which it is provided, and
the Company relies on such agreements, other security measures and trade-secret
laws to protect such proprietary information.
The Company has pending applications for registration of trademarks in
connection with its products in the United States, Australia and other foreign
countries. The Company intends to file additional applications to register
trademarks in the United States and other key jurisdictions as considered
necessary. The Company also relies on the laws of trade secrets and copyright to
protect its proprietary rights to its central control system software and
various other software programs.
Employees
As of December 31, 1996, the Company employed approximately 830 people on a
full and part-time basis. Approximately 30, 150, and 500 were employed in the
on-line lottery, gaming machine and wagering systems and racetrack operations
segments, respectively. Another 150 people provide corporate manufacturing,
finance and administration and national marketing services to the operating
segments. Of the total 830 people, approximately 210 are part-time employees in
the wagering systems and racetrack operations segment.
The Company has no collective bargaining agreements with any of its
employees and believes that its overall relations with employees are good.
Government Regulation
In the United States, lotteries are not permitted unless expressly
authorized by law in such jurisdiction. Currently, there are thirty-eight
lotteries operating in the United States and District of Columbia. All these
lotteries operate a traditional lottery, namely, offering lotto and instant
scratch-off games. Video lottery, involving video simulated games of chance
played on gaming devices, is not authorized under traditional lottery statutes
in the majority of these jurisdictions. There are presently seven video lottery
operations in the United States. Legislation in each jurisdiction generally
specifies certain standards to ensure the security and integrity of the lottery
operation that include, but are not limited to: the minimum percentage of gross
revenues paid back to players in prize money; the percentage of gross revenues
paid to a state purpose; randomness of play; goods and services regarded as
major procurements requiring state bids; and suitability standards for agents
and vendors of major procurements. Policy and management decisions of the
lottery operations are generally governed by a commission appointed by the
governor of each state with the day-to-day operations of the lottery
administered by a director appointed either by the governor or lottery
commission. The lottery commission and director of each state generally exercise
significant authority, including the determination of the types of games played,
the price of tickets, the manner in which the lottery is marketed and selection
of vendors of equipment and services.
To ensure the integrity of their lottery operations, most jurisdictions
require detailed background disclosure and investigations of vendors providing
goods and services under a contract award for a major procurement, which
typically include: on-line computer systems and services; instant ticket
printing; ticket validation systems; gaming devices; drawing equipment; and
advertising services. Background investigations are conducted on company
subsidiaries, affiliates, officers, directors, and shareholders who own 5% or
more of the outstanding capital stock of the Company for purposes of meeting
suitability standards defined under statute and regulations of each
jurisdiction. Additionally, vendors are required to respond and meet
comprehensive standards as described in a lottery's request for proposals or
invitations for bid for the goods and services contracted. Failure on the part
of a vendor to meet suitability standards or provider requirements as delineated
in the request for proposals could jeopardize the award of a lottery contract to
the Company or provide grounds for the termination of an existing lottery
contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are highly regulated, although the operations
typically vary from lotteries in the United States. In addition, restrictions
are often imposed on foreign corporations seeking to do business in
international jurisdictions.
The manufacture, distribution and operation of gaming devices or facilities
are subject to extensive federal, provincial, state and local regulation. These
regulations vary from jurisdiction to jurisdiction. All jurisdictions require
various licenses, permits and approvals to be held by companies and their key
personnel in connection with the manufacture, distribution or operation of
gaming devices or facilities. Generally, gaming devices may not be manufactured,
distributed or operated unless such licenses are obtained from the appropriate
regulatory authorities
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of the jurisdictions. Changes in such laws, regulations and procedures could
have an adverse effect on the Company's operations.
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful for a person to manufacture, deliver or receive gaming machines, gaming
machine devices and components thereof across interstate lines unless that
person has first registered with the Attorney General of the United States.
Certain of the Company's subsidiaries are so registered and must renew their
registrations annually. In addition, various record keeping and equipment
identification requirements are imposed by the Federal Act. Violation of the
Federal Act may result in seizure or forfeiture of equipment, as well as other
penalties.
Although the regulatory schemes in the jurisdictions in which the Company
sells or operates video lottery gaming machines or systems (the "Operating
Jurisdictions") are not identical, their material attributes are substantially
similar, as described below.
The manufacture, sale and distribution of gaming devices, including video
lottery terminals, and the ownership and operation of gaming facilities in each
Operating Jurisdiction, are subject to various provincial, state, county and/or
municipal laws, regulations and ordinances, which are administered by the
relevant regulatory agency or agencies in that Operating Jurisdiction (the
"Department"). These laws, regulations and ordinances primarily concern the
responsibility, financial stability and character of gaming equipment
manufacturers, distributors and operators, as well as persons financially
interested or involved in gaming or liquor operations.
No manufacturing, distributing, owning or operating of gaming devices may
be conducted unless proper licenses are obtained. An application for a license
may be denied for failure to satisfy any standard or requirement as determined
by the Department. In order to ensure the integrity of the video lottery gaming
system, most jurisdictions have the authority to conduct background
investigations of the Company, its key personnel and significant stockholders.
The Department may at any time revoke, suspend, condition, limit or restrict a
license for any cause deemed in violation of its law or regulations. Fines for
violation of gaming laws or regulations may be levied against the holder of a
license and persons involved. In September 1992, the Victoria Gaming Commission
of Victoria, Australia, reversed a previous decision that had placed VLC on the
roll of approved gaming manufacturers for Victoria. Although the decision did
not affect sales already completed in Victoria, it prohibited future sales. The
Company reapplied for placement on the roll of approved gaming manufacturers and
such approval was received in December 1993. In March 1994, the RACJ of Quebec
granted the Company a manufacturing license. The RACJ reconsidered its earlier
denial of the Company's licensing application (which denial was based upon,
among other things, concerns about a possible relationship between the Company
and a former chief executive officer) in light of the developments relating to
transactions resulting in the former chief executive officer no longer owning
any Company securities. Other than the September 1992 decision by the Victoria
Gaming Commission (which approved the Company's reapplication) and the
reconsidered decision of the RACJ in Quebec, the Company and its key personnel
have been approved for licensing upon completed application in all Operating
Jurisdictions in which the Company has applied. Suspension or revocation of such
licenses could have a material adverse effect upon the Company's future
operations and the experience in Victoria and Quebec indicates that there can be
no assurance that the Company will receive necessary or appropriate licenses,
permits or approvals or, if received, that such licenses, permits or approvals
will be renewed or retained. The actions of any licensing authority may be
considered by regulatory authorities in other jurisdictions. Similarly, the
rejection or termination of the Company, its personnel, or major stockholders in
any other jurisdiction may have adverse consequences in other jurisdictions.
In addition to the Operating Jurisdictions, the Company will seek to do
business in other jurisdictions if they authorize video lottery gaming
operations in the future. The Company cannot predict the nature of the
regulatory scheme in any such jurisdiction. Certain states do have regulatory
schemes currently in place which authorize forms of video gaming other than
video lottery, such as video poker. There can be no assurance that the Company
will obtain the necessary licenses, permits or approvals to conduct business in
any new jurisdiction.
The Company regularly engages public affairs advisors and lobbyists in
various United States jurisdictions to advise legislators and the public in
connection with lottery legislation and to advise the Company in connection with
contract proposals. Officers of the Company may make campaign contributions to
various candidates of political parties.
- 25 -
<PAGE>
The process by which lottery contract awards are made may be subject to
intense scrutiny and review by federal and state authorities not directly
related to lottery authorities. It is impossible to predict the impact, if any,
on the Company of any such review of lottery procurement decisions.
In certain jurisdictions, the Company's pari-mutuel wagering segment is
also subject to extensive state regulatory and licensing requirements similar to
the Company's on-line lottery and video gaming machine subsidiaries. The
Company's racetrack operations in Sunland Park, New Mexico, are subject to
regulation of the New Mexico Racing Commission and other authorities.
Nevada Regulatory Matters
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the operation of slot machine
routes in Nevada are subject to: (I) The Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, "Nevada Act"); and (ii)
various local ordinances and regulations. Such activities are subject to the
licensing and regulatory control of the Nevada Gaming Commission ("Nevada
Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and
various local, city and county regulatory agencies (collectively referred to as
the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (I) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) to provide a
source of state and local revenues through taxation and licensing fees. Change
in such laws, regulations and procedures could have an adverse effect on the
Company's manufacturing, distribution and slot route operations.
The Company is registered by the Nevada Commission as a publicly traded
corporation and has been found suitable to own the stock of a wholly owned
subsidiary (VLC of Nevada, Inc., a "Registered Corporation") (the "Nevada
Subsidiary") which is licensed as a manufacturer, distributor and an operator of
a slot machine route. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or receive any percentage of
profits from, the Nevada Subsidiary without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company and the Nevada
Subsidiary have obtained from the Nevada Gaming Authorities the various
registrations, approvals, permits, findings of suitability and licenses
(collectively "Gaming Licenses") in order to engage in manufacturing,
distribution and slot route activities in Nevada. Such Gaming Licenses are
currently limited by the Nevada Commission to expire at midnight, April 24,
1997, the date of the regularly scheduled Nevada Commission meeting. The Company
and the Nevada Subsidiary have applied for unlimited Gaming Licenses. VLC has
also applied for an unlimited manufacturer's and distributor's license and it is
expected that VLC's application will be considered at the same time that the
applications of the Company and the Nevada Subsidiary are considered. The
following regulatory requirements currently apply to the Company and the Nevada
Subsidiary, and will continue to apply to the Company and the Nevada Subsidiary
if they are granted new Gaming Licenses. The following regulatory requirements
will also apply to VLC if it is licensed. There can be no assurances that the
pending applications of the Company, the Nevada Subsidiary and VLC will be
approved or that if approved, they will be approved on a timely basis or without
conditions or limitations.
All gaming devices and cashless wagering systems that are manufactured,
sold or distributed for use or play in Nevada, or for distribution outside of
Nevada, must be manufactured by licensed manufacturers and distributed or sold
by licensed distributors. All gaming devices manufactured for use or play in
Nevada must be approved by the Nevada Commission before distribution or exposure
for play. The approval process for gaming devices includes rigorous testing by
the Nevada Board, a field trial and a determination as to whether the gaming
device meets strict technical standards that are set forth in the regulations of
the Nevada Commission. Associated
- 26 -
<PAGE>
equipment must be administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada. The Winning Touch (R) gaming machine
has been approved by the Nevada Commission.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company, the Nevada
Subsidiary or VLC in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Nevada Subsidiary and VLC are
required to file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company who are actively and
directly involved in the licensed activities of the Nevada Subsidiary and VLC
may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing or
a finding of suitability must pay all the costs of the investigation. Changes in
licensed positions must be reported to the Nevada Gaming Authorities and in
addition to their authority to deny an application for a finding of suitability
or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Nevada Subsidiary, VLC, or the subsidiaries
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company and the Nevada Subsidiary (and
will have the authority to require VLC) to terminate the employment of any
person who refuses to file appropriate applications. Determination of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
The Company and the Nevada Subsidiary are (and VLC will be) required to
submit detailed financial and operating reports to the Nevada Commission.
Substantially all material loans, leases, sales of securities and similar
financing transactions by the Nevada Subsidiary are (and those of VLC will be)
required to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
Nevada Subsidiary or VLC, the licenses they hold could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Nevada Subsidiary, VLC, the Company and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of the licenses held by the Company, the
Nevada Subsidiary and VLC could (and revocation of any license would) materially
adversely affect the Company's manufacturing, distribution and inter-casino
linked system operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his/her suitability determined as a beneficial holder of the Company's
voting securities if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (I) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities
- 27 -
<PAGE>
analysts for informational purposes and not to cause a change in its management,
policies or operations; and (iii) such other activities as the Nevada Commission
may determine to be consistent with such investment intent. If the beneficial
holder of voting securities who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and financial information
including a list of beneficial owners. The applicant is required to pay all
costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the Common Stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company, the Nevada Subsidiary or VLC,
the Company (I) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities, including, if necessary, the immediate
purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation if
the Nevada Commission has reason to believe that his acquisition of such debt
security would otherwise be inconsistent with the declared policy of the State
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (I) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company and the Nevada Subsidiary are (and VLC will be) required to
maintain a current stock ledger in Nevada which may be examined by the Nevada
Gaming Authorities at any time. If any securities are held in trust by an agent
or by a nominee, the record holder may be required to disclose the identity of
the beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. The Company
is also required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require the stock
certificates of the Company to bear a legend indicating that the securities are
subject to the Nevada Act. However, to date, the Nevada Commission has not
imposed such a requirement on the Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. Such
approval, if given, does not constitute a finding, recommendation or approval by
the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially
- 28 -
<PAGE>
adverse effects of these business practices upon Nevada's gaming industry and to
further Nevada's policy to: (I) assure the financial stability of corporate
gaming licensees and their affiliates; (ii) preserve the beneficial aspects of
conducting business in the corporate form; and (iii) promote a neutral
environment for the orderly governance of corporate affairs. Approvals are, in
certain circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Registered Corporation's Board of
Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (I) a percentage of
the gross revenues received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
Native American Gaming Regulations
Gaming on Native American lands is extensively regulated under federal law,
tribal-state compacts and tribal law. The Indian Gaming Regulatory Act of 1988
("IGRA") provides the framework for federal and state control over all gaming on
Native American lands. IGRA regulates the conduct of gaming on Native American
lands and the terms and conditions of contracts with third parties for
management of gaming operations. IGRA established the National Indian Gaming
Commission ("NIGC") to operate as an independent agency, within the U. S.
Department of the Interior, to exercise primary federal regulatory
responsibility over such gaming. The NIGC is delegated authority to issue
regulations governing tribal gaming activities, approve tribal ordinances for
regulating Class II and Class III gaming, approve management agreements for
gaming facilities, conduct investigations and monitor tribal gaming generally.
The IGRA classifies games that may be conducted on Native American lands
into three categories. "Class I Gaming" includes social games solely for prizes
of minimal value, or traditional forms of Native American Gaming engaged in by
individuals as part of, or in connection with, tribal ceremonies or
celebrations. "Class II Gaming" includes bingo, pulltabs, lotto, punch boards,
tip jars, instant bingo, and other games similar to bingo, if those games are
played at the same location as bingo is played. "Class III Gaming" includes all
other commercial forms of gaming, such as table games, slots, video casino
games, and other commercial gaming (e.g., sports betting and pari-mutuel
wagering).
Class I Gaming on Native American lands is within the exclusive
jurisdiction of the Native American tribes and is not subject to the provisions
of IGRA. Class II Gaming is permitted on Native American lands if (a) the state
in which the Native American lands lie permits such gaming for any purpose by
any person, organization or entity; (b) the gaming is not otherwise specifically
prohibited on Native American lands by federal law; (c) the gaming is conducted
in accordance with a tribal ordinance or resolution which has been approved by
the NIGC; (d) a Native American tribe has sole proprietary interest and
responsibility for the conduct of gaming; (e) the primary management officials
and key employees are tribally licensed; and (f) several other requirements are
met. Class III Gaming is permitted on Native American lands if the conditions
applicable to Class II Gaming are met and, in addition, the gaming is conducted
in conformance with the terms of a written agreement between a tribal
- 29 -
<PAGE>
government and the government of the state within whose boundaries the tribe's
lands lie (a "tribal-state compact").
IGRA requires states to negotiate in good faith with Native American tribes
that seek to enter into a tribal-state compact for the conduct of Class III
Gaming. Such tribal-state compact may include provisions for the allocation of
criminal and civil jurisdiction between the state and the Native American tribe
necessary for the enforcement of such laws and regulations, taxation by the
Native American tribe of such activity in amounts comparable to those amounts
assessed by the state for comparable activities, remedies for breach, standards
for the operation of such activity and maintenance of the gaming facility,
including licensing, and any other subjects that are directly related to the
operation of gaming activities. The terms of tribal-state compacts vary from
state to state. Compacts within one state tend to be substantially similar to
each other. Compacts usually specify the types of permitted games, entitle the
states to inspect casinos, require background investigations and licensing of
casino employees and vendors, and may require the tribe to pay a portion of the
state's expenses for establishing and maintaining regulatory agencies.
Other Jurisdictions and Government Approvals
Most of the other jurisdictions in which the Company and its subsidiaries
conduct business or intend to conduct business in the future require various
licenses, permits, findings of suitability or other approvals (collectively
"Government Approvals") in connection with the manufacture and/or distribution
of gaming devices or provision of goods or services to the Lottery and Racing
Industries. Some jurisdictions allow the Company to operate under a temporary
Government Approval or on a transactional basis during the pendency of a
comprehensive background investigation. While the Company has received
Government Approvals in all of the jurisdictions in which the Company's
applications have been acted upon (including Victoria, Australia, and Quebec,
Canada, in which the Company's applications were initially denied and then
subsequently granted), there can be no assurance that required Government
approvals will be given or renewed in the future.
Most of the jurisdictions in which the Company and its subsidiaries conduct
business or intend to conduct business in the future require gaming devices to
meet certain standards and specifications established by each jurisdiction. In
addition, most jurisdictions require gaming devices to be reviewed and approved
by an independent testing laboratory prior to the gaming devices being sold or
offered for public play. The Company has received or is seeking such approvals
for its gaming devices, but there can be no assurance that such approvals will
be maintained or that additional requisite approvals will be obtained.
Additional Financial Information
Certain financial information for each of the Company's last three fiscal
years with respect to industry segments and foreign and domestic operations and
export sales is set forth in Note 3 to the Notes to Consolidated Financial
Statements.
- 30 -
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices, principal manufacturing and distribution
facilities occupy approximately 82,000 square feet in a building owned by the
Company and located in Bozeman, Montana. The Company leases approximately 26,000
square feet serving as a warehouse/assembly facility in the Bozeman area.
The Company's on-line lottery services subsidiary, AWI, leases facilities
in New Jersey located in a complex of which AWI occupies approximately 46,000
square feet. In connection with its operations in the various jurisdictions, AWI
occupies approximately 30 additional sites, most of which it holds under lease.
The Company leases space in Reno (4,800 square feet) and Las Vegas (13,900
square feet), Nevada, primarily for product sales and support as well as
assembly, repair and storage of video gaming machine products. Also in Bozeman,
Montana, the Company leases approximately 5,300 square feet out of which it
operates one of its route businesses. The Company also owns two buildings, one
in Billings and one in Livingston, Montana, out of which it operates its other
two route businesses.
The Company also leases approximately 5,000 square feet of office space in
Billings, Montana for the administrative offices of UWS. UWS leases
approximately 12,100 square feet in San Diego, California, which primarily
houses the subsidiary's research and development activities. UWS leases
approximately 2,900 square feet of space in Winnipeg, Canada, for administrative
and repair services. The Company's racetrack facility in Sunland Park, New
Mexico, rests on approximately 153 acres and contains in excess of 330,000
square feet inclusive of the grandstand, stables, barns, offices, etc. The
racetrack itself is a one-mile oval track.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, a class action, alleging violations of the federal
antitrust laws, was filed in June 1994, in the federal district court in South
Dakota against the Company and certain video lottery gaming machine operators in
South Dakota by a group of other video lottery gaming machine operators,
alleging, among other things, a combination and conspiracy to unlawfully
restrain trade in video lottery gaming machines by fixing lease prices for such
machines, allocating territories and refusing to deal with other operators.
Unspecified treble damages were sought, along with injunctive relief to bar the
alleged practices. On November 6, 1996, the South Dakota federal district court
granted the Company's and other defendants' motion for summary judgment,
dismissing, with prejudice, all claims of the plaintiffs in this matter. In
December 1996, plaintiffs filed an appeal of this ruling with the Eighth Circuit
of the U. S. Court of Appeals.
On March 25, 1996, the Company reached an agreement with the Shelhamer
family to settle all outstanding claims and disputes, including dismissal of all
outstanding lawsuits between them. (See Note 2 to the Consolidated Financial
Statements.)
On December 9, 1996, a purported class action was filed in the Court of
Chancery, Delaware State Court, directing certain officers and directors of the
Company to fulfill their fiduciary obligations by effecting a transaction for
acquisition of the Company. This action is presently in its preliminary stages.
On August 6 and August 7, 1996, respectively, AWI and the Company received
notice of a complaint filed by EDS in state court in Collin County, Texas,
against the Company and AWI alleging breach of an agreement entered into in
connection with services provided by EDS under the agreement. EDS was seeking
payment of charges totaling in excess of $33 million, among other things. The
Company has been withholding these amounts because of EDS performance issues.
The Company and EDS settled all claims against each other on January 30, 1997
pursuant to a Master Settlement Agreement ("MSA"). (See Note 16 to the
Consolidated Financial Statements.) Accordingly, a Joint Motion to Dismiss was
filed by EDS and subsequently accepted by the District Court, Collin County,
Texas in February 1997.
Although the Company is a party in various other claims and legal actions
arising in the ordinary course of business, in the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not likely have a material adverse effect on the financial position or
results of operations of the Company.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has traded on the National Market System of Nasdaq under
the symbol VLTS since the Company's initial public offering on July 24, 1991.
Prior to that time, there was no public market for the Common Stock. The
following table sets forth the high and low bid prices for the common shares for
the periods indicated as reported by Nasdaq.
<TABLE>
<CAPTION>
YEAR High Low
---- ---- ---
<S> <C> <C>
1996
Quarter ended December 31, 1996 $5.75 $3.00
Quarter ended September 30, 1996 $4.75 $2.88
Quarter ended June 30, 1996 $6.88 $3.75
Quarter ended March 31, 1996 $7.38 $4.38
1995
Quarter ended December 31, 1995 $6.50 $3.50
Quarter ended September 30, 1995 $7.25 $4.73
Quarter ended June 30, 1995 $9.63 $5.50
Quarter ended March 31, 1995 $9.88 $7.13
</TABLE>
As of March 1, 1997, there were approximately 588 holders of record of the
Company's Common Stock. Since its formation in May 1991, the Company has not
paid any dividends to its stockholders. The Company currently intends to retain
any earnings to help finance the growth and development of its business and does
not anticipate paying cash dividends on its capital stock in the foreseeable
future. Any future determination as to the payment of dividends on its Common
Stock will depend, among other things, on the future earnings, capital
requirements and financial condition of the Company, and on such other factors
as the Company's Board of Directors may consider relevant. In addition, the
existing bank line of credit held by the Company restricts the payments of
dividends by the Company. (See Note 10 to the Consolidated Financial
Statements.)
[This space intentionally left blank]
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of the Company and subsidiaries, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, and the report thereon, are included elsewhere in this
Form 10-K. The selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Selected Financial Information
(Dollars in thousands, except per share data)
Years Ended December 31,
OPERATIONS DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES
On-line lottery $ 88,843 91,653 101,559 115,544 51,552
Gaming machine and route operations 60,186 61,398 68,571 59,069 59,299
Wagering systems and racetrack operations(1) 27,652 28,111 18,652 --- ---
-------- ------- ------- ------- -------
Total revenues 176,681 181,162 188,782 174,613 110,851
COSTS AND EXPENSES
On-line lottery 59,333 59,438 62,397 67,985 32,757
Gaming machine and route operations 32,911 35,992 39,815 35,074 37,219
Wagering systems and racetrack operations 20,104 22,286 13,992 --- ---
Selling, general and administrative 28,697 31,139 34,000 30,362 15,873
Research and development 7,969 8,888 8,513 6,629 2,570
Other charges 34,135 2,763 23,994 --- ---
Depreciation and amortization 23,822 22,587 20,694 18,033 10,351
-------- -------- ------- ------- -------
Total costs and expenses 206,971 183,093 203,405 158,083 98,770
-------- ------- ------- ------- -------
(Loss) earnings from operations (30,290) (1,931) (14,623) 16,530 12,081
Other income (expense) (2,694) (1,833) (242) (9,032) 258
Income taxes benefit (expense) 8,753 846 (1,303) (3,152) (3,990)
-------- --------- ------- ------- -------
Net (loss) earnings from continuing
operations (24,231) (2,918) (16,168) 4,346 8,349
Discontinued operations1 5,482 (5,482) --- --- ---
Extraordinary item 4,014 --- --- --- ---
-------- --------- ------- ------- -------
Net (loss) earnings $(14,735) (8,400) (16,168) 4,346 8,349
======== ========= ======= ======= =======
(Loss) earnings per share data:
Continuing operations $(2.27) (.28) (1.54) .35 .74
Discontinued operations .51 (.51) --- --- ---
Extraordinary item .38 --- --- --- ---
------ ----- ----- --- ---
$(1.38) (.79) (1.54) .35 .74
====== ===== ===== === ===
Weighted average shares(2) 10,699 10,608 10,507 12,312 11,316
====== ====== ====== ====== ======
December 31,
BALANCE SHEET DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital $ 28,084 19,987 23,344 51,458 25,111
Total assets 168,043 165,851 174,032 139,513 150,029
Total long-term debt(1)(3)
(excluding current installments) 9,312 12,885 9,060 855 3,006
Stockholders' equity 72,231 86,448 94,112 108,215 103,435
======== ======= ======= ======= =======
</TABLE>
(1) Wagering systems and racetrack operations revenue and costs since May 3,
1994. (See Note 2 to the Consolidated Financial Statements.)
(2) Common stock equivalents are excluded if antidilutive.
(3) On January 30, 1997, the Company and EDS reached an agreement to settle all
claims against each. The agreement, among other things, provided for the
extinguishment of outstanding fees of approximately $38.0 million for a
note payable of approximately $26.1 million which matures in 2004. (See
Note 16 to the Consolidated Financial Statements.)
- 33 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table presents for the years indicated, the percentage of
revenues represented by certain operational data, as well as the percentage
change in such items.
<TABLE>
<CAPTION>
Percentage (%) of Total Revenues Percentage (%) Increase
Years Ended (Decrease)
December 31, Year 1996 Year 1995
1996 1995 1994 Over 1995 Over 1994
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
On-line lottery 50.2 50.6 53.8 (3.1) (9.7)
Gaming machine and route operations 34.0 33.9 36.3 (2.0) (10.5)
Wagering systems and racetrack operations 15.8 15.5 9.9 (1.4) 50.3
----- ----- -----
100.0 100.0 100.0 (2.5) (4.0)
----- ------- -----
Costs and expenses:
On-line lottery 33.6 32.8 33.1 (0.2) (4.8)
Gaming machine and route operations 18.6 19.9 21.1 (8.6) (9.5)
Wagering systems and racetrack operations 11.4 12.3 7.3 (9.9) 59.3
Selling, general and
administrative 16.2 17.1 18.0 (7.7) (8.5)
Research and development 4.5 4.9 4.5 (10.1) 4.7
Other charges 19.3 1.5 12.7 1,135.4 (88.3)
Depreciation and
amortization 13.5 12.5 11.0 5.3 9.2
----- ----- -----
117.1 101.0 107.7 13.0 (10.0)
----- ------ -----
Loss from operations (17.1) (1.0) (7.7) 1,468.6 (87.0)
Other (expense) income, net (1.5) (1.0) (0.1) 50.0 800.0
----- ------ ------
Net loss before income taxes,
discontinued operations and extraordinary
items (18.6) (2.0) (7.8) 789.2 (75.0)
===== ===== ===== ======= =====
</TABLE>
Wagering systems and racetrack operations revenue and costs relate to a
subsidiary which was acquired by the Company on May 3, 1994. Consequently,
certain percentages from 1994 are not comparable to 1995 and 1996.
Revenue from the on-line lottery segment consists primarily of a
contractual percentage of lottery ticket sales in eight states as well as
revenue from on-line lottery equipment sales. The segment revenue will
experience fluctuations depending on relative sizes of jackpots and the number
of terminals on-line and selling tickets in the states in which the Company
operates. The Company expects on-line lottery services revenue to continue to be
a significant component of total revenues. On-line lottery revenue is generated
by the Company's AWI subsidiary.
Revenue from the gaming machine and route operations segment consists of
sales and lease of video gaming machines, sales of parts, central control site
hardware and software, service of terminals, license fees, and from the
operation of gaming machine routes. Route operations revenue consists primarily
of gaming machine wagers net of pay-outs to patrons and state gaming taxes.
Revenue from gaming machine sales is subject to potentially significant
fluctuations. When and if new jurisdictions approve legislation for video
lottery gaming operations or forms of casino gaming, and if the Company is
awarded a contract in any such jurisdictions, the segment may experience a surge
in sales revenue that may or may not decline dramatically depending on the
jurisdiction and gaming venue. Gaming machine and route operations includes
lease revenue which is derived from the lease of terminals to the Oregon and
Rhode Island lotteries which implemented video lottery programs in 1992. The
Rhode Island program is a limited form of video lottery at two pari-mutuel
facilities. In December 1995 the Company began leasing video gaming machines to
the Delaware Lottery. The Company expects video lottery and
- 34 -
<PAGE>
route operations revenue to continue to be a major component of total revenues.
Gaming machine revenue is primarily generated by the Company's VLC subsidiary.
Revenue from wagering systems and racetrack operations is generated
primarily from a contractual percentage of handle processed through computerized
pari-mutuel wagering systems from approximately 124 contracts in North America,
international sales and lease of pari-mutuel wagering systems, and ownership and
operation of a racetrack in Sunland Park, New Mexico. While on-track attendance
and handle from pari-mutuel wagering in the United States has markedly decreased
over the last decade as jurisdictions have legalized other forms of gaming,
there has also been a substantial increase in simulcast and off-track wagering
handle during the same period. Due to the significant increase of alternate
forms of gaming during the last several years, there can be no assurance that
such historical patterns will remain the same in the future, nor can the Company
predict the magnitude of any resulting net economic effects on this segment of
its business. The Company expects wagering systems and racetrack operations
revenue to be a significant component of total revenues. Wagering systems and
racetrack operations revenue is generated by the Company's UWS subsidiary.
Gross profit for each segment is herein defined as revenues for that
segment less the corresponding costs and expenses (excluding depreciation and
amortization expense and any special or other charges). Costs and expenses
related to on-line lottery revenue include all direct costs and allocated
indirect costs involved in operating the on-line lottery equipment in each
jurisdiction in which the Company has a contract as well as costs of equipment
sales, inclusive of materials, labor and allocated manufacturing overhead. Costs
and expenses related to gaming machine revenue include direct costs of
production, including labor, and allocated manufacturing overhead. Costs and
expenses related to route operations include the locations owners' share of the
net machine revenues. Costs and expenses related to wagering systems operations
include direct and allocated indirect costs associated with the operation of
totalisator equipment at the racetracks at which the Company has a contract as
well as direct costs of equipment sales.
Selling, general and administrative expenses consist of labor costs,
professional fees, repairs and maintenance expense, promotion and advertising
costs, occupancy and other costs, other than those included in costs and
expenses applicable to the determination of gross profit as defined above or
research and development as discussed below.
Research and development costs represent costs incurred to gain and develop
new knowledge applicable to the Company's various gaming systems inclusive of
software and hardware technology. Included in the costs are labor, material,
consulting, occupancy and other expenses associated with the research and
development efforts. Development costs are capitalized in accordance with
Statement of Financial Accounting Standards Board Statement No. 86 for certain
software developed for sale or lease.
Other charges include special and unusual charges recorded by the Company
for restructurings, asset valuation impairments, liquidated damage assessments
and other contract losses that are considered by the Company to be non-recurring
operating expenses not specifically attributable to normal individual segment
revenues.
1996 Compared with 1995
Total revenue in 1996 decreased by $4.5 million (2.5%) to $176.7 million
from $181.2 million in 1995. The overall gross profit increased by $.9 million
(1.4%) to $64.3 million from $63.4 million in 1995. The Company had a net loss
from operations of $24.2 million in 1996 as compared to net loss from operations
of $2.9 million in 1995. The increase in loss reflects significant special and
other unusual charges recorded in 1996. Absent the special and other unusual
charges, the Company would have had net earnings before income taxes of $1.2
million in 1996 and a net loss before income taxes of $1.0 million in 1995. The
improvement reflects the $.9 million increase in gross profit and reductions in
selling, general and administrative costs and research and development costs,
net of capitalization.
On-line Lottery
Revenue from the on-line lottery segment decreased by $2.9 million (3.1%)
to $88.8 million from $91.7 million in 1995. Included in the on-line lottery
revenue in 1996 and 1995 is $4.4 million and $5.3 million, respectively, of
revenue from international on-line lottery equipment sales. The Company is
actively marketing inventory, with a carrying value of approximately $3.8
million, of on-line lottery terminals in a number of
- 35 -
<PAGE>
international locations; however, there can be no assurance of additional
international on-line lottery equipment sales in the near future.
The Company experienced a decline in revenues from its contract with the
Florida Lottery of approximately $5.0 million from 1995 levels as a result of
lower lottery ticket sales and a reduction in the contractual fee percentage.
The expiration of the contract with the Florida Lottery was extended from June
30, 1996 as a result of a delay of the award of a new contract. In October 1996,
the Company was notified by the Florida Lottery that the Company had been
selected as the most highly qualified bidder for the award of a new five-year
one-line lottery contract. A competitor of the Company has protested the Florida
Lottery's selection of the Company and a decision is expected in the second
quarter 1997. Pending resolution of the protest, the Company will commence
contract negotiations. Under the terms of the request for proposal, sizable
capital expenditures in excess of current credit facilities would be required to
fulfill its terms. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted. The Florida Lottery
contract accounted for approximately 34% of on-line lottery revenues in the last
three years.
The Company's contract with the Washington Lottery expired in June 1996 and
the new contract was awarded to a competitor. The contract accounted for $5.7
million (6.5%) and $10.4 million (11.3%) of on-line lottery revenues in 1996 and
1995, respectively.
In December 1995, the Delaware Lottery implemented a video gaming program
which is centrally controlled and monitored by the Company's on-line lottery
system in the state. The implementation of the video gaming program is the
primary reason for a $5.1 million increase in revenues from 1995 levels from the
contract with the Delaware Lottery. The implementation of the video gaming
program in Delaware has also resulted in additional lease revenues for the
Company's gaming machine segment.
In the third quarter 1996 the Company implemented an on-line lottery system
under contract with the Maryland Lottery. The new contract generated $2.9
million of on-line lottery revenue from start-up through December 31, 1996.
The gross profit margin of the on-line lottery segment was 33% in 1996 as
compared to 35% in 1995. The gross profit margin on services revenue in the
on-line lottery segment was 36.1% in 1996 as compared to 33% in 1995. The
decrease is primarily attributable to a contractual reduction in the fee
structure with the Florida Lottery in 1996. Management does not anticipate
significant fluctuations in gross profit margins in the near future. The gross
profit margin on on-line central system and equipment sales was 24% and 20% in
1996 and 1995, respectively.
In 1996, the Company withheld certain payments to EDS primarily due to EDS
performance issues and related on-line lottery customer disputes. In mid-1996
the agreement between EDS and the Company was terminated and EDS filed a
complaint against the Company seeking payment of outstanding fees. On January
30, 1997, the Company and EDS settled all claims against each other and agreed
to transition the EDS services and personnel to the Company. The terms of the
settlement include the receipt by the Company of all of the common and preferred
shares owned by EDS (545,454 common and 1,912,728 preferred shares) certain
property, plant and equipment used in the provision of services to on-line
lottery customers and the extinguishment of approximately $38,000,000 of
outstanding fees in return for a $26,100,000 note payable. The note payable
calls for interest payments only for the first two years and principal and
interest payments in years three through seven (maturity). The note is secured
by the 2,458,182 shares of redeemed Common and Preferred Stock, certain
inventories, fixed assets and software technology and carries prepayment
provisions upon the disposal of substantially all the assets or stock of the
Company's on-line lottery subsidiary. The transition of the EDS services and
related employees to the Company is anticipated to be completed in the second
quarter of 1997.
The Company paid or accrued approximately $81,600,000 and $70,300,000 to
EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses approximately $9,687,000 and $2,675,000 were capitalized primarily in
conjunction with software development and deferred start-up costs in 1996 and
1995, respectively.
Gaming Machine and Route Operations
Revenue from gaming machine sales and route operations decreased by $1.2
million (2.0%) to $60.2 million from $61.4 million in 1995.
- 36 -
<PAGE>
Revenue was recognized on delivery of 4,557 units in 1996 as compared to
7,772 in 1995. Included in the total units were approximately 917 and 1,562 of
royalty unit sales in 1996 and 1995, respectively. Additionally, the Company
shipped 1,175 gaming machines under lease arrangements to the Oregon, Rhode
Island and Delaware lotteries in 1996 as compared to 1,570 gaming machines
shipped to the Oregon, Rhode Island and Delaware lotteries in 1995.
The following table reflects domestic and foreign revenues for the years
ended December 31, 1996 and 1995 (amounts in millions):
Years Ended
December 31,
Jurisdiction 1996 1995 $ Change % Change
------------ ---- ---- -------- --------
Domestic:
Montana $19.7 19.3 0.4 2.0
Nevada 1.3 --- 1.3 ---
South Dakota 3.0 3.8 (0.8) (21.1)
Louisiana 1.4 9.0 (7.6) (84.4)
Oregon 7.1 6.0 1.1 18.3
Rhode Island 2.3 2.4 (0.1) (4.2)
Delaware 2.3 --- 2.3 ---
Other 2.4 1.6 0.8 0.5
----- ---- ----- -----
39.5 42.1 (2.6) (6.2)
Foreign:
Alberta, Canada 3.1 0.7 2.4 342.9
Atlantic Canada 0.9 1.6 (0.7) (43.8)
Norway 2.9 --- 2.9 ---
Quebec 2.2 12.3 (10.1) (82.1)
Victoria, Australia 5.9 3.4 2.5 73.5
South Australia 0.7 0.2 0.5 250.0
Peru 3.6 --- 3.6 ---
Iceland 0.7 0.8 (0.1) (12.5)
Other 0.7 0.3 0.4 133.3
----- ---- ----- -----
20.7 19.3 1.4 7.3
----- ---- ----- -----
$60.2 61.4 (1.2) (2.0)
===== ==== ===== =====
Montana revenue includes $16.5 and $15.3 million from route operations in
1996 and 1995, respectively.
In 1996, voters in approximately one-half of the state's parishes in
Louisiana voted to discontinue video lottery operations in those parishes.
Existing locations will be allowed to operate for approximately two years before
the gaming machines must be removed.
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as leases revenue, increased to
45% from 41% in 1995. The increase is primarily attributable to the lower sales
levels in Louisiana and Quebec which historically carry lower margins for the
Company relative to other jurisdictions and higher software sales which carry
higher gross profit margins. The gross profit margin from route operations was
28.5% in 1996 as compared to 27.5% in 1995.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operations segment
decreased by $.5 million or (1.6%) to $27.6 million from $28.1 million in 1995.
The decrease is attributable to a decline in revenues from the racetrack
operations at Sunland Park, New Mexico of approximately $.9 million offset by an
increase of $.4 million in revenues generated from wagering systems services and
equipment sales. The decline in revenue at Sunland Park is the result of lower
handle and attendance and lower revenues resulting from a shorter 1996-1997 live
racing season. The increase in revenues for wagering systems is attributable to
revenues from additional services under existing contracts, renegotiation of
existing contracts under more favorable terms and increased interface fees
resulting from increased levels of simulcasting. Lost revenues from closed
customer facilities were offset by these increases as well as additional
revenues generated at customer facilities that are now open year round for
simulcasting and the addition of new customers.
- 37 -
<PAGE>
The number of customer contracts declined in 1996 primarily due to closing
of six customer facilities in Kansas, South Dakota, Texas, and Wisconsin. In
1996, United Tote signed contracts with five new customers, and renewed
contracts with six U. S. customers and seven Canadian customers. The company
plans to continue to renew existing contracts at margins at least comparable to
existing contracts and plans to secure new contracts at comparable margins,
although no assurance can be given that existing contracts will be renewed or
new contracts will be entered into with comparable gross profit margins.
The gross profit margin from the wagering systems and racetrack operations
segment was 27% in 1996 as compared to 21% in 1995. The gross profit margins for
wagering systems services and equipment sales were 38% in 1996 and 30% in 1995.
The increase in margin is due to increases in the simulcasting and interface
revenues which carry higher margins, combined with lower operating expenses from
wagering systems. The Sunland Park racetrack operations yielded negative gross
margins in both years.
On March 21 the New Mexico legislature voted to allow casino gaming at
pari-mutuel racetracks in New Mexico, including the Company's racetrack in
Sunland Park, New Mexico. The bill, which is anticipated to be signed by the
state's Governor, allows, among other things, the operation of up to 300 video
gaming machines per pari-mutuel racetrack facility for up to twelve hours per
day. The implementation of gaming is subject to the timing and satisfaction of
conditions of the legislation, including the state's formation of a separate
commission to oversee the gaming and other regulatory matters (including the
grant of necessary licenses to the Company). Consequently, the Company does not
anticipate that any revenues will be generated from the approved gaming until
late 1997 or early 1998.
Selling, General and Administrative
Total selling, general and administrative expenses ("SG&A") decreased by
$2.4 million (7.7%) to $28.7 million from $31.1 million in 1995. The decrease is
primarily attributable to administrative head-count reductions, cost containment
measures and lower trade show spending offset in part by additional marketing
efforts primarily in casino markets.
As a percentage of sales, SG&A expenses were 16.2% in 1996 as compared to
17.2% in 1995. Management anticipates 1997 SG&A levels to be at or near 1996
levels given the current level of activity. Should business development
activities increase in the next several fiscal quarters, the SG&A levels would
follow.
Research and Development
In 1996, the Company expended $8.0 million (net of capitalization) on
research and development activities as compared to $8.9 million (net of
capitalization) in 1995. The Company capitalized approximately $4.1 million and
$2.7 million, respectively, of the development costs primarily in conjunction
with the development of the Company's MasterLinkTM system central system
software. The new modules and significant enhancements related to the
MasterLinkTM system in 1996 were implemented with the Delaware and Maryland
on-line lottery systems in 1996. The Delaware Lottery installation was the first
installation of the video gaming module of the MasterLinkTM system. The Maryland
on-line lottery system reached start-up in the third quarter of 1996 with the
most recent version of the MasterLinkTM system including a module for keno
games. The Company expects to continue to refine and enhance the Company's
MasterLinkTM system in 1997 for video and on-line lottery applications as well
as continue the development and enhancement of other on-line, video gaming and
wagering systems hardware and software products.
Other Charges
In 1996, the Company recorded approximately $34.1 million of special
charges consisting of approximately $18.0 million for inventory write-downs
primarily related to the on-line lottery segment, $8.4 million associated with
on-line lottery customer disputes and contract liabilities, $4.6 million for
impairment of intangible and other assets for an on-line lottery contract and
$3.1 million related to the wagering systems segment as discussed in Note 2 to
the Consolidated Financial Statements.
The Company's 1995 consolidated statement of operations includes
approximately $2.8 million of unusual reserves and write-offs associated with
exit costs and charges and asset impairments related to five contracts.
- 38 -
<PAGE>
Depreciation and Amortization
Depreciation and amortization increased by $1.2 million to $23.8 million
from $22.6 million in 1995. The increase is attributable to approximately $25.5
million of new capital assets placed in service and $10.0 million of capitalized
deferred start-up and software development costs in 1996. The majority of
capital assets procured and manufactured in 1996 were placed in service in the
third quarter in conjunction with the on-line lottery implementation in Maryland
and the delivery of video gaming machines under lease agreement with the Oregon
Lottery.
1995 Compared with 1994
Total revenue in 1995 decreased by $7.6 million (4.0%) to $181.2 million
from $188.8 million in 1994. The overall gross profit decreased by $9.1 million
(12.6%) to $63.4 million from $72.5 million in 1994. The Company had a net loss
from operations of $2.9 million in 1995 as compared to $16.2 million in 1994.
The decrease in losses primarily reflects less special and other charges
recorded. The 1994 charges of $24.0 million represented goodwill impairment of
$17.3 million and other charges primarily for inventories of $6.7 million. The
Company also experienced a decline in gross profit margins in 1995 from 1994
levels.
On-line Lottery
Revenue from the on-line lottery segment decreased by $9.9 million (9.7%)
to $91.7 million from $101.6 million in 1994. Included in the on-line lottery
revenue in 1995 and 1994 is $5.3 million and $9.9 million, respectively, of
revenue from international on-line lottery equipment sales. Revenue from the
Company's contract with the Florida Lottery of $35.2 million decreased by $2.4
million from 1994 primarily reflecting a decline in the contractual fee rate.
Also, included in 1994 revenue is $3.1 million from contracts with two off-track
betting corporations in the state of New York that expired in December 1994.
The gross profit margin of the on-line lottery segment was 35.2% in 1995 as
compared to 38.6% in 1994. The gross profit margin on services revenue in the
on-line lottery segment was 36.1% in 1995 as compared to 39.3% in 1994. The
decrease is primarily attributable to a contractual reduction in the fee
structure with the Florida Lottery in 1995. The gross profit margin on on-line
central system and equipment sales was 19.7% and 32.1% in 1995 and 1994,
respectively.
Gaming Machine and Route Operations
Revenue from gaming machine sales and route operations decreased by $7.2
million (10.5%) to $61.4 million from $68.6 million in 1994.
Revenue was recognized on delivery of 7,772 units in 1995 as compared to
10,008 in 1994. Included in the total units were approximately 1,562 and 2,792
of royalty unit sales in 1995 and 1994, respectively. Additionally, the Company
shipped 1,570 gaming machines under lease arrangements to the Oregon, Rhode
Island and Delaware lotteries in 1995 as compared to 400 gaming machines shipped
to the Oregon Lottery in 1994.
- 39 -
<PAGE>
The following table reflects domestic and foreign revenues for the years
ended December 31, 1995 and 1994 (amounts in millions):
Years Ended
December 31,
Jurisdiction 1995 1994 $ Change % Change
------------ ---- ---- -------- --------
Domestic:
Montana $19.3 17.9 1.4 7.8
South Dakota 3.8 5.9 (2.1) (35.6)
Louisiana 9.0 12.0 (3.0) (25.0)
Oregon 6.0 4.4 1.6 36.4
Rhode Island 2.4 2.1 0.3 14.3
Other 1.6 1.4 0.2 14.3
----- ---- ---- -----
42.1 43.7 (1.6) (3.6)
Foreign:
Alberta, Canada 0.7 5.4 (4.7) (87.0)
Atlantic Canada 1.6 0.8 0.8 100.0
Quebec 12.3 10.5 1.8 17.1
Victoria, Australia 3.4 5.2 (1.8) (34.6)
South Australia 0.2 2.0 (1.8) (90.0)
Iceland 0.8 0.5 0.3 60.0
Other 0.3 0.5 (0.2) (40.0)
----- ---- ---- -----
19.3 24.9 (5.6) (22.5)
----- ---- ---- -----
$61.4 68.6 (7.2) (10.5)
===== ==== ==== =====
Montana revenue includes $15.3 and $15.4 million from route operations in
1995 and 1994, respectively.
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as leases revenue, decreased
slightly to 41.4% from 41.9% in 1994. The decrease is primarily attributable to
a revenue decline from the lower royalty unit sales under a technology transfer
agreement between the Company and a Victoria, Australia
manufacturer/distributor. The royalty revenue has nominal direct cost
components. The gross profit margin from route operations was 27.5% in 1995 as
compared to 28.6% in 1994.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operations was $28.1
million in 1995 compared to $18.7 million for the eight months ended December
31, 1994. The gross profit margin decreased to 21% in 1995 from 25% in the eight
months ended in 1994.
Selling, General and Administrative
Total selling, general and administrative expenses ("SG&A") decreased by
$2.9 million (8.5%) to $31.1 million from $34.0 million in 1994. The decrease is
primarily attributable to lower legal and professional fees as well as reduced
business development expenses. Business development expenses are primarily
lobbying, political contributions, trade shows, travel, meals and lodging. As a
percentage of sales, SG&A expenses were 17.2% in 1995 as compared to 18.0% in
1994.
Research and Development
In 1995, the Company expended $8.9 million (net of capitalization) on
research and development activities as compared to $8.5 million (net of
capitalization) in 1994. The Company capitalized approximately $2.7 million and
$5.2 million, respectively, of the development costs primarily in conjunction
with the development of the MasterLinkTM system central system software.
Depreciation and Amortization
Depreciation and amortization increased by $1.9 million to $22.6 million
from $20.7 million in 1994. The increase is attributable to approximately $19.4
million of new capital assets placed in service and $3.5 million of capitalized
deferred start-up and software development costs in 1995. Approximately $8.1
million was placed in
- 40 -
<PAGE>
service in November and December of 1995 in conjunction with the Arizona on-line
lottery implementation and start-up and the delivery of approximately 300 gaming
machine terminals to the Oregon and Delaware lotteries as part of the leasing
programs with those jurisdictions. Approximately $2.4 million of the $3.5
million capitalized deferred start-up and software development costs were
capitalized in the fourth quarter 1995 in conjunction with the Arizona on-line
lottery implementation and start-up and significant enhancements to the
MasterLinkTM system.
Liquidity and Capital Resources
Working capital, defined as current assets less current liabilities,
increased by $8.0 million to $28.0 million at December 31, 1996 from $20.0
million at December 31, 1995.
The increase in working capital primarily reflects a decrease in current
amounts payable to EDS from December 31, 1995. Included in trade accounts
payable at December 31, 1996 and 1995, respectively, are amounts payable to EDS
of $1.2 million and $10.7 million. In January 1997, the Company settled all
outstanding disputes with EDS which included, among other things (see Note 16 to
the Consolidated Financial Statements), a reduction of the amounts payable to
EDS from the $38.0 million, recorded as a non-current liability at December 31,
1996, to a note payable with a net present value of $26.1 million. The note
payable calls for interest only payments for years one and two, and principal
and interest payments in years three through maturity in 2004. The note is
secured by the 2.4 million shares of Common and Preferred Stock returned by EDS
in the settlement and certain assets of the Company's on-line lottery subsidiary
and has provisions for accelerated payments upon the sale of the secured assets
as well as the Company or certain of its subsidiaries.
Despite the operating losses incurred in 1996, the Company generated
approximately $18.7 million of cash from operations in 1996 as compared to $1.9
million in 1995. The cash provided by operations combined with cash provided by
financing activities in excess of $18 million in 1996, was used to invest in
capital and intangible assets of in excess of $35 million in 1996. While a
portion ($4.6 million) of intangible assets were written off in conjunction with
other special charges recorded in 1996, the remaining expenditures are
investments expected to be recoverable from the future operations of the
Company. The investments were primarily for the implementation of an on-line
lottery system in Maryland, development of the MasterLinkTM system software,
manufacture and delivery of video gaming machines under lease agreement to the
Oregon Lottery and the manufacture and placement of pari-mutuel wagering system
terminals.
In 1996, the Company was named the successful bidder with both the
Minnesota and Florida lotteries for on-line lottery contracts. Discussions and
negotiations with the Minnesota Lottery are currently in progress. Subject to
the final ruling by the administrative judge in the protest proceedings
initiated by a competitor, discussions and negotiations on the contract terms
will begin with the Florida Lottery. Under the terms of the Florida request for
proposal, sizable capital expenditures in excess of current credit facilities
could be required. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted.
The Company's credit facility with First Bank, N.A., expires in February
1998. The credit facility allows additional third party financing within certain
parameters specified in the credit agreement, including Amendment No. 5 to the
agreement dated January 30, 1997.
- 41 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
Independent Auditors' Report 43
Consolidated Financial Statements:
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 44
Balance Sheets as of December 31, 1996 and 1995 45
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 46
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 47
Notes to Consolidated Financial Statements 48
All schedules are omitted because the information prescribed thereon is not
applicable nor required or is furnished in the consolidated financial statements
or notes thereto.
- 42 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Video Lottery Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Video
Lottery Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Video
Lottery Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/S/ KPMG PEAT MARWICK LLP
Billings, Montana
February 28, 1997
- 43 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
On-line lottery $ 88,842,968 91,653,710 101,559,326
Gaming machine and route operations 60,186,249 61,397,937 68,571,177
Wagering systems and racetrack operations 27,651,989 28,110,605 18,651,802
------------ ----------- -----------
Total revenues 176,681,206 181,162,252 188,782,305
------------ ----------- -----------
COSTS AND EXPENSES:
On-line lottery 59,332,807 59,438,258 62,396,996
Gaming machine and route operations 32,910,623 35,991,531 39,814,825
Wagering systems and racetrack operations 20,103,761 22,286,127 13,991,770
Selling, general and administrative 28,697,610 31,139,361 34,000,545
Research and development 7,969,025 8,887,785 8,513,137
Other charges 34,135,000 2,762,667 23,994,000
Depreciation and amortization 23,822,437 22,587,049 20,694,018
------------ ----------- -----------
Total costs and expenses 206,971,263 183,092,778 203,405,291
----------- ----------- -----------
Loss from operations (30,290,057) (1,930,526) (14,622,986)
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 1,059,794 1,243,471 1,445,688
Interest expense (3,753,555) (3,077,183) (1,687,441)
------------ ----------- -----------
(2,693,761) (1,833,712) (241,753)
------------ ----------- -----------
Loss before income taxes and extraordinary
items (32,983,818) (3,764,238) (14,864,739)
Income tax benefit (expense) 8,752,842 846,374 (1,303,034)
------------ ---------- -----------
Net loss from operations (24,230,976) (2,917,864) (16,167,773)
Reversal of (provision for) loss on discontinuance of
wagering systems operations, net 5,482,279 (5,482,279) ---
------------ ---------- -----------
Net loss before extraordinary items (18,748,697) (8,400,143) (16,167,773)
Extraordinary gain, net 4,014,050 --- ---
------------ ---------- -----------
Net loss $(14,734,647) (8,400,143) (16,167,773)
============ ========== ===========
Net earnings (loss) per share:
From continuing operations $(2.27) (.28) (1.54)
From discontinued operations .51 (.51) ---
From extraordinary items .38 --- ---
------ ---- -----
$(1.38) (.79) (1.54)
====== ==== =====
Weighted average shares outstanding 10,698,926 10,608,472 10,506,687
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 44 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,321,884 1,992,667
Restricted short-term deposits 1,364,231 3,768,385
Accounts receivable, net 19,352,571 22,254,361
Current installments of notes receivable, net 2,818,371 2,814,814
Inventories 18,296,801 26,399,936
Prepaid expenses 1,027,256 1,261,963
Income tax refund receivable 3,551,415 2,431,068
Deferred income taxes 15,499,722 7,732,606
------------- -------------
Total current assets 66,232,251 68,655,800
------------- -------------
Property, plant and equipment 153,123,865 132,325,663
Less accumulated depreciation (78,416,733) (60,493,819)
------------- -------------
Net property, plant and equipment 74,707,132 71,831,844
------------- -------------
Restricted cash deposits 2,521,075 817,024
Notes receivable, excluding current installments 2,216,074 3,101,503
Goodwill, net 10,133,364 10,952,241
Intangible and other assets, net 12,232,860 10,492,573
------------- -------------
$ 168,042,756 165,850,985
------------- =============
LIABILITIES
Current liabilities:
Notes payable $ 7,650,000 8,250,000
Current installments of long-term debt 10,604,402 9,588,708
Accounts payable 6,645,855 15,490,638
Accrued expenses 13,247,658 15,339,707
------------- -------------
Total current liabilities 38,147,915 48,669,053
------------- -------------
Long-term debt, excluding current installments 9,312,371 12,884,564
Due to EDS 38,025,010 --
Other liabilities -- 10,000,000
Deferred income taxes 10,326,000 7,849,206
------------- -------------
Total liabilities 95,811,296 79,402,823
------------- -------------
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000 shares; no
shares issued -- --
Series A Junior Preferred stock, $.01 par value, convertible non-
cumulative. Authorized 1,912,728 shares 19,127 19,127
Common stock, $.01 par value. Authorized 25,000,000 shares 108,292 106,821
Paid-in capital 97,764,970 97,284,358
Deferred restricted stock compensation (417,129) (452,991)
Accumulated deficit (25,243,800) (10,509,153)
------------- -------------
Total stockholders' equity 72,231,460 86,448,162
------------- -------------
$ 168,042,756 165,850,985
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
- 45 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Series A
Preferred Common Restricted Total
Stock Stock Paid-in stock compen- Accumulated stockholders'
par value par value capital sation deficit equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993 $ --- 123,188 94,032,726 --- 14,058,763 108,214,677
Net loss --- --- --- --- (16,167,773) (16,167,773)
Restricted stock issued --- 1,700 1,694,550 (1,696,250) --- ---
Amortization of deferred restricted
stock compensation --- --- --- 169,714 --- 169,714
Stock redemption --- (24,582) (65,117,241) --- --- (65,141,823)
Stock issued, net of issue costs 19,127 5,455 66,427,887 --- --- 66,452,469
Stock issued under stock purchase
plan --- 337 272,299 --- --- 272,636
Stock options exercised --- 237 326,420 --- --- 326,657
------- ------- ---------- ---------- ----------- -----------
December 31, 1994 19,127 106,335 97,636,641 (1,526,536) (2,109,010) 94,126,557
Net loss --- --- --- --- (8,400,143) (8,400,143)
Amortization of deferred restricted
stock compensation --- --- --- 323,545 --- 323,545
Rescission of deferred restricted stock
compensation --- (500) (749,500) 750,000 --- ---
Stock issued under stock purchase
plan --- 986 397,217 --- --- 398,203
------- ------- ---------- ---------- ----------- -----------
December 31, 1995 19,127 106,821 97,284,358 (452,991) (10,509,153 86,448,162
Net loss --- --- --- --- (14,734,647) (14,734,647)
Deferred restricted stock
compensation --- 300 132,900 35,862 --- 169,062
Stock issued under stock purchase
plan --- 1,171 347,712 --- --- 348,883
------- ------- ---------- ---------- ----------- -----------
December 31, 1996 $19,127 108,292 97,764,970 (417,129) (25,243,800) 72,231,460
======= ======= ========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Share Amounts Outstanding 1994 1995 1996
---- ---- ----
Series A Common Series A Common Series A Common
Balance Preferred Stock Stock Preferred Stock Stock Preferred Stock Stock
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year --- 12,318,805 1,912,728 10,633,544 1,912,728 10,682,109
Sale of stock 1,912,728 545,454 --- --- --- ---
Stock issued under stock
purchase plan --- 33,742 --- 98,565 --- 117,075
Stock redemption --- (2,458,182) --- --- --- ---
Restricted stock issued (rescinded) --- 170,000 --- (50,000) --- 30,000
Stock options exercised --- 23,725 --- --- --- ---
--------- ---------- --------- ---------- --------- ----------
End of year 1,912,728 10,633,544 1,912,728 10,682,109 1,912,728 10,829,184
========= ========== ========= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 46 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,734,647) (8,400,143) (16,167,773)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
(Reversal of) provision for loss on sale of
wagering systems operations (5,482,279) 5,482,279 ---
Depreciation and amortization 23,822,437 22,587,049 20,694,018
Other charges 34,135,000 2,762,667 23,994,000
Extraordinary gain, net (4,014,050) --- ---
Other, net 78,447 (50,856) 4,418
Changes in operating assets and liabilities:
Sales of receivables 1,466,952 2,339,710 4,311,874
Receivables, net 1,942,256 (7,502,586) (6,312,382)
Inventories (3,488,868) 6,923,294 (26,066,800)
Prepaid expenses 234,707 103,334 (27,995)
Accounts payable 2,006,279 (12,616,174) 18,538,836
Accrued expenses (10,853,878) (7,044,732) (7,152,483)
Deferred and refundable income taxes (6,410,669) (2,640,409) 351,387
------------ ----------- -----------
Net cash provided by operating activities 18,701,687 1,943,433 12,167,100
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (25,522,476) (19,046,937) (13,332,480)
Expenditures on intangible and other noncurrent assets (10,037,063) (3,540,804) (7,058,678)
Acquisition of business operations, net of cash acquired --- --- (26,969,161)
Proceeds from sales of equipment 109,440 386,063 357,287
Change in restricted cash deposits 700,103 181,728 7,298,152
Maturities (purchases) of available-for-sale
securities, net of purchases --- --- 24,607,595
------------ ----------- -----------
Net cash used in investing activities (34,749,996) (22,019,950) (15,097,285)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable to banks (600,000) 8,250,000 ---
Proceeds from issuance of long-term debt 4,364,424 24,286,477 213,900
Repayments of long-term debt (13,078,791) (14,735,245) (4,055,255)
Amounts payable to EDS 27,343,010 --- ---
Common stock sold under employee benefit plans 348,883 398,203 599,293
Sale of stock, net --- --- 66,452,469
Redemption of common stock --- --- (65,141,823)
------------ ------------ -----------
Net cash provided by (used in) financing activities 18,377,526 18,199,435 (1,931,416)
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 2,329,217 (1,877,082) (4,861,601)
------------ ------------ -----------
Cash and cash equivalents, beginning of year 1,992,667 3,869,749 8,731,350
------------ ------------ -----------
Cash and cash equivalents, end of year $ 4,321,884 1,992,667 3,869,749
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 47 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of Video Lottery Technologies, Inc. and subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition. Revenue from the sale of video gaming machines,
on-line lottery terminals and related parts is recognized primarily upon
delivery to the customer. Revenue from sales of on-line lottery and video gaming
central site systems and equipment is recognized using the percentage of
completion method of accounting for long-term construction type contracts where
costs to complete can reasonably be estimated or upon acceptance of the system
when costs to complete cannot reasonably be estimated. Prior to revenue
recognition on system sales, costs incurred are applied against progress
billings and recorded as a net accrued liability or other current asset as
appropriate.
On-line lottery and wagering systems revenues are recognized as the
services are performed and primarily relate to revenues from long-term contracts
which require installation and operation of on-line lottery and pari-mutuel
wagering networks. Revenues under these contracts are generally based on a
percentage of sales volume, which may fluctuate over the life of the contracts.
Route operations revenue consists primarily of video machine gaming wagers,
net of payouts and state gaming taxes.
Revenue from racetrack operations is generated primarily from ownership and
operation of a racetrack in Sunland Park, New Mexico.
Equipment leased to others is accounted for as operating leases,
whereby monthly rentals are recorded as income when earned.
Cash and Cash Equivalents. Cash deposits and all highly liquid debt
instruments with maturities of three months or less are considered cash
equivalents in the statements of cash flows.
Restricted deposits. Cash deposits expected to be refunded or released
within one year are considered restricted short-term deposits. The deposits are
primarily for bonds that are required by customers for proposals and long-term
contracts.
Inventories. Inventories are carried at the lower of cost or market value.
Cost is determined using the first-in, first-out method and includes materials,
labor, allocated indirect manufacturing overhead as well as initial tooling and
other setup charges.
Accounts and Notes Receivable. Accounts and notes receivable are recorded
at cost, less the related allowance for impaired notes receivable. (See Note 5.)
Property, Plant and Equipment. Property, plant and equipment is stated at
cost. Equipment under capital leases is stated at the lower of the present value
of minimum lease payments at the beginning of the lease term or the fair market
value of the asset at the inception of the lease.
Depreciation of property, plant and equipment is calculated using the
straight-line method over the estimated useful lives of the assets or the life
of the related contract (including contract extensions) as follows:
- 48 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Item Estimated life
Wagering systems and on-line lottery equipment 3 - 7 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 10 years
Game operations equipment 7 years
Furniture and fixtures 5 - 10 years
Equipment under capital leases is depreciated on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset.
The Company in 1996 reclassified approximately $2,400,000 of on-line
lottery equipment from property, plant and equipment to inventories held for
sale. (See Note 15.)
Goodwill, Intangible and Other Assets. Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over the expected periods to be benefited, currently
estimated at 15 years from acquisition date May 1994 (see Note 2). Intangible
and other assets are stated at cost net of accumulated amortization. Intangible
and other assets are amortized over their respective economic useful lives
ranging up to 10 years. Accumulated amortization of Goodwill, Intangible and
other assets was approximately $12,100,000 and $7,594,000 at December 31, 1996
and 1995, respectively. In 1994, the Company recorded impairment losses on
goodwill based on estimates of discounted future operating cash flows related to
the asset. In June 1995, the Company adopted Statement of Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" (the "Statement"). The
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum of
these expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the asset is considered "impaired"
and an impairment loss is recognized. Measurement of the impairment loss amount
is based on the fair value of the asset. Fair value is measured based on the
present value of the expected future net cash flows calculated using a discount
rate commensurate with the risks involved.
Foreign Currency Translations and Transactions. Gains and losses from
foreign currency transactions and remeasurements are included in results of
operations.
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. The current and noncurrent portions of these deferred tax assets and
liabilities are classified in the balance sheet based on the respective
classification of the assets and liabilities which give rise to such deferred
income taxes.
Earnings per Common Share. Earnings per common share is computed by
dividing net earnings by the weighted average number of common shares
outstanding and the common stock equivalents of convertible preferred stock and
stock options outstanding using the treasury stock method. Common stock
equivalents are excluded from the loss per share calculation when the effect is
antidilutive.
Fair Value of Financial Instruments. The carrying value of financial
instruments, consisting primarily of cash, accounts receivable and accounts
payable, approximates fair value due to the liquid nature of the instruments.
(See Notes 5 and 10 for fair value estimates of notes receivable and long-term
debt.)
Stock based compensation plans. The Company applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its stock based
compensation plan. Accordingly, no compensation cost has been recognized for
options granted under the plans. (See Note 12.)
- 49 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Reclassifications. Certain reclassifications have been made to the 1995 and
1994 amounts to conform to the 1996 presentation. (See Note 2.)
Management 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 and 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.
(2) DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED/EXTRAORDINARY ITEM
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"). UWS is involved in
the design, manufacture, operation, sale and lease of computerized wagering
systems, primarily pari-mutuel wagering systems, and the ownership and operation
of a racetrack facility. The original purchase price of $29,600,000 included
$19,600,000 in cash and the issuance of $10,000,000 notes, payable over a
three-year period.
During the fourth quarter 1994 and the first quarter 1995, certain negative
developments affecting UWS and the pari-mutuel wagering industry became
increasingly apparent. These developments included a significant decline in the
gross revenues at pari-mutuel wagering and other facilities, sharp reductions in
gross margins and the failure of various state legislative initiatives
authorizing the introduction of gaming devices at tracks to occur as
anticipated. The Company's investment in Goodwill, net of amortization,
attributable to the wagering systems segment of UWS of $17,300,000 was written
off in the fourth quarter of 1994, leaving approximately $11,700,000 of Goodwill
associated with the racetrack operations segment of UWS.
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to the sellers in the aggregate amount
of $10,000,000 made in conjunction with the acquisition of UWS in May 1994. On
March 25, 1996, the Company reached an agreement with the sellers settling all
outstanding claims and disputes, including dismissal of all outstanding
litigation, resulting in a $4,014,050 gain on debt extinguishment. (See Note
10.)
The Company, in the fourth quarter 1995, made a decision to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico. The Company entered into
a non-binding letter of intent in the fourth quarter 1995 for the sale of this
segment; however, this transaction was abandoned because final terms could not
be negotiated. The Company continued to review other potential opportunities for
the sale of this operation through the second quarter 1996; however, due to
operational improvements and industry and market conditions, the Company decided
to no longer actively pursue the disposal of the wagering systems segment. In
accordance with the requirements outlined in Financial Accounting Standards
Board Emerging Issues Task Force issue No. 90-16 "Accounting for Discontinued
Operations Subsequently Retained," the results of operations of the wagering
systems segment have been reclassified to continuing operations in all periods
presented. The estimated provision for loss on disposal of $5,482,279, recorded
in 1995, was reversed in the third quarter 1996. Concurrent with the reversal,
the Company recorded an impairment charge on certain long-lived assets of the
wagering systems segment of approximately $2,800,000. Additionally, in 1996 the
Company implemented a restructuring plan of the manufacturing and repair and
maintenance operations of the wagering systems segment inclusive of closing a
facility in Shepherd, Montana. The manufacturing of wagering system terminals
will be performed in the Company's Bozeman, Montana facility. Costs and expenses
recorded in the third quarter 1996 for the restructuring plan were approximately
$300,000.
(3) BUSINESS SEGMENTS
The Company operates principally in three business segments: the sale,
design, manufacture, installation and operation of on-line lotteries; the
design, manufacture, marketing and leasing of video gaming machines and central
control systems and related services; and the design, manufacture, sale and
operation of computerized pari-mutuel wagering systems for dog and horse racing
tracks. These segments operate throughout the United States and on a limited
international basis.
- 50 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
On-line lottery $ 88,842,968 91,653,710 101,559,326
Gaming machine and route operations 64,530,676 62,889,528 83,249,299
Wagering systems and racetrack operations 27,651,989 28,110,605 18,651,802
Less intercompany revenues (4,344,427) (1,491,591) (14,678,122)
------------- ------------- -------------
Total revenues $ 176,681,206 181,162,252 188,782,305
============= ============= =============
Operating profit:
On-line lottery $ 15,262,606 19,745,027 24,203,095
Gaming machine and route operations 22,353,843 21,920,030 28,344,614
Wagering systems and racetrack operations 2,462,421 1,166,720 823,969
Less intercompany operating profit (loss) 432,708 (1,972,490) (1,486,982)
------------- ------------- -------------
Total operating profit $ 40,511,578 40,859,287 51,884,696
============= ============= =============
Capital expenditures:
On-line lottery $ 16,270,712 8,079,300 7,080,663
Gaming machine and route operations 5,809,103 5,353,786 2,403,181
Wagering systems and racetrack operations 3,455,358 4,762,307 3,846,948
Corporate 402,877 1,352,647 1,284,709
Less intercompany step-up in basis (415,574) (501,103) (1,283,021)
------------- ------------- -------------
Total capital expenditures $ 25,522,476 19,046,937 13,332,480
============= ============= =============
Depreciation and amortization:
On-line lottery $ 14,247,555 14,242,014 13,237,470
Gaming machine and route operations 4,908,125 3,772,100 3,424,638
Wagering systems and racetrack operations 5,085,807 4,657,756 3,836,063
Corporate 501,481 620,931 486,193
Less depreciation on intercompany
step-up basis (920,531) (705,752) (290,346)
------------- ------------- -------------
Total depreciation and amortization $ 23,822,437 22,587,049 20,694,018
============= ============= =============
Identifiable assets:
On-line lottery $ 62,349,531 77,547,719 68,292,863
Gaming machine and route operations 45,656,205 34,904,859 47,149,696
Wagering systems and racetrack operations 42,692,115 46,106,131 49,261,426
Corporate 19,066,692 9,546,562 11,770,845
Less intercompany step-up in basis (1,721,787) (2,254,286) (2,443,218)
------------- ------------- -------------
Total identifiable assets $ 168,042,756 165,850,985 174,031,612
============= ============= =============
</TABLE>
Intercompany revenues and expenses from transactions between subsidiaries
are eliminated in consolidation. Operating profit is defined as revenues less
cost of sales, depreciation and amortization and excludes other special charges.
Included in the on-line lottery segment is revenue from equipment sales of
approximately $4,408,000, $5,314,000 and $9,940,000 and costs and expenses
associated with equipment sales revenue of approximately $3,062,000, $4,267,000
and $8,235,000 in the years ended December 31, 1996, 1995 and 1994,
respectively.
The gaming machine segment includes operating lease revenue of
approximately $10,726,000, $6,783,000 and $6,047,000 and revenues from royalties
of approximately $627,000, $3,600,000 and $7,200,000 in the years ended December
31, 1996, 1995 and 1994, respectively.
- 51 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Included in the wagering systems segment is revenue from equipment sales of
approximately $2,140,000, $2,124,000 and $2,330,000 and costs and expenses
associated with equipment sales revenue of approximately $1,295,000, $1,133,000
and $1,143,000 in the years ended December 31, 1996, 1995 and eight months ended
December 31, 1994, respectively.
Revenue related to racetrack operations was approximately $7,153,000,
$7,968,000 and $4,821,000 and operating losses related to racetrack operations
were approximately $(1,569,000), $(1,327,000), and $(874,000) in the years ended
December 31, 1996, 1995 and the eight months ended December 31, 1994,
respectively.
Total identifiable assets of the racetrack operations were approximately
$22,710,000, $23,889,000 and $22,255,000 at December 31, 1996, 1995 and 1994,
respectively.
(4) REVENUE CONCENTRATION
The Company had revenues from customers or distributors within a specific
jurisdiction which accounted for more than 10% of the Company's gaming machine
and route operations revenues approximately as follows:
Years Ended December 31,
1996 1995 1994
Amount % Amount % Amount %
Montana $19,748,000 32.8 $19,523,000 31.2 $17,927,000 26.1
Quebec 2,169,000 3.6 12,291,000 19.6 10,532,000 15.4
Louisiana 1,389,000 2.3 8,999,000 14.4 12,044,000 17.6
Oregon 7,090,000 11.7 6,054,000 9.7 4,327,000 6.3
Montana revenue includes total revenues from route operations of
approximately $16,548,000, $15,269,000 and $15,422,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company derives on-line lottery revenue from contracts ranging from one
to five years with varying options for extensions and renewals and from on-line
lottery system software and equipment sales from customers in ten individual
states and three international jurisdictions. For the years ended December 31,
1996, 1995 and 1994, the following customers accounted for more than 10% of the
Company's on-line lottery revenue:
Contract 1996 1995 1994
Expiration Amount % Amount % Amount %
---------- ------ - ------ - ------ -
Florida 6/96 $30,203,000 34.0 $35,247,000 38.5 $37,692,000 37.1
Pennsylvania 12/98 23,164,000 26.1 22,101,000 24.1 22,229,000 21.9
The Company's contract with the Washington State Lottery expired in June
1996. The expired contract accounted for approximately $5,739,000 (6.5%) of the
lottery services revenue in 1996, $10,382,000 (11.3%) in 1995 and $10,930,000
(10.8%) in 1994. The expiration date of the current contract with the Florida
Lottery was extended from June 30, 1996, as a result of a delay of the award of
a new contract. On October 31, 1996, the Company was notified by the Florida
Lottery that the Company has been selected as the most highly qualified bidder
for the award of a new five-year on-line lottery contract. A competitor, GTECH
Corporation, has protested the Florida Lottery's selection of the Company.
Pending resolution of the protest, the Company will commence contract
negotiations. Under the terms of the request for proposal, sizable capital
expenditures in excess of current credit facilities would be required to fulfill
its terms. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted.
Export Sales. The Company had total export sales from the United States of
approximately $28,600,000, $30,200,000 and $38,500,000 during the years ended
December 31, 1996, 1995 and 1994, respectively.
- 52 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(5) NOTES AND ACCOUNTS RECEIVABLE
A summary of receivables follows:
December 31,
1996 1995
---- ----
Trade $20,438,177 23,423,223
Notes receivable 5,260,118 7,783,514
Accrued interest 5,415 113,621
----------- ----------
25,703,710 31,320,358
Less allowance for doubtful accounts (1,316,694) (3,149,680)
Less current portion (22,170,942) (25,069,175)
----------- ----------
$ 2,216,074 3,101,503
=========== =========
The Company finances sales of gaming machine equipment to certain customers
meeting minimum credit standards. Installment notes bear interest at interest
rates of up to 18% and generally mature within one to five years.
At December 31, 1996, approximately 39% of the Company's receivables were
from various governments or their designated agencies. The Company estimates the
fair value of gross notes receivable at December 31, 1996 to approximate
carrying value. This estimate is based on current discount rates for instruments
of similar credit quality available in the secondary market.
(6) INVENTORIES
A summary of inventories, net of valuation reserves, follows:
December 31,
1996 1995
---- ----
Manufacturing:
Raw materials $5,461,972 15,159,742
Work-in-process 733,436 673,082
Finished goods 11,321,877 8,602,181
Customer service and other 779,516 1,964,931
----------- ----------
$18,296,801 26,399,936
=========== ==========
The Company had reserves for inventories of approximately $14,200,000 and
$5,200,000 at December 31, 1996 and 1995, respectively, primarily related to
finished goods. At December 31, 1996, the Company had approximately 500 finished
video gaming machines located in various casino gaming locations, under trial
arrangements with customers, included in inventory.
(7) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Wagering systems and on-line lottery equipment $103,572,304 88,207,880
Land, buildings and improvements 14,280,158 14,201,871
Machinery and equipment 5,931,264 5,046,108
Game operations equipment 27,676,069 23,507,049
Furniture and fixtures 1,664,070 1,362,755
------------ -----------
$153,123,865 132,325,663
============ ===========
</TABLE>
- 53 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In 1996, the Company transferred on-line lottery equipment with a net book
value of approximately $2,400,000 to inventories held for sale in conjunction
with the termination of an on-line lottery contract. During 1995 and 1994, the
Company transferred approximately $1,030,000 and $1,221,000, respectively, of
game operations equipment from inventory to property, plant and equipment in
conjunction with leasing activities and $3,900,000 and none, respectively, from
inventory to property and equipment in connection with installations of
terminals under on-line lottery contracts. Other additions to game operations
equipment and on-line lottery equipment in the three-years ended December 31,
1996, are included in the Consolidated Statement of Cash Flows.
Game operations equipment at December 31, 1996 and 1995 includes video
gaming machines with an aggregate cost of approximately $20,866,000 and
16,972,000, respectively, and carrying value of approximately $11,900,000 and
$10,837,000, respectively, which is being leased to customers. For the years
ended December 31, 1996, 1995 and 1994, depreciation expense on this equipment
was approximately $2,830,000, $2,021,000 and $1,710,000, respectively. Two lease
agreements provide rent payments to the Company based on a percentage of net
gaming receipts. One agreement is on a month-to-month basis, the other is for a
five-year period ending in December 2000 with provisions for three one-year
extensions. Another agreement is a master lease whereby individual terminal
shipment lease terms are for one year, with four consecutive automatic one-year
renewals with decreasing lease payments, with an option by the lessee to
terminate the lease at the end of each such year. Future lease receipts, by the
Company, under the contractual lease agreements, assuming renewals, based on the
terminals accepted through December 31, 1996, are approximately as follows:
Year ending December 31,
1997 $ 7,292,000
1998 5,167,000
1999 4,235,000
2000 3,565,000
2001 386,000
-----------
$20,645,000
===========
Lease income was approximately $10,726,000, $6,783,000 and $6,047,000 in
1996, 1995 and 1994, respectively.
(8) INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets, net of amortization, follows:
December 31,
1996 1995
Software development costs $ 9,059,037 6,679,014
Deferred start-up costs and other 2,646,043 2,260,780
Non-compete agreements 527,780 1,552,779
----------- ----------
$12,232,860 10,492,573
=========== ==========
The Company capitalized approximately $4,124,000, $2,675,000 and $5,154,000
of software development costs in the years ended December 31, 1996, 1995 and
1994, respectively. The costs are primarily related to the development of the
MasterLinkTM system.
Total amortization expense of intangible and other assets (including
Goodwill) was approximately $4,229,000, $3,454,000 and $3,091,000 in 1996, 1995
and 1994, respectively. Amortization of software development costs, included in
total amortization of intangible and other assets, was approximately $1,266,000,
$941,000 and $233,000 in 1996, 1995 and 1994, respectively.
Management estimates that all capitalized development and deferred start-up
costs will be recovered through operations. Should plans for a jurisdiction,
product or product enhancements be abandoned or otherwise expire, the related
costs are expensed. (See Note 15.)
- 54 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(9) LEASE OBLIGATIONS
The Company has noncancelable operating leases for office space, equipment
and vehicles which expire at various dates over the next five years. Future
minimum lease payments under noncancelable operating leases as of December 31,
1996, including leases to be assumed by the Company in conjunction with the
settlement agreement between the Company and EDS (see Note 16), are
approximately as follows:
Year ending December 31,
1997 $2,754,000
1998 2,276,000
1999 968,000
2000 518,000
2001 93,000
==========
In 1996, 1995 and 1994, rental expense was approximately $752,000, $633,000
and $1,709,000, respectively.
(10) LONG-TERM DEBT
A summary of long-term debt, including capitalized lease obligations,
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
8.25% note payable in monthly installments
including interest, through September 2001
(see Note 2) $ 5,728,870 ---
7.2% to 10.4% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including
interest, maturing through November 1999 1,753,139 3,753,272
9.0% note payable in monthly installments
including interest through December 1998,
secured by assets leased to others (see Note 7) 5,164,764 5,200,000
LIBOR plus 2.25% notes payable in equivalent monthly
installments of $250,000 plus interest through
February 1998. Secured by stock of subsidiaries 7,270,000 13,520,000
----------- ----------
19,916,773 22,473,272
Less current installments 10,604,402 9,588,708
----------- ----------
Long-term debt, excluding current installments $ 9,312,371 12,884,564
=========== ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
Year ending December 31,
1997 $10,604,402
1998 4,417,997
1999 2,252,298
2000 1,638,507
2001 1,003,569
===========
Cash paid for interest was approximately $2,567,000, $2,762,000 and
$1,524,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
- 55 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Based on borrowing rates currently available to the Company for borrowings
with similar terms and maturities, the fair value of long-term debt at December
31, 1996 approximates carrying value.
The Company maintains a credit facility with First Bank, N.A. In
conjunction with the Company's settlement with EDS, effective January 30, 1997
(see Note 16), the credit agreement with First Bank, N.A. was amended to, among
other things, allow for the pari passu securitization of certain assets of the
Company by EDS, extend the maturity date of the revolving line of credit to
February 18, 1998, and increase the line of credit from $17,500,000 to
$19,500,000. In addition to the revolving line of credit, the facility is
structured with two three-year term loans payable through February 1998. The
revolving line of credit which matures February 28, 1998, bears interest at
LIBOR (5.59% at December 31, 1996) plus 2.25% and carries a commitment fee of
.25% on the unadvanced amount. The credit agreement contains certain restrictive
covenants including leverage and cash flow ratios, change in control, payments
of dividend's restrictions and minimum stockholders' equity. Primarily as a
result of the termination of the agreement with EDS in July 1996, the Company
was in default of certain provisions of the credit agreement. The defaults have
been waived by First Bank, N.A. As of December 31, 1996, the Company had
utilized $17,150,000 (including $9,500,000 allocated for irrevocable letters of
credit for the Company's bonding program. ) of the revolving line of credit.
(11) INCOME TAXES
Income tax expense (benefit) from operations consists of the following:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Current:
Federal $(3,532,520) (1,218,616) 645,838
State 70,000 --- (285,448)
Foreign --- 581,583 591,257
----------- -------- ---------
(3,462,520) (637,033) 951,647
----------- -------- ---------
Deferred:
Federal (3,614,436) 306,354 157,622
State (1,602,006) (515,695) 193,765
Foreign (73,880) --- ---
----------- -------- ---------
(5,290,322) (209,341) 351,387
----------- -------- ---------
$(8,752,842) (846,374) 1,303,034
=========== ======== =========
The provision for income tax (benefit) expense differs from the amount
which would be provided by applying the Federal statutory income tax rate to
loss from operations before income taxes as follows:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Computed expected tax (benefit) $(8,402,621) (3,236,281) (5,202,659)
Goodwill impairment --- --- 6,055,002
Extraordinary gain (1,344,718) --- ---
State taxes, net of Federal impact (995,804) (335,202) (59,594)
Increase in valuation reserve 1,582,000 1,772,254 ---
Tax exempt interest income --- (10,159) (107,621)
Non-deductible expenses 218,703 371,200 507,002
Goodwill amortization 286,607 286,607 471,011
Foreign taxes (73,880) 581,583 591,257
Foreign sales credit --- (276,376) (473,000)
Other, net (23,129) --- (478,364)
----------- -------- ---------
$(8,752,842) (846,374) 1,303,034
=========== ======== =========
- 56 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following:
December 31,
1996 1995
Deferred tax assets:
Allowance for doubtful accounts $ 500,971 1,217,481
Inventory reserves 4,843,591 2,076,717
Provision for discontinued operations --- 2,168,241
Net operating loss carryforward 10,774,111 1,639,562
Tax credits 1,321,006 1,321,006
Accrued liabilities 3,367,418 3,034,974
------------ ----------
Deferred tax assets 20,807,097 11,457,981
------------ ----------
Less valuation reserve (5,307,375) (3,725,375)
------------ ----------
Net deferred tax assets 15,499,722 7,732,606
------------ ----------
Deferred tax liabilities:
Fixed assets, principally depreciation (7,797,992) (6,830,385)
Deferred costs (3,546,568) (2,094,356)
Lease obligations 638,883 1,075,535
Other 379,677 ---
------------ ----------
Net deferred tax liabilities (10,326,000) (7,849,206)
------------ ----------
Net deferred income tax asset (liability) $ 5,173,722 (116,600)
============ ==========
The ultimate realization of deferred tax assets is dependent upon the
existence of, or generation of, taxable income in the periods in which those
temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, taxes paid in carryback years, projected
future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods the net deferred tax assets are deductible, at
December 31, 1996, management believes it is more likely than not that the
Company will realize the benefits of these net deductible differences.
The Tax Reform Act of 1986 expanded the corporate alternative minimum tax
(AMT). Under the Act, the Company's tax liability is the greater of its regular
tax or the AMT. The Company is subject to the AMT primarily due to depreciation
limitations for AMT purposes. The AMT actually paid will be allowed as a credit
against regular tax in the future to the extent future regular tax expense
exceeds AMT. At December 31, 1996, the Company has approximately $1,321,000 of
AMT credit carryforwards which are available to reduce future federal regular
income taxes over an indefinite period. In addition, at December 31, 1996, the
Company has approximately $27,200,000 of net operating loss carryforwards
primarily for federal regular income tax purposes which expire in 2011. A
significant amount of the net operating loss carryforward balance is anticipated
to be utilized in 1997, primarily as a result of the gain on extinguishment of
debt discussed in Note 16.
Net cash received from prior period refunds was approximately $2,442,000 in
1996. Cash paid for income taxes was approximately $1,516,000 and $2,254,000
during 1995 and 1994, respectively.
(12) BENEFIT PLANS
On May 16, 1994, the Board of Directors adopted the 1994 Stock Incentive
Plan (the "Plan") which was approved by the Company's stockholders on June 15,
1994. The Plan provides for the granting of options, stock appreciation rights,
restricted stock, performance units and performance shares to employees,
consultants and advisors of the Company and the granting of options to
non-employee directors of the Company (collectively or individually, "Awards").
The total number of shares authorized for issuance under the Plan was 1,000,000.
At December 31, 1996, the remaining number of shares available for issuance
under the Plan was 189,500. The Plan replaces the 1992 Stock Incentive Plan
which replaced the 1991 Stock Option Plan. No further stock options will
- 57 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
be granted under the 1991 and 1992 plans. All stock options presently
outstanding under the 1991 and 1992 plans will continue to be governed by the
terms of the 1991 Stock Option Plan and 1992 Stock Incentive Plan.
Options granted under the Plan are designated as either incentive stock
options or as non-incentive stock options. The term of the option may not exceed
10 years from the date the option is granted or 15 years in the case of
non-incentive stock options. Incentive stock options owned by stockholders with
more than 10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 100% of the fair
market value at the grant date, and the term of the option may not exceed 5
years from the date of grant.
On February 23, 1993, the Board of Directors adopted a Non-Employee Stock
Option Plan whereby non-employee directors of the Company elected or appointed
after January 1, 1993 shall receive a one-time grant of options to acquire
20,000 shares of Common Stock. The exercise, pricing, vesting, duration and all
other terms and conditions applicable to each option granted under the
Non-Employee Stock Option Plan shall be in accordance with the provisions of the
1992 Stock Incentive Plan.
All options currently outstanding are 100% exercisable no later than 4
years after grant date.
Weighted Average
Options Exercise Price
------- ----------------
Year ended December 31, 1994
Outstanding, beginning of year 511,214 $14.23
Granted 782,500 11.10
Exercised (23,725) 13.77
Cancelled (58,620) 14.16
----------
Outstanding, end of year 1,211,369 12.12
=========
Exercisable, end of year 372,690 14.54
========= ======
Year ended December 31, 1995
Granted 70,000 $ 8.33
Exercised --- ---
Cancelled (361,587) 14.20
---------
Outstanding, end of year 919,782 11.45
=========
Exercisable, end of year 539,657 12.44
========= ======
Year ended December 31, 1996
Granted 352,500 $ 4.78
Exercised --- ---
Cancelled (348,693) 11.74
---------
Outstanding, end of year 923,589 8.76
=========
Exercisable, end of year 547,749 9.67
========= ======
Information regarding options outstanding and exercisable at December 31,
1996, follows:
<TABLE>
<CAPTION>
Range of Options Outstanding Options Exercisable
Exercise Weighted Average Weighted Average Weighted Average
Price Number Exercise Price Remain Life (Yrs) Number Exercise Price
-------- ------ -------------- ----------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$3.00 - 5.00 200,000 $4.24 9.9 98,333 $4.25
$5.00 - 10.00 438,333 7.69 8.3 234,160 8.53
$10.00 - 15.00 241,256 13.03 6.2 206,256 13.07
$15.00 - 28.00 44,000 16.47 7.4 9,000 20.81
------- -------
$3.00 - 28.00 923,589 8.76 8.0 547,749 9.67
============== ======= ===== === ======= =====
</TABLE>
- 58 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock option benefit plans. Accordingly, no
compensation cost has been recognized in the Company's consolidated statement of
operations for options granted under the plan. Had compensation cost for the
options granted under the Company's plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method of
Financial Accounting Standards Board Statement 123, the Company's net loss and
loss per share amounts would have been as reflected in the pro-forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss $(15,156,647) (8,509,143)
============ ==========
Loss per share $(1.42) (.80)
====== ====
</TABLE>
The fair value of the options granted in 1996 and 1995 was estimated using
the Black-Scholes model with the following assumptions for 1996 and 1995:
dividend yield of 0%; expected life of 5 years; volatility of 57% and a
risk-free interest rate of 6%. The effects of applying Financial Accounting
Standards Board Statement No. 123 in this pro-forma disclosure may not be
indicative of future results. Statement 123 does not apply to awards prior to
1995 and additional awards in future years are anticipated.
A stock purchase plan was established in 1991, which is available to all
permanent full-time employees. The Stock Purchase Plan provides for the purchase
of the Company's Common Stock through payroll deductions of up to 3% of an
employee's current compensation. In addition, the Company may make cash
contributions to each employee's stock purchase account in an amount up to 50%
of each payroll deduction credited to the account. The Board of Directors has
authorized 200,000 shares of the Company's Common Stock for issuance under the
Stock Purchase Plan. Under the Stock Purchase Plan, the Company will offer to
sell shares of its Common Stock at the end of each one year period (the
"Purchase Period"), which begins January 1 and ends December 31 of each year.
Shares will be purchased at the lesser of 85% of the fair market value of the
Company's Common Stock on the first or last day of the Purchase Period. There
were 117,075 shares at $2.98 per share purchased in January of 1997 for the 1996
Purchase Period; 98,565 shares at $4.04 per share purchased in January of 1996
for the 1995 Purchase Period; and 33,742 shares at $8.08 per share purchased in
January of 1995 for the 1994 Purchase Period. Under the Stock Purchase Plan, the
Company contributed approximately $117,000, $102,000 and $91,000 for 1996, 1995
and 1994, respectively.
In 1992, the Board of Directors adopted a 401(K) employee savings plan.
Employer contributions are discretionary under the plan. Employer contributions
under the plan were approximately $237,000, $206,000 and $357,000 for 1996, 1995
and 1994, respectively.
(13) COMMITMENTS AND CONTINGENCIES
During 1996, 1995 and 1994, the Company sold notes receivable from gaming
machine equipment sales, with a face value of $1,466,952, $2,339,710 and
$4,311,874. respectively, to banks and other third parties. The notes are
secured by the underlying equipment. The receivables sold are subject to
recourse provisions in the event of default by the primary obligor. The
outstanding balance of the notes receivable sold with recourse was approximately
$4,678,000 at December 31, 1996. The Company has established reserves for
estimated losses under the recourse provisions. At December 31, 1996, the
Company had guaranteed or pledged security for the indebtedness of others in the
amount of approximately $5,801,000 (including $4,678,000 notes receivable sold
to banks and other third parties).
The Company is obligated to provide services and/or equipment under certain
of its contracts. In addition, the various state on-line lottery and video
gaming contracts contain provisions under which the Company may be subject to
monetary penalties for central computer downtime, terminal failures, delays in
servicing inoperable terminals within specified time periods and ticket stock
shortages among other things. The Company accrues any net losses in fulfilling
the terms of these contracts when the loss is probable and can be reasonably
estimated (see Note 15). At December 31, 1996 and 1995, respectively, the
Company had accrued liabilities of approximately
- 59 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
$3,115,000 and $2,859,000 representing progress billings and estimated costs to
fulfill its obligations to deliver products and services under certain customer
contracts.
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At December 31, 1996, the Company had collateral in
support of the various bonds outstanding consisting of $3,350,000 of restricted
deposits and $9,500,000 of irrevocable standby letters of credit. Should the
Company fail to meet contractually specified obligations during the contract
term, the lottery authority may assess damages and exercise its right to collect
on the applicable bond. The Company has had disputes with customers over
implementation schedules, deliverables and other issues. The Company works with
these customers to resolve these differences; however, should the Company be
unable to resolve any disputes in a mutually satisfactory manner, the Company
may suffer negative consequences in its relationships with these and other
customers and its pursuit of future business. The ultimate cost to the Company
of such damages (if any) would be net of its claims under risk management
policies in effect as appropriate.
Historically, the Company has met its cash flow requirements primarily with
cash provided by operations, public offerings of equity securities, and from
borrowings from financial institutions. The Company, in 1996, was named the
successful bidder for on-line lottery contracts with the Minnesota and Florida
lottery authorities. The negotiations for a new contract with the Minnesota
Lottery have been initiated. The award by the Florida Lottery has been protested
by a competitor. If the award is upheld, the Company will begin negotiations of
a new contract. Sizable capital expenditures in excess of current capital
sources may be required in advance of any anticipated capital generated by the
Florida contract, accordingly, the Company may need additional financing, the
availability and the terms of which are subject to various uncertainties, with
no assurance that such financing can be obtained.
The recovery of a significant amount of the Company's investment in the
racetrack operations in New Mexico is largely contingent upon the implementation
of gaming legislation in the state. On March 21 the New Mexico legislature voted
to allow casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack in Sunland Park, New Mexico. The bill, which is anticipated
to be signed by the state's Governor, allows, among other things, the operation
of up to 300 video gaming machines per pari-mutuel racetrack facility for up to
twelve hours per day. The implementation of gaming is subject to the timing and
satisfaction of conditions of the legislation, including the state's formation
of a separate commission to oversee the gaming and other regulatory matters
(including the grant of necessary licenses to the Company). Consequently, the
Company does not anticipate that any revenues will be generated from the
approved gaming until late 1997 or early 1998.
A significant percentage of the Company's consolidated revenues are derived
from sales to customers in jurisdictions that have enacted legislation
permitting various types of gaming. Such enacted legislation may change due to
political and economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
As previously reported, a purported class action, alleging violations of
the federal antitrust laws, was filed in June 1994, in the federal district
court in South Dakota against the Company and certain video lottery machine
operators in South Dakota by a group of other video lottery machine operators,
alleging, among other things, a combination and conspiracy to unlawfully
restrain trade in video lottery machines by fixing lease prices for such
machines, allocating territories and refusing to deal with other operators.
Unspecified treble damages were sought, along with injunctive relief to bar the
alleged practices. On November 6, 1996, the court granted the Company's and
other defendants' motion for summary judgment and dismissed, with prejudice, all
claims of the plaintiffs. In December 1996, plaintiffs filed an appeal of this
ruling with the Eighth Circuit of the U. S. Court of Appeals. The Company cannot
predict the outcome of the appeal.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not have a material adverse effect on its consolidated financial position
or results of operations.
- 60 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(14) STOCKHOLDERS' EQUITY
In January 1994, Electronic Data Systems Corporation ("EDS") purchased
545,454 shares of the Company's Common Stock and 1,912,728 shares of Series A
Junior Preferred Stock (Series A Preferred Stock), each at a share price of
$27.50. The Series A Preferred Stock carries dividend rights equal to the
Company's Common Stock, is non-voting, and is convertible to 1,912,728 shares of
Common Stock after ninety days prior written notice (see Note 16).
In February 1994, the Company completed a transaction with an investor
group represented by William Spier, a director of the Company. As a result of
this transaction, the Company repurchased 2,458,182 shares of its Common Stock
at a cash price of, in effect, $26.50 per share.
(15) OTHER CHARGES
In 1996 the Company recorded approximately $34,100,000 of special charges
for restructuring costs and asset impairments, consisting of $18,000,000 for
inventory value impairments primarily related to the on-line lottery segment,
$8,400,000 associated with on-line lottery customer disputes and contract
liabilities, $4,600,000 for impairment of intangible and other assets for an
on-line lottery contract and approximately $3,100,000 related to the wagering
systems segment as discussed in Note 2. Approximately $21,200,000 of the charges
were recorded in the fourth quarter of 1996, primarily related to the Company's
revised strategies and resulting estimates regarding on-line lottery operations.
In 1995, the Company recorded approximately $2,763,000 of special and other
unusual charges associated with exit costs and charges and asset impairments
related to five contracts.
In the fourth quarter 1994, the Company revised its international and
domestic operations strategies. The revision of the international operations to
a strategy of alliances in selective markets and developments in the
international market place resulted in a special charge of $6,694,000
representing reserves and write-offs for inventory of $4,099,000 and write-offs
and accruals of foreign contract investments and commitments of $2,595,000. In
addition to the $6,694,000 of charges, the Company recorded an impairment charge
of approximately $17,300,000 related to the goodwill attributable to the
acquisition of UWS. (See Note 2.)
In addition to the restructuring charges discussed above, the Company's
1994 consolidated statement of operations includes approximately $3,115,000 of
unusual reserves and write-offs recorded in the fourth quarter 1994. Included in
the amount is approximately $1,000,000 of inventory adjustments which resulted
from the Company's reevaluation of future customer needs and product
obsolescence, $450,000 for severance charges, $1,025,000 for estimated
settlements of disputed obligations and $640,000 for write-down of intangible
assets.
(16) EDS RELATIONSHIP/SUBSEQUENT EVENT
In conjunction with the stock sale to EDS in 1994 as discussed in Note 14,
the Company entered into a ten-year agreement with EDS which, among other
things, called for EDS to provide to the Company enhanced computing,
communications, system and engineering and field maintenance services under the
lottery services subsidiary's on-line lottery contracts. In 1996, the Company
withheld certain payments to EDS primarily due to EDS performance issues and
related on-line lottery customer disputes. In mid-1996 the contract with EDS was
terminated and EDS filed a complaint against the Company seeking payment of
outstanding fees. On January 30, 1997, the Company and EDS settled all claims
against each other and agreed to transition the EDS services to the Company. The
settlement resulted in a net of taxes extraordinary gain on debt extinguishment
of approximately $13,280,000 for the Company. The terms of the settlement
include the receipt by the Company of all of the common and preferred shares
owned by EDS (545,454 common and 1,912,728 preferred shares) certain property,
plant and equipment used in the provision of EDS services to on-line lottery
customers and the extinguishment of approximately $38,000,000 of outstanding
fees in return for a $26,100,000 note payable. The note payable calls for
interest payments only for the first two years and principal and interest
payments in years three through seven
- 61 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(maturity). The note is secured by the 2,458,182 shares of redeemed Common and
Preferred Stock, certain inventories, fixed assets and software technology and
carries prepayment provisions upon the disposal of substantially all the assets
or stock of the Company or certain of its subsidiaries. The transition of the
EDS services and related employees to the Company is anticipated to be completed
in the second quarter of 1997. The following schedule reflects pro-forma amounts
as if the settlement had occurred at December 31, 1996:
<TABLE>
<CAPTION>
December 31, Settlement/Extra- December 31,
1996 Reported ordinary Gain, Net 1996, Pro-forma
------------- ------------------ ---------------
<S> <C> <C> <C>
Current assets $ 66,232,251 (3,470,000) 62,762,251
Non-current assets 101,810,505 2,700,000 104,510,505
------------ ----------- -----------
Total assets $168,042,756 (770,000) 167,272,756
============ =========== ===========
Current liabilities $ 38,147,915 7,000,000 45,147,915
Non-current liabilities 57,663,381 (11,950,000) 45,713,381
------------ ----------- -----------
Total liabilities 95,811,296 (4,950,000) 90,861,296
------------ ----------- -----------
Stockholders equity
exclusive of accumulated deficit 97,475,260 (9,100,000) 88,375,260
Accumulated deficit (25,243,800) 13,280,000 (11,963,800)
------------ ----------- -----------
Stockholders' equity 72,231,460 4,180,000 76,411,460
------------ ----------- -----------
Total liabilities and equity $168,042,756 (770,000) 167,272,756
============ =========== ===========
Shares outstanding:
Common 10,829,184 (545,454) 10,283,730
Preferred 1,912,728 (1,912,728) ---
=========== ========== ==========
</TABLE>
The Company paid or accrued approximately $81,600,000, $70,300,000 and
$69,400,000 to EDS for costs and expenses in 1996, 1995 and 1994, respectively.
Of those costs and expenses approximately $5,087,000 (net of $4,600,00
impairment charge discussed in Note 15), $2,675,000 and $4,406,000 were
capitalized primarily in conjunction with software development and deferred
start-up costs in 1996, 1995 and 1994, respectively. Included in trade accounts
payable are current balances due to EDS of approximately $1,200,000 and
$10,682,000 at December 31, 1996 and 1995, respectively.
- 62 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard R. Burt (2) 50 Chairman and Director
James J. Davey (1)(2) 55 Vice Chairman and Director
Patricia W. Becker (1)(2) 45 Director
John R. Hardesty 57 Director
William P. Lyons 55 Director
William Spier (1)(2) 62 Director
Richard M. Haddrill 43 President, Chief Financial Officer, and Treasurer and Director
Dennis V. Gallagher 44 General Counsel
Michael L. Eide 47 President, Video Lottery Consultants, Inc.
Dena J. Rosenzweig 39 General Counsel and Secretary, AWI
Susan J. Carstensen 34 Vice President, Finance
</TABLE>
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Richard R. Burt became a director and chairman of the Company on December
15, 1994. Mr. Burt is a founder and the chairman of IEP Advisors, Inc. in
Washington D.C., a consulting and merchant banking firm. From 1991 to 1994, Mr.
Burt was a partner in McKinsey & Co., a world-wide management consulting firm.
During the period from 1989 to 1991, Mr. Burt served as the Chief Negotiator in
the Strategic Arms Reduction Talks (START) with the former Soviet Union. He was
the U.S. Ambassador to the Federal Republic of Germany from 1985 to 1989. Mr.
Burt was the Assistant Secretary of State for European and Canadian Affairs from
1983 to 1985, and served as Director of Politico-Military Affairs from 1981 to
1983. Mr. Burt also serves as the Chairman of the Board of Weirton Steel, Inc.,
a tin-plate manufacturer, and serves on the Board of Directors of the Paine
Webber Mutual Funds, Hollinger International, a company owning newspapers in
Europe, Canada, Australia and the United States, and Archer Daniels Midland, an
agri-business company. In addition, Mr. Burt is a member of the Textron
Corporation's International Advisory Council and the Bank of Montreal's
International Advisory Board. (See Item 11 - Compensation Committee Interlocks
and Insider Participation.)
James J. Davey was elected as a director of the Company effective February
25, 1993, and was elected as vice chairman on May 31, 1994. He first joined the
Company as chief operating officer in October 1992. Mr. Davey served as chief
executive officer from February 25, 1993 until May 31, 1994, and from February
24, 1994 until May 31, 1994, he also served as president. From October 1992
until February 1993, Mr. Davey served as president of the Company's on-line
lottery services subsidiary, AWI. From 1986 to October 1992, Mr. Davey was the
director for the Oregon State Lottery. From 1985 to 1986, Mr. Davey was deputy
director and assistant director of administration for the Oregon State Lottery.
From 1980 through 1984, Mr. Davey served as administrator for the Oregon
Department of Revenue.
Patricia W. Becker was appointed to the Board of Directors effective
January 18, 1995 to fill a newly created position thereon. Ms. Becker is a
consultant to the Company and serves as chair of its Compliance Committee. Ms.
Becker served as the chief of staff to Bob Miller, Governor of Nevada, from
October 1993 to January 1995. Prior to that, she was senior vice president,
general counsel and secretary of Harrah's Casino Hotels from June 1989 to July
1993 and vice president, general counsel and secretary from 1984 to 1989. Ms.
Becker was deputy and chief deputy attorney general assigned to the Nevada
Gaming Division from 1979 until she was appointed to the State Gaming Control
Board, where she served until September 1984. Ms. Becker is a vice chair for the
Gaming Law Section of the American Bar Association, a past president of the
Nevada Trial Lawyers Association and general counsel and a trustee of the
International Association of Gaming Attorneys. Ms. Becker
- 63 -
<PAGE>
currently serves on the Board of Directors of Fitzgeralds Gaming Company, a
Nevada based company which owns casinos. (See Item Compensation Committee
Interlocks and Insider Participation.)
John R. Hardesty was appointed to the Board of Directors effective December
18, 1996 to fill a vacancy thereon created by the resignation of Jeffrey D.
Cushman. Mr. Hardesty is chairman of Electro Dynamics Crystal Corporation, a
manufacturer of electronic components for the communication industry. Mr.
Hardesty also owns 100% of Thermo Dynamics, Inc., a manufacturer of synthetic
quartz for the electronics industry, and is a director of Reno Air, Inc., a
commercial airline, and LeTeko, Inc., a gold exploration company. From 1988
until its sale in 1995, Mr. Hardesty was the owner and chairman of Dixson Inc.,
a manufacturer of electronic instruments for the heavy duty truck market and
process control market.
William P. Lyons, Jr. became a director of the Company in February 1993, in
connection with the Stockholders' Agreement between the Company and William
Spier. Mr. Lyons is president of William P. Lyons and Company, Inc., a New York
headquartered investment company, and since May 1995, has served as chairman of
the board of Holmes Protection Group, Inc., a security and alarm systems
company. Since 1992 Mr. Lyons has been chairman of JVL Corporation, a holding
company which formerly owned a pharmaceutical manufacturing company. In 1988, a
company affiliated with Mr. Lyons acquired Duro-Test Corporation and Mr. Lyons
served for four years as that New Jersey specialty lighting manufacturer's
chairman and chief executive officer. Mr. Lyons previously was a professor
(adjunct) of Law and Management at Yale University, where he taught courses on
corporate financial reporting, corporate valuation and entrepreneurship for more
than six years. Mr. Lyons is also a director of Keystone Consolidated
Industries, Inc., a manufacturer of steel and wire rod products, Lydall, Inc., a
specialty fiber materials manufacturer, and Holmes Protection Group, Inc.
William Spier became a director of the Company in July 1991. Mr. Spier was
chairman of DeSoto, Inc., a detergent and household cleaning products
manufacturer, from May 1991 to September 27, 1996 and chief executive officer of
DeSoto, Inc., from May 1991 to January 1994 and from September 1995 to September
27, 1996. He has been president and chairman of Sutton Holding Corp., a New York
based investment company, since 1989. Since 1982 Mr. Spier has been a private
investor. Prior to that time, he was vice chairman of Phibro-Salomon Inc., an
investment banking firm. Mr. Spier is also a director of Keystone Consolidated
Industries, Inc., a manufacturer of steel and wire rod products, Geotek
Communications, Inc., a wireless telecommunications company, EA Industries,
Inc., an electronics contracting manufacturer and Integrated Technology USA,
Inc., a developer and marketer of computer peripherals and telecommunication
devices.
Richard M. Haddrill was appointed President of the Company and to its Board
of Directors on August 21, 1996. He filled the Board vacancy created by the
resignation of Stephen Vanderwoude. In addition, in December 1996, Mr. Haddrill
assumed the position of President of AWI. Mr. Haddrill joined the Company in
December 1994 as the Company's executive vice president of operations and chief
financial officer. In December 1994, Mr. Haddrill was also appointed treasurer
of the Company. In August 1995, Mr. Haddrill also assumed the position of chief
executive officer of UWS. From July 1992 until November 1994, Mr. Haddrill
served as executive vice president -- corporate and president of international
subsidiaries for Knowledgeware, Inc., a provider of application development
software and services worldwide. Prior to joining Knowledgeware, Inc. in 1991 as
an executive vice president and chief financial officer, Mr. Haddrill was a
managing partner of the Colorado and New Mexico offices of the accounting firm
of Ernst & Young from August 1989 to October 1991 and held various positions as
a partner or employee with Ernst & Young from January 1975 to September 1989.
Dennis V. Gallagher was appointed general counsel to the Company on
February 10, 1997. From July 1993 until February 1997, Mr. Gallagher was vice
president and general counsel of Harrah's Riverboat Casino Entertainment
Division located in Memphis, Tennessee. From November 1984 until July 1993, he
served as associate general counsel and assistant secretary of Harrah's Hotels
and Casinos in Reno, Nevada. Mr. Gallagher was the Chief of the Investigations
Division of the Nevada State Gaming Control Board from November 1983 until
November 1994. From April 1981 until November 1983 he served as Deputy Attorney
General of the State of Nevada representing various state agencies including the
Nevada Gaming Commission and State Gaming Control Board. From September 1979 to
April 1981 he was engaged in the private practice of law. From August 1978 to
September 1979, Mr. Gallagher was a Deputy Legislative Counsel to the Nevada
Legislature.
Michael L. Eide has served as president and a director of the Company's
wholly-owned subsidiary, VLC, since December 1, 1994. Prior to that time he
served as treasurer and chief financial officer of the Company from May 1991
until December 1994 and assistant secretary from October 1992 through December
1994. He has also held the positions of secretary, treasurer and assistant
secretary with VLC during the period November 1990
- 64 -
<PAGE>
through December 1994. From 1977 to December 1988, Mr. Eide was a principal in
the accounting firm of Neil, Williamson, Eide and Staker in Bozeman, Montana.
Dena J. Rosenzweig served as general counsel of the Company from September
18, 1996 until February 10, 1997. From February 1995 until September 1996 she
was deputy general counsel of the Company. Since February 1995 she has been
assistant secretary of the Company and general counsel of AWI. From February
1995 until March 1996 she was assistant secretary of AWI. She has served as
secretary of AWI since March 1, 1996. From September 1993 until February 1995
Ms. Rosenzweig was general counsel of Republic Waste Industries, Inc., a waste
management and environmental services company located in Atlanta, Georgia. From
July 1992 until September 1993 she served as associate counsel of Healthdyne,
Inc. of Atlanta, Georgia, a provider of home health care services. From July
1989 through June 1992 Ms. Rosenzweig was a corporate associate of Alston &
Bird, Attorneys at Law, in Atlanta, Georgia.
Susan J. Carstensen was appointed vice president, finance of the Company on
November 7, 1996. From June 1995 to November 1996 she was corporate controller
for the Company. From February 1995 to June 1995 she was the director of
internal audit for the Company. Ms. Carstensen was manager, cost and financial
accounting for Martin Marietta Astronautics Group in Denver, Colorado from May
1991 through February 1995. From August 1985 through May 1991 Ms. Carstensen was
with the accounting firm of Ernst & Young in Denver, Colorado.
During fiscal year 1996, directors who were not employees of the Company
received $15,000 annually for serving on the Board of Directors, plus $1,000 for
each Board meeting and $1,000 for each Audit or Compensation Committee meeting
attended. A non-employee director serving as chairperson of the Company's Board
of Directors receives $30,000 annually for serving in such capacity. Each
non-employee director who serves as the chairperson of any committee of the
Board of Directors receives a further fee of $7,500 per annum for his or her
services in such capacity. In consideration of the extensive work and time
required of the members of the Strategic Planning Committee, effective April 1,
1995, the Board approved compensation to the chairperson of the Strategic
Planning Committee of $10,000 per month, to non-employee directors serving on
the subcommittee of the Strategic Planning Committee of $5,000 per month and to
non-employee directors serving on the Strategic Planning Committee of $2,500 per
month. Effective August 1, 1995, the Board approved adjusting the Strategic
Planning Committee fees to: Chairperson, $5,000 per month, and Committee
members, $2,500 per month. The Strategic Planning Committee was abolished
effective January 31, 1997. Directors are also reimbursed for out-of-pocket
expenses incurred in attending Board of Directors and committee meetings. As
non-employee directors, Mr. Spier was granted an option under the Company's 1991
Stock Option Plan to purchase 10,000 shares of Common Stock at an exercise price
of $14.00 per share; Mr. Lyons was granted an option to purchase 10,000 shares
of Common Stock at an exercise price of $14.50 per share pursuant to the
Company's 1992 Stock Incentive Plan, and an option to purchase 20,000 shares at
an exercise price of $11.25 per share pursuant to the Company's 1993 Stock
Incentive Plan for Non-Employee Directors; Mr. Burt was granted an option to
purchase 10,000 shares of Common Stock pursuant to the Company's 1994 Stock
Incentive Plan, and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $8.25 per share; and Ms. Becker was granted
an option to purchase 10,000 shares of Common Stock pursuant to the Company's
1994 Stock Incentive Plan and an option to purchase 20,000 shares pursuant to
the Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $9.28 per share. On August 12, 1996,
concurrent with his becoming a non-employee director as a result of the
expiration of his employment agreement in August 1996, Mr. Davey received an
option to purchase 10,000 shares of Common Stock pursuant to the Company's 1994
Stock Incentive Plan and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $3.41 per share. On December 18, 1996,
concurrent with his becoming a non-employee director, Mr. Hardesty received an
option to purchase 10,000 shares of Common Stock pursuant to the Company's 1994
Stock Incentive Plan and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $4.13 per share. Directors who are employees
of the Company receive no additional compensation for serving as a director,
except that all directors and executive officers receive up to $10,000 in
reimbursement of their expenses in connection with matters related to various
regulatory disclosure requirements and up to $1,500 per quarter thereafter to
keep such information current.
- 65 -
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file by specific dates with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company on Forms 3, 4 and 5. Officers, directors and greater
than ten-percent stockholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. The Company is
required to report any failure to file by the relevant due date any of these
reports based solely on the Company's review of copies of such reports furnished
to it and written representations received by the Company that the filing of a
Form 5 was not required. Based upon this review, the Company is not aware of any
person who at any time during 1996, was a director, officer or a beneficial
owner of ten percent or more of any class of equity securities of the Company
registered pursuant to the Exchange Act who failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during 1996.
[This space intentionally left blank]
- 66 -
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information for the years ended
December 31, 1996, 1995 and 1994 concerning the compensation of the chief
executive officer as of December 31, 1996 and each of the four most highly
compensated executive officers of the Company (other than the chief executive
officer) who were serving as executive officers as of December 31, 1996(1). The
table also sets forth the compensation paid during fiscal year ended December
31, 1996 to any person who served as chief executive officer during 1996
regardless of compensation level.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Other Long Term Compensation
Annual Compensation Annual Awards All Other
Name and Compen- Restricted Stock Options Compen-
Principal Position Year Salary $ Bonus $ sation $ Stock $ (2) (Shares) sation $
- ------------------ ---- -------- ------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Haddrill 1996 202,133 150,000 --- 133,200 140,000 ---
President, Chief 1995 200,000 150,000 --- --- --- ---
Financial Officer and 1994 13,076 82,500 --- 621,250 140,000 ---
Treasurer
Michael L. Eide 1996 203,256 40,000 --- --- 20,000 ---
President - VLC 1995 207,620 --- --- --- --- ---
1994 180,433 --- --- --- 50,000 ---
1993 151,742 --- --- --- ---
Mark F. Spagnolo (3) 1996 67,234 --- 2,193 --- --- ---
1995 123,333 120,000 4,116 --- --- 39,500
Dena J. Rosenzweig 1996 138,462 10,000 --- --- 5,000 ---
General Counsel
</TABLE>
- ----------
(1) OnDecember 31, 1996, Messrs Haddrill and Eide and Ms. Rosenzweig were the
only executive officers of the Company subject to disclosure.
(2) With respect to Mr. Haddrill's restricted stock holdings, of the initial
grant of 70,000 shares, 35,000 remained restricted as of December 31, 1996
with a market value of approximately $122,500 and such restrictions on
17,500 shares will lapse in each of November 1997 and 1998. Mr. Haddrill
was also awarded 30,000 shares of restricted Common Stock which vest at a
rate of one-third annually over the next three years beginning on September
9, 1997. (See "Employment and Other Contracts.") All dividends declared and
paid by the Company, if any, on the restricted stock, shall be held by the
Company until such restrictions thereon lapse at which time the dividends,
without interest thereon, shall be paid.
(3) Mr. Spagnolo performed the duties of acting chief executive officer as an
independent contractor. Other annual compensation represents a leased
vehicle paid for by the Company. All other compensation reflects $39,500
paid to Mr. Spagnolo with respect to director fees for this fiscal year
until his resignation and appointment as acting chief executive officer on
June 26, 1995. (See "Employment and Certain Other Contracts.")
STOCK OPTIONS
As a result of approval of the Company's 1994 Stock Incentive Plan at the
Annual Meeting of Stockholders on June 15, 1994, no further grants may be made
pursuant to the 1992 Stock Incentive Plan. The Company's 1994 Stock Incentive
Plan provides, among other things, for the grant of options to purchase shares
of Common Stock.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to options granted
under the Company's 1994 Stock Incentive Plan (other than 20,000 of the options
granted discussed below to each of Mr. Davey and Mr. Hardesty
- 67 -
<PAGE>
which were granted under the Company's 1993 Stock Incentive Plan for
Non-employee Directors) to each of the executive officers and directors named in
the Summary Compensation Table above during 1996.
<TABLE>
<CAPTION>
OPTION GRANTS DURING 1996
Individual Grants
Number of Percent of Potential
Securities Total Options Realizable Value at Assumed
Underlying Granted to Exercise Annual Rates of Stock Price
Options Employees Price Expiration Appreciation for Option Term(2)
Name Granted(1) in 1996 (per Share) Date 5% 10%
- ------------------- ---------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark F. Spagnolo --- --- --- --- --- ---
James J. Davey 30,000 (3) 11.0% $3.41 08/12/06 $ 64,336 $163,040
Richard M. Haddrill 140,000 (3) 51.4% 4.44 09/09/06 390,921 990,670
Michael L. Eide 20,000 (3) 7.3% 5.49 01/22/06 69,053 174,993
Dena J. Rosenzweig 5,000 (3) 1.8% 5.49 01/22/06 17,263 43,748
John R. Hardesty 30,000 (3) 5.5% 4.13 12/18/06 77,920 197,465
======= ===== ======== ========
</TABLE>
- ----------
(1) All options were granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant. Such options may not be
exercised later than 10 years, or earlier than six months, after the date
of grant.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions. The amounts
reflected in this table may not necessarily be achieved.
(3) These options vest over a period of three years.
The following table provides certain information with respect to the number
and value of unexercised options outstanding as of December 31, 1996. No options
were exercised by the named executives during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Aggregated 1996 Option Exercises
and December 31, 1996 Option Values
Number of Unexercised Options
(in Common Shares) Value of Unexercised In-the-Money (1)
at December 31, 1996 Options at December 31, 1996
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------------------
<S> <C> <C>
James J. Davey (2) 13,333/16,667 1,200/$1,500
Richard M. Haddrill 140,000/140,000 ---/---
Michael L. Eide 36,667/35,333 ---/---
Dena J. Rosenzweig ---/5,000 ---/---
</TABLE>
- ----------
(1) Options are in the money if the fair market value of the underlying
securities exceeds the exercise or base price of the option. Fair market
value of the Common Stock underlying the options on December 31, 1996 was
$3.50, the last reported sales price on the National Market System of
Nasdaq on that date, which does not exceed the base price.
(2) The options to acquire 50,000 shares of Common Stock granted to Mr. Davey
in February 1993 expired unexercised pursuant to the option agreement
relating thereto three months following the expiration of his employment
agreement.
DEFINED BENEFIT AND LONG-TERM COMPENSATION PLAN
The Company does not have any defined benefit, actuarial or long-term
incentive plan.
- 68 -
<PAGE>
EMPLOYMENT AND CERTAIN OTHER CONTRACTS
Employment Agreement with Richard M. Haddrill: On September 9, 1996 the
Board of Directors approved the terms of an employment agreement with Mr.
Haddrill executed as of December 2, 1996. Pursuant to this agreement, Mr.
Haddrill serves the Company as its president. Unless sooner terminated pursuant
to its terms, the employment agreement terminates on January 1, 1999. The
employment agreement provides for a base salary of $240,000 and a cash bonus of
$150,000 payable on January 2, 1997. For the years ending December 31, 1997 and
1998, Mr. Haddrill is eligible to receive bonuses of up to $450,000 and
$504,000, respectively, if certain performance criteria are satisfied for such
year. In addition, under the employment agreement, Mr. Haddrill was awarded
30,000 shares of restricted Common Stock that vest at the rate of one-third
annually over the next three years beginning on September 9, 1997, and Mr.
Haddrill was awarded options to purchase 140,000 shares of Common Stock at an
exercise price of $4.44 per share, the fair market value of the Common Stock as
of December 2, 1996, 70,000 shares of which vested immediately and 35,000 shares
of which vest upon each of the first and second anniversaries of the date of
grant. The employment agreement further provides that if Mr. Haddrill's
employment is terminated for any reason, then all unvested restricted shares
lapse. In addition, the employment agreement provides that if Mr. Haddrill's
employment is terminated for "cause" (as defined in the employment agreement) or
by him other than for "good reason" (as defined in the employment agreement),
then all unvested options shall be forfeited. If Mr. Haddrill's employment is
terminated for any other reason, then certain of the options become exercisable,
and all such options become immediately exercisable upon a "change of control"
(as defined in the employment agreement) of the Company. The employment
agreement further provides that Mr. Haddrill's existing options to acquire
140,000 shares Common Stock, all of which are out-of-the-money, will not be
repriced. In addition, if Mr. Haddrill's employment is terminated for any reason
other than "cause" or if he terminates his employment for "good reason," then he
is entitled to receive all accrued but unpaid salary and bonus and to receive a
lump sum equal to the greater of the aggregate amount of the base salary
remaining to be paid under the terms of the employment agreement and $420,000
(except in certain cases this amount is reduced to $350,000). Mr. Haddrill is
entitled to the reimbursement of relocation expenses and other business
expenses. Finally, the employment agreement provides that Mr. Haddrill will not
compete with the Company for a period of 18 months following his termination.
Agreement with Dennis V. Gallagher: On January 24, 1997, the Company
entered into an agreement with Mr. Gallagher to provide legal services to the
Company as its general counsel. The agreement provides Mr. Gallagher with a base
salary of $180,000 and a cash bonus potential of $100,000 based upon the
Company's executive incentive compensation plan. In addition, under the
agreement, Mr. Gallagher was awarded options to purchase 20,000 shares of the
Company's Common Stock within sixty days of his date of employment and an
additional option to purchase 10,000 shares no later than February 28, 1998,
both grants at fair market value as of the date of grant and to vest over a
three-year period from the date of grant. Mr. Gallagher is entitled to
reimbursement of his relocation expenses. If Mr. Gallagher is removed from his
position with the Company without cause prior to February 10, 1998, he will
receive his then current salary for a period of twelve months following
termination. In the event termination is without cause after February 8, 1998,
he will continue to be paid his then current salary for a period of six months
following termination. In the event there is a change of control of the Company
and Mr. Gallagher's employment is terminated by the Company without good cause,
or by Mr. Gallagher for certain reasons set forth in the agreement, within one
year then Mr. Gallagher is entitled to an amount equal to one-half his base
salary in effect at the date of termination. If termination should occur prior
to February 10, 1998 the Company will pay an amount equal to the base salary in
effect as of the date of such termination. Mr. Gallagher also agreed to certain
confidentiality, non-competition and similar provisions.
Agreement with Michael L. Eide: On January 17, 1995, the Company entered
into an agreement with Mr. Eide to provide for the continuance of his position
as president of VLC. If Mr. Eide is removed from his position with the Company
without cause, he will receive his then current salary for a period of six
months following termination. In the event there is a change of control of the
Company and Mr. Eide's employment is terminated by the Company without good
cause, or by Mr. Eide for certain reasons set forth in the agreement, then Mr.
Eide is entitled to an amount equal to twice his annual salary. Mr. Eide also
agreed to certain confidentiality, non-competition and similar provisions.
Compensation Arrangement with Mark F. Spagnolo and EDS: Mark F. Spagnolo
was appointed acting chief executive officer of the Company replacing J. Stephen
Vanderwoude, effective June 26, 1995. Mr. Spagnolo went on a temporary leave of
absence from his position of division vice president of EDS at the Company's
request. In connection with Mr. Spagnolo's appointment, the Company and EDS
entered into an agreement under which Mr. Spagnolo relinquished all EDS duties
during this temporary leave of absence, including all duties and
responsibilities
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<PAGE>
for EDS with respect to the Company. While serving the Company in this capacity,
Mr. Spagnolo did not sign or approve any filing or other matter under the
securities acts (including approvals or reviews of public disclosures of
information). Mr. Spagnolo performed his duties of acting chief executive
officer as an independent contractor for which the Company paid Mr. Spagnolo a
fee of $20,000 per month together with medical benefits, life insurance and
automobile use comparable to those previously provided to him by EDS. Mr.
Spagnolo agreed to certain confidentiality, non-interference and similar
provisions, and was entitled to cash bonuses in the same manner as such bonuses
were available to other executive officers of the Company. Effective April 5,
1996, Mr. Spagnolo's temporary leave of absence terminated and he returned to
EDS. Mr. Spagnolo was paid a bonus of $120,000 for the period from June 26, 1995
to December 31, 1995.
Agreement with Dena J. Rosenzweig: Ms. Rosenzweig currently provides legal
services to the Company as the general counsel and secretary of AWI, and has an
agreement with the Company to continue in those positions through March 31,
1997. That agreement provides that for the months of April and May 1997, Ms.
Rosenzweig will provide certain such services to the Company upon reasonable
notice and at mutually agreed upon times for up to ten days per month. In
consideration of such services, Ms. Rosenzweig shall receive the sum of $16,667
per month beginning October 1, 1996 and ending January 31, 1997. From February
1, 1997 through September 30, 1997, Ms. Rosenzweig shall receive the sum of
$22,222 per month.
Agreement with Susan Carstensen: On December 5, 1996, the Company entered
into an agreement with Ms. Carstensen with respect to her position as vice
president of finance. If Ms. Carstensen is removed from her position with the
Company without cause, she will receive her then current salary for a period of
six months following termination. In the event there is a change of control of
the Company and Ms. Carstensen's employment is terminated by the Company without
good cause, or by Ms. Carstensen for certain reasons set forth in the agreement,
then Ms. Carstensen is entitled to an amount equal to one-half of her annual
salary. Ms. Carstensen also agreed to certain confidentiality, non-competition
and similar provisions.
Compensation Committee Interlocks and Insider Participation
Richard R. Burt, who became the Chairman of the Board of Directors in
December 1994, is the chairman and a founder of IEP Advisors, Inc. (IEP), which
has been retained by the Company to provide consulting services and to assist
the Company in connection with its international activities since October 1994
at a rate of $15,000 per month plus expenses. The Company paid IEP an aggregate
of approximately $202,095 for 1996. Although the formal agreement with IEP
expired as of September 30, 1995, the Company continued to utilize the services
of IEP throughout 1996 and, accordingly, continued to make payments to IEP for
such services. The Board of Directors has ratified the payment of these amounts
and extended the agreement until October 1997 unless terminated upon 30 days
notice by the Company or IEP, or earlier as provided under the current
arrangement.
In addition, Mr. Burt and the Company entered into a consulting agreement
in November 1994, under which Mr. Burt is to provide advice and assistance
relating to the promotion of the Company's business and to assist in the
development of business opportunities for the Company. The agreement provides
for a per day rate of $1,000 for each day such services are performed and
reimbursement of out-of-pocket expenses. The agreement is separate and distinct
from Mr. Burt's duties and responsibilities as a director of the Company. The
agreement further provides for termination of the agreement by Mr. Burt or the
Company, without penalty, upon 90 days' prior written notice. No fees or
expenses were paid during 1996 pursuant to the agreement.
In January 1995, the Company entered into a consulting agreement with
Patricia W. Becker, a director of the Company, for a period of two years
commencing January 16, 1995. The agreement provides that Ms. Becker shall serve
as the chairperson of the Compliance Committee of the Company, and otherwise
provide advice and assistance to the Company on matters of regulatory compliance
and such other matters as requested by the Company. The agreement provides for
an annual retainer fee of $75,000 plus a per day rate of $1,000 for each day
such services are performed and reimbursement of out-of-pocket expenses. The
agreement is separate and distinct from Ms. Becker's duties and responsibilities
as a director of the Company. The agreement further provides for termination of
the agreement by Ms. Becker or the Company, without penalty, upon 90 days' prior
written notice. The Company paid Ms. Becker an aggregate amount of approximately
$117,750 during the fiscal year ended December 31, 1996 pursuant to the
agreement. This agreement was extended in December 1996 for one additional year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 1, 1997 by (I) each person owning
beneficially more than five percent of the outstanding shares of the Common
Stock, (ii) each director and director nominee of the Company, (iii) each person
named in the Summary Compensation Table appearing elsewhere herein and (iv) all
executive officers and directors of the Company as a group. The information
under this caption is based on representations made to the Company by individual
directors or nominees and/or filings made with the SEC. Each person has sole
investment and voting power with respect to the shares indicated except as
otherwise shown.
None of the executive officers of the Company has served on the board of
directors of any other entity that has had any of such entity's officers serve
either on the Board of Directors or the Company's Compensation Committee.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Number of Shares Percent of Class
Beneficially Owned(1) March 1, 1997(1)
--------------------- ----------------
<S> <C> <C>
William Spier+............................................. 1,496,574 (2) 14.5%
101 East 52nd St., New York, NY 10022
R. B. Haave Associates, Inc................................ 938,000 (3) 9.09%
36 Grove St., New Canaan, CT 06840
Fir Tree Partners (Fir Tree, Inc. d/b/a Fir Tree Partners). 781,900 (4) 7.58%
1211 Ave of the Americas, 29th Floor
New York, NY 10036
EDS VLT Holdings, Inc...................................... 0 (5) --%
5400 Legacy Drive, Plano, TX 75024
Richard M. Haddrill+, ++................................... 243,020 (6)(7) 2.36%
Michael L. Eide++.......................................... 166,747 (8)(9) 1.62%
William P. Lyons+.......................................... 62,000 (10) *
James Davey+............................................... 18,743 (11) *
Mark F. Spagnolo........................................... 0 (12) *
Patricia W. Becker+........................................ 30,000 (13) *
Richard R. Burt+........................................... 30,000 (13) *
John R. Hardesty+.......................................... 15,000 (14) *
Dena J. Rosenzweig++....................................... 1,666 (15) *
All directors and executive officers as a group............ 2,063,750 (2)(6)(7)(8)(9)(10) 20.00%
(11)(13)(14)(15)
</TABLE>
- ----------
+ Director of the Company
++ Executive Officer of the Company
* Denotes less than 1%
(1) Based on 10,318,730 shares of Common Stock outstanding as of the close of
business on March 1,1997 which excludes 545,454 shares of Common Stock
which are deemed authorized but unissued pursuant to the terms of the
settlement agreement with EDS. (See Note 16 to the Notes to Consolidated
Financial Statements.) The share holdings in this table do not include
rights to receive stock or options granted under various Company plans to
directors and executive officers that do not vest or become exercisable
within 60 days of March 1,1997. Includes 117,075 shares issuable pursuant
to the 1991 Employee Stock Purchase Plan for the 1996 purchase period.
(2) Included in Mr. Spier's beneficial ownership are 1,197,659 shares of Common
Stock purchased by various parties in an investor group who have granted
Mr. Spier sole voting and investment power in respect of such shares. In
addition to Mr. Spier, the parties who hold these shares are Asgard Ltd., a
Guernsey corporation ("Asgard"), Parkway M&A Capital Corporation, a British
Virgin Islands corporation ("Parkway"), Video Investment Partners, a
Delaware limited partnership ("VIP"), Gabriel Capital L.P., a Delaware
limited partnership ("Gabriel"), Alpine Associates, Ltd., a New Jersey
limited partnership ("Alpine"), LBN Investment Associates, L.P., a Delaware
limited partnership ("LBN"), and Homer Noble, an individual ("Noble").
Asgard holds 148,307 shares; Parkway holds 7,500 shares (not including
7,500 shares previously owned by Parkway which are not controlled by Mr.
Spier); VIP holds 226,167 shares; Alpine holds 370,766 shares; Gabriel
holds 222,459
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<PAGE>
shares; LBN holds 148,307 shares; and Noble holds 74,153 shares. Mr. Spier
holds 285,405 shares acquired as part of the investor group. These holdings
represent approximately 1.39%, .07%, 2.12%, 3.47%, 2.10%, 1.4% and .7%,
respectively, of the 10,682,109 shares outstanding as of the Record Date.
Each of Asgard, Parkway, VIP, Alpine, Gabriel, LBN and Noble disclaims
beneficial ownership of these securities for purposes of Schedule 13D
because each has granted to Mr. Spier sole investment and voting power in
respect of the shares. Also included in Mr. Spier's beneficial ownership
are 3,500 shares of Common Stock owned prior to the purchases by the
investor group and 10,000 shares of Common Stock which may be acquired
pursuant to options currently exercisable under the Company's 1991 Stock
Option Plan.
(3) R. B. Haave Associates, Inc. is an Investment Advisor registered under
Section 203 of the Investment Advisors Act of 1940, with sole power to vote
or to direct the vote and sole power to dispose or to direct the
disposition of the shares. R. B. Haave Associates, Inc.'s holdings are
reported pursuant to amendment to Schedule 13G dated January 27, 1997, as
an amendment to the initial Schedule 13D, as filed on March 22, 1996.
(4) Fir Tree, Inc. is a New York corporation doing business as Fir Tree
Partners ("Fir Tree Partners"), of which Mr. Jeffrey Tannenbaum is the sole
shareholder, executive officer, director and principal. Mr. Tannenbaum
acquired the shares through his position as principal of Fir Tree Partners
for an institutional account for which Fir Tree Partners serves as trading
advisor and for the account of the Fir Tree Value Fund, L.P. ("Fir Tree
Value Fund") of which Mr. Tannenbaum is the general partner. Fir Tree
Partner's holdings are reported pursuant to amendment to Form 13D dated
August 4, 1995, as an amendment to the initial Form 13D, as filed on
October 12, 1994. Fir Tree Partners is the beneficial owner of 781,900
shares of Common Stock of which 498,930 shares are beneficially owned by
Fir Tree Partners in its capacity as investment advisor to Fir Tree LDC, a
Cayman Islands limited duration company ("Fir Tree LDC"). Jeffrey
Tannenbaum is the investment advisor of Fir Tree LDC and, as such, retains
voting and dispositive power over the shares, and 282,970 shares are
beneficially owned by Fir Tree Partners for the account of the Fir Tree
Value Fund.
(5) EDS VLT Holdings Inc., a wholly-owned subsidiary of EDS, purchased 545,454
shares of Common Stock and 1,912,758 shares of Series A Junior Preferred
Stock from the Company, representing approximately 5.2% of the outstanding
shares of Common Stock and 100% of the outstanding shares of Series A
Junior Preferred Stock. Pursuant to the terms of the settlement agreement
between the Company and EDS, all shares outstanding were returned to the
Company as authorized but unissued stock. All shares previously owned by
EDS VLT Holdings are currently pledged as collateral to EDS and First Bank
NA pursuant to the terms of the settlement agreement. (See Note 16 to the
Notes to Consolidated Financial Statements.)
(6) Includes 70,000 shares of restricted stock of the Company vesting in equal
installments on each of November 1,1995, 1996, 1997 and 1998 and 30,000
shares of restricted stock of the Company vesting in equal installments on
each of September 9, 1997, 1998 and 1999.
(7) Includes options to purchase 140,000 shares of Common Stock, currently
exercisable or which will be exercisable within 60 days, granted pursuant
to the Company's 1994 Stock Incentive Plan.
(8) Includes options to purchase 2,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1991 Stock Option Plan and
33,333 currently exercisable under the Company's 1994 Stock Option Plan.
(9) Includes 12,318 shares held by Mr. Eide's son as to which Mr. Eide
disclaims beneficial ownership.
(10) Includes options to purchase 10,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1992 Stock Incentive Plan and
options to purchase 20,000 shares of Common Stock currently exercisable
granted pursuant to the Company's 1993 Stock Incentive Plan for
Non-Employee Directors.
(11) Includes options to purchase 5,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1994 Stock Incentive Plan and
options to purchase 10,000 shares of Common Stock currently exercisable
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee
Directors.
(12) Mr. Spagnolo resigned as a director of the Company on June 23, 1995 and,
pursuant to the terms of the Company's 1992 Stock Incentive Plan and the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, those
unvested options were forfeited on that date and those then exercisable
terminated three months from the date of his resignation. (See "Employment
and Certain Other Contracts.") Mr. Spagnolo was an officer of EDS and one
of its wholly-owned subsidiaries which owns 545,454 shares of Common Stock
and 1,912,728 shares of Series A Junior Preferred Stock of the Company. Mr.
Spagnolo disclaims beneficial ownership of these securities.
(13) Includes options to purchase 10,000 shares of Common Stock currently
exercisable or which will be exercisable within 60 days, granted pursuant
to the Company's 1994 Stock Incentive Plan and options to purchase 20,000
shares of Common Stock currently exercisable or which will be exercisable
within 60 days, pursuant to the Company's 1993 Stock Incentive Plan for
Non-Employee Directors.
(14) Includes options to purchase 10,000 shares of Common Stock granted under
the Company's 1993 Stock Incentive Plan for Non-Employee Directors and
5,000 shares pursuant to the Company's 1994 Incentive Stock Plan currently
exercisable or which will be exercisable within 60 days.
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<PAGE>
(15) Includes options to purchase 1,666 shares of Common Stock granted under the
Company's 1994 Incentive Stock Plan currently exercisable or which will be
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1996 the Company and its subsidiaries have had no transactions in
which any director of the Company, or any member of the immediate family of any
such director, had a material direct or indirect interest reportable under the
applicable rules of the SEC except as follows:
On February 23, 1993, William Spier, on behalf of himself and an investor
group (see Note 2 to the "Stock Ownership of Certain Beneficial Owners and
Management" table), executed a Stockholders' Agreement with the Company. The
Stockholders' Agreement, among other things, limits the manner of disposition of
shares of Common Stock held by these parties, prohibits them from soliciting
proxies in opposition to the Board of Directors, subjects certain proposals by
these persons of merger or similar transactions to consent by unaffiliated
directors and stockholders, limits the right of these persons to acquire
additional shares (other than pursuant to certain options granted by Larry
Lippon, the Company's former chief executive officer, or the Company), grants
these persons the right to require the Company to register their shares under
the Securities Act of 1933, provides for the reimbursement of certain of the
expenses of these persons (estimated to be approximately $85,000), and grants
these persons the right to appoint one person in addition to Mr. Spier to the
Board of Directors. In connection with this Agreement, William P. Lyons was
appointed to the Board of Directors. In addition, the Stockholders' Agreement
fixed the size of the Board of Directors at six members, although the Board of
Directors (including Mr. Spier) subsequently increased the size of the Board to
seven members by a unanimous vote.
In February 1994, EDS, through a wholly owned subsidiary, purchased from
the Company 545,454 shares of Common Stock and 1,912,728 shares of the Company's
Series A Junior Preferred Stock for an aggregate of $67,600,005 or $27.50 per
share. The Company used $38,101,821 of the proceeds from this transaction to
purchase from an investor group represented by Mr. Spier options to acquire
2,458,182 shares of Common Stock, which shares were owned by Larry Lippon, the
Company's former chief executive officer. Mr. Lippon granted these options to
the investor group represented by Mr. Spier pursuant to a Purchase and Option
Agreement between the investor group and Mr. Lippon dated as of October 1992.
The Company exercised these options for $27,040,002 or $11.00 per share and
retired the shares of Common Stock acquired thereby. As part of this agreement,
the investor group exercised its remaining options to acquire 119,412 shares of
Common Stock.
In 1994, Mr. Spier entered into an agreement with a subsidiary of EDS
(PremiTech), which is a limited partner of HP Partners L.P. (in which Mr. Spier
is also a partner), to acquire the partnership interest in HP Partners L.P. held
by EDS for approximately $2,000,000, at the option of EDS, in the event that EDS
did not enter into an agreement for the provision of information technology
services to Holmes Protection Group, Inc. HP Partners L.P. holds approximately
35% of the common stock of Holmes Protection Group, Inc. and has the right to
appoint three directors. At the time Mr. Spier served as a director of Holmes
Protection Group, Inc. EDS and Holmes Protection Group, Inc. entered into an
information technology services agreement, similar to the agreement between EDS
and the Company described below, in April 1995.
On September 18, 1996, Mr. Spier filed with the Securities and Exchange
Commission (the "SEC") a Schedule 13D indicating that he, on behalf of himself
and possibly other parties, including Mr. Lyons, had expressed to the Board of
Directors an interest in exploring a possible acquisition of AWI or the business
of the Company. (See "Security Ownership of Certain Beneficial Owners and
Management.") On November 14, 1996, Mr. Spier delivered a letter to the Board of
Directors proposing an acquisition of the Company by an investor group Mr. Spier
is forming (the "Spier Proposal"). The Spier Proposal contemplated the payment
of $6.00 per share in cash and was subject to a number of conditions, including
obtaining financing and regulatory approval. On November 26, 1996, Mr. Spier
delivered a letter to the Board of Directors relating to the Spier Proposal. On
December 4, 1996, Mr. Spier's counsel delivered a letter to Board of Directors
including proposed terms for the Spier Proposal. On December 6, 1996, the Board
constituted a Special Committee (consisting of Messrs. Burt and Davey and Ms.
Becker) to consider the Spier Proposal and any other such proposals that may be
forthcoming. Mr. Hardesty was added as a member of the Special Committee upon
his election to the Board of Directors on December 18, 1996. The Special
Committee offered to enter into negotiations with Mr. Spier and his investor
group if certain concerns (including concerns about the feasibility of the
transaction, the availability of financing and the need for regulatory approval)
were satisfied. On December 17, 1996, Mr. Spier delivered a letter to the Board
of Directors which, among other things, restated the Spier Proposal and offered
to purchase up to twenty percent (20%) of the Company's Common Stock at prices
up to $6.00 per share after entering into a Merger
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<PAGE>
Agreement. On December 18, 1996, Mr. Spier filed an amendment to his Schedule
13D which, among other things, encouraged stockholders to communicate their
support for the Spier Proposal to the Board of Directors. By letter dated
December 23, 1996, the Special Committee notified Mr. Spier that his December
17, 1996 letter did not satisfy the Special Committee's concerns. The Special
Committee again requested that Mr. Spier provide information regarding his
proposed financing and the likelihood of regulatory approval and requested that
Mr. Spier agree to certain conditions to assure that, as a director, Mr. Spier
not be afforded any unfair advantage in connection with any potential
transaction. Mr. Spier has not agreed to the Special Committee's conditions nor
satisfied its concerns. Mr. Spier formally withdrew his proposal on January 14,
1997. Copies of the letters comprising the Spier Proposal have been filed as
exhibits to Mr. Spier's Schedule 13D.
The Company entered into a number of agreements with EDS starting in 1994.
Mark F. Spagnolo was an officer of EDS and was appointed a director of the
Company in accordance with one of the agreements. Mr. Spagnolo resigned as
director on June 23, 1995, and on June 26, 1995, Mr. Jeffrey D. Cushman, an
officer of EDS, was appointed to fill this position. Pursuant to a management
services agreement (the "MSA") with EDS dated as of January 1994, which became
effective as of March 1, 1994, EDS provided information and technology
management services to the Company's on-line lottery services subsidiary, AWI,
as part of a strategic technology partnership between the Company and EDS.
Pursuant to the agreement, the Company paid or accrued approximately $81.6
million to EDS for costs and expenses in 1996. Of those costs and expenses,
approximately $9.7 million were capitalized in conjunction with software
development and deferred start-up cost in 1996. At December 31, 1996, the
Company had a net payable to EDS in the amount of approximately $39.0 million.
In 1996, the Company withheld certain payments to EDS primarily due to EDS
performance issues and related on-line lottery customer disputes. In mid-1996
the contract with EDS was terminated and EDS filed a complaint against the
Company seeking payment of outstanding fees. On January 30, 1997, the Company
and EDS settled all claims against each other and agreed to transition the EDS
services to the Company. The terms of the settlement include the receipt by the
Company of all of the common and preferred shares owned by EDS (545,454 common
and 1,912,728 preferred shares) certain assets used in the provision of services
to on-line lottery customers and the extinguishment of approximately $38,000,000
of outstanding fees in return for a $26,100,000 note payable. The note payable
calls for interest payments only for the first two years and principal and
interest payments in years three through seven (maturity). The note is secured
by the 2,458,182 shares of redeemed Common and Preferred Stock, certain
inventories, fixed assets and software technology and carries prepayment
provisions upon the disposal of substantially all the assets or stock of the
Company or certain of its subsidiaries. The transition of the EDS services and
related employees to the Company is anticipated to be completed in the second
quarter of 1997.
During 1996 the Company and its subsidiaries have not had transactions in
which any executive officer of the Company, or any member of the immediate
family of any such executive officer, had a material direct or indirect interest
reportable under the applicable rules of the SEC except as follows:
The brother of Dena J. Rosenzweig, the Company's general counsel during
1996, is a partner in the law firm of Rogers & Hardin, which has served as legal
counsel to the Company since February 1993. The Company has paid fees to Rogers
& Hardin totaling approximately $150,947 during fiscal year 1996.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements (See page 42 for the Index to consolidated
financial statements)
Independent Auditors' Report
Consolidated Financial Statements:
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 Balance Sheets as of
December 31, 1996 and 1995 Statements of Stockholders' Equity for
the years
ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
All schedules are omitted because the information prescribed thereon
is not applicable nor required or is furnished in the consolidated financial
statements or notes thereto.
(a) 3. Listing of Exhibits
3.1 Certificate of Incorporation of Company (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-18
(Registration No. 33-41000) (the 1991 Registration Statement)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the 1991 Registration Statement)
4.1 Specimen form of the Company's Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the 1991 Registration Statement)
4.2 Certificate of Designation for Series A Junior Preferred Stock
(incorporated by reference to Exhibit 4.2 to the 1993 Form 10-K)
10.1 Video Lottery Technologies, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the 1991 Registration Statement)
*10.2 Video Lottery Technologies, Inc. 1991 Employee Stock Purchase
Plan (amended December 18, 1996)
10.3 Form of Indemnification Agreement between the Company and its
directors and officers (incorporated by reference to Exhibit 10.3 to the 1991
Registration Statement)
10.6 Stockholders Agreement, dated February 23, 1993, between William
Spier (on behalf of purchasers) and the Company (incorporated by reference to
Exhibit 10.23 to the 1992 Form 10-K).
10.7 Stock Purchase and Sale Agreement dated January 20, 1994, between
William Spier (on behalf of sellers) and the Company (incorporated by reference
to Exhibit 10.26 to the 1993 Form 10-K).
10.8 Stockholders Agreement dated January 20, 1994, between the
Company and Electronic Data Systems Corp. (incorporated by reference to Exhibit
10.27 to the 1993 Form 10-K).
10.9 Credit Agreement dated February 16, 1995, made by the Company to
First Bank National Association. (Incorporated by reference to Exhibit 10.9 to
the 1994 Form 10-K.)
10.10 Revolving Note, dated February 16, 1995, made by the Company to
First Bank National Association. (Incorporated by reference to Exhibit 10.10 to
the 1994 Form 10-K.)
10.11 Term Notes A and B, dated February 16, 1995, made by the Company
to First Bank National Association. (Incorporated by reference to Exhibit 10.11
to the 1994 Form 10-K.)
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<PAGE>
10.12 Pledge Agreement, dated February 16, 1995, made by the Company
to First Bank National Association. (Incorporated by reference to Exhibit 10.12
to the 1994 Form 10-K.)
10.13 Amendment No. 1 to First Bank National Association Credit
Agreement and Waiver. (Incorporated by reference to Exhibit 10.13 to the 1995
Form 10-K.)
10.14 Amendment No. 1 to Borrower Pledge Agreement to Borrower Pledge
Agreement to First Bank National Association Credit Agreement. (Incorporated by
reference to Exhibit 10.14 to the 1995 Form 10-K.)
10.15 Amendment No. 2 to First Bank National Association Credit
Agreement. (Incorporated by reference to Exhibit 10.15 to the 1995 Form 10-K.)
10.16 Settlement Agreement - between Video Lottery Technologies, Inc.,
and the Shelhamers. (Incorporated by reference to Exhibit 10.16 to the 1995 Form
10-K.)
10.17 Master Settlement Agreement - between Video Lottery
Technologies, Inc. and Electronic Data Systems Corporation. (Incorporated by
reference to Form 8-K dated January 30, 1997.)
*10.18 Amendment No. 3 to First Bank National Association Credit
Agreement
*10.19 Waiver and Amendment No. 4 to First Bank National Association
Credit Agreement
*10.20 Consent, Waiver and Amendment No. 5 to First Bank National
Association Credit Agreement
*10.21 International Equity Partners Related Party Consulting
Agreement
*10.22 Richard R. Burt Related Party Consulting Agreement
*10.23 Patricia W. Becker Related Party Consulting Agreement
*10.24 Richard M. Haddrill Employment Agreement
*10.25 Dennis V. Gallagher Employment Agreement
*10.26 Michael L. Eide Employment Agreement
*10.27 Dena J. Rosenzweig Employment Agreement
*10.28 Susan J. Carstensen Employment Agreement
*22.1 List of Subsidiaries
*24.1 Independent Auditors' Consent
*EX-27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:
Form 8-K dated December 9, 1996, reporting the response of the Special
Committee of the Board of Directors of the Company by letter to Mr. William
Spier with respect to his proposal to acquire the Company.
Form 8-K dated December 23, 1996, reporting the response of the Special
Committee of the Board of Directors of the Company by letter to Mr. William
Spier's letter to the Company dated December 17, 1996.
(c) Exhibits required by Item 601 of Regulation S-K: The exhibits filed
herewith and incorporated by reference herein are set forth in Item 14(a)(3)
above.
(d) See page 42 for the Index to consolidated financial statements and
financial statement schedules.
*Filed herewith
- 76 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VIDEO LOTTERY TECHNOLOGIES, INC.
Date: March 27, 1997 /s/ RICHARD M HADDRILL
-----------------------------------------------
Richard M. Haddrill, President, Chief Financial
Officer, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ RICHARD R. BURT Chairman and Director March 27, 1997
- -------------------------
Richard R. Burt
/s/ JAMES J. DAVEY Vice Chairman and Director March 27, 1997
- --------------------------
James J. Davey
/s/ RICHARD M. HADDRILL President, Chief Financial March 27, 1997
- ------------------------- Officer, Treasurer and Director
Richard M. Haddrill (Principal Accounting Officer)
Director March _____, 1997
- -------------------------
William Spier
Director March _____, 1997
- -------------------------
William P. Lyons, Jr.
/s/ PATRICIA W. BECKER Director March 19, 1997
- -------------------------
Patricia W. Becker
/s/ JOHN R. HARDESTY Director March 21, 1997
- -------------------------
John R. Hardesty
- 77 -
VIDEO LOTTERY TECHNOLOGIES, INC.
1991 EMPLOYEE STOCK PURCHASE PLAN
(Amended June 19, 1991,
February 19, 1993 and December 18, 1996)
ARTICLE I. INTRODUCTION
------------
Section 1.01 Purpose. The purpose of the Video Lottery Technologies, Inc.
-------
1991 Employee Stock Purchase Plan (the "Plan") is to provide employees of Video
Lottery Technologies, Inc., a Delaware corporation (the "Company"), and certain
related corporations with an opportunity to share in the ownership of the
Company by providing them with a convenient means for regular and systematic
purchases of the Company's Common Stock, par value $.01 per share, and, thus, to
develop a stronger incentive to work for the continued success of the Company.
Section 1.02 Rules of Interpretation. It is intended that the Plan be an
------------------------
employee stock purchase plan" as defined in Section 423(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations
promulgated thereunder. Accordingly, the Plan shall be interpreted and
administered in a manner consistent therewith if so approved. All Participants
in the Plan will have the same rights and privileges consistent with the
provisions of the Plan.
Section 1.03 Definitions. For purposes of the Plan, the following terms
-----------
will have the meanings set forth below:
(a) "Acceleration Date" means the earlier of the date of stockholder
approval or approval by the Company's Board of Directors of (i) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Company
Common Stock would be converted into cash, securities or other property,
other than a merger of the Company in which stockholders of the Company
immediately prior to the merger have the same proportionate ownership of
stock in the surviving corporation immediately after the merger; (ii) any
sale, exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company; or
(iii) any plan of liquidation or dissolution of the Company.
(b) "Affiliate" means any subsidiary corporation of the Company, as
defined in Section 424(f) of the Code, whether now or hereafter acquired or
established.
(c) "Committee" means the committee described in Section 10.01.
(d) "Company" means Video Lottery Technologies, Inc., a Delaware
corporation, and its successors by merger or consolidation as contemplated
by Article XI herein.
(e) "Current Compensation" means all regular wage, salary and
commission payments paid by the Company to a Participant in accordance with
the terms of his or her
- 1 -
<PAGE>
employment, but excluding annual bonus payments and all other forms of
special compensation.
(f) "Fair Market Value" as of a given date means such value of the
Common Stock as reasonably determined by the Committee, but shall not be
less than (i) the closing price of the Common Stock as reported for
composite transactions if the Common Stock is then traded on a national
securities exchange, (ii) the last sale price if the Common Stock is then
quoted on the NASDAQ National Market System, or (iii) the average of the
closing representative bid and asked prices of the Common Stock as reported
on NASDAQ on the date as of which the fair market value is being
determined. If on the date of grant of any option hereunder the Common
Stock is not traded on an established securities market, the Committee
shall make a good faith attempt to satisfy the requirements of this Section
5 and in connection therewith shall take such action as it deems necessary
or advisable. If on a given date the Common Stock are not traded on an
established securities market, the Committee shall make a good faith
attempt to satisfy the requirements of this Section 1.03 and in connection
therewith shall take such action as it deems necessary or advisable.
(g) "Participant" means a Permanent Full-Time Employee who is eligible
to participate in the Plan under Section 2.01 and who has elected to
participate in the Plan.
(h) "Participating Affiliate" means an Affiliate which has been
designated by the Committee in advance of the Purchase Period in question
as a corporation whose eligible Permanent Full-Time Employees may
participate in the Plan.
(i) "Permanent Full-Time Employee" means an employee of the Company or
a Participating Affiliate as of the first day of a Purchase Period,
including an officer or director who is also an employee, but excluding an
employee whose customary employment is less than 20 hours per week.
(j) "Plan" means the Video Lottery Technologies, Inc. 1991 Employee
Stock Purchase Plan, as amended, the provisions of which are set forth
herein.
(k) "Purchase Period" means the approximate 12-month period beginning
on the first business day in January and ending on the last business day in
December of each year; provided, however, that the initial Purchase Period
will commence on the date of the commencement of the Company's initial
public offering of Common Stock and will terminate on December 31, 1991,
and that the then current Purchase Period will end upon the occurrence of
an Acceleration Date.
(l) "Common Stock" means the Company's Common Stock, $.01 par value,
as such stock may be adjusted for changes in the stock or the Company as
contemplated by Article XI herein.
(m) "Stock Purchase Account" means the account maintained on the books
and
- 2 -
<PAGE>
records of the Company recording the amount received from each Participant
through payroll deductions made under the Plan and from the Company through
matching contributions.
ARTICLE II. ELIGIBILITY AND PARTICIPATION
-----------------------------
Section 2.01 Eligible Employees. All Permanent Full-Time Employees shall be
------------------
eligible to participate in the Plan beginning on the first day of the first
Purchase Period to commence after such person becomes a Permanent Full-Time
Employee. Subject to the provisions of Article VI, each such employee will
continue to be eligible to participate in the Plan so long as he or she remains
a Permanent Full-Time Employee.
Section 2.02 Election to Participate. An eligible Permanent Full-Time
------------------------
Employee may elect to participate in the Plan for a given Purchase Period by
filing with the Company, in advance of that Purchase Period (or prior to such
later date as the Committee may determine) and in accordance with such terms and
conditions as the Committee in its sole discretion may impose, a form provided
by the Company for such purpose ( which authorizes regular payroll deductions
from Current Compensation beginning with the first payday, or such other date as
determined by the Committee, in that Purchase Period and continuing until the
employee withdraws from the Plan or ceases to be eligible to participate in the
Plan)."
Section 2.03 Limits on Stock Purchase. No employee shall be granted any
-------------------------
right to purchase Common Stock hereunder if such employee, immediately after
such a right to purchase is granted, would own, directly or indirectly, within
the meaning of Section 423(b)(3) and Section 424(d) of the Code, Common Stock
possessing 5% or more of the total combined voting power or value of all the
classes of the capital stock of the Company or of all Affiliates.
Section 2.04 Voluntary Participation. Participation in the Plan on the part
-----------------------
of a Participant is voluntary and such participation is not a condition of
employment nor does participation in the Plan entitle a Participant to be
retained as an employee.
ARTICLE III. PAYROLL DEDUCTIONS, COMPANY
---------------------------
CONTRIBUTIONS AND STOCK PURCHASE ACCOUNT
----------------------------------------
Section 3.01 Deduction from Pay. The form described in Section 2.02 will
-------------------
permit a Participant to elect payroll deductions of any multiple of 1% but not
less than 1% or more than 3% of such Participant's Current Compensation for each
pay period, subject to such other limitations as the Committee in its sole
discretion may impose. A Participant may cease making payroll deductions at any
time, subject to such limitations as the Committee in its sole discretion may
impose.
Section 3.02 Company Contributions. The Company may, in the sole discretion
---------------------
of the Committee, from time to time contribute to each Participant's Stock
Purchase Account an amount equal to up to 50% of each payroll deduction credited
to such Account. No Company contributions shall be deemed to have been made
until such contributions are credited to the Participant's Stock
- 3 -
<PAGE>
Purchase Account as provided in Section 3.03.
Section 3.03 Credit to Account. Payroll deductions will be credited to the
-----------------
Participant's Stock Purchase Account on each payday, and Company contributions
will be credited to the Participant's Stock Purchase Account on the last
business day of the Purchase Period at the time of and in connection with the
purchase of shares of Common Stock in accordance with Articles IV and V hereof.
Section 3.04 Interest. No interest will be paid upon payroll deductions,
--------
Company contributions or on any amount credited to, or on deposit in, a
Participant's Stock Purchase Account.
Section 3.05 Nature of Account. The Stock Purchase Account is established
-----------------
solely for accounting purposes, and all amounts credited to the Stock Purchase
Account will remain part of the general assets of the Company or the
Participating Affiliate (as the case may be).
Section 3.06 No Additional Contributions. A Participant may not make any
----------------------------
payment into the Stock Purchase Account other than the payroll deductions made
pursuant to the Plan.
ARTICLE IV. RIGHT TO PURCHASE SHARES
------------------------
Section 4.01 Number of Shares. Each Participant will have the right to
----------------
purchase on the last business day of the Purchase Period all, but not less than
all, of the largest number of whole shares of Common Stock that can be purchased
at the price specified in Section 4.02 with the entire credit balance in the
Participant's Stock Purchase Account, subject to the limitation that [(a)
deleted], (b) in accordance with Section 423(b)(8) of the Code, no more than
$25,000 in Fair Market Value (determined at the beginning of each Purchase
Period) of Common Stock and other stock may be purchased under the Plan and all
other employee stock purchase plans (if any) of the Company and the Affiliates
by any one Participant for any calendar year.
Section 4.02 Purchase Price. The purchase price for any Purchase Period
---------------
shall be the lesser of (a) 85% of the Fair Market Value of the Common Stock on
the first business day of that Purchase Period or (b) 85% of the Fair Market
Value of the Common Stock on the last business day of that Purchase Period, in
each case rounded up to the next higher full cent.
ARTICLE V. EXERCISE OF RIGHT
-----------------
Section 5.01 Purchase of Stock. On the last business day of a Purchase
-----------------
Period, the entire credit balance in each Participant's Stock Purchase Account
will be used to purchase the largest number of whole shares of Common Stock
purchasable with such amount (subject to the limitations of Section 4.01),
unless the Participant has filed with the Company, in advance of that date and
subject to such terms and conditions as the Committee in its sole discretion may
impose, a form provided by the Company which requests the distribution of the
entire credit balance in cash.
- 4 -
<PAGE>
Section 5.02 Cash Distributions. Any amount remaining in a Participant's
-------------------
Stock Purchase Account after the last business day of a Purchase Period will be
paid to the Participant in cash within 30 days after the end of that Purchase
Period.
Section 5.03 Notice of Acceleration Date. The Company shall use its best
-----------------------------
efforts to notify each Participant in writing at least ten days prior to any
Acceleration Date that the then current Purchase Period will end on such
Acceleration Date.
ARTICLE VI. WITHDRAWAL FROM PLAN; SALE OF STOCK
-----------------------------------
Section 6.01 Voluntary Withdrawal. A Participant may, in accordance with
---------------------
such terms and conditions as the Committee in its sole discretion may impose,
withdraw from the Plan and cease making payroll deductions by filing with the
Company a form provided for this purpose. In such event, the entire credit
balance in the Participant's Stock Purchase Account will be paid to the
Participant in cash within 30 days, provided that in no event shall any
Participant be entitled to withdraw from such Account any Company contributions
credited to such Account at the end of the Purchase Period pursuant to Section
3.03. A Participant who withdraws from the Plan will not be eligible to reenter
the Plan until the beginning of the next Purchase Period following the date of
such withdrawal.
Section 6.02 Death. Subject to such terms and conditions as the Committee
-----
in its sole discretion may impose, upon the death of a Participant, no further
amounts shall be credited to the Participant's Stock Purchase Account.
Thereafter, on the last business day of the Purchase Period during which such
Participant's death occurred and in accordance with Section 5.01, the entire
credit balance in such Participant's Stock Purchase Account will be used to
purchase Common Stock, unless such Participant's estate has filed with the
Company, in advance of that day and subject to such terms and conditions as the
Committee in its sole discretion may impose, a form provided by the Company
which elects to have the entire credit balance in such Participant's Stock
Account distributed in cash within 30 days after the end of that Purchase Period
or at such earlier time as the Committee in its sole discretion may decide,
provided that in no event shall any Participant's estate be entitled to receive
from such Account any Company contributions credited to such Account at the end
of the Purchase Period pursuant to Section 3.03. Each Participant, however, may
designate one or more beneficiaries who, upon death, are to receive the Common
Stock or the amount that otherwise would have been distributed or paid to the
Participant's estate and may change or revoke any such designation from time to
time. No such designation, change or revocation will be effective unless made by
the Participant in writing and filed with the Company during the Participant's
lifetime. Unless the Participant has otherwise specified the beneficiary
designation, the beneficiary or beneficiaries so designated will become fixed as
of the date of the death of the Participant so that, if a beneficiary survives
the Participant but dies before the receipt of the payment due such beneficiary,
the payment will be made to such beneficiary's estate.
Section 6.03 Termination of Employment. Subject to such terms and
---------------------------
conditions as the Committee in its sole discretion may impose, upon a
Participant's normal or early retirement with the consent of the Company under
any pension or retirement plan of the Company or Participating
- 5 -
<PAGE>
Affiliate, no further amounts shall be credited to the Participant's Stock
Purchase Account. Thereafter, on the last business day of the Purchase Period
during which such Participant's approved retirement occurred and in accordance
with Section 5.01, the entire credit balance in such Participant's Stock
Purchase Account will be used to purchase Common Stock, unless such Participant
has filed with the Company, in advance of that day and subject to such terms and
conditions as the Committee in its sole discretion may impose, a form provided
by the Company which elects to receive the entire credit balance in such
Participant's Stock Purchase Account in cash within 30 days after the end of
that Purchase Period, provided that (i) in no event shall any Participant be
entitled to receive from such Account any Company contributions credited to such
Account at the end of the Purchase Period pursuant to Section 3.03, and (ii)
such Participant shall have no right to purchase Common Stock in the event that
the last day of such a Purchase Period occurs more than three months following
the termination of such Participant's employment with the Company by reason of
such an approved retirement. In the event of any other termination of employment
(other than death) with the Company or a Participating Affiliate, participation
in the Plan will cease on the date the Participant ceases to be a Permanent
Full-Time Employee for any reason. In such event, the entire credit balance in
such Participant's Stock Purchase Account will be paid to the Participant in
cash within 30 days, provided that in no event shall any Participant be entitled
to receive from such Account any Company contributions credited to such Account
at the end of the Purchase Period pursuant to Section 3.03. For purposes of this
Section 6.03, a transfer of employment to any Affiliate, or a leave of absence
which has been approved by the Committee, will not be deemed a termination of
employment as a Permanent Full-Time Employee.
ARTICLE VII. NONTRANSFERABILITY
------------------
Section 7.01 Nontransferable Right to Purchase. The right to purchase
-----------------------------------
Common Stock hereunder may not be assigned, transferred, pledged or hypothecated
(whether by operation of law or otherwise), except as provided in Section 6.02,
and will not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition or
levy of attachment or similar process upon the right to purchase will be null
and void and without effect.
Section 7.02 Nontransferable Account. Except as provided in Section 6.02,
------------------------
the amounts credited to a Stock Purchase Account may not be assigned,
transferred, pledged or hypothecated in any way, and any attempted assignment,
transfer, pledge, hypothecation or other disposition of such amounts will be
null and void and without effect.
ARTICLE VIII. STOCK CERTIFICATES
------------------
Section 8.01 Delivery. Promptly after the last day of each Purchase Period
--------
and subject to such terms and conditions as the Committee in its sole discretion
may impose, the Company will cause to be delivered to or for the benefit of the
Participant a certificate representing the Common Stock purchased on the last
business day of such Purchase Period.
Section 8.02 Securities Laws. The Company shall not be required to issue or
---------------
deliver
- 6 -
<PAGE>
any certificate representing Common Stock prior to registration under the
Securities Act of 1933, as amended, or registration or qualification under any
state law if such registration is required. The Company shall use its best
efforts to accomplish such registration (if and to the extent required) not
later than a reasonable time following the Purchase Period, and delivery of
certificates may be deferred until such registration is accomplished.
Section 8.03 Completion of Purchase. A Participant shall have no interest
----------------------
in the Common Stock purchased until a certificate representing the same is
issued to or for the benefit of the Participant.
Section 8.04 Form of Ownership. The certificates representing Common Stock
-----------------
issued under the Plan will be registered in the name of the Participant or
jointly in the name of the Participant and another person, as the Participant
may direct on a form provided by the Company.
ARTICLE IX. EFFECTIVE DATE, AMENDMENT AND
-----------------------------
TERMINATION OF PLAN
-------------------
Section 9.01 Effective Date. The Plan was approved by the Board of
---------------
Directors on May 28, 1991 and shall be approved by the stockholders of the
Company within twelve (12) months thereof.
Section 9.02 Plan Commencement. The initial Purchase Period under the Plan
-----------------
will commence on the date of the commencement of the Company's initial public
offering of Common Stock. Thereafter, each succeeding Purchase Period will
commence and terminate in accordance with Section 1.03(k).
Section 9.03 Powers of Board. The Board of Directors may amend or
-----------------
discontinue the Plan at any time. No amendment or discontinuation of the Plan,
however, shall without stockholder approval be made that: (i) absent such
stockholder approval, would cause Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "Act") to become unavailable with respect to the Plan,
(ii) requires stockholder approval under any rules or regulations of the
National Association of Securities Dealers, Inc. or any securities exchange that
are applicable to the Company, or (iii) permit the issuance of Common Stock
before payment therefor in full
ARTICLE X. ADMINISTRATION
--------------
Section 10.01 The Committee. The Plan shall be administered by a committee,
-------------
the members of which shall serve at the pleasure of the Board of Directors (the
"Committee"); provided, however, that in the absence of such a committee, the
Board of Directors shall administer the Plan and shall assume the authority of
the Committee under the Plan.
Section 10.02 Powers of Committee. Subject to the provisions of the Plan,
-------------------
the Committee shall have full authority to administer the Plan, including
authority to interpret and
- 7 -
<PAGE>
construe any provision of the Plan, to establish deadlines by which the various
administrative forms must be received in order to be effective, and to adopt
such other rules and regulations for administering the Plan as it may deem
appropriate. The Committee shall have full and complete authority to determine
whether all or any part of the Common Stock acquired pursuant to the Plan shall
be subject to restrictions on the transferability thereof or any other
restrictions affecting in any manner a Participant's rights with respect thereto
but any such restrictions shall be contained in the form by which a Participant
elects to participate in the Plan pursuant to Section 2.02. Decisions of the
Committee will be final and binding on all parties who have an interest in the
Plan.
Section 10.03 Stock to be Sold. The Common Stock to be issued and sold
----------------
under the Plan may be treasury shares or authorized but unissued shares, or the
Company may purchase Common Stock in the market for sale under the Plan. Except
as provided in Section 11.01, the aggregate number of shares of Common Stock to
be sold under the Plan will not exceed 200,000 shares.
Section 10.04 Notices. Notices to the Committee should be addressed as
-------
follows:
Video Lottery Technologies, Inc.
2311 South 7th Avenue
Bozeman, Montana 59715
ARTICLE XI. ADJUSTMENT FOR CHANGES
----------------------
IN STOCK OR COMPANY
-------------------
Section 11.01 Stock Dividend or Reclassification. If the outstanding shares
----------------------------------
of Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of securities of the Company, or shares of a different
par value or without par value, through reorganization, recapitalization,
reclassification, stock dividend, stock split, amendment to the Company's
Certificate of Incorporation, reverse stock split or otherwise, an appropriate
adjustment shall be made in the maximum numbers and kind of securities to be
purchased under the Plan with a corresponding adjustment in the purchase price
to be paid therefor.
Section 11.02 Merger or Consolidation. If the Company is merged into or
------------------------
consolidated with one or more corporations during the term of the Plan,
appropriate adjustments will be made to give effect thereto on an equitable
basis in terms of issuance of shares of the corporation surviving the merger or
of the consolidated corporation, as the case may be.
ARTICLE XII. APPLICABLE LAW
--------------
Rights to purchase Common Stock granted under the Plan shall be construed
and shall take effect in accordance with the laws of the State of Delaware.
- 8 -
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT, dated as of April 30, 1996, amends and modifies a
certain Credit Agreement, dated as of February 16, 1995, as amended by
amendments dated as of June 26, 1995 and March 4, 1996 (as so amended, the
"Credit Agreement"), between VIDEO LOTTERY TECHNOLOGIES, INC. (the "Borrower")
and FIRST BANK NATIONAL ASSOCIATION (the "Bank")"), as Administrative Bank and
as the Bank. Terms not otherwise expressly defined herein shall have the
meanings set forth in the Credit Agreement.
FOR VALUE RECEIVED, the Borrower and the Bank agree that the Credit
Agreement is amended as follows.
ARTICLE I - AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Termination Date. The definition of "Termination Date" in Section 1.1
is amended by deleting "May 1, 1996" and inserting "June 30, 1997" in place
thereof.
1.2 Construction. All references in the Credit Agreement to "this
Agreement", "herein" and similar references shall be deemed to refer to the
Credit Agreement as amended by this Amendment. Reference in the Revolving Note
to "Termination Date" shall be deemed to refer to the Termination Date as
extended pursuant to this Amendment.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Amendment and to make and maintain
the Loans under the Credit Agreement as amended hereby, the Borrower hereby
warrants and represents to the Bank that it is duly authorized to execute and
deliver this Amendment, and to perform its obligations under the Credit
Agreement as amended hereby, and that this Amendment constitutes the legal,
valid and binding obligation of the Borrower, enforceable in accordance with its
terms.
ARTICLE III - CONDITIONS PRECEDENT
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions precedent:
3.1 Warranties. Before and after giving effect to this Amendment, the
representations and warranties in Article VII of the Credit Agreement shall be
true and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement. The execution by the Borrower of
this Amendment shall be deemed a representation that the Borrower has complied
with the foregoing condition.
3.2 Defaults. Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be continuing
under the Credit Agreement. The execution by the Borrower of this Amendment
shall be deemed a representation that the Borrower has complied with the
foregoing condition.
1
<PAGE>
3.3 Documents and Fee. The following shall have been delivered to the Bank,
each duly executed and dated, or certified, as of the date hereof, as the case
may be, and the following fee shall have been paid to the Bank:
(a) Resolutions; Incumbency. Certified copies of resolutions of the Board
of Directors of the Borrower authorizing or ratifying the execution,
delivery and performance, respectively, of this Amendment, the Note and
other documents provided for in this Amendment, and a certificate of the
Secretary or an Assistant Secretary of the Borrower certifying the names of
the officer or officers of the Borrower authorized to sign this Amendment
and the Note and other documents provided for in this Amendment, together
with a sample of the true signature of each such officer.
(b) Certificate of Incorporation and By-laws. A certified copy of any
amendment or restatement of the Certificate or Articles of Incorporation or
the By-laws of the Borrower made or entered following date of the most
recent certified copies furnished to the Bank.
(c) Consent by Guarantors. A Guarantors' consent in substantially the form
of that attached hereto, executed by each of the Guarantors.
(d) Extension Fee. The Borrower shall have paid to the Bank an extension
fee in the amount of $100,000, which shall be non-refundable, but which may
be applied to the up-front fee if on or before June 30, 1996, the Borrower
and the Bank enter into a commitment for a new transaction to refinance the
Credit Agreement.
ARTICLE IV -GENERAL
4.1 Expenses. The Borrower agrees to reimburse the Bank upon demand for all
reasonable expenses (including reasonable attorneys' fees and legal expenses)
incurred by this Bank in the preparation, negotiation and execution of this
Amendment and any other document required to be furnished herewith, and in
enforcing the obligations of the Borrower hereunder, and to pay and save the
Bank harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Credit
Agreement.
4.2 Counterparts. This Amendment may be executed in as many counterparts as
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
4.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
4.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
4.5 Successors; Enforceability. This Amendment shall be binding upon the
Borrower and the
2
<PAGE>
Bank and their respective successors and assigns, and shall inure to the benefit
of the Borrower and the Bank and the successors and assigns of the Bank. Except
as hereby amended, the Credit Agreement shall remain in full force and effect
and is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Minneapolis, Minnesota by their respective officers thereunto duly
authorized as of the date first written above.
FIRST BANK NATIONAL ASSOCIATION
By: /S/ DAVID A. DRAXLER
---------------------------------------
Title: Vice President
VIDEO LOTTERY TECHNOLOGIES, INC.
By: /S/ RICHARD M. HADDRILL
---------------------------------------
Title: Executive Vice President
3
WAIVER AND FOURTH AMENDMENT TO
CREDIT AGREEMENT
THIS WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is
dated as of August 19, 1996, and is by and between VIDEO LOTTERY TECHNOLOGIES,
INC., a Delaware corporation (the "Borrower") and FIRST BANK NATIONAL
ASSOCIATION, as administrative bank (the "Administrative Bank"), and FIRST BANK
NATIONAL ASSOCIATION as the sole Bank party (the "Bank") to that certain Credit
Agreement dated as of February 16, 1995, among the Borrower, the Administrative
Bank and such Bank, as amended by that certain Amendment No. 1 to Credit
Agreement and Waiver dated as of June 26, 1995, Second Amendment to Credit
Agreement dated as of March 4, 1996 and Third Amendment to Credit Agreement
dated as of April 30, 1996 (as so amended, the "Credit Agreement"). Capitalized
terms not otherwise expressly defined herein shall have the meanings set forth
in the Credit Agreement.
RECITALS
WHEREAS, the Borrower has requested that the Administrative Bank and the Bank
waive the Default arising under Section 10.1(d) of the Credit Agreement because
of the termination of the EDS Agreement in contravention of Section 8.11 of the
Credit Agreement; and
WHEREAS, the Administrative Bank and the Bank are willing to do so subject to
the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I - WAIVER
The Administrative Bank and the Bank hereby waive the Default arising under
Section 10.1(d) of the Credit Agreement because of the termination of the EDS
Agreement in contravention of Section 8.11 of the Credit Agreement. The waiver
granted herein is limited to the specific Default described above and is not
intended, and shall not be construed, to be a general waiver of any term or
provision of the Credit Agreement or a waiver of any other existing or future
Default or Event of Default.
ARTICLE II - AMENDMENTS TO THE CREDIT AGREEMENT
2.1 Amendments to Credit Agreement. The Credit Agreement is hereby amended
as follows:
(a) Section 1.1 of the Credit Agreement is amended by respectively
amending the definitions of "Consolidated EBITDA", "Eurodollar Rate Loan
Unit", "Interest
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Periods", "Loan Documents", "Reference Rate Loan Unit", "Restricted
Subsidiary" and "Revolving Credit Commitment" to read as follows:
"'Consolidated EBITDA': For any period, the after-tax Consolidated
Adjusted Net Income of the Borrower for such period plus the sum of the
following amounts deducted in arriving at such Consolidated Adjusted Net
Income: (a) Consolidated Interest Expense; (b) federal, state and local
income taxes; and (c) depreciation and amortization and other non-cash
expenses; provided, however, that the Operations of UWS shall be included
in the calculation of Consolidated EBITDA notwithstanding that such
operations are being reported externally as discontinued.
'Eurodollar Rate Loan Unit': Each portion of any Loan designated as
such in a notice of borrowing under Section 2.3 or a notice of continuation
or conversion under Section 2.4.
'Interest Period': For any Eurodollar Rate Loan Unit, the period which
shall begin on (and include) the date of the initial borrowing date of
such Eurodollar Rate Loan Unit or the date of the conversion of any
Reference Rate Loan Unit into a Eurodollar Rate Loan Unit or the date
of the continuation of a Eurodollar Rate Loan Unit as a Eurodollar
Rate Loan Unit upon the termination of the Interest Period then
applicable thereto and, unless the final maturity of such Eurodollar
Rate Loan Unit is accelerated, shall end on the numerically
corresponding day which is one, two or three months thereafter in the
case of Eurodollar Rate Loan Units comprising part of the Revolving
Loans, one month thereafter in the case of Eurodollar Rate Loan Units
comprising part of Term Loan A or three months thereafter in the case
of Eurodollar Rate Loan Units comprising part of Term Loan B;
provided, however, that:
(a) any such Interest Period which would otherwise end on a
day not a Eurodollar Business Day shall end on the next
succeeding Eurodollar Business Day unless such next succeeding
Eurodollar Business Day falls in another calendar month, in which
case such Interest Period shall end on the next preceding
Eurodollar Business Day;
(b) any Interest Period which begins on the last Eurodollar
Business Day of a calendar month (or on a day for which no
numerically corresponding day in the calendar month at the end of
such Interest Period) shall end on the last Eurodollar Business
Day of the calendar month at the end of such Interest Period;
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(c) no Interest Period for Eurodollar Rate Loan Units
comprising part of the Revolving Loans shall extend beyond the
Termination Date;
(d) no Interest Period relating to any Term Loan shall
extend beyond the stated Maturity of such Term Loan; and
(e) Interest Periods shall not be chosen for Eurodollar Rate
Loan Units which would require payment of any amount of such
Eurodollar Rate Loan Unit prior to the last day of the Interest
Period in order to pay any installment of any Term Loan when due
or in order to pay such Term Loan in full at its Maturity Date.
'Loan Documents': This Agreement, the Notes, the Borrower Pledge
Agreement, the AWI Security Agreement, the Subsidiary Guaranties, the
Letters of Credit, the Letter of Credit Applications, the VLT Security
Agreement, the Tote Pledge Agreement (if required by the
Administrative Bank and the Banks), the VLC Security Agreement and
each other instrument, document, guaranty, security agreement,
mortgage, or other agreement executed and delivered by the Borrower or
any other Loan Party pursuant to which the Borrower or such other Loan
Party incurs any liability to the Banks with respect to the
Obligations, agrees to perform any covenant or agreement with respect
to the Obligations or grants any security interest to secure the
Obligations.
'Reference Rate Loan Unit': Each portion of any Loan designated as
such in a notice of borrowing under Section 2.3 or a notice of
continuation or conversion under Section 2.4.
'Restricted Subsidiary': AWI and each of its Subsidiaries, VLC and
each of its Subsidiaries and any other Subsidiary whose capital stock
is subject to a Lien in favor of the Administrative Bank for itself
and the ratable benefit of the Banks.
'Revolving Credit Commitment': The maximum unpaid principal amount of
Revolving Loans and Letter of Credit Obligations which may from time
to time be outstanding hereunder, being $17, 500,000.00, as the same
may be reduced from time to time pursuant to Section 4.3 and, as the
context may require, the agreement of the Banks to make Revolving
Loans to the Borrower and of First Bank to issue Letter of Credit for
the account of the Borrower and of each Bank to purchase Letter of
Credit Participations, in each case subject to the terms and
conditions of this Agreement."
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(b) Section 1.1 of the Credit Agreement is further amended by adding
the following definitions of "AWI Security Agreement", "Borrower Security
Agreement", "Replacement Data Processing Services Contract", "Restricted
Contract", "Restricted Contract Obligor", "Tote Pledge Agreement", and VLC
Security Agreement":
"'AWI Security Agreement': The Security Agreement dated as of
August 19, 1996 made by AWI in favor of the Administrative Bank for
itself and the ratable benefit of the Banks, as originally executed
and as it may be amended, modified, supplemented, restated or replaced
from time to time.
'Borrower Security Agreement': The Security Agreement dated as of
August 19, 1996 made by the Borrower in favor of the Administrative
Bank for itself and the ratable benefit of the Banks, as originally
executed and as it may be amended, modified, supplemented, restated or
replaced from time to time.
'Replacement Data Processing Services Contract': Any contract
approved by the Administrative Bank and the Banks (which approval
shall not be unreasonably withheld or delayed) between the Borrower or
any of its Subsidiaries and a third party (including EDS) pursuant to
which such third party contracts to provide data processing services
to the Borrower or any of its Subsidiaries in connection with the
Borrower's or such Subsidiary's performance of its obligations under
the Material Contracts.
'Restricted Contract(s)': The Minnesota Contract and each other
Material Contract generating accounts now or hereafter subject to a
Lien in favor of the Administrative Bank for itself and the ratable
benefit of the Banks. The Restricted Contracts include, without
limitation, the contracts identified on Schedule 1.1 (Restricted
Contracts) attached to that certain Waiver and Fourth Amendment to
Credit Agreement dated as of August 19, 1996 (the "Fourth Amendment")
among the Borrower, the Administrative Bank and the Banks and
incorporated into this Agreement by reference.
'Restricted Contract Obligor(s)'. Each state lottery or other
Person (other than the Borrower or any of its Subsidiaries or Related
Parties) which is a party to a Restricted Contract. The Restricted
Contract Obligors include, without limitation, the parties identified
on Schedule 1.1 (Restricted Contracts) attached to the Fourth
Amendment and incorporated into this Agreement by reference.
'Tote Pledge Agreement': The Pledge Agreement, if any, required
by the Administrative Bank to be made by Tote in favor of the
Administrative Bank for itself and the ratable benefit of the Banks
pursuant to Section 8.13, as originally executed in the form attached
as part of Exhibit 1 to the Fourth
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Amendment and as it may be amended, modified, supplemented, restated
or replaced from time to time.
'VLC Security Agreement': The Security Agreement dated as of
August 19, 1996 made by VLC in favor of the Administrative Bank for
itself and the ratable benefit of the Banks, as originally executed
and as it may be amended, modified, supplemented, restated or replaced
from time to time."
(c) Section 2.2 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 2.2 Loan Units. Except as otherwise provided herein, the
Loans shall be comprised of Eurodollar Rate Loan Units and/or
Reference Rate Loan Units as shall be selected by the Borrower in
accordance with Section 2.3 and Section 2.4. Any combination of types
of Loan Units may be outstanding at the same time; provided, however,
that: (a) the Revolving Loans may not consist of more than five (5)
different Eurodollar Rate Loan Units; and (b) no Term Loan may consist
of more than two (2) different Eurodollar Rate Loan Units. Each
Eurodollar Rate Loan Unit shall be in a minimum amount of $100,000.00
or in an integral multiple of $100,000.00 above such amount. Each
Reference Rate Loan Unit shall be in an amount of not less than
$100,000.00.
(d) Section 2.3(a) of the Credit Agreement is amended in its entirety
to read as follows:
"(a) Revolving Loans. Any request by the Borrower for Revolving
Loans shall be in writing, or by telephone promptly confirmed in
writing if so requested by the Administrative Bank, and must be given
so as to be received by the Administrative Bank not later than 12:00
noon, Minneapolis time, on: (i) the date of the requested Revolving
Loans, if such Revolving Loans will not include Eurodollar Rate Loan
Units; or (ii) on the third Eurodollar Business Day prior to the date
of the requested Revolving Loans, if such Revolving Loans will include
Eurodollar Rate Loan Units. Each request for Revolving Loans shall
specify the borrowing date (which shall be a Business Day) and the
amount of such Revolving Loans. Each request for Revolving Loans shall
be in a minimum amount of $100,000.00. Each request for Revolving
Loans shall be deemed a representation and warranty by the Borrower
that all conditions precedent specified in Section 6.2 to such
Revolving Loans are satisfied on the date of such request and on the
date the requested Revolving Loans are made. Each written request or
confirmation shall be in the form of Exhibit E attached hereto.
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(e) Section 2.4 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 2.4 Continuation or Conversion of Loan Units for Loans.
The Borrower may elect to: (i) continue any outstanding Eurodollar
Rate Loan Unit from one Interest Period into a subsequent Interest
Period to begin on the last day of the earlier Interest Period; or
(ii) convert any outstanding Loan Unit into another Type of Loan Unit
(on the last day of an Interest Period only, in the instance of a
Eurodollar Rate Loan Unit), by giving the Administrative Bank notice
in writing, or by telephone promptly confirmed in writing if so
requested by the Administrative Bank, given so as to be received by
the Administrative Bank not later than 10:00 a.m., Minneapolis time:
(A) on the date of the requested continuation or conversion, if the
continuing or converted Loan Unit shall be a Reference Rate Loan Unit;
or (B) three (3) Eurodollar Business Days prior to the date of the
requested continuation or conversion, if the continuing or converted
Loan Unit shall be a Eurodollar Rate Loan Unit. Each notice of
continuation or conversion of a Loan Unit shall specify: (i) the
effective date of continuation or conversion (which shall be a
Business Day and, if the resulting Loan Unit is a Eurodollar Rate Loan
Unit, a Eurodollar Business Day); (ii) the amount and the Type or
Types of Loan Units following such continuation or conversion; and
(iii) for continuation as, or conversion into, Eurodollar Rate Loan
Units, the Interest Periods for such Loan Units. Absent timely notice
of continuation or conversion, each Eurodollar Rate Loan Unit shall
automatically convert into a Reference Rate Loan Unit on the last day
of an applicable Interest Period, unless paid in full on such last
day. No Loan Unit comprising part of the Revolving Loans or the Term
Loans, as the case may be, shall be continued as, or converted into, a
Eurodollar Rate Loan Unit if the Interest Period selected for such
Loan Unit may not transpire prior to the Maturity of the relevant Loan
or if a Default or Event of Default shall exist. Each written notice
of continuation or conversion shall be in the form of Exhibit G
attached hereto. The Administrative Bank shall give prompt written
notice to each Bank of any notice received by the Administrative Bank
from the Borrower pursuant to this Section 2.4."
(f) Section 2.6 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 2.6 Funding Losses. The Borrower will indemnify each
Bank upon demand against any loss or expense which such Bank may
sustain or incur (including, without limitation, any loss or expense
sustained or incurred in obtaining, liquidating or employing deposits
or other funds acquired to effect, fund or maintain any Loan Unit) as
a consequence of: (i) any failure of the Borrower to make any payment
when due of any amount
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due hereunder with respect to the principal of any Loan or under the
relevant Note; or (ii) any failure of the Borrower to borrow, continue
or convert a Loan Unit on a date specified therefor in a notice
thereof; or (iii) any payment (including, without limitation, any
payment pursuant to Section 4.2, 4.3 or 10.2), prepayment or
conversion of any Eurodollar Rate Loan Unit on a date other than the
last day of the Interest Period for such Loan Unit. Determinations by
a Bank for purposes of this Section 2.6 of the amount required to
compensate such Bank shall be conclusive in the absence of manifest
error, subject, however, to rebuttal by the Borrower."
(g) Section 2.7(e)(i) of the Original Agreement is amended by changing
the percentage "one and one-half percent (1.50%)" as set forth therein to
the percentage "one and three-quarters percent (1.75%)".
(h) Section 3.1 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 3.1 Interest.
(a) Revolving Loans.
(i) Subject to the provisions of Section
3.1(a)(ii), the Borrower agrees to pay interest on the
outstanding principal amount of each Revolving Loan from
the date of such Revolving Loan until the Maturity
thereof:
(A) With respect to each Reference Rate Loan
Unit comprising a portion of such Revolving Loan, at
a fluctuating rate per annum equal at all times to
the Reference Rate; and
(B) With respect to each Eurodollar Rate Loan
Unit comprising a portion of such Revolving Loan, at
a rate per annum equal at all times during the
Interest Period relating to such Eurodollar Rate
Loan Unit to the sum of the Eurodollar Rate (Reserve
Adjusted) in effect for such Interest Period plus
two and one-quarter percent (2.25%) per annum.
(ii) Notwithstanding the provisions of Section
3.1(a)(i), at all times after the occurrence and during
the continuance of any Event of Default, the Borrower
agrees to pay interest on the outstanding principal
amount of each Revolving Loan from the date on which the
Administrative Bank notifies
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the Borrower of such Event of Default at a rate per
annum at all times equal to the sum of the Reference
Rate plus two percent (2.0%) per annum.
(b) Term Loans.
(i) Subject to the provisions of Section
3.1(b)(ii), the Borrower agrees to pay interest on the
outstanding principal amount of each Term Loan from the
date of such Term Loan until the Maturity thereof as
follows:
(A) with respect to each Reference Rate Loan
Unit comprising a portion of such Term Loan, at a
fluctuating rate per annum equal at all times to the
Reference Rate;
(B) with respect to each Eurodollar Rate Loan
Unit comprising a portion of such Term Loan, at a
rate per annum equal at all times during the
Interest Period relating to such Eurodollar Rate
Loan Unit to the sum of the Eurodollar Rate (Reserve
Adjusted) in effect for such Interest Period plus
two and one-quarter percent (2.25%) per annum.
(ii) Notwithstanding the provisions of Section
3.1(b)(i), at all times after the occurrence and during
the continuance of any Event of Default, the Borrower
agrees to pay interest on the outstanding principal
balance of each Term Loan from the date on which the
Administrative Bank notifies the Borrower of such Event
of Default at a rate per annum at all times equal to the
sum of the Reference Rate plus two percent (2.0%) per
annum.
(c) All Loans.
(i) Until Maturity of a Loan: (A) interest accrued
through the end of a month on each Reference Rate Loan
Unit shall be payable on the Monthly Payment Date
coinciding with the end of such month, commencing on the
first such Monthly Payment Date following the Closing
Date; and (B) interest accrued during the applicable
Interest Period on each Eurodollar Rate Loan Unit shall
be payable on the last day of such applicable Interest
Period. Interest on each Loan shall also be
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payable at its Maturity. Interest accrued after Maturity
shall be payable on demand.
(ii) No provision of this Agreement or any Note
shall require the payment of interest in excess of the
rate permitted by applicable law."
(i) Section 4.2(a)(i) of the Credit Agreement is amended by changing
the words "any Term Loan" appearing therein to the words "any Loan".
(j) Section 4.2(d) of the Credit Agreement is amended in its entirety
to read as follows:
"(d) Application of Prepayments. Each prepayment of any Term Loan
shall be applied to the unpaid installments of such Loan in the
inverse order of their maturities. Subject to the immediately
preceding sentence, the Banks shall apply prepayments first to
Reference Rate Loan Units, then to Eurodollar Rate Loan Units having
an Interest Period ending on such day of prepayment and then to other
Eurodollar Rate Loan Units."
(k) Section 4.3 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 4.3 Mandatory Reduction of Revolving Credit Commitment.
The Revolving Credit Commitment shall be permanently reduced by the
amount of each reduction in the Letter of Credit Obligations occurring
after August 19, 1996 as a result of a reduction in the amount
available to be drawn on the Letters of Credit which does not result
from a drawing thereon. The reduction in the Revolving Credit
Commitment shall be applied to the Individual Revolving Credit
Commitments of the Banks pro rata in accordance with their
Percentages."
(l) Section 5.2 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 5.2 Deposits Unavailable or Interest Rate
Unascertainable or Inadequate; Impracticability. If any Bank
determines (which determination shall be conclusive and binding on the
parties hereto) that:
(a) deposits of the necessary amount for the relevant
Interest Period for any Eurodollar Rate Loan Unit are not
available to such Bank in the relevant market or that, by reason
of circumstances affecting such market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Interbank Rate
for such Interest Period;
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(b) the Eurodollar Rate (Reserve Adjusted) will not
adequately and fairly reflect the cost to such Bank of making or
funding any Eurodollar Rate Loan Units for its relevant Interest
Period; or
(c) the making or funding of any Eurodollar Rate Loan Units
has become impracticable as a result of any event occurring after
the date of this Agreement which, in the opinion of such Bank,
materially and adversely affects such Loan Unit or such Bank's
Commitment to make such Loan Unit or the relevant market;"
such Bank shall promptly give notice of such determination to the
Borrower and the Administrative Bank, and (A) all Loans made by such
Bank shall accrue interest at the Reference Rate during the period on
and after the date of such Bank's notice through the date on which
such Bank determines that the circumstances giving rise to such Bank's
determination under subsection (a), (b) or (c) no longer exists; (B)
(1) any notice of a new Eurodollar Rate Loan Unit previously given by
the Borrower and not yet borrowed or converted shall be deemed, as to
such Bank, to be a notice to make a Reference Rate Loan Unit and (2)
the Borrower shall be obligated to either prepay in full any
outstanding Eurodollar Rate Loan Units without premium or penalty on
the last day of the current Interest Period with respect thereto or
convert any such Eurodollar Rate Loan Unit to a Reference Rate Loan
Unit on the last day of such Interest Period or, in either case, on
such earlier date as may be required by applicable law. Any prepayment
or conversion of any Eurodollar Rate Loan Unit prior the end of its
Interest Period shall be accompanied by any payment required by
Section 2.6."
(m) Section 8.(1)(i) of the Credit Agreement is amended in its
entirety to read as follows:
"(i) Immediately upon becoming aware of the occurrence thereof,
notice of the institution of any litigation, arbitration or
governmental proceeding, or the rendering of a judgment or decision in
such litigation or proceeding, which is material to the Borrower, any
of its Subsidiaries or any of their respective property, and the steps
being taken by the Person(s) affected by such proceeding and, with
respect to any judicial or arbitration proceeding between the Borrower
and any of its Subsidiaries, on the one hand, and EDS, on the other
hand, immediately upon service on the Borrower or any of its
Subsidiaries, notice of any motion or other procedural request by EDS
for an order or other form of relief which, if granted, would
interfere with the Borrower's or any of its Subsidiaries' unrestricted
right to use any of its assets in the conduct of its business or would
require the Borrower or any of its Subsidiaries to grant a Lien to EDS
including, without limitation, any request
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by EDS for an order requiring the Borrower or any of its Subsidiaries
to deposit any money into escrow."
(n) Section 8.11 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 8.11 Restricted Contracts; Etc. (a) Perform, and cause
each of its Subsidiaries to perform, their respective duties,
obligations, liabilities and covenants under any Replacement Data
Processing Services Contract and each Restricted Contract in
accordance with the terms thereof; and (b) deliver to the Bank, and
cause each of its Subsidiaries to deliver to the Bank, copies of any
notice issued or received by such Person asserting that a breach or
default has occurred under any Material Contract or any Replacement
Data Processing Services Contract."
(o) Article VIII is amended by adding the following new Section 8.13:
"8.13 Tote Pledge Agreement. Immediately, but in no event more than
ten (10) Business Days' after the Administrative Bank requests that
Tote execute and deliver the Tote Pledge Agreement and obtains any
license that may be required by New Mexico law pertaining to the
licensing of owners or operators of race tracks, the Borrower shall
cause Tote to execute and deliver the Tote Pledge Agreement together
with a secretary's certificate and opinion of counsel in the form
attached as part of Exhibit 1 to the Fourth Amendment and the Borrower
shall co-operate, and cause Tote to co-operate, with the
Administrative Bank in obtaining any applicable license and the
Borrower shall pay and discharge all of the costs and expenses
incurred by the Administrative Bank in connection with obtaining such
license and the Tote Pledge Agreement."
(p) Section 9.2(c) of the Credit Agreement is amended in its entirety
to read as follows:
"(c) any of its property necessary or convenient to the
performance of any Restricted Contract unless such Person reserves for
itself all rights necessary to perform such Restricted Contract;"
(q) Section 9.6 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.6 Subsidiaries, Partnerships and Joint Ventures.
Either: (a) form or acquire any corporation which would thereby become
a Subsidiary; or (b) form or enter into any partnership as a limited
or general partner or form or enter into any joint venture."
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(r) Section 9.8 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.8 Restricted Contracts, Etc. (a) Amend, modify or
waive any material provision of any Replacement Data Processing
Services Contract or any Restricted Contract in any manner which
materially adversely affects the value of the Collateral or in
contravention of the provisions of any Loan Document; (b) assign or
transfer, by operation or law or otherwise, as collateral or
otherwise, any of the Borrower's or any of its Subsidiaries' right or
interest in or with respect to any Replacement Data Processing
Services Contract or any Restricted Contract, as the case may be,
except to the Administrative Bank for itself and the ratable benefit
of the Banks or as permitted by other Sections of this Article IX; or
(c) amend, modify or waive any subordination provision of the
subordinated notes issued by the Borrower under that certain Stock
Purchase Agreement dated April 18, 1994 between the Borrower and
Lloyd, John and Linda Shelhamer and the Jane Ringling Shelhamer
Marital Trust as amended and restated by promissory notes dated March
25, 1996 from the subordination provisions set forth in the original
notes dated May 3, 1994, which subordination provisions apply to such
amended and restated notes."
(s) Section 9.9 of the Credit Agreement by inserting the word "and"
after the semi-colon following "subsection (h)" therefor, changing the
semi-colon following "subsection (i)" thereof to a period and by deleting
the remainder of Section 9.9.
(t) Section 9.10(d) of the Credit Agreement is amended in its entirety
to read as follows:
"(d) Other Indebtedness incurred by VLC or NSTC so long as: (i)
no Default or Event of Default has occurred and is continuing at the
time of the incurrence of such Indebtedness; (ii) the Indebtedness
incurred by VLC is for the purpose of financing its leases (including
revenue sharing contracts) of gaming machines to or with third parties
and the aggregate original principal amount of any such Indebtedness
incurred by VLC does not exceed $15,000,000.00; and (iii) the
aggregate original principal amount of any Indebtedness incurred by
NSTC does not exceed $10,000,000.00;"
(u) Section 9.11(c) of the Credit Agreement is amended in its entirety
to read as follows:
"(c) Liens granted by VLC securing only VLC's Indebtedness
permitted by Section 9.10(d); provided, however, that such Lien
attaches only to the gaming machines being financed by such
Indebtedness, the leases pertaining thereto and the proceeds of any
thereof;"
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(v) Section 9.12(a)(iii) of the Credit Agreement is amended by
changing the amount "$25,000,000.00" appearing therein to the amount
"$20,000,000.00".
(w) Section 9.15 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.15 Restricted Payments. Purchase or redeem or
otherwise acquire for value any shares of the Borrower's or any of its
Subsidiaries' stock, declare or pay any dividends thereon (other than
stock dividends), make any distribution on, or payment on account of
the purchase, redemption, defeasance or other acquisition or
retirement for value of, any shares of the Borrower's stock or set
aside any funds for any such purpose, except that: (a) any of the
Borrower's direct or indirect wholly-owned Subsidiaries may pay
dividends to its corporate parent; and (b) the Borrower and any of its
Subsidiaries may consummate any transaction permitted by Section 9.1."
(x) Section 9.17 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.17 Consolidated Net Worth. Permit, as of any Quarterly
Measurement Date, its Consolidated Net Worth to be less than the sum
of $81,400,000.00 plus 100% of the cumulative Consolidated Net Income
(without any deduction for losses) earned on and after January 1,
1996; minus the actual amount of charges taken in the second, third
and/or fourth quarter of the Borrower's 1996 fiscal year up to a
maximum deduction of $20,000,000.00."
(y) Section 9.18 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.18 Cash Flow Leverage Ratio. Permit, as of any
Quarterly Measurement Date, the Consolidated Cash Flow Leverage Ratio
to be greater than 2.5 to 1.0."
(z) Section 9.20 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.20 Sale of Stock; etc. Permit any of its Subsidiaries
to sell any capital stock or any options, warrants or similar rights
to acquire any shares of, or other securities convertible into, any of
the Borrower's Subsidiaries' capital stock."
(aa) Section 10.1(h) of the Credit Agreement is amended in its
entirety to read as follows:
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"(h) A judgment or judgments for the payment of money in excess
of the sum of $5,000,000.00 in the aggregate for any or all of the
Loan Parties shall be rendered against any Loan Party and such Loan
Party shall not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof,
prior to any execution on such judgments by such judgment creditor,
within 30 days from the date of entry thereof, and within said period
of 30 days, or such longer period during which execution of such
judgment shall be stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal or, without affecting the
applicability of the foregoing, any order or other form of relief is
entered in any judicial or arbitration proceeding between the Borrower
and any of its Subsidiaries, on the one hand, and EDS, on the other
hand, which interferes with the Borrower's or any of its Subsidiaries'
unrestricted right to use any of its assets in the conduct of its
business or requires that the Borrower or any of its Subsidiaries
grant a Lien to EDS including, without limitation, any order or other
form of relief requiring the Borrower or any of its Subsidiaries to
deposit any money into escrow; or"
(ab) Section 10.1 of the Credit Agreement is amended by changing the
period following subsection "(n)" thereof to a semi-colon followed by the
word "or" and by adding the following new subsection "(o)":
"(o) The Borrower or any of its Subsidiaries week-to-week data
processing arrangement with EDS shall terminate unless a Replacement
Data Processing Services Contract is then in existence or unless the
Administrative Bank and the Banks has approved (which approval will
not be unreasonably delayed or withheld) AWI as the provider of data
processing services in connection with the Borrower's or its
Subsidiaries' performance of their obligations under the Material
Contracts."
(ac) Section 12.14 of the Credit Agreement is amended in its entirety
to read as follows:
"Section 12.14 Limitation on Interest in Restricted Contracts.
Notwithstanding anything contained herein or in any of the other Loan
Documents to the contrary, the covenants and other terms and
provisions set forth in this Agreement and/or the other Loan Documents
(including, without limitation, the rights, remedies of the
Administrative Bank and/or the Banks) with respect to any Restricted
Contract are ineffective, void ab initio, invalid and unenforceable to
the extent that such covenants, terms, provisions, rights or remedies
in any way violate, or constitute or result in a breach of or default
under any covenant or other term or provision set forth in such
Restricted Contract as construed under applicable law including,
without limitation,
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Section 9-318(4) of the Code, or require the consent of any third
party (other than the Borrower or any of its Subsidiaries) which is a
party to such Restricted Contract."
(ad) Exhibit E to the Credit Agreement is amended to conform to
Exhibit E (Amended 8/96) attached hereto.
(ae) Exhibit G to the Credit Agreement is amended to conform to
Exhibit G (Amended 8/96) attached hereto.
(af) Schedule 7.6 to the Credit Agreement is amended to conform to
Schedule 7.6 (Amended 8/96) attached hereto.
2.2 Construction. All references in the Credit Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to the
Credit Agreement as amended by this Amendment.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Amendment and to make and maintain
the Loans under the Credit Agreement as amended hereby, the Borrower hereby
warrants and represents to the Lender that: (a) The execution, delivery and
performance by the Borrower of this Amendment, the Replacement Notes (as
hereinafter defined) and any other documents to which the Borrower is a party
have been duly authorized by all necessary corporate or partnership action, do
not require any approval or consent of, or any registration, qualification or
filing with, any government agency or authority or any approval or consent of
any other person (including, without limitation, any stockholder or partner), do
not and will not conflict with, result in any violation of or constitute any
default under, any provision of the Borrower's articles of incorporation or
bylaws, any agreement binding on or applicable to the Borrower or any of its
property, or any law or governmental regulation or court decree or order,
binding upon or applicable to the Borrower or of any of its property and will
not result in the creation or imposition of any security interest or other lien
or encumbrance in or on any of its property pursuant to the provisions of any
agreement applicable to the Borrower or any of its property; (b) The Credit
Agreement as amended by this Amendment and the Replacement Notes are the legal,
valid and binding obligations of the Borrower and are enforceable in accordance
with their respective terms, subject only to bankruptcy, insolvency,
reorganization, moratorium or similar laws, rulings or decisions at the time in
effect affecting the enforceability of rights of creditors generally and to
general equitable principles which may limit the right to obtain equitable
remedies.
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ARTICLE IV - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
4.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE VII of the Credit Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Credit Agreement and for the
litigation now scheduled on Schedule 7.6 (Amended 8/96). The execution by
the Borrower of this Amendment shall be deemed a representation that the
Borrower has complied with the foregoing condition.
4.2 Before and after giving effect to this Amendment, no Default or no
Event of Default shall have occurred and be continuing under the Credit
Agreement except for those expressly waived by the terms hereof. The
execution by the Borrower of this Amendment shall be deemed a
representation that the Borrower has complied with the foregoing condition.
4.3 The Administrative Bank shall have received a duly executed copy
of this Amendment and the following documents or other items appropriately
completed and duly executed by the Borrower and the other Loan Parties
where appropriate:
(a) a replacement Revolving Note (the "Replacement Revolving
Note") in the form provided by the Administrative Bank appropriately
completed and duly executed by the Borrower;
(b) a replacement Term Note A (the "Replacement Term Note A") in
the form provided by the Administrative Bank appropriately completed
and duly executed by the Borrower;
(c) a replacement Term Note B (the "Replacement Term Note B"; and
together with the Replacement Revolving Note and Replacement Term Note
A being sometimes hereinafter referred to collectively as the
"Replacement Notes" and individually as a "Replacement Note") in the
form provided by the Administrative Bank appropriately completed and
duly executed by the Borrower;
(d) an Amendment No. 2 to the Borrower Pledge Agreement (the
"Pledge Agreement Amendment") in the form provided by the
Administrative Bank appropriately completed and duly executed by the
Borrower pursuant to which, among other things, the Borrower pledges
to the Administrative Bank not less than 100% of AWI's, VLC's, UWS',
Raven's D& R Music, Inc.'s, Automatic Music Services, Inc.'s and
Automation First, Inc.'s issued and
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outstanding stock, together with the original stock certificates for
such stock and undated stock powers signed by the Borrower in blank;
(e) the Borrower Security Agreement in the form provided by the
Administrative Bank appropriately completed and duly executed by the
Borrower together with UCC-1 Financing Statements in a form acceptable
to the Banks appropriately completed and duly executed by the
Borrower;
(f) a Consent in the form provided by the Administrative Bank
appropriately completed and duly executed by each Guarantor;
(g) the AWI Security Agreement appropriately completed and duly
executed by AWI together with UCC-1 Financing Statements in a form
acceptable to the Banks appropriately completed and duly executed by
AWI;
(h) the VLC Security Agreement appropriately completed and duly
executed by VLC together with UCC-1 Financing Statements in a form
acceptable to the Banks appropriately completed and duly executed by
VLC;
(i) recent UCC searches from the filing offices in all states
required by the Banks which reflect that no Person holds a Lien in any
of the Borrower's or any of its Subsidiaries' assets other than
Permitted Liens;
(j) a certified copy of Resolutions of the Board of Directors of
each Loan Party authorizing or ratifying the execution, delivery and
performance of this Amendment, the Replacement Notes, the Pledge
Agreement Amendment and any other documents provided for in this
Amendment;
(k) a certificate by the Secretary or any Assistant Secretary of
each Loan Party certifying the names of the officers of such Loan
Party authorized to sign this Amendment, the Replacement Notes, the
Pledge Agreement Amendment and any other documents provided for in
this Amendment together with a sample of the true signature of such
officers;
(l) an Opinion of Counsel to the Loan Parties in form and
substance satisfactory to the Administrative Bank and the Bank;
(m) an amendment fee of $50,000.00 in immediately available
funds; and
(n) such other approvals, opinions or documents as the
Administrative Bank or the Bank may reasonably request.
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ARTICLE V - GENERAL
5.1 Expenses. The Borrower agrees to reimburse the Administrative Bank and
each Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys and legal expenses incurred by the Administrative Bank or such Bank in
the preparation, negotiation and execution of this Amendment and any other
document required to be furnished herewith, and in enforcing the obligations of
the Borrower hereunder, and to pay and save the Administrative Bank and the
Banks harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Credit
Agreement.
5.2 Counterparts. This Amendment may be executed in as many counterparts as
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
5.3 Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
5.4 Law. This Amendment shall be a contract made under the laws of the
State of Minnesota, which laws shall govern all the rights and duties hereunder.
5.5 Successors: Enforceability. This Amendment shall be binding upon the
Borrower , the Administrative Bank and each Bank and their respective successors
and assigns, and shall inure to the benefit of the Borrower, the Administrative
Bank and each Bank and the successors and assigns of the Administrative Bank and
each Bank. Except as hereby amended, the Credit Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects.
5.6 Recitals. The recitals hereto are incorporated herein by reference and
constitute an integral part of this Amendment.
5.7 Acknowledgement and Release. In order to induce the Administrative Bank
and the Banks to enter into this Amendment, the Borrower represents and warrants
to the Administrative Bank and the Bank that no events have taken place and no
circumstances exist at the date hereof which would give the Borrower the right
to assert a defense, offset or counterclaim to any claim by the Administrative
Bank or the Bank for payment of the Obligations.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
VIDEO LOTTERY TECHNOLOGIES, INC.,
a Delaware corporation
By: /S/ Richard M. Haddrill
---------------------------------------
Title: Executive Vice President
FIRST BANK NATIONAL ASSOCIATION,
AS ADMINISTRATIVE BANK AND A BANK
By /S/ David A. Draxler
---------------------------------------
Its: Vice President
19
CONSENT, WAIVER AND FIFTH AMENDMENT TO
CREDIT AGREEMENT
THIS CONSENT, WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT (the
"Amendment") is dated as of January 30, 1997, and is by and between VIDEO
LOTTERY TECHNOLOGIES, INC., a Delaware corporation (the "Borrower") and FIRST
BANK NATIONAL ASSOCIATION, as administrative bank (the "Administrative Bank"),
and FIRST BANK NATIONAL ASSOCIATION as the sole Bank party (the "Bank") to that
certain Credit Agreement dated as of February 16, 1995, among the Borrower, the
Administrative Bank and such Bank, as amended by that certain Amendment No. 1 to
Credit Agreement and Waiver dated as of June 26, 1995, Second Amendment to
Credit Agreement dated as of March 4, 1996, Third Amendment to Credit Agreement
dated as of April 30, 1996 and Waiver and Fourth Amendment to Credit Agreement
dated August 19, 1996 (as so amended, the "Credit Agreement"). Capitalized terms
not otherwise expressly defined herein shall have the meanings set forth in the
Credit Agreement.
RECITALS
WHEREAS, the Borrower has requested that the Administrative Bank and the
Bank consent to the EDS Settlement, amend certain provisions of the Credit
Agreement and waive the Borrower's and its Subsidiaries' compliance with certain
provisions of the Credit Agreement; and
WHEREAS, the Administrative Bank and the Bank are willing to do so subject
to the terms and conditions of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I - CONSENT
The Administrative Bank and the Bank hereby consent to the consummation of
the EDS Settlement. This consent is limited to the EDS Settlement as set forth
in the EDS Settlement Documents in effect on the date of this Amendment.
ARTICLE II - AMENDMENTS TO THE CREDIT AGREEMENT
2.1 Amendments to Credit Agreement. The Credit Agreement is hereby amended
------------------------------
as follows:
(a) Section 1.1 of the Credit Agreement is amended by respectively
amending the definitions of "Change of Control," "Permitted Redemptions,"
"Restricted
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Contracts," "Revolving Credit Commitment" and "Termination Date" to
read as follows:
"`Change of Control': The earlier to occur of: (a) a `Change
of Control' as defined in the EDS Note; or (b) the occurrence
after the date of this Agreement of any event where any Person or
Persons acting together which would constitute a `group' for
purposes of Section 13(d) (or any successor provision) of the
Securities Exchange Act of 1934, as it may be amended, and any
successor act thereto and the rules and regulations promulgated
thereunder (such Person or Persons together with its or their
Related Parties being a `Restricted Holder') shall beneficially
own at least 40% of the aggregate voting power of all classes of
the Borrower's stock entitled to vote generally in the election
of the Borrower's directors; or (b) any Restricted Holder shall
succeed in controlling the election of a majority of the
Borrower's board of directors or directing the Borrower's
management policies.
`Permitted Redemptions': Redemptions made by the Borrower of
its stock: (a) held by the Administrative Bank; or (b) pursuant
to the EDS Settlement Agreement in accordance with the terms of
EDS Settlement Documents in effect on the date of the Consent and
Fifth Amendment to Credit Agreement dated as of January 30, 1997
(the Fifth Amendment') among the Borrower, the Administrative
Bank and the Bank.
`Restricted Contract(s)': (a) The Material Contracts
identified on Schedule 1.1 (Restricted Contracts) attached to
that certain Waiver and Fourth Amendment to Credit Agreement
dated as of August 19, 1996 (the `Fourth Amendment') among the
Borrower, the Administrative Bank and the Banks and incorporated
into this Agreement by reference; (b) each other now existing or
hereafter arising Material Contract other than any Third-Party
Financed Material Contract in which the Administrative Bank has
released its lien in accordance with Section 25 of that certain
Security Agreement, Pledge and Assignment: Equipment, Inventory,
Securities and Intellectual Property dated as of the date of the
Fifth Amendment (the "Masterlink Security Agreement") made by the
Borrower and AWI in favor of the Administrative Bank and the
ratable benefit of the Banks; and (c) each now existing or
hereafter arising Technology License; provided, however, that:
(x) no such Material Contract or Technology License shall be a
Restricted Contract if the Lien in favor of the Administrative
Bank for itself and the ratable benefit of the Banks does not
attach to such Material Contract or Technology License in
accordance with the proviso clause set forth in ARTICLE II of the
AWI Security Agreement; and (y) the term of each Material
Contract shall be deemed to include any period when: (i) the
Restricted Contract Obligor has exercised its rights under such
Material Contract, through its right of usufruct or otherwise, to
employ the Borrower's or any of its Subsidiaries assets; and (ii)
the Bank has entered into
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a replacement, substitute or other contract with any Restricted
Contract Obligor following the occurrence of an Event of Default.
`Revolving Credit Commitment': The maximum unpaid principal
amount of Revolving Loans and Letter of Credit Obligations which
may from time to time be outstanding hereunder, being
$10,000,000.00 for Revolving Loans and $9,500,000.00 for Letter
of Credit Obligations, as the same may be reduced from time to
time pursuant to Section 4.3 and, as the context may require, the
agreement of the Banks to make Revolving Loans to the Borrower
and of First Bank to issue Letter of Credit for the account of
the Borrower and of each Bank to purchase Letter of Credit
Participations, in each case subject to the terms and conditions
of this Agreement.
`Termination Date': The date which is the earlier of: (a)
February 28, 1998; or (b) the date upon which the obligation of
the Banks to make Revolving Loans is terminated pursuant to
Section 10.2."
(b) Section 1.1 of the Credit Agreement is further amended by
adding the following definitions of "AWI Sale," "EDS/AWI Scheduled
Inventory," EDS/AWI Scheduled Inventory Net Proceeds," "EDS Bank
License Agreement," "EDS Deed of Trust," "EDS Deed of Trust Parity
Agreement," "EDS Intercreditor Agreement," "EDS Mandatory
Prepayments," "EDS Note," "EDS Obligations," "EDS Security Agreement,"
"EDS Settlement," "EDS Settlement Agreement," "EDS Settlement
Documents," "Fair Market Value," "Mandatory Prepayment Event," "Route
Business Subsidiary, "Route Business Subsidiary Sale, "Technology
License," "Third-Party Financed Material Contract," and "VLC Sale":
"`AWI Sale': Any sale of all or substantially all of the
assets of AWI or the Borrower's equity interest in AWI in any
transaction (or related series of transactions) permitted by
Section 9.2(d)(iii) or otherwise approved by the Administrative
Bank and the Banks. For purposes of this definition,
"substantially all" shall include, without limitation, any EDS
Mandatory Prepayment Event arising from the sale of all or
substantially all of AWI's assets or the Borrower's equity
interest in AWI.
`EDS/AWI Scheduled Inventory': The `Scheduled Equipment and
Inventory' described in the EDS Security Agreement in effect on
the date of the Fifth Amendment.
`EDS/AWI Scheduled Inventory Net Proceeds': The difference
between: (a) the gross proceeds received by the Borrower or AWI
from the sale, lease, assignment or other disposition of EDS/AWI
Scheduled Inventory, excluding the use of any such inventory in
accordance with any state on-line lottery contract and in a
manner that does not involve the transfer of title to
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such inventory, and including without limitation, an actual or
constructive loss of such property and any insurance payments in
respect thereof, an agreed or compromised loss of such property,
or the taking of any property under the power of eminent domain,
minus (b) such duties, transfer taxes, ad valorem taxes and
similar taxes imposed on and paid by the Borrower or AWI as a
consequence of such a sale or disposition of such property other
than taxes measured by the net income of the Borrower or AWI. For
purposes of this paragraph, if any portion of the consideration
received or receivable by VLT or AWI from such sale shall be in a
form other than cash, such consideration shall be valued at its
Fair Market Value.
'EDS Deed of Trust': The Deed of Trust, Assignment of Leases
and Rents, Security Agreement, Financing Statement and Fixture
Filing dated as of the date of the EDS Settlement Agreement in
favor of American Land Title Insurance Company, as trustee (the
`Trustee'), for the benefit of EDS covering the property lying in
Gallatin County, Montana and more particularly described on
Exhibit A attached thereto (the `Mortgaged Property').
`EDS Deed of Trust Parity Agreement': The Deed of Trust
Parity Agreement dated as of the date of the EDS Settlement
Agreement among VLT, EDS, and the Bank.
`EDS Intercreditor Agreement': The Intercreditor Agreement
dated as of the date of the EDS Settlement Agreement between EDS
and the Administrative Bank, which Intercreditor Agreement
includes the Bank Masterlink Protections Priority Addendum
attached thereto.
`EDS Mandatory Prepayments': The prepayments required to be
made by the Borrower and AWI upon the occurrence of a `Mandatory
Prepayment Event' as described in the EDS Note in effect on the
date of the Fifth Amendment.
`EDS Note': The $27,000,000 Promissory Note jointly and
severally made by the Borrower and AWI payable to EDS together
with each renewal, replacement and substitute note therefor.
`EDS Obligations': The `Obligations' as defined in the EDS
Security Agreement.
`EDS Security Agreement': The Security Agreement, Pledge and
Assignment: Equipment, Inventory, Securities and Intellectual
Property dated as of the date of the EDS Settlement Agreement
pursuant to which the Borrower and certain of its Subsidiaries
have granted to EDS a Lien in the
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collateral described on Exhibit A attached thereto (the `EDS
Security Agreement Collateral').
"`EDS Settlement': The transactions contemplated by the EDS
Settlement Agreement and the other EDS Settlement Documents.
`EDS Settlement Agreement': The Master Settlement Agreement
dated as of January 30, 1997 among the Borrower and certain of
its Subsidiaries, on the one hand, and EDS and certain of its
subsidiaries, on the other.
`EDS Settlement Documents': The EDS Settlement Agreement,
the EDS Note, the EDS Deed of Trust, the EDS Security Agreement
and each other document executed and/or delivered by the Borrower
or any of its Subsidiaries as a condition to consummating the EDS
Settlement, in each as amended, modified, supplemented or
restated from time to time as permitted by Section 9.21.
`Fair Market Value': The Fair Market Value of any non-cash
consideration from the sale of EDS/AWI Scheduled Inventory shall
be determined as follows:
(a) any debt instrument shall be valued at its face amount;
(b) any equity security for which there is an established
public market shall be valued at the established
trading price for such security on the date on which it
is deliverable to (or upon the order of) the Borrower
or AWI;
(c) any other non-cash consideration shall have the value
established by an appraisal prepared by an appraiser
selected jointly by VLT, AWI, EDS and the
Administrative Bank at least 45 days prior to the date
on which such consideration is deliverable to the
Borrower or AWI, or, if the Borrower, AWI, EDS and the
Administrative Bank do not agree on an appraiser, by a
panel of four appraisers, one of which shall be
selected by the Borrower and AWI, one of which shall be
selected by EDS, one of which shall be selected by the
Administrative Bank and the fourth of which shall be
selected by the three appraisers previously selected.
Such appraisers must have experience in the appraisal
of property of the same type as the subject
consideration, and each appraiser shall submit to the
Borrower, AWI,
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EDS and the Administrative Bank a written estimate of value. If there
is more than one written estimate and such estimates differ, the Fair
Market Value shall be the arithmetical average of all such estimates.
The Borrower shall use, and shall cause AWI to use, their best efforts
to provide to all appraisers such access to records of, and access to
the physical consideration, in order to permit the development of
those estimates. The cost of such appraisals shall be borne equally by
the Borrower and AWI as an entity, EDS and the Administrative Bank.
`Mandatory Prepayment Event': The occurrence of any AWI Sale, any
VLC Sale, any sale of any EDS/AWI Scheduled Inventory or any receipt
by the Borrower or any of its Subsidiaries of a payment or payments
under a Technology License (or similar technology transfer) of any
part of the `Masterlink Protections' (as defined in the Masterlink
Security Agreement referred to below) (the `Masterlink Protections')
for its use in operating on-line lottery systems anywhere in the world
where such payment, when aggregated with all other prior payments
under such Technology License exceed $7,500,000 for a given country.
`Route Business Subsidiary': Raven's D & R Music, Inc.
(`Raven's'), Automatic Music Service of Billings, Inc. (`Automatic
Music') and Automation First, Inc. (`Automation').
`Route Business Subsidiary Sale': Any sale of all or
substantially all of the assets of any Route Business Subsidiary or
the Borrower's equity interest in any Route Business Subsidiary in any
transaction (or related series of transactions) approved by the
Administrative Bank and the Banks.
`Technology License': Any license (or similar technology
transfer) between the Borrower or any of its Subsidiaries and a third
party pursuant to which the Borrower or its Subsidiary permits its
intellectual property to be used by such third party in connection
with the operation of video lottery, on-line lottery or computerized
wagering systems.
`Third-Party Financed Material Contract': Any Material Contract
entered into by the Borrower or any of its Subsidiaries after the date
of the Fifth Amendment with a state lottery where: (a) the Borrower's
or its Subsidiaries' performance of its respective initial obligations
under such Material Contract require Consolidated Capital Expenditures
of at least $5,000,000.00; and (b) another Person (other than one of
the Borrower's Subsidiaries or Related Parties) finances (or enters
into a binding commitment to finance) at least 50% of such
Consolidated Capital Expenditures; provided,
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however, that any Indebtedness must be permitted under Section 9.10(d)
at the time incurred.
`VLC Sale': Any sale of all or substantially all of the assets of
VLC or the Borrower's equity interest in VLC in any transaction (or
related series of transactions) permitted by Section 9.2(d)(iii) or
otherwise approved by the Administrative Bank and the Banks. For
purposes of this definition, `substantially all' shall include,
without limitation, any EDS Mandatory Prepayment Event arising from
the sale of all or substantially all of VLC's assets or the Borrower's
equity interest in VLC."
(c) Section 2.7 of the Credit Agreement is amended by adding the
following new subsection "(j)":
"(j) Cash Collateral Account. The Borrower and First Bank agree
that, so long as no Default or Event of Default has occurred and is
continuing:
(i) if any Letter of Credit issued by First Bank for the
account of CNA Surety Companies (or any beneficiary on any
replacement or substitute Letter of Credit) to secure AWI's
performance of a CNA Material Contract (the `CNA Letter(s) of
Credit') is cancelled or reduced (other than pursuant to a draw
thereon), then the amount of such cancellation or reduction shall
be deemed to have cancelled or reduced, on a dollar for dollar
basis, the CNA Letters of Credit secured by the Cash Collateral
Account established by the Letter of Credit Applications for the
CNA Letters of Credit;
(ii) Contemporaneously with such cancellation or reduction,
the Borrower authorizes the Administrative Bank to prepay the
Term Loans in accordance with Section 4.2(d)(i) by the amount of
such cancellation or reduction."
(d) Sections 3.1(a) and (b) of the Credit Agreement are respectively
amended in their entirety to read as follows:
"Section 3.1 Interest.
(a) Revolving Loans.
(i) Subject to the provisions of Section 3.1(a)(ii),
the Borrower agrees to pay interest on the outstanding
principal amount of each Revolving Loan from the date of
such Revolving Loan until the Maturity thereof:
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(A) With respect to each Reference Rate
Loan Unit comprising a portion of such Revolving
Loan, at a fluctuating rate per annum equal at all
times to: (1) the Reference Rate through August
31, 1997; or (2) the sum of the Reference Rate
plus one percent (1.00%) per annum thereafter; and
(B) With respect to each Eurodollar Rate
Loan Unit comprising a portion of such Revolving
Loan, at a rate per annum equal at all times
during the Interest Period relating to such
Eurodollar Rate Loan Unit to the sum of the
Eurodollar Rate (Reserve Adjusted) in effect for
such Interest Period plus: (1) two and one-quarter
percent (2.25%) per annum through August 31, 1997;
or (2) three and one-quarter percent (3.25%) per
annum thereafter.
(ii) Notwithstanding the provisions of Section
3.1(a)(i), at all times after the occurrence and during the
continuance of any Event of Default, the Borrower agrees to
pay interest on the outstanding principal amount of each
Revolving Loan from the date on which the Administrative
Bank notifies the Borrower of such Event of Default at a
rate per annum at all times equal to the sum of the
Reference Rate plus: (A) two percent (2.0%) per annum
through August 31, 1997; or (B) three percent (3.0%) per
annum thereafter.
(b) Term Loans.
(i) Subject to the provisions of Section 3.1(b)(ii),
the Borrower agrees to pay interest on the outstanding
principal amount of each Term Loan from the date of such
Term Loan until the Maturity thereof as follows:
(A) with respect to each Reference Rate
Loan Unit comprising a portion of such Term Loan,
at a fluctuating rate per annum equal at all times
to: (1) the Reference Rate through August 31,
1997; or (2) the sum of the Reference Rate plus
one percent (1.00%) per annum thereafter;
(B) with respect to each Eurodollar Rate
Loan Unit comprising a portion of such Term Loan,
at a rate per annum equal at all times during the
Interest Period relating to such Eurodollar Rate
Loan Unit to the sum of the Eurodollar Rate
(Reserve Adjusted) in effect for such Interest
Period plus: (1) two and one-quarter percent
(2.25%) per annum through
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August 31, 1997; or (2) three and one-quarter
percent (3.25%) per annum thereafter.
(ii) Notwithstanding the provisions of Section
3.1(b)(i), at all times after the occurrence and during the
continuance of any Event of Default, the Borrower agrees to
pay interest on the outstanding principal balance of each
Term Loan from the date on which the Administrative Bank
notifies the Borrower of such Event of Default at a rate per
annum at all times equal to the sum of the Reference Rate
plus: (A) two percent (2.0%) per annum through August 31,
1997; or (B) three percent (3.0%) per annum thereafter."
(e) Section 4.2 of the Credit Agreement is amended by: (i) relettering
subsection "(d)" thereof as subsection "(f)"; (ii) adding the following new
subsections "(d)" and "(e)"; and (iii) amending newly relettered subsection
"(f)" to read as set forth below:
"(d) Partial Mandatory Prepayment of all Loans. The Borrower
shall prepay the Loans as follows:
(i) Contemporaneously with the cancellation or reduction
(other than by a drawing thereon) of any CNA Letter of Credit,
the Borrower shall prepay the Loans by the amount of such
cancellation or reduction.
(ii) Contemporaneously with the Borrower's or any of its
Subsidiaries' receipt of any cash proceeds from the sale, lease,
assignment or other disposition of EDS/AWI Scheduled Inventory of
the Borrower or AWI, excluding the use of any such inventory in
accordance with any Material Contract and in a manner that does
not involve the transfer of title to such EDS/AWI Scheduled
Inventory, and including without limitation, an actual or
constructive loss of such property and any insurance payments in
respect thereof, an agreed or compromised loss of such property,
or the taking of any property under the power of eminent domain
of any EDS/AWI Scheduled Inventory, the Borrower shall use such
cash proceeds to prepay the Loans by an amount which, when
aggregated with all prior payments under subsection (ii), does
not exceed 30% of the amount of the EDS/AWI Scheduled Inventory
Net Proceeds received by such Person; provided, however, that:
(A) if non-cash consideration is received for any
EDS/AWI Scheduled Inventory, then the percentage applicable
to each cash payment (including, without limitation, any
down payment) received by the Borrower or AWI shall be
increased
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<PAGE>
to 50% until such time as the Borrower
shall have prepaid the required 30% of
EDS/AWI Scheduled Inventory Net
Proceeds;
(B) if the transaction (or related series of
transactions) combines the sale of EDS/AWI Scheduled
Inventory and a Technology License, then the required
prepayment from received cash proceeds under this subsection
(ii) shall be the greatest of:
(1) 30% (or 50% if subsection (A) of
this proviso clause is operative) of EDS/AWI
Scheduled Inventory Net Proceeds if the
consideration for the sale of the EDS/AWI
Scheduled Inventory is separately stated and is
greater than $500.00 per Excalibur or Ovation
computer terminal sold in such transaction;
(2) $250.00 times the number of
Excalibur or Ovation computer terminals sold in
such combined transaction; or
(3) the amount of the EDS Mandatory
Prepayment required to be made to EDS with respect
to such transaction (or related series of
transactions).
(C) the required maximum prepayment percentage of 30%
of EDS/AWI Scheduled Inventory Net Proceeds shall be
increased to 60% (or 100% if subsection (A) of this proviso
clause is operative) upon payment in full of the EDS
Obligations.
(iii) Contemporaneously with the Borrower's or any of its
Subsidiaries' receipt of cash proceeds from any Route Business
Subsidiary Sale, the Borrower shall prepay the Term Loans by the
following amounts:
(A) $1,000,000.00 if all of the Route Business
Subsidiaries are sold in any transaction (or related series
of transactions);
(B) $ 500,000.00 if Raven's is one of the Route
Business Subsidiaries sold in any such Route Business
Subsidiary Sale which does not involve all of the Route
Business Subsidiaries;
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<PAGE>
(C) $ 400,000.00 if Automatic Music is one of the Route
Business Subsidiaries sold in any such Route Business
Subsidiary Sale which does not involve all of the Route
Business Subsidiaries; and/or
(D) $ 100,000.00 if Automation First is one of the
Route Business Subsidiaries sold in any such Route Business
Subsidiary Sale which does not involve all of the Route
Business Subsidiaries.
(iv) Contemporaneously with the Borrower's or any of its
Subsidiaries' receipt of a payment or payments under a Technology
License of any part of the Masterlink Protections for its use in
operating on-line lottery systems anywhere in the world, the
Borrowers shall prepay the Loans by an amount equal to 25% of the
portion of such payments which, when aggregated with all other
prior payments under such Technology License, exceed $7,500,000
for a given country.
(v) The prepayments on the Loans required by this Section
shall be first equally applied against the principal balance of
each Term Loan or, if the Term Loans have been paid in full,
against the Revolving Loans.
(e) Full Mandatory Prepayment of all Loans. The Borrower shall
prepay all Obligations contemporaneously with the closing of any AWI
Sale or VLC Sale. The prepayment required by this Section shall
include, without limitation, the aggregate face amount of all Letters
of Credit then outstanding. Amounts paid by the Borrower with respect
to the Letters of Credit shall be made directly to an interest-bearing
collateral account maintained at First Bank for application to the
Borrower's reimbursement obligations under Section 2.7(d) as payments
are made on the Letters of Credit, with the balance, if any, to be
applied to the other Obligations.
(f) Application of Prepayments. Each prepayment of any Term Loan
shall be applied to the unpaid installments of such Loan in the
inverse order of their maturities except that prepayments of the Term
Loans pursuant to subsection (d) above shall be applied against unpaid
installments of such Loan in the order of their maturities. Subject to
the immediately preceding sentence, the Banks shall apply prepayments
first to Reference Rate Loan Units, then to Eurodollar Rate Loan Units
having an Interest Period ending on such day of prepayment and then to
other Eurodollar Rate Loan Units."
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<PAGE>
(f) Section 4.3 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 4.3 Mandatory Reduction of Revolving Credit Commitment.
The Revolving Credit Commitment shall be permanently reduced by the
amount of: (a) each mandatory prepayment on the Revolving Loans
pursuant to Section 4.2(d) or (e) and (b) each reduction in the Letter
of Credit Obligations occurring after August 19, 1996 as a result of a
reduction in the amount available to be drawn on the Letters of Credit
which does not result from a drawing thereon. The reduction in the
Revolving Credit Commitment shall be applied to the Individual
Revolving Credit Commitments of the Banks pro rata in accordance with
their Percentages."
(g) ARTICLE VIII is further amending by adding the following new
Section 8.14:
"Section 8.14 Masterlink Protections Co-operation. If, at any
Quarterly Measurement Date, the Borrower's Consolidated Cash Flow
Leverage Ratio exceeds 3.5 to 1.0 or Consolidated Debt Service
Coverage Ratio is less than 2.0 to 1.0, the Borrower, immediately, but
in no event more than ten (10) Business Days' after the Administrative
Bank requests that the Borrower deposit copies of all software
programs necessary or convenient to the Borrower's or any of its
Subsidiaries' performance of a Restricted Contract into escrow, shall
execute and deliver, and shall cause each of its relevant Subsidiaries
to execute and deliver, an escrow agreement substantially similar in
terms to the "Source Code Escrow Account" constituting one of the EDS
Settlement Documents and deposit the required software into the escrow
created thereby."
(h) Section 9.2 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.2 Sale of Assets. Except for Permitted Liens, sell,
transfer, lease, or otherwise convey, by license or otherwise: (a) any
Consolidated Current Asset or any EDS/AWI Scheduled Inventory except
in connection with: (i) sales of equipment or inventory permitted by
subsection (d)(i) below; (ii) sales of long-term notes and contracts
receivables permitted by subsection (d)(ii) below; or (iii) any AWI
Sale or VLC Sale or any Route Business Subsidiary Sale where the
Borrower prepays the Obligations in accordance with Section
4.2(d)(iii) or (e) as the case may be; (b) any of the capital stock of
AWI, VLC or any Route Business Subsidiary except in connection with an
AWI Sale, VLC Sale or Route Business Subsidiary Sale, as the case may
be, and where the Borrower prepays the Obligations in
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<PAGE>
accordance with Section 4.2(d)(iii) or (e), as the case may be; (c)
any of its property, not constituting Collateral, necessary or
convenient to the performance of any Restricted Contract unless such
Person reserves for itself all rights necessary to perform such
Restricted Contract; or (d) all or any substantial part of its other
assets except for: (i) sales of inventory or equipment in the ordinary
course of business which shall include sales of EDS/AWI Scheduled
Inventory where such sale is to a non-affiliate of the Borrower and
the Borrower prepays the Loans in accordance with Section 4.2(d); (ii)
sales of notes, lease receivables and contracts receivables in the
ordinary course of business so long as the aggregate amount of the
contingent liabilities of any or all of the Borrower or any of its
Subsidiaries incurred in connection with such sales does not exceed
$20,000,000.00; (iii) any AWI Sale or VLC Sale where the Borrower
prepays the Obligations in accordance with Section 4.2(e); (iv) any
Route Business Subsidiary Sale where Borrower prepays the Loans in
accordance with Section 4.2(d)(iii); (v) licenses of any intellectual
property necessary or convenient to VLC's or UWS' respective
businesses of providing video gaming or computerized wagering systems
or services (or licensing its respective technologies therefor)
pursuant to non-exclusive Technology Licenses to a non-affiliate of
the Borrower that, in the case of VLC, generates revenues subject to
the Administrative Bank's security interest under the VLC Security
Agreement; (vi) sales of up to $20,000,000.00 of assets by NSTC to
non-affiliates of the Borrower; or (vii) other sales or dispositions
of assets, not constituting Collateral or otherwise restricted by this
Section 9.2, so long as the aggregate fair market value of the assets
involved in all such transactions during any of the Borrower's fiscal
years does not exceed $5,000,000.00; or"
(i) Section 9.10(d) of the Credit Agreement is amended in its entirety
to read as follows:
"(d) Other Indebtedness incurred by the Borrower, AWI, VLC, UWS
or NSTC so long as: (i) no Default or Event of Default has occurred
and is continuing at the time of the incurrence of such Indebtedness;
(ii) such incurrence would not cause the Pro Forma Consolidated Cash
Flow Leverage Ratio to exceed 2.75 to 1.0 or the Pro Forma
Consolidated Debt Service Coverage Ratio to be less than 1.75 to 1.0
as of the date on which such Indebtedness is proposed to be incurred;
(iii) the Indebtedness incurred by AWI is for the purpose of financing
the AWI's Consolidated Capital Expenditures with respect to a
Third-Party Financed Material Contract; (iv) the Indebtedness incurred
by all or any of the Borrower, VLC or UWS does not exceed the
aggregate original principal amount $15,000,000.00; and (v) the
aggregate original principal amount of any Indebtedness incurred by
NSTC does not exceed $15,000,000.00;"
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<PAGE>
(j) Section 9.10 of the Credit Agreement is further amended by
respectively relettering subsections "(e)" and "(f)" as "(f)" and "(g)" and
by adding the following new subsection "(e)":
"(e) Indebtedness evidenced by the EDS Note; provided, however,
that the amount of such permitted Indebtedness shall be reduced by
principal payments thereon;"
(k) Section 9.11 of the Credit Agreement is amended by respectively
relettering subsections "(j)" and "(k)" as "(l)" and "(m)" and by adding
the following new subsections "(j)" and "(k)":
"(j) Liens granted by AWI securing only AWI's Indebtedness
permitted by Section 9.10(d); provided, however, that such Lien
attaches only to the relevant Third-Party Financed Material Contract,
any software necessary for AWI's performance of such Third-Party
Financed Material Contract, the equipment and inventory required to be
provided by AWI pursuant to such Third-Party Financed Material
Contract and the proceeds of any thereof and shall secure only the
Indebtedness incurred to finance AWI's Consolidated Capital
Expenditures related to such Third-Party Financed Material Contract;
(k) Liens granted by the Borrower, AWI, VLC and UWS pursuant to
the EDS Settlement Documents in effect on the date of the Fifth
Amendment securing the Indebtedness evidenced by the EDS Note
permitted by Section 9.10(e);"
(l) Newly relettered Section 9.11(l) of the Credit Agreement is
amended in its entirety to read as follows:
"(l) Rights in favor of a party (other than the Borrower or any
of its Subsidiaries or Related Parties) under a Material Contract or a
Technology License";
(m) Section 9.15 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.15 Restricted Payments. Purchase or redeem or
otherwise acquire for value any shares of the Borrower's or any of its
Subsidiaries' stock, declare or pay any dividends thereon (other than
stock dividends), make any distribution on, or payment on account of
the purchase, redemption, defeasance or other acquisition or
retirement for value of, any shares of the Borrower's stock or set
aside any funds for any such purpose, except that: (a) any of the
Borrower's direct or indirect wholly-owned Subsidiaries may pay
14
<PAGE>
dividends to its corporate parent; (b) the Borrower and any of its
Subsidiaries may consummate any transaction permitted by Section 9.1;
or (c) the Borrower may make the Permitted Redemptions so long as any
payment to EDS pursuant to the EDS Settlement Document are made only:
(i) in accordance with the schedule established by the EDS Note in
effect on the date of the Fifth Amendment; or (ii) as a result of the
occurrence of an EDS Mandatory Prepayment Event where the amount of
any such mandatory prepayment does not exceed the amount of the
prepayment required by the terms of the EDS Note in effect on the date
of the Fifth Amendment."
(n) Section 9.17 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.17 Consolidated Net Worth. Permit, as of any Quarterly
Measurement Date, its Consolidated Net Worth to be less than the sum
of $81,400,000.00 plus 100% of the cumulative Consolidated Net Income
(without any deduction for losses) earned on and after January 1,
1996; minus the lesser of: (a) $20,000,000.00; or (b) the excess of
the actual amount of charges taken in the four consecutive fiscal
quarter period commencing with the second quarter of the Borrower's
1996 fiscal year and ending with the first quarter of the Borrower's
1997 fiscal over the actual amount of gain realized upon the
consummation of the EDS Settlement in such first quarter."
(o) Section 9.18 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.18 Cash Flow Leverage Ratio. Permit, as of any
Quarterly Measurement Date, the Consolidated Cash Flow Leverage Ratio
to be greater than 2.75 to 1.0."
(p) Section 9.19 of the Credit Agreement is amended in its entirety to
read as follows:
"Section 9.19 Debt Service Coverage Ratio. Permit, as of any
Quarterly Measurement Date, the Consolidated Debt Service Coverage
Ratio to be less than 1.75 to 1.0."
(q) ARTICLE IX of the Credit Agreement is further amended by adding
the following new Section 9.21:
"Section 9.21 EDS Settlement. (a) Make any payment on the EDS
Note or any other EDS Settlement Document except in accordance with
the terms thereof in effect on the date of the Fifth Amendment; or (b)
amend or modify any EDS Settlement Document."
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<PAGE>
(r) Section 10.1(k) of the Credit Agreement is amended in its entirety
to read as follows:
"(k) (i) Any "Event of Default" (howsoever defined) shall occur
under any EDS Settlement Document; or (ii) the maturity of any
Indebtedness of any Loan Party (other than Indebtedness under this
Agreement or the other Loan Documents or the Indebtedness under the
EDS Note or any other EDS Settlement Document) in the aggregate amount
of more than $1,000,000.00 for any or all of the Loan Parties shall be
accelerated, or any Loan Party shall fail to pay any such Indebtedness
when due or, in the case of such Indebtedness payable on demand, when
demanded, or any event shall occur or condition shall exist and shall
have the effect of causing the holder of any such Indebtedness or any
trustee or other Person acting on behalf of such holder to cause such
Indebtedness to become due prior to its stated maturity or to realize
upon any collateral given as security therefor; or."
(s) Section 10.1(n) of the Credit Agreement is amended in its entirety
to read as follows:
"(n) Payment (by set-off or otherwise) of liquidated damages
under any Material Contract in excess of $2,000,000.00 for any single
occurrence, or $4,000,000.00 in the aggregate for all occurrences in
any fiscal year; or Contract, unless such liquidated damages are: (i)
covered by insurance and the insurer has agreed that its insurance
policy insures the payment of the relevant liquidated damages; or (ii)
being contested in good faith by appropriate proceedings; or."
(t) Section 10.1 of the Credit Agreement is further amended by
substituting a period for the semi-colon appearing at the end of Section
10.1(n) and by deleting the remainder of Section 10.1 following such
period.
(u) Exhibit H to the Credit Agreement is amended to conform to Exhibit
H (Amended 1/97) attached hereto.
2.2 Construction. All references in the Credit Agreement to "this
------------
Agreement," "herein" and similar references shall be deemed to refer to the
Credit Agreement as amended by this Amendment.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Amendment and to make and maintain
the Loans under the Credit Agreement as amended hereby, the Borrower hereby
warrants and represents to the Lender that:
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<PAGE>
(a) The execution, delivery and performance by the Borrower of this
Amendment and any other documents to which the Borrower is a party have
been duly authorized by all necessary corporate or partnership action, do
not require any approval or consent of, or any registration, qualification
or filing with, any government agency or authority or any approval or
consent of any other person (including, without limitation, any stockholder
or partner), do not and will not conflict with, result in any violation of
or constitute any default under, any provision of the Borrower's articles
of incorporation or bylaws, any agreement binding on or applicable to the
Borrower or any of its property, or any law or governmental regulation or
court decree or order, binding upon or applicable to the Borrower or of any
of its property and will not result in the creation or imposition of any
security interest or other lien or encumbrance in or on any of its property
pursuant to the provisions of any agreement applicable to the Borrower or
any of its property except pursuant to the documents required to be
executed and delivered pursuant hereto;
(b) The Credit Agreement as amended by this Amendment and the other
Loan Documents to which any Loan Party is a party are the legal, valid and
binding obligations of each Loan Party which is a party thereto and are
enforceable in accordance with their respective terms, subject only to
bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings
or decisions at the time in effect affecting the enforceability of rights
of creditors generally and to general equitable principles which may limit
the right to obtain equitable remedies;
(c) The VLT Shares, upon delivery to the Administrative Bank pursuant
to Section 4.3(l) have been duly authorized, validly issued, fully paid and
non-assessable. The VLT Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act").
ARTICLE IV - CONDITIONS AND EFFECTIVENESS
This Amendment shall become effective on the date first set forth above,
provided, however, that the effectiveness of this Amendment is subject to the
satisfaction of each of the following conditions:
4.1 Before and after giving effect to this Amendment, the
representations and warranties in ARTICLE VII of the Credit Agreement shall
be true and correct as though made on the date hereof except for changes
that are permitted by the terms of the Credit Agreement and for changes
that are required by the terms of this Amendment. The execution by the
Borrower of this Amendment shall be deemed a representation that the
Borrower has complied with the foregoing condition.
4.2 Before and after giving effect to this Amendment, no Default or no
Event of Default shall have occurred and be continuing under the Credit
Agreement except for
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<PAGE>
those expressly waived by the terms hereof. The execution by the Borrower
of this Amendment shall be deemed a representation that the Borrower has
complied with the foregoing condition.
4.3 The Administrative Bank shall have received a duly executed copy
of this Amendment and the following documents or other items appropriately
completed and duly executed by the Borrower and the other Loan Parties
where appropriate:
(a) a Security Agreement, Pledge and Assignment: Equipment,
Inventory Securities and Intellectual Property (the "IP Security
Agreement") in the form provided by the Administrative Bank
appropriately completed and duly executed by the Borrower, AWI, VLC
and UWS together with UCC-1 Financing Statements in a form acceptable
to the Banks appropriately completed and duly executed by each such
Loan Party;
(b) an Intercreditor Agreement in a form acceptable to the
Administrative Bank, in its sole discretion, appropriately completed
and duly executed by EDS, the Borrower, AWI, VLC and UWS;
(c) a Deed of Trust, Assignment of Leases and Rents, Security
Agreement, Financing Statement and Fixture Filing (the "Deed of
Trust") covering the Borrower's Bozeman, MT main office facility in
the form provided by the Administrative Bank appropriately completed
and duly executed by the Borrower together with UCC-1 Financing
Statements in a form acceptable to the Administrative Bank
appropriately completed and duly executed by the Borrower;
(d) a Deed of Trust Parity Agreement in a form acceptable to the
Administrative Bank, in its sole discretion, appropriately completed
and duly executed by EDS, the Borrower, the Borrower and the Trustee;
(e) a Consent in the form provided by the Administrative Bank
appropriately completed and duly executed by each Guarantor;
(f) recent UCC searches from the filing offices in all states
required by the Banks which reflect that no Person holds a Lien in any
of the Borrower's or any of its Subsidiaries' assets covered by the IP
Security Agreement or the Deed of Trust other than Permitted Liens;
(g) a certified copy of Resolutions of the Board of Directors of
each Loan Party authorizing or ratifying the execution, delivery and
performance of this Amendment and any other documents provided for in
this Amendment;
(h) a certificate by the Secretary or any Assistant Secretary of
each Loan Party certifying the names of the officers of such Loan
Party authorized to
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sign this Amendment and any other documents provided for in this
Amendment together with a sample of the true signature of such
officers;
(i) an Opinion of Counsel to the Loan Parties in form and
substance satisfactory to the Administrative Bank and the Bank;
(j) an amendment fee of $50,000.00 in immediately available
funds;
(k) 35,000 shares of the Borrower's common stock (the "VLT
Shares") issued in the name of First Bank National Association;
(l) a Stock Agreement in a form acceptable to the Administrative
Bank, in its sole discretion, appropriately completed and duly
executed by the Borrower; and
(m) such other approvals, opinions or documents as the
Administrative Bank or the Bank may reasonably request.
ARTICLE V - GENERAL
5.1 Expenses. The Borrower agrees to reimburse the Administrative Bank and
--------
each Bank upon demand for all reasonable expenses, including reasonable fees of
attorneys and legal expenses incurred by the Administrative Bank or such Bank in
the preparation, negotiation and execution of this Amendment and any other
document required to be furnished herewith, and in enforcing the obligations of
the Borrower hereunder, and to pay and save the Administrative Bank and the
Banks harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of this Amendment, which
obligations of the Borrower shall survive any termination of the Credit
Agreement; provided, however, that the Borrower's obligations to reimburse the
Administrative Bank and the Bank for its attorney's fees and legal expenses
shall be limited to the sum of: (a) $20,000.00; (b) plus out-of pocket expenses;
plus (c) any amount of attorney's fees incurred in connection with the
preparation, and negotiation of the Intercreditor Agreement, the Deed of Trust
Parity Agreement and the Bank License Agreement in excess of $5,000.00.
5.2 Counterparts. This Amendment may be executed in as many counterparts as
------------
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
5.3 Severability. Any provision of this Amendment which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provisions in any other jurisdiction.
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5.4 Law. This Amendment shall be a contract made under the laws of the
---
State of Minnesota, which laws shall govern all the rights and duties hereunder.
5.5 Successors: Enforceability. This Amendment shall be binding upon the
--------------------------
Borrower , the Administrative Bank and each Bank and their respective successors
and assigns, and shall inure to the benefit of the Borrower, the Administrative
Bank and each Bank and the successors and assigns of the Administrative Bank and
each Bank. Except as hereby amended, the Credit Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects.
5.6 Recitals. The recitals hereto are incorporated herein by reference and
--------
constitute an integral part of this Amendment.
5.7 Acknowledgement and Release. In order to induce the Administrative Bank
---------------------------
and the Banks to enter into this Amendment, the Borrower represents and warrants
to the Administrative Bank and the Bank that no events have taken place and no
circumstances exist at the date hereof which would give the Borrower the right
to assert a defense, offset or counterclaim to any claim by the Administrative
Bank or the Bank for payment of the Obligations.
5.8 Investment Representation. The Administrative Bank represents and
-------------------------
warrants to the Borrower that the Administrative Bank is (a) an "accredited
investor" as defined in Rule 501 promulgated under the Securities Act, and (b)
acquiring the VLT Shares for investment and not with a view to selling or
otherwise distributing the VLT Shares. The Administrative Bank acknowledges that
the VLT Shares have not been registered under the Securities Act.
ARTICLE VI - WAIVER
The Administrative Bank and the Bank hereby waive:
(a) the Borrower's compliance with Section 4.2(b)(iii) of the Credit
Agreement for calendar year 1997; and
(b) any Event of Default that would arise under Section 10.1(m) of the
Credit Agreement because of the cancellation, termination or expiration of
the Material Contract with Florida which expired on June 30, 1996 or of the
Material Contract with Minnesota which will expire on August 13, 1997;
(c) any Event of Default that would arise under Section 10.1(n) of the
Credit Agreement because of the imposition of liquidated damages under the
Minnesota Contract in excess of $2,000,000.00 for any single occurrence or
$4,000,000.00 in the aggregate for all occurrences in any fiscal year so
long as the amount of liquidated damages, net of recovered insurance
proceeds, does not exceed $3,400,000.00.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first written above.
VIDEO LOTTERY TECHNOLOGIES, INC., a
Delaware corporation
By: /S/ DENA ROSENZWEIG
----------------------------------------
Title: General Counsel & Assistant Secretary
FIRST BANK NATIONAL ASSOCIATION, AS
ADMINISTRATIVE BANK AND A BANK
By /S/LARRY E. MCCABE
---------------------------------------
Its Assistant Vice President
21
CONSULTING AGREEMENT
THIS AGREEMENT made this 25 day of March, 1997, between Video Lottery
Technologies, Inc., and its subsidiary corporations (collectively "VLT"), and
International Equity Partners L.P. ("IEP").
The parties agree as follows:
Section 1: Scope of Work. IEP shall assist VLT in expanding its international
activities by:
A) Identifying potential new markets for VLT and its affiliates to enter;
B) Providing political analysis relevant to market entry in targeted
countries, including identifying and establishing contact with key
decision-makers in target countries;
C) Conducting surveys in new markets for potential local partners;
D) Assisting VLT and its affiliates in preparing and submitting proposals
and bids in new markets; and
E) Evaluating the viability of obtaining outside equity and debt
financing from both private and public sources to support VLT and its
affiliates in their international expansion plans.
Section 2: Compensation.
A) In consideration of IEP's performing its services hereunder, VLT shall
pay IEP a monthly fee of $15,000, payable within twenty (20) days
after the end of each month during the term hereof, pursuant to the
submission by IEP of a monthly invoice with a description of the
services rendered during the preceding month by IEP hereunder.
B) VLT shall reimburse IEP its actual expenses incurred in carrying out
the activities described in Section 1 above, including costs of
travel, telephone and post charges, and printing costs. IEP shall
provide VLT with complete documentation to support each expense.
C) Nothing in this Agreement shall prejudice or alter the rights of
either party under any other valid existing or future agreements
between these parties.
Section 3: Term. This Agreement is effective retroactively to October 1, 1995,
as ratified by the VLT Board of Directors, and shall continue on a
month-to-month basis thereafter which may be terminated by either party, for any
reason, upon 30 days written notice of intent to terminate to the other party.
This Agreement is subject to annual approval of the VLT Board of Directors.
Section 4: During the term hereof, IEP agrees to use its best efforts, skill,
knowledge and experience in the performance of its services hereunder; and IEP
will not directly or indirectly maintain any business or financial interests, or
engage in any business or financial activities, or perform similar type services
as provided hereunder which conflict with the interests of VLT or otherwise
interfere with IEP's ability to fully discharge its services hereunder. IEP also
agrees not
<PAGE>
to disclose, either during the term hereof or thereafter, any unpublished or
confidential proprietary information concerning the business of VLT obtained by
IEP hereunder.
Section 5:
A) It is understood that IEP will perform its services hereunder as an
independent contractor, and that it is not an employee, agent or legal
representative of VLT for any purpose.
B) This agreement is not assignable by IEP.
Section 6. IEP hereby acknowledges that it has received and read VLT's Code of
Conduct and agrees to abide by its provisions.
Section 7. It is understood that the IEP services to be provided hereunder shall
be separate and distinct from (i) any services otherwise being or to be provided
by Richard R. Burt, Chairman of IEP, whose relationship with VLT as a consultant
is covered by a separate agreement; and (ii) Mr. Burt's duties and
responsibilities as a Director and Chairman of the Board of Directors of VLT.
Section 8. IEP understands that: (i) VLT and its directors, officers, employees
and consultants are subject to investigation and regulation by governmental
regulatory agencies; (ii) IEP's engagement hereunder is subject to review and
approval by VLT's Compliance Committee; and (iii) IEP's engagement hereunder is
subject to the maintenance in good standing of its status with such agencies.
Section 9. This Agreement shall not be modified except in writing signed by both
parties hereto.
International Equity Partners, L.P. (IEP) Video Lottery Technologies, Inc.
By: /s/ Richard Burt By: /s/ Dennis Gallagher
--------------------------- ----------------------------
Title: Chairman Title: General Counsel
------------------------ ------------------------
- 2 -
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
November 29, 1994
Mr. Richard R. Burt, Chairman
International Equity Partners
1101 Connecticut Avenue, NW
Suite 804
Washington, DC 20036
Dear Rick:
This will confirm our agreement concerning services to be rendered by you
as a consultant to Video Lottery Technologies, Inc. (the "Company").
It is agreed as follows:
1. The Company hereby retains you as a Consultant for a period commencing
with the date of your election as Chairman of the Board of Directors of the
Company and ending on the date you cease to serve as a Director of the Company,
or on such other date as you and the Company may agree.
2. The Company hereby retains you to provide the Company with your advice
and assistance relating to the promotion of the Company's business, domestically
and internationally, and otherwise to assist in the development of business
opportunities for the Company. It is understood that your services as a
Consultant hereunder shall be separate and distinct from any services otherwise
being or to be provided by International Equity Partners, whose relationship
with the Company is covered by a separate agreement; and are also separate and
distinct from your duties and responsibilities as a Director and Chairman of the
Board of Directors of the Company.
3. In consideration of your performing services as a Consultant hereunder,
the Company shall pay you at the rate of $1,000 per day for each day in which
you perform such services, plus reimbursement of your expenses incurred in
connection therewith, payable within fifteen (15) days after the end of each
month during which you perform such services. Such reimbursement of expenses
shall be in accordance with existing Company policies.
<PAGE>
Mr. Burt
November 29, 1994
Page -2-
4. During the term hereof, you agree to use your best efforts, skill,
knowledge and experience in the performance of your services as a Consultant
hereunder; and you will not directly or indirectly maintain any business or
financial interest, or engage in any business or financial activity, or perform
similar type services as provided hereunder which conflict with the interests of
the Company or otherwise interfere with your ability fully to discharge your
services hereunder. You also agree not to disclose, either during the term
hereof or thereafter, any unpublished or confidential proprietary information
concerning the business of the Company obtained by you hereunder.
5. It is understood that you will be performing your services as a
Consultant hereunder as an independent contractor, and not as an agent or
employee of the Company.
6. This agreement calls for your personal services and is not assignable by
you.
7. You or the Company may terminate this agreement, without penalty, at any
time and for any reason, upon ninety (90) days' prior written notice to the
other.
8. You hereby acknowledge that you have received and have read the
Company's Code of Conduct and agree to abide by its provisions.
If the foregoing correctly reflects our agreement, please so acknowledge
below where indicated and return one copy to me, retaining the original of this
letter for your files.
Sincerely,
/S/
J. Stephen Vanderwoude
JSV/jjd
ACCEPTED AND AGREED TO:
/S/
- ----------------------------------
Richard R. Burt
Date: Dec. 2, 1994
----------------------------
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
January 21, 1997
Patricia Becker
1800 Wincanton Drive
Las Vegas, NV 89134
RE: Amended Letter Agreement
Dear Patty:
This letter will amend the letter agreement (the "Agreement") between you and
Video Lottery Technologies, Inc. dated January 16, 1995, as follows:
It is hereby agreed that the term of the Agreement is hereby extended for a
period of one (1) year from January 16, 1997 through January 15, 1998.
Except as hereinabove amended, the Agreement remains in full force and effect.
Please indicate your acceptance by signing one copy of this letter, retain the
other copy for your files.
Yours very truly,
VIDEO LOTTERY TECHNOLOGIES INC
Richard M. Haddrill
President
ACCEPTED AND AGREED TO:
/S/
- -----------------------------
Patricia Becker
Dated: 1/25 , 1997
----------------------
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
January 16, 1995
Patricia Becker, Esq.
1695 Circle Drive
Reno, NV 89509
Dear Patti:
This will confirm our agreement concerning services to be rendered by you
as a consultant to Video Lottery Technologies, Inc. (the "Company").
It is agreed as follows:
1. The Company hereby retains you as a Consultant for a period of two (2)
years, from January 16, 1995 to January 15, 1997, to serve as the Chairman of
the Compliance Committee of the Company, and otherwise to provide advice and
assistance to the Company on matters of regulatory compliance and such other
matters as requested by the President and CEO of the Company. It is understood
that your services as a Consultant hereunder shall be separate and distinct from
your duties and responsibilities as a Director of the Company.
2. In consideration of your performing services as a Consultant hereunder,
the Company shall pay you an annual retainer fee of $75,000, payable monthly,
and shall also pay you at the rate of $1,000 per day for each day in which you
perform such services, plus reimbursement of your expenses incurred in
connection therewith, payable within fifteen (15) days after the end of each
month during which you perform such services. Such reimbursement of expenses
shall be in accordance with existing Company policies.
3. During the term hereof, you will use your best efforts, skill, knowledge
and experience in the performance of your services as a Consultant hereunder;
and you will not directly or indirectly maintain any business or financial
interests, or engage in any business or financial activities, or perform similar
type services as provided hereunder which conflict with the interests of the
Company. You also agree not to disclose, either during the term hereof or
thereafter, any unpublished or confidential proprietary information concerning
the business of the Company obtained by you hereunder.
<PAGE>
Ms. Becker
January 16, 1995
Page 2
4. It is understood that you will be performing your services as a
Consultant hereunder as an independent contractor, and not as an agent or
employee of the Company. However, since you will also be serving as a Director
of the Company, and will be performing your duties as a Consultant at the
request and with the approval of the Board, your services hereunder will be
covered by the Company's directors' and officers' liability insurance, and the
indemnification provided by the Company to you as a Director will extend to your
activities as a consultant to the Company as well.
6. This agreement calls for your personal services and is not assignable by
you.
7. You or the Company may terminate this agreement, without penalty, at any
time and for any reason, upon ninety (90) days' prior written notice to the
other.
8. You hereby acknowledge that you have received and have read the
Company's Code of Conduct and agree to abide by its provisions.
If the foregoing correctly reflects our agreement, please so acknowledge
below where indicated and return one copy to me, retaining the original of this
letter for your files.
Sincerely,
/S/
J. Stephen Vanderwoude
ACCEPTED AND AGREED TO:
/s/
- -----------------------------
Patricia Becker
Date: January 18, 1995
JSV/jjd
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of the 2nd day of December, 1996 (date
hereof) by and between Video Lottery Technologies, Inc., (the "Company"), and
Richard M. Haddrill, an individual (the "Executive") (hereinafter collectively
referred to as "the parties").
WHEREAS, the Company and the Executive desire to establish an employment
relationship on the terms set forth herein, which shall (except to the extent
expressly provided herein) supersede and replace those set forth in that certain
Employment Agreement dated as of November 1, 1994 by and between the Company and
the Executive (the "Prior Employment Agreement"),
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:
1. Employment Term. Subject to the terms and provisions of this Agreement,
---------------
the Company hereby agrees to employ the Executive and Executive hereby agrees to
be employed by the Company for the period commencing on the date hereof and
ending on January 1, 1999, unless terminated sooner as hereinafter provided (the
"Employment Term").
2. Duties. During the Employment Term the Executive shall serve as ------
President of the Company. The Executive shall perform such services and duties
as are incident to such position and such other duties as determined from time
to time by the Board of Directors of the Company (the "Board") which are
consistent with such position. All officers of the Company and its subsidiaries
shall report to the Executive, and the Executive shall have the authority,
consistent with guidelines adopted by the Board, to hire, terminate and
determine the compensation of such officers and other employees of the Company
and such subsidiaries. The Executive's duties shall include, without additional
compensation, the performance of similar services for any Affiliates (as defined
below) of the Company as may be reasonably requested by the Board from time to
time. The Executive shall devote his full business time, attention and skills to
the performance of such duties, services and responsibilities, and will use his
best efforts to promote the interests of the Company. The Executive will not,
without the prior written approval of the Board, engage in any other business
activity which would interfere with the performance of his duties, services and
responsibilities hereunder or which is in violation of policies established from
time to time by the Company and provided to the Executive; provided, however,
that Executive may manage his personal finances and investments. The Executive
may participate in civic and charitable activities and serve on Boards of
Directors to the extent they do not affect the Executive's ability to perform
his duties as an officer of the Company provided they are approved by the
Chairman of the Board in advance, which approval will not be unreasonably
withheld. An "Affiliate" of the Company shall mean any entity, whether a
corporation, firm, partnership or other legal entity or business unit or
division that directly or indirectly is controlled by the Company, including,
but not limited to, Automated Wagering International, Inc., Video Lottery
Consultants Inc. and United Wagering Systems International, Inc., or their
successors. The Executive's principal place of employment shall be located, at
the discretion of the Executive, in either the greater Bozeman, Montana or the
greater
1
<PAGE>
Las Vegas, Nevada metropolitan area and the Company shall not require the
Executive to relocate from such area without the Executive's prior written
consent.
3. Compensation. In order to induce the Executive to become President of
------------
the Company and in consideration of the performance by the Executive of the
Executive's obligations during the Employment Term (including any services as an
officer, director, employee, member of any committee of the Company, or
otherwise), the Company will:
(a) during the Employment Term pay the Executive a salary (the "Base
Salary") at an annual rate of not less than $240,000 for each of
the twelve- month periods ending December 31, 1997 and December
31, 1998, and $74,959 for the period commencing September 9, 1996
and ending December 31, 1996, payable in accordance with the
normal payroll practices of the Company then in effect for other
officers of the Company. The Board shall have the authority, in
its sole discretion, to increase, but not decrease, such Base
Salary and will review it in conjunction with a significant
change in the scale and scope of the Executive's duties;
(b) pay the Executive an earned bonus of $150,000 for 1996 payable on
January 2, 1997;
(c) during the Employment Term and for the twelve-month periods
ending December 31, 1997 and 1998, pay the Executive annual
bonuses of amounts up to $450,000 and $504,000 for each
respective twelve-month period if financial or other performance
criteria related to the Company and its businesses are attained,
which criteria shall be subject to reasonable agreement by the
Executive that they are appropriate in connection with
performance-based criteria for the President and other senior
management of the Company and shall be proposed by the Executive
no later than December 31 of each such year and approved or
modified by the Board no later than the following February 15;
(d) award the Executive as of the date hereof restricted stock of
30,000 shares of the Company's common stock, of which one-third
of such shares shall fully vest on September 9, 1997, one-third
of such shares shall fully vest on September 9, 1998, and
one-third of such shares shall fully vest on September 9, 1999
(unless the Executive's employment hereunder shall have been
terminated for any reason prior to such vesting, in which case
all unvested shares of such restricted stock shall be forfeited;
provided, however, that upon the occurrence of a "change in
control" as defined in the Company's 1994 Stock Incentive Plan
(the "Plan") (which Plan shall not be amended inconsistent with
this Agreement), all restrictions on such restricted stock shall
lapse immediately and no such stock shall be forfeited regardless
of whether the Executive remains an employee of the
2
<PAGE>
Company); provided, however, that the Company and the Executive
acknowledge and agree that, pursuant to the Prior Employment
Agreement, the Company awarded to the Executive restricted stock
of 70,000 shares of the Company's common stock, of which 17,500
shares fully vested on November 1, 1995, 17,500 shares fully
vested on November 1, 1996 and an additional 17,500 shares shall
fully vest on each of November 1, 1997 and November 1, 1998
(unless the Executive's employment hereunder shall have been
terminated for any reason prior to such vesting, in which case
all unvested shares of such restricted stock shall be forfeited;
provided, further, that upon the occurrence of a "change in
control" as defined in the Plan, all restrictions on such
restricted stock shall lapse immediately and no such stock shall
be forfeited regardless of whether the Executive remains an
employee of the Company); and
(e) as of the date hereof, grant the Executive options to purchase an
aggregate of 140,000 shares of the Company's common stock (70,000
of which shall be fully vested as of the date hereof, 35,000 of
which shall vest on November 1, 1997 and 35,000 of which shall
vest on November 1, 1998, unless the Executive's employment
hereunder shall have been terminated prior to such vesting, in
which case, (i) if the Executive's employment shall have been
terminated by the Company for Cause or by the Executive other
than for Good Reason, then all unvested options shall be
forfeited, and (ii) in all other cases all unvested options shall
be subject to Section 8 of this Agreement; provided, however,
that upon the occurrence of a "change in control" as defined in
the Plan, all stock options shall become immediately and fully
exercisable and any termination of the Executive's employment
shall not affect his right to exercise such options for a period
of at least 90 days after such termination, it being understood
that, in the event of the liquidation or dissolution of the
Company or a merger or consolidation of the Company (a
"Transaction"), the options shall continue in effect in
accordance with their terms and the Executive shall be entitled
to receive in respect of each share subject to any outstanding
stock option granted to him pursuant to this Agreement, upon
exercise of any such option, the same number and kind of stock,
securities, cash, property, or other consideration that each
holder of a share of the Company's common stock was entitled to
receive in the Transaction in respect of a share), with an
exercise price equal to the average of the opening and closing
prices of such common stock on the date hereof. (Each option
shall have a term of ten years from the date of grant and shall
be granted under and subject to the terms of the Plan and shall
be incentive stock options within the meaning of Section 422 of
the Internal Revenue Code.) Notwithstanding the foregoing
provisions of this Section 3(e) and the provisions of Section 22
hereof, the Company and the Executive acknowledge and agree that
the
3
<PAGE>
Company granted to the Executive pursuant to the Prior Employment
Agreement options (the "Old Options") to purchase an aggregate of
140,000 shares of the Company's common stock, which Old Options
shall continue to be governed by the terms and conditions of the
Prior Employment Agreement; provided, however, that in no event
shall the exercise prices of the Old Options be reduced or
modified.
4. Benefits. During the Employment Term, the Executive shall be entitled to
--------
participate in any employee benefit plans (including, but not limited to, any
life insurance, disability, medical, dental, hospitalization, savings,
retirement and other benefit plans of the Company) then in effect for executive
officers and receive any other fringe benefits that the Company then provides to
executive officers of the Company to the extent the Executive meets the
eligibility requirements for any such plan or benefit. The Company will pay the
November, 1996 premium (approximately $27,000) for the Executive's split dollars
life insurance policy now in effect and subject to assignment to the Company of
benefits from the policy equal to the premium paid by the Company of such
policy. (Notwithstanding the foregoing, the Company shall have no obligation
other than that set forth in Section 3 to provide the Executive stock-based
compensation or to pay the Executive any bonuses or other incentive or
performance-based compensation). In addition, during the Employment Term, the
Company shall provide the Executive with such other perquisites reasonably
requested by the Executive and customarily provided to senior officers of
companies comparable in size to the Company.
5. Reimbursements for Business Expenses. Subject to compliance by the
--------------------------------------
Executive with such policies regarding expenses and expense reimbursement as may
be adopted from time to time by the Company, during the Employment Term, the
Executive is authorized to incur reasonable expenses in the performance of his
duties hereunder in the furtherance of the business of the Company and the
Company shall reimburse the Executive for all such reasonable expenses. In
addition, the Company shall promptly reimburse the Executive for all actual out
of pocket expenses incurred by the Executive in connection with his
consideration of employment with the Company, including, but not limited to, up
to $4,000 in respect of reasonable legal, accounting and financial advisory fees
and expenses incurred by the Executive in connection therewith and with the
negotiation of this Agreement. In addition, the Executive may request
reimbursement of actual expenses in excess of the foregoing and the Company
shall not unreasonably refuse any such request.
6. Vacations. During the Employment Term the Executive shall be entitled to
---------
paid vacations in accordance with the policies of the Company in effect from
time to time; provided that the Executive shall be entitled to at least four
weeks paid vacation during each year of the Employment Term.
7. Termination. The Executive's employment hereunder may be terminated
-----------
under the following circumstances:
(a) Death. The Executive's employment hereunder shall be terminated
4
<PAGE>
automatically upon the Executive's death.
(b) Disability. The Company may terminate the Executive's employment
after having established the Executive's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties under this Agreement for
one hundred and eighty (180) consecutive days or for two hundred and ten (210)
days during any twelve (12) month period or for two hundred and seventy (270)
days during any twenty-four (24) month period.
(c) Cause. The Company may terminate the Executive's employment for
"Cause." A termination for Cause is a termination evidenced by a finding adopted
in good faith by the Board that the Executive (i) willfully and continually
failed to substantially perform his duties with the Company (other than a
failure resulting from the Executive's incapacity due to physical or mental
illness) and such failure continues after written notice to the Executive
providing a reasonable description of the basis for the determination that the
Executive has failed to perform his duties, (ii) indicted for a criminal offense
other than misdemeanors not disclosable under the federal securities laws, (iii)
has breached this Agreement in any material respect and such breach is not
susceptible to remedy or cure or has not already materially damaged the Company,
or is susceptible to remedy or cure and no such damage has occurred, is not
cured or remedied reasonably promptly after written notice to the Executive
providing a reasonable description of the breach, (iv) engaged in conduct to the
material detriment of the Company that is dishonest, fraudulent, unlawful or
grossly negligent or which is not in compliance with the Company's Code of
Conduct or similar applicable set of standards or conduct and business practices
set forth in writing and provided to the Executive prior to such conduct, or (v)
any regulatory authority, gaming commission, lottery agency or similar authority
in any jurisdiction in which the Company is conducting business or intends to
submit a proposal or conduct business finds the Executive unsuitable or unfit to
continue to act as a representative, officer, director or employee of the
Company, the Company has received notice from such authority of such a finding
or the Executive fails to file appropriate applications with, provide requested
information to, or otherwise fails to cooperate with, any such authority. No
act, nor failure to act, on the Executive's part, shall be considered "willful"
for purposes of (i) above unless he has acted or failed to act with an absence
of good faith and without a reasonable belief that his action or failure to act
was in the best interest of the Company. Notwithstanding anything contained in
this Agreement to the contrary, no failure to perform by the Executive after
Notice of Termination is given by the Executive shall constitute Cause for
purposes of this Agreement. Termination for Cause shall be by action of the
Chairman of the Board after giving the Executive and his legal advisors an
opportunity to meet with the Chairman of the Board, contest the basis for
termination, and to demonstrate that the Executive's continued employment is in
the best interests of the Company. In addition, the Company may require that the
Executive take a paid leave of absence if the Chairman of the Board determines
that there is a reasonable basis to believe that a regulatory authority, gaming
commission, lottery agency or similar authority may likely find the Executive
unsuitable or unfit or there are serious concerns regarding the honesty,
integrity or possible misconduct of the Executive. During the leave of absence
the Executive will be entitled to demonstrate to the Chairman of the Board that
such
5
<PAGE>
concerns are unfounded. However, if at any time following three months after the
start of the leave of absence, the Chairman of the Board reasonably determines
that a continuation of the Executive's employment will jeopardize the good
standing of the Company with any such authority, commission or agency, the
Company may terminate the Executive for Cause.
(d) (1) Good Reason. The Executive may terminate his employment for
"Good Reason." As used in this Section 7(d), the term "Company" shall also refer
to its successor entity or any entity which has acquired control of the Company.
For purposes of this Agreement, Good Reason shall mean the occurrence of any of
the events or conditions described in Subsections (i) through (viii) hereof:
(i) the Executive determines prior to December 2, 1997 to terminate
his employment;
(ii) the Executive is no longer serving as President of the Company,
the Executive is directed to report to other than the Chairman of the
Board, or the assignment to the Executive of any duties or
responsibilities which are inconsistent with the status, title,
position or responsibilities of such position (which assignment is not
rescinded after the Company receives written notice from the Executive
providing a reasonable description of such inconsistency);
(iii) after a Change in Control (as hereinafter defined in Section
7(e), the Company's requiring the Executive to be based at any place
outside a 30-mile radius from the principal location from which the
Executive served as an employee of the Company immediately prior to
the Change in Control and except for reasonably required travel on the
Company's business which is not materially greater than such travel
requirements prior to the Change in Control;
(iv) after a Change in Control, the failure by the Company to provide
the Executive with compensation and benefits substantially comparable,
in the aggregate, to those provided for under the employee benefit
plans, programs and practices in effect immediately prior to the
Change in Control (other than stock option and other equity based
compensation plans);
(v) after a Change in Control, the insolvency or the filing (by any
party including the Company) of a petition for bankruptcy of the
Company;
(vi) any material breach by the Company of any provision of this
Agreement (which breach, if susceptible to cure, has not been cured
within thirty (30) days by the Company after reasonable notice in
writing from the Executive providing a reasonable description of the
breach);
6
<PAGE>
(vii) after a Change in Control, the failure of the Company to obtain
an agreement, satisfactory to the Executive, from any successor or
assign of the Company to assume and agree to perform this Agreement,
as contemplated in Section 16 hereof; and
(viii) the Executive determines within twelve (12) months of a Change
in Control to terminate his employment with the Company.
(2) Any event or condition described in Section 7(d)(1)(ii), (iii),
(iv) or (vi) above which occurs prior to a Change in Control but which was at
the request of a third party who has taken steps reasonably calculated to effect
a Change in Control, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to a Change in Control.
(3) The Executive's right to terminate his employment pursuant to this
Section 7(d) shall not be affected by his incapacity due to physical or mental
illness.
(e) For purposes of this Agreement, a "Change in Control" shall mean
any of the following events:
(1) The "acquisition" by any "Person" (as the term person is
used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") of "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of any securities of the Company which generally entitles the holder
thereof the vote for the election of directors of the Company (the
"Voting Securities") which, when added to the Voting Securities then
Beneficially Owned by such Person, would result in such Person
Beneficially Owning forty percent (40%) or more of the combined voting
power of the Company's then outstanding Voting Securities; provided,
however, that for purposes of this paragraph (1), a Person shall not
be deemed to have made an acquisition of Voting Securities if such
Person: (i) acquires Voting Securities as a result of a stock split,
stock dividend or other corporate restructuring in which all
stockholders of the class of such Voting Securities are treated on a
pro rata basis; (ii) becomes the Beneficial Owner of more than the
permitted percentage of Voting Securities solely as a result of the
acquisition of Voting Securities by the Company which, by reducing the
number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by such Person; (iii) is the
Company or any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is owned
directly or indirectly by the Company (a "Controlled Entity") or (iv)
acquires Voting Securities in connection with a "Non-Control
Transaction" (as defined in paragraph (3) below);
(2) The individuals who, as of the date of this Agreement
were members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least a
7
<PAGE>
majority of the Board; provided, however, that if either the election
of any new director or the nomination for election of any new director
by the Company's stockholders was approved by a vote of at least a
majority of the Incumbent Board, such new director shall be considered
as a member of the Incumbent Board; provided further, however, that no
individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened election Contest" (as described in Rule 14a-11 promulgated
under the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board
(a "Proxy Contest") including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest;
(3) The consummation or effectiveness of:
(i) A merger, consolidation or reorganization involving the
Company (a "Business Combination"), unless
(A) the stockholders of the Company, immediately before the
Business Combination, own, directly or indirectly immediately
following the Business Combination, at least fifty-one percent (51 %)
of the combined voting power of the outstanding voting securities of
the corporation resulting from the Business Combination (the
"Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before the Business
Combination,
(B) all or a portion of the individuals who were members of
the Incumbent Board immediately prior to the execution of the
agreement providing for the Business Combination constitute at least a
majority of the members of the Board of Directors of the Surviving
Corporation, and
(C) no Person (other than the Company or any Controlled
Entity), a trustee or other fiduciary holding securities under one or
more employee benefit plans or arrangements (or any trust forming a
part thereof) maintained by the Company, the Surviving Corporation or
any Controlled Entity, or any Person who, immediately prior to the
Business Combination, had Beneficial Ownership of forty percent (40%)
or more of the then outstanding Voting Securities) has Beneficial
Ownership of forty percent (400%) or more of the combined voting power
of the Surviving Corporation's then outstanding voting securities (a
transaction described in this subparagraph (i) shall be referred to as
a "Non-Control Transaction");
(ii) A complete liquidation or dissolution of the Company;
or
(iii) The sale or other disposition of all or substantially
all of the assets of the Company to any Person (other than a transfer
to a Controlled Entity); or
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(4) A Person acquires 10% or more of the combined voting
power of the Company's then outstanding Voting Securities from any of
the Company's stockholders who, as of the date of this Agreement, owns
in excess of 10% of such voting power and who has representation on
the Board unless such Person becomes party to a stockholders agreement
imposing restrictions on its ability to exercise control substantially
similar to that agreed to by such current 10% stockholders.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because forty percent (40%) or more of the then
outstanding Voting Securities is Beneficially Owned by (A) a trustee
or other fiduciary holding securities under one or more employee
benefit plans or arrangements (or any trust forming a part thereof)
maintained by the Company or any Controlled Entity or (B) any
corporation which, immediately prior to its acquisition of such
interest, is owned directly or indirectly by the stockholders of the
Company in the same proportion as their ownership of stock in the
Company immediately prior to such acquisition.
(f) Notice of Termination. Any purported termination of the
Executive's employment hereunder by the Company or by the Executive for Good
Reason shall be communicated by written Notice of Termination to the other. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
indicates the specific termination provision in this Agreement relied upon as a
basis for termination. For purposes of this Agreement, no such purported
termination of employment shall be effective without such Notice of Termination.
(g) Termination Date. "Termination Date" shall mean in the case of the
Executive's death, his date of death, or in all other cases, the date specified
in the Notice of Termination; provided, however, that if the Executive
terminates his employment for Good Reason, the date specified in the Notice of
Termination shall not be more than 30 days from the date the Notice of
Termination is given to the Company and if the Company terminates the
Executive's employment other than for Cause, the date specified in the Notice of
Termination shall be no less than 30 days from the date the Notice of
Termination is given to the Executive.
8. Compensation Upon Termination. Upon termination of the Executive's
-------------------------------
employment during the Employment Term, the Executive shall be entitled to the
following benefits:
(a) If the Executive's employment is terminated by the Company for
Cause or Disability or by the Executive (other than for Good Reason), or by
reason of the Executive's death, the Company shall pay to the Executive (or to
the Executive's legal representatives) all amounts earned or accrued hereunder
through the Termination Date but not paid as of the Termination Date, including
(i) Base Salary, (ii) reimbursement (in accordance with Company policy) for any
and all monies advanced or expenses incurred in connection with the Executive's
employment for reasonable and necessary expenses incurred by the Executive on
behalf of the Company for the period ending on the Termination Date, (iii)
accrued but unpaid vacation pay,
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<PAGE>
(iv) any previously awarded and vested, but unpaid, bonus or incentive
compensation and (v) any previous compensation which the Executive has
previously deferred (including any interest earned or credited
thereon)(collectively, "Accrued Compensation. Executive's entitlement to any
other benefits shall be determined in accordance with the Company's employee
benefit plans and other applicable programs and practices then in effect and all
unvested stock options and unvested shares of restricted stock shall be
forfeited.
(b) Subject to the last sentence of Section 8(c), if the Executive's
employment is terminated (i) by the Company prior to a Change in Control for any
reason other than for Cause, death or Disability, (ii) by the Executive prior to
December 2, 1997 for Good Reason pursuant to Section 7(d)(1)(i), or (iii) by the
Executive for Good Reason pursuant to Section 7(d)(1)(ii) or (vi), the Company
shall pay to the Executive all Accrued Compensation plus any bonus or portion
thereof which would be payable if the Executive's employment had continued
because the performance targets relating thereto had been achieved as of the
Termination Date ("Earned Bonus") and, to the extent not covered by the
foregoing, Accrued Bonus (as hereinafter defined). The term "Accrued Bonus"
shall mean the amount of the bonus which would have been payable to the
Executive pursuant to Section 3(b) or (c) hereof in respect of the year of the
Employment Term in which the Termination Date occurs and calculated as if the
Executive were employed by the Company as of the end of such year (but, to the
extent the bonus is contingent on the achievement of performance targets, based
on whether such targets were actually achieved) multiplied by a fraction, the
numerator of which shall be the number of days in such year which have elapsed
prior to the Termination Date and the denominator of which shall be the number
of days in such year. In addition, subject to Executive's compliance with the
provisions of Sections 9, 10, and 11, the Executive shall receive (i) within ten
days a lump sum equal to the greater of the aggregate amount of the Base Salary
for the duration of the Employment Term which would have been payable absent
such termination of employment (discounted using the prime rate then in effect)
and an aggregate of $420,000 and (ii) until the end of the Employment Term, the
life insurance, medical, dental and hospitalization benefits which the Executive
would have been entitled to receive ff he had continued his employment with the
Company until the last day of the Employment Term, on the terms and conditions
applicable to other executive officers of the Company as in effect from time to
time during such period; provided, however, that in the event of a termination
of the Executive's employment pursuant to Section 8(b)(ii) hereof, the amounts
payable to the Executive shall be calculated pursuant to the Prior Employment
Agreement. Executive's entitlement to any other benefits shall be determined in
accordance with the Company's employee benefit plans and other programs and
practices then in effect and all unvested shares of restricted stock shall be
forfeited upon such termination of employment and unvested stock options shall
vest or be forfeited as set forth in the following sentence. If a termination of
the Executive's employment hereunder which is governed by this Section 8(b)
occurs on or prior to the second anniversary of the date hereof, then, to the
extent not previously vested, all stock options which would have vested by such
second anniversary shall vest and become exercisable and the termination of the
Executive's employment shall not affect his right to exercise such options for a
period of at least 90 days after such termination and, if such a termination of
the Executive's employment occurs after the second anniversary of the date
hereof, the number of unvested stock options equal to the number
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<PAGE>
of options which would have vested on the anniversary of the date hereof
following the Termination date multiplied by a fraction, the numerator of which
shall be the number of days in the year beginning on the anniversary of the date
hereof immediately preceding the Termination Date which have elapsed prior to
the Termination Date and the denominator shall be the number of days in such
year which ends on the anniversary of the date hereof, shall vest and become
exercisable (and the termination of the Executive's employment shall not affect
his right to exercise such options for a period of at least 90 days after such
termination) and all other unvested stock options granted pursuant to the
Agreement shall be forfeited upon such termination of employment.
(c) If the Executive's employment by the Company is terminated by the
Company following a Change in Control other than for Cause, death or Disability,
or by the Executive for Good Reason (other than as defined in Section
7(d)(1)(ii) or (vi)), then the Executive shall be entitled to the benefits
provided below.
(i) the Company shall pay the Executive all Accrued
Compensation;
(ii) the Company shall pay the Executive as severance pay
and in lieu of any further salary for periods subsequent to the
Termination Date a single lump-sum cash amount equal to two (x 2)
times the sum of (A) the Executive's Base Salary at the greater of (x)
the highest rate in effect at any time within the ninety (90) day
period ending on the date the Notice of Termination is given and (y)
the rate in effect immediately prior to the Change in Control and (B)
the greater of the annual bonus paid to the Executive in the year
preceding the termination of Employment or the sum of Earned Bonus and
Accrued Bonus or $180,000; and
(iii) for twenty-four (24) months, the Company shall at its
expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, medical, dental and hospitalization
benefits which were being provided to the Executive at the time the
Notice of Termination is given (or the benefits provided to the
Executive at the time of the Change in Control, if greater). The
benefits provided in this Section 8(c)(iii) shall be no less favorable
to the Executive, in terms of amounts and deductibles and costs to
him, than the coverage provided the Executive under the plans
providing such benefits at the time the Notice of Termination is given
(or at the time of the Change in Control ff more favorable to the
Executive). The Company's obligation hereunder with respect to the
foregoing benefits shall be limited to the extent that the Executive
obtains any such benefits pursuant to a subsequent employer's benefit
plans, in which case the Company may reduce the coverage of any
benefits it is required to provide the Executive hereunder as long as
the aggregate coverage of the combined benefit plans is no less
favorable to the Executive, in terms of amount and deductibles and
costs to him, than the coverage required to be provided
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<PAGE>
hereunder.
If the Executive's employment by the Company is terminated by the Company other
than for Cause, death or Disability or by the Executive for Good Reason at any
time after a transaction or other actions have been proposed to or by the
Company or to its stockholders, which if consummated or completed would
constitute a Change in Control, and such transaction or other action ultimately
is consummated or completed, then (whether or not the Executive was employed
following a Change in Control), the Executive's employment shall be deemed to
have been terminated following a Change in Control and the Executive shall be
entitled to the benefits set forth in this Section 8(c) and the shares of
restricted stock and stock options granted pursuant to the Prior Employment
Agreement or this Agreement and outstanding prior to such termination of the
Executive's employment shall be deemed to have been held by the Executive and
outstanding immediately following the Change in Control, notwithstanding any
other provision of this Agreement to the contrary.
(d) The amounts (other than any life insurance and medical, dental and
hospitalization coverage) provided for in this Section 8 shall be paid within
five (5) business days after the Executive's Termination Date. The continuation
of any life insurance, medical, dental or hospitalization benefits pursuant to
Section 8(b) or 8(c) shall be in satisfaction of the Company's obligations under
Section 4980B of the Internal Revenue Code of 1986, or any similar state law
requiring continuation of such insurance or benefits, with respect to the period
of time during which such insurance or benefits are continued hereunder.
(e) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment.
(f) The amounts payable by the Company pursuant to this Section 8
shall be in full satisfaction of any claims the Executive might assert in
connection with severance and claims of wrongful termination and fraudulent
inducement or similar claims based on this Agreement or relating to an
employer/employee relationship.
(g) The Company shall use its best efforts to ensure that shares of
the Company's common stock obtained by the Executive from the Company by reason
of the exercise of stock options or the award of shares of restricted stock in
accordance with this agreement shall be covered by an effective registration
statement on Form S-8 (or similar or successor form) with the intention that the
Executive may sell such shares in compliance with the Securities Act of 1933
(whether or not he is employed by the Company at the time of the sale). The
Executive acknowledges that any sale of such Shares may be subject to other
restrictions under the federal securities laws including those relating to the
possession of non-public information (which the Executive may not have the right
to disclose under this Agreement).
12
<PAGE>
9. Non-Disclosure Covenant. Executive acknowledges that during the
-------------------------
Employment Relationship (as defined below), he has had and will have access to
information treated as confidential or proprietary by the Company, including
plans for future developments and information about costs, customers, profits,
markets, sales, products, key personnel, pricing policies, operational methods,
technical processes, know-how, research and development, strategic planning and
other business affairs and methods and other information not available to the
public or in the public domain (the "Confidential Information"). Confidential
Information shall not include any information known generally to the public or
any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that of the Company. In
recognition of the foregoing, during and at all times following the Executive's
Employment Relationship, the Executive shall hold in confidence and not use,
copy or create, or directly or indirectly disclose, any descriptions, analyses,
lists or records (of any kind) of any Confidential Information or proprietary
data of the Company, except to the extent authorized in writing by the Board or
required by law or any court or administrative agency, other than such use,
copying, creation or disclosure to an employee of the Company or other person,
in each case, which is reasonably necessary or appropriate in connection with
the performance by the Executive of duties germane to the Executive's position
with the Company. The term "Employment Relationship" shall mean the period,
prior to the Termination Date, during which the Executive received compensation
from the Company for services rendered to the Company either as an employee or
as a consultant, including periods prior to the date of this Agreement (whether
pursuant to the Prior Employment Agreement or otherwise) and during the
Employment Term. This Section 9 shall survive the termination of this Agreement
and the termination of the Executive's employment hereunder.
10. Covenant Not to Compete: Non-interference.
-----------------------------------------
(a) Competition. The Executive agrees that during the Employment Term
and for a period of the greater of eighteen months after the Termination Date or
the period after the Termination Date during which (or in respect of which) the
Executive continues to receive payments or employee benefits from the Company
pursuant to Section 8 (such greater period of time is hereinafter referred to as
the "Restricted Period"), without the prior written approval of the Board, he
will not participate in the management of, be employed by or own any equity
interest in any business in competition with any of the principal businesses of
the Company (including any business segment which is "significant" within the
meaning of Regulation S-X) in a geographical area in which the Company engages
in or solicits business or as of the Termination Date is actually planning to
engage in or solicit business; provided, however, that nothing in this Section
10(a) shall prohibit the Executive from owning stock of a competitor amounting
to less that five percent (5%) of the outstanding capital stock of such
competitor where the Executive does not otherwise participate in the management,
control or operation of such competitor's business which competes with the
Company. The invalidity of any part of this provision shall not render invalid
the remainder of the provision and if any portion of this provision is so broad
as to be unenforceable it shall be interpreted to be only so broad as is
enforceable.
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<PAGE>
(b) lnterference. The Executive hereby agrees that during the
Employment Term and, following the Termination Date, for the Restricted Period,
he will not interfere with the Company's relationship with, or endeavor to
employ or entice away from the Company, any person, firm, corporation,
governmental entity or other business organization who or which was an employee,
customer or supplier of, or maintained a business relationship with, the Company
at any time (whether before or after the Termination Date), or which the Company
has solicited or prepared to solicit (by preparation or submission of a bid or
otherwise) within one (1) year prior to the Termination Date. The Executive
agrees to promptly notify the Company if any such party contacts the Executive
regarding any proposal or solicitation (whether orally or in writing) which, if
accepted, might result in a violation of this Section 10(b).
11. Ownership of Trade Secrets, Etc.
-------------------------------
(a) All written materials, documents and records (of any kind) created
by the Executive or coming into his possession during the Employment
Relationship concerning the business affairs of the Company shall be and become
the sole property of the Company, and, upon the Termination Date or upon the
request of the Company during the Employment Term, the Executive shall promptly
deliver the same to the Company.
(b) The Executive agrees that any trade secret, invention,
improvement, patent, patent application or writing, and any program, method,
process, system or novel technique (whether or not capable of being trademarked,
copyrighted or patented), conceived, devised, developed, or otherwise obtained
by him during the Employment Relationship relating to the business of the
Company, shall be and become the sole property of the Company and the Executive
agrees to give the Company prompt written notice of his conception, invention,
authorship, development or acquisition of any such trade secret, invention,
improvement, patent application, writing, program, method, process, system or
novel technique and to execute such instruments of transfer, assignment,
conveyance or confirmation and such other documents, and to do all appropriate
lawful acts, as may be requested by the Company to transfer, assign, confirm,
and perfect in the Company all legally protectable rights in any such trade
secret, invention, improvement, patent, patent application, writing, program,
method, process, system or novel technique.
12. Understanding and Remedies. For purposes of Sections 9, 10, 11 and 12,
--------------------------
the term "Company" shall include Video Lottery Technologies, Inc. ("VLT") as
well as current and future majority-owned subsidiaries of VLT and all current
and future joint ventures in which VLT is involved. It is understood by the
Executive and the Company that the covenants contained in this Section 12 and in
Sections 9, 10, and 11 are essential elements of this Agreement and that, but
for the agreement of the Executive to comply with such covenants, the Company
would not have agreed to enter into this Agreement. The Executive and the
Company have independently consulted with their respective counsel and have been
advised concerning the reasonableness and propriety of such covenants with
specific regard to the nature of the business conducted by the Company. The
Executive hereby agrees that all covenants contained in this Section 12 and
Sections 9, 10, and 11 of this Agreement are reasonable and valid. The
14
<PAGE>
Executive acknowledges that the Company may have no adequate remedy at law if
the Executive violates any of the terms hereof. In such event, the Company shall
have the right, in addition to any other rights it may have, to obtain in any
court of competent jurisdiction injunctive relief to restrain any breach or
threatened breach hereof or otherwise to specifically enforce any of the
provisions hereof and the Executive hereby waives any and all rights to assert
any claim or defense that the Company has an adequate remedy at law for any
breach. In addition, the Executive waives all rights to a jury trial in any
other action to adjudicate the rights of the Company and the Executive
hereunder. The provisions of Sections 9, 10, 11, and 12 of this Agreement shall
survive the termination of this Agreement and the termination of the Executive's
employment hereunder.
13. Consideration for Chief Executive Officer. The Company agrees to
--------------------------------------------
consider the Executive for promotion to the position of Chief Executive Officer
within six months of the date hereof.
14. Relocation and Other Expenses. Notwithstanding the last sentence of
------------------------------
Section 2 hereof, the Executive agrees to relocate the Company's headquarters to
Bozeman, Montana and/or Las Vegas, Nevada as the Executive and the Board shall
mutually determine, and to establish personal residence in such city or cities.
The Company shall reimburse the Executive for all actual costs incurred by the
Executive in connection with the establishment of his personal residence in such
city, including, without limitation, the costs of selling the Executive's home
in Atlanta, Georgia (including real estate commissions and legal fees), moving
expenses, the costs of storing the Executive's furnishings, the costs of
temporary housing (not to exceed six (6) months) in either Bozeman, Montana or
Las Vegas, Nevada, as the case may be, and the costs of relocation visits
(collectively, "Relocation Expense"), which amount shall be net of any federal
and state income taxes payable by the Executive in connection with the
Relocation Expense reimbursement. In addition, the Company shall compensate the
Executive for the actual costs of furnishing his home(s) in Bozeman, Montana
and/or Las Vegas, Nevada (the "Furnishing Allowance"), up to $24,000, which
amount shall be net of any federal and state income taxes payable by the
Executive in connection with the Furnishing Allowance, and for membership fees
and annual dues for the Executive's membership in a golf club in either Bozeman,
Montana or Las Vegas, Nevada as agreed upon by the Chairman of the Board or his
designee. Notwithstanding anything in this Section 14 to the contrary, in lieu
of any reimbursement for the costs of hotel accommodations, automobile rental
and meals in Bozeman, Montana and Las Vegas, Nevada, the Executive shall receive
a reimbursement allowance of $2,500 per month for a period of six (6) months
from the date of relocation of the Company's headquarters to Bozeman, Montana or
Las Vegas, Nevada; provided, however, that the Board may, in its discretion,
determine to extend such six-month period.
15. Withholding. Anything to the contrary herein notwithstanding, all
payments required to be made by the Company hereunder to the Executive, or his
estate or beneficiaries, shall be subject to the withholding of such amounts as
the Company may reasonable determine it should withhold pursuant to any
applicable tax law or regulation.
15
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16. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns and the Company shall require
any successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. The term "the
Company" as used herein shall include such successors and assigns. The term
"successors and assigns" as used herein shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement) whether by merger, court order, operation or law or
otherwise.
(b) Neither this Agreement nor any right or interest hereunder shall
be assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representative.
17. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other, provided that all notices to the Company shall be directed to the
attention of the Board with a copy to the Secretary of the Company. All notices
and communications shall be deemed to have been received on the date of delivery
thereof or on the third business day after the mailing thereof, except that
notice of change of address shall be effective only upon receipt.
18. Non-exclusivity of Rights. Nothing in this Agreement shall limit or
--------------------------
reduce such rights as the Executive may have under any other agreements with the
Company or any of its subsidiaries concerning subject matter other than that
which is addressed herein; provided, however, that the payments and benefits
provided under Section 8 shall be in lieu of any other termination benefits
(including severance, notice, and pay and salary continuation) to which the
Executive may otherwise be entitled under any other agreement, plan, policy or
practice of the Company or under applicable law and the Executive hereby waives
any and all rights to such other termination benefits. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan
or program of the Company of any of its subsidiaries shall be payable in
accordance with such plan or program, except as explicitly modified by this
Agreement.
19. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreement or
representations,
16
<PAGE>
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
20. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of Georgia without giving
effect to the conflict of law principles thereof.
21. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
22. Entire Agreement. Except to the extent expressly provided herein, this
----------------
Agreement constitutes the entire agreement between the parties hereto and
supersedes all prior agreements, understandings and arrangements, oral or
written, between the parties hereto with respect to the subject matter hereof,
including, without limitation, the Prior Employment Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has executed this Agreement as of
the day and year first above written.
VIDEO LOTTERY TECHNOLOGIES, INC.
BY: /S/
----------------------------------------
RICHARD R. BURT
Chairman of the Board
BY: /S/
---------------------------------------
RICHARD M. HADDRILL
17
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
January 24, 1997
Mr. Dennis V. Gallagher
2120 Duntreath Meadows
Germantown, TN 38139
Dear Dennis
This will confirm the terms and conditions of your employment with Video
Lottery Technologies, Inc. (the "Company"), in the position of General Counsel,
Video Lottery Technologies, Inc.
In consideration of your expending your best efforts in the performance of
your duties on behalf of the Company, the Company agrees, in the event your
employment with the Company is terminated without good cause or you terminate
such employment for Good Reason (as hereinafter defined) within one (1) year
following the date of a Change in Control of the Company (as hereinafter
defined), to pay you an amount equal to one-half (1/2) your annual base salary
in effect as of the date of the termination of such employment with the Company.
However, should such termination occur prior to February 10, 1998 the Company
will pay you an amount equal to your annual base salary in effect as of the date
of such termination.
For the purposes hereof, a "Change in Control" of the Company shall have
the same meaning as that provided under Section 3.8 of the Company's 1994 Stock
Incentive Plan.
For the purposes hereof, "Good Reason" means the occurrence, within one (1)
year following such Change in Control, of any of the following events or
conditions,
(i) your no longer serving as General Counsel, or your being assigned any
duties or responsibilities which are inconsistent with the status, title,
position or responsibilities of such position;
(ii) a reduction in your annual base salary;
(iii) the Company's requiring you to be based at any place outside a
30-mile radius from the principal location from which your served as an employee
of the Company immediately prior to the Change in Control and except for
reasonably required travel on the Company's business which is not materially
greater than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to provide you with compensation and
benefits
<PAGE>
substantially comparable, in the aggregate, to those provided for under the
employee benefit plans, programs and practices in effect immediately prior to
the Change in Control (other than stock option and other equity based
compensation plans);
(v) the insolvency or the filing (by any party including the Company) of a
petition for bankruptcy of the Company;
(vi) any material breach by the Company of any provision of this letter;
and
(vii) the failure of the Company to obtain an agreement, satisfactory to
you, from any successor or assign of the Company to assume and agree to perform
this Agreement.
Other than your employment being terminated as a result of a Change in
Control, under the terms and circumstances hereinabove described, your
employment with the Company will continue for an indefinite period but may be
terminated by the Company with or without cause. If such termination is without
cause prior to February 10, 1998, you will continue to be paid your then current
salary for the next twelve (12) months following termination, in accordance with
the Company's customary payroll practices. If such termination is without cause
after February 8, 1998, you will continue to be paid your then current salary
for the next six (6) months following termination, in accordance with the
company's customary payroll practices. If you voluntarily terminate your
employment or if your employment is terminated for cause (as hereinafter
defined), then no such continued salary benefit will be paid.
It is understood that the Company, at any time, may terminate your
employment for "Cause." A termination for Cause is a termination evidenced by a
finding adopted in good faith by the President of the Company that you (i)
willfully and continually failed to substantially perform you duties with the
Company (other than a failure resulting from your incapacity due to physical or
mental illness), (ii) engaged in willful misconduct, (iii) have breached this
Agreement in any material respect, (iv) engaged in conduct that is dishonest,
fraudulent, unlawful or grossly negligent or conduct which is not in compliance
with the Company's Code of Conduct or similar applicable set of standards of
conduct and business practices, or (v) any regulatory authority, gaming
commission, lottery agency or similar authority in any jurisdiction in which
the Company is conducting business or intends to submit a proposal or conduct
business provides a reasonable basis for concern that it likely will find you
unsuitable or unfit to continue to act as a representative, officer, director or
employee of the Company, the Company has received notice from such authority of
such a finding or you fail to file appropriate applications with, provide
requested information to, or otherwise fail to cooperate with, any such
authority. No act, nor failure to act, on your part, shall be considered
"willful" for purposes of (ii) above unless you have acted or failed to act,
with an absence of good faith and without a reasonable belief that your action
or failure to act was in the best interest of the Company. Notwithstanding
anything contained in this Agreement to the contrary, no failure to perform by
you after notice of termination is given shall constitute Cause for purposes
hereof. Termination for Cause shall be by action of the Board after giving you
and your legal advisors an opportunity to meet with the Board, contest the basis
for termination, and to demonstrate that your continued employment is in the
best interests of the Company.
<PAGE>
It is understood that either of the foregoing payments that may be payable
to you upon termination of your employment shall be in lieu of any other
severance payments ordinarily provided by the Company to employees under its
severance policy, but shall not otherwise affect any other benefits (including
COBRA and pension rights) and payments to which you may be entitled upon your
leaving the employ of the Company.
In connection with your employment with the Company, you will be eligible
or participate in any bonus or executive incentive compensation plan as may be
established to maintained by the Company for its executives, subject to such
factors and discretionary bases as may be determined by the Company's President,
Board of Directors or its Compensation Committee.
Finally, you agree to continue to abide by the Company's Standard
Conditions of Employment, the form of which is attached hereto and to be
executed by you.
Dennis, if you are prepared to accept employment with the Company on the
basis of the foregoing terms and conditions, please acknowledge below and return
one copy of this letter to the Company, keeping another copy for your files.
Very truly yours,
/S/
Richard M. Haddrill
President of VLT, Inc.
ACCEPTED AND AGREED TO:
/S/
- -----------------------------
Dennis V. Gallagher
DATE: 1/27/97
------------------------
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
STANDARD CONDITIONS OF EMPLOYMENT
The following are the Standard Conditions of Employment under which video
Lottery Technologies, Inc. and its subsidiaries (the "Company") hereby employs
the undersigned (the "Employee").
CODE OF CONDUCT/REGULATORY COMPLIANCE
A. Employee acknowledges that he/she has received a copy of and has read
the Company's Code of Conduct, and agrees to abide by its provisions.
B. Employee recognizes and acknowledges that, in the conduct of its
business. the Company and its directors, officers, employees and representatives
are regularly subject to continuous investigation and regulation by governmental
agencies. He/she agrees to cooperate fully with such investigations and comply
fully with all such regulations; and to provide and supplement in a timely
fashion such information as may be requested of Employee in connection
therewith.
C. Employee agrees to complete such forms and documents as may be required
by the Company and any governmental agencies in the conduct of the Company's
business; and to fully and truthfully disclose all information required therein.
<PAGE>
NONDISCLOSURE OF PROPRIETARY INFORMATION
A. Employee recognizes and acknowledges that during the term of his/her
employment, Employee will develop , have access to and come into Possession of
trade secrets and confidential information of the Company, including, without
limitation, software systems, technology, specifications, processes, programs
and documentation, methods and data which the Company owns, plans or develops,
whether for its own use or for use by its clients, developments, designs,
inventions and improvements, techniques, trade secrets and works of authorship,
customer lists, supplier lists, proposals, marketing plans and procedures, all
of which are confidential and are the sole property of the Company. Employee
further recognizes and acknowledges that in order to enable the Company to
perform services for its clients, those clients may furnish to the Company
confidential information concerning their business affairs, property, methods of
operation or other data, and that the goodwill afforded to the Company and its
employees requires keeping such services and information confidential. All of
these materials and information including, without limitation, those relating to
the Company's systems and the Company's clients, are referred to herein as
"Proprietary Information."
B. Employee agrees that during the term of his/her employment and at all
times thereafter, Employee will keep any and all Proprietary Information
confidential and will not disclose any Proprietary Information, directly or
indirectly, to any third person or entity, without the prior written consent of
the Company. Employee further agrees that during the term of his/her employment
and at all times thereafter, Employee will not use, handle, copy or duplicate,
2
<PAGE>
in part or in whole, any Proprietary Information, except as directed by the
Company and in the ordinary course of the Company's business.
C. Employee agrees that, upon request by the Company, and in any event
immediately upon termination of Employee's employment, Employee shall return to
the Company any and all property, keys, notes, memoranda, writings, lists,
files, reports, customer lists, correspondence, tapes, software, cards, surveys,
maps, logs, machines, technical data, work product or any other tangible product
or document or computer material of any kind whatsoever, and all copies thereof,
which has been produced or received by or otherwise submitted or made available
to Employee in connection with his/her employment with the Company.
D. Employee understands and agrees that all Proprietary Information is and
shall remain the sole property of the Company and that Employee has not and will
not appropriate for his/her own use or for the use of any third party any
Proprietary Information. Furthermore, Employee, without any separate
compensation or consideration of any kind, hereby assigns and agrees to assign
to the Company, its successors, assigns or nominees, Employee's entire right,
title and interest in any developments, designs, patents, inventions and
improvements, trade secrets, trademarks, copyrightable subject matter or other
Proprietary Information which Employee has made or conceived, or may make or
conceive, either solely or jointly with others, while in the employ of the
Company, or with the use of time, material or facilities of the Company or
relating to any actual or anticipated business, research, development, product,
service or activity of the Company known to Employee while employed at the
Company, or suggested by or resulting from any task assigned to Employee or work
3
<PAGE>
performed by Employee for or on behalf of the Company, whether or not such work
was performed prior to the date of Employee's employment.
NONCOMPETITION
Employee agrees that, because of the confidential and competitive-sensitive
nature of the Proprietary Information and because the use, or even the
appearance of the use, of the Proprietary Information in certain circumstances
may cause irreparable damage to the Company and its reputation, or to clients of
the Company, Employee will not, directly or indirectly, from the date of his/her
employment until the expiration of (6) months after the date on which Employee's
employment with the Company terminates for any reason whatsoever, own, manage,
operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including as
director, officer, consultant, representative, independent contractor, employee,
partner, or investor, with any business, enterprise, organization or other
individual or entity which solicits business, performs services or produces
goods which are comparable to or competitive with any business of the Company (a
"Competitor"); provided, however, that the foregoing restrictions shall not
prohibit Employee from owning publicly traded stock or other securities of a
Competitor, amounting to no more than one (it) percent of such stock or
securities.
NONSOLICITATION
Employee agrees that during the term of his/her employment and for a period
of one (1) year thereafter, Employee will not interfere with the
4
<PAGE>
Company's relationship with, or endeavor to employ or entice away from the
Company, any business, enterprise, organization or other individual or entity,
which or who is an employee, customer of or supplier of goods or services to the
Company, or which or who otherwise maintains a business relationship with the
Company.
REMEDIES
Employee acknowledges that any breach or violation of the nondisclosure,
noncompetition or nonsolicitation provisions of these Standard Conditions of
Employment will result in irreparable injury and damage to the Company and/or
the clients of the Company, which could not adequately be compensated by money
damages alone. Accordingly, Employee agrees that in the event of such a breach
or violation, or any threat of such a breach or violation (in addition to the
right to pursue other remedies, including, without limitation, damages), the
Company or, where appropriate, the client of the Company, will be entitled to
obtain in any court of competent jurisdiction an immediate injunction and
restraining order to prevent such a breach or violation by Employee and by any
third party acting for or with Employee, or to enforce these Standard Conditions
of Employment; and Employee hereby waives any and all rights to assert any claim
or defense that the Company has an adequate remedy of law thereunder.
NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in these Standard Conditions of Employment should be interpreted or
construed to confer upon Employee any right with respect to continuance of
Employee's employment with the Company for any fixed period of time, nor
5
<PAGE>
interfere in any way with the right of the Company or Employee to terminate the
employment relationship between the Company and Employee, with or without cause.
SURVIVAL OF CONDITIONS
These Standard Conditions of Employment shall survive any termination of
Employee's employment with the Company.
SEVERABILITY
If any provision of these Standard Conditions of Employment is determined
by a court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other part
or provision thereof.
Employee acknowledges that these Standard Conditions of Employment have
been presented to Employee in connection with the Company's offer to employ
Employee; and that Employee has carefully read, and fully understands, agrees
to, and accepts them as a condition of employment with the Company.
Date: 1/27/97 EMPLOYEE:
-----------------
/S/ DENNIS GALLAGHER
---------------------------------------
Signature
Dennis Gallagher
---------------------------------------
Name Typed/printed
10/26/94
6
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
January 24, 1997
Mr. Dennis V. Gallagher
2120 Duntreath Meadows
Germantown, TN 38139
Dear Dennis,
On behalf of Video Lottery Technologies, Inc., we are pleased to offer you the
position of General Counsel, VLT. This position reports to the President. We
expect you to begin your employment on February 10, 1997.
Should you decide to accept this offer, you understand that you will be required
to complete and sign an Employee Personal Disclosure Form which will be used to
conduct an investigation into your background, sign a Standard Conditions of
Employment Agreement and the enclosed employment letter, and sign an
Acknowledgement that you have read and will abide by the Video Lottery
Technologies, Inc. Code of Conduct.
This offer includes:
* annual base salary of $180,000;
* annual bonus potential of $ 1 00,000 based upon the VLT Executive
Incentive Compensation plan;
* stock options: grant at fair value at date of grant of 20,000 options
to be approved by the Board of Directors within 60 days of your start
date to vest at 33.333% per year over three (3) years and another
grant of 10,000 options to be granted no later that February 28, 1998
to vest over a three (3) year period from the date of grant;
* relocation package (such expenses to be grossed up for Income tax
affect): reimbursement for cost incurred in moving household/personal
belongings to Las Vegas, Nevada, (This move can be coordinated by the
VLT travel department in Bozeman), airfare, motel, meals, car rental
for two househunting trips to Las Vegas; 30 days temporary housing;
reimbursement for the direct cost of purchasing a home and for closing
and commission expenses related to the sale of your home in Tennessee;
* severance: is addressed in the enclosed Employment Letter.
<PAGE>
As an employee you will be entitled to participate in the VLT, Inc. standard
benefit package. Presently, the standard benefit package includes:
* health/dental insurance with Intermountain Administrators, Inc. The
employee has a choice of annual deductible and contributes to the
premium (a cost schedule and plan document is enclosed);
* flexible spending plan with health and/or dependent care accounts
(plan is enclosed)
* Company paid life/AD&D insurance at one times annual base salary to a
maximum of $50,000. The employee may purchase supplemental life/AD&D
and/or dependent life insurance. SAFECO is the carrier;
* 401K plan. Eligibility is first month after twelve (I 2) months
service;
* employee stock purchase plan. Open enrollment for next calendar year
in December each year;
* Company paid short term disability insurance, six months service
required;
* employee paid long term disability insurance (30 hours a week
eligibility requirement);
* eight (8) paid holidays a calendar year;
* Vacation/PDO granted on anniversary of hire; during the first year of
employment five (5) days are granted at six months service and another
five (5) days on the first year of service anniversary.
For clarification and protection of both you and the company, your acceptance of
this offer represents the sole agreement between you and the Company. Employment
with the Company is defined as at-will. At-will is defined as employment and
compensation that can be terminated with or without cause, and with or without
notice, at any time, at the option of either the employer or the employee. No
prior promises, representations, and/or understandings relative to any terms or
conditions of your employment are to be considered as part of this agreement
unless expressed in writing in this letter.
It is also understood that should the investigations concerning your background
raise concerns in regard to the Company's licensure, this will constitute
grounds for immediate termination of your employment and shall nullify any
obligation of the Company pertaining to this offer.
Dennis, we are confident that you will make a contribution to our efforts. If
you have questions, please call me or Dick Haddrill.
If you accept our offer, please sign the Acceptance, the Employment Letter,
complete and sign the Employee Personal Disclosure Form, the Acknowledgement
---------------------------------
pertaining to the Code of
<PAGE>
Conduct, and The Standard Conditions of Employment Agreement, and return all of
these to my attention.
Sincerely,
Video Lottery Technologies, Inc.
/S/
- --------------------------
Richard Haddrill
President
cc: Ed Neuman
encl: Acceptance, Employee Personal Disclosure Form, Code of Conduct and
acknowledgement, Employment Letter, Standard Conditions of Employment
Agreement, benefits information
<PAGE>
ACCEPTANCE
I accept the position of General Counsel, VLT with Video Lottery Technologies,
Inc. under the terms and conditions stated in the letter of January 24, 1997
from Richard Haddrill, President, to Dennis V. Gallagher.
/S/
- ------------------------
Dennis V. Gallagher
1/27/97
- ------------------------
Date
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
January 17, 1995
Mr. Michael L. Eide
634 Stonegate
Bozeman, MT 59715
Dear Mike:
This will confirm the terms and conditions of your continued employment
with Video Lottery Technologies, Inc. (the "Company"), in the position of
President, Video Lottery Consultants Division.
In consideration of your continuing to expend your best efforts in the
performance of your duties on behalf of the Company, the Company agrees, in the
event your employment with the Company is terminated without good cause or you
terminate such employment for Good Reason (as hereinafter defined) within one
(1) year following the date of a Change in Control of the Company (as
hereinafter defined), to pay you an amount equal to two (2) times your annual
salary in effect as of the date of the termination of such employment with the
Company.
For the purposes hereof, a "Change in Control" of the Company shall have
the same meaning as that provided under Section 3.8 of the Company's 1994 Stock
Incentive Plan.
For the purposes hereof, "Good Reason" means the occurrence, within one (1)
year following such Change in Control, of any of the following events or
conditions,
(i) your no longer serving as President, or your being assigned any duties
or responsibilities which are inconsistent with the status, title, position or
responsibilities of such position;
(ii) a reduction in your annual base salary;
<PAGE>
Mr. Eide
January 17, 1995
Page 2
(iii) the Company's requiring you to be based at any place outside a 30-
mile radius from the principal location from which you served as an employee of
the Company immediately prior to the Change in Control and except for reasonably
required travel on the Company's business which is not materially greater than
such travel requirements prior to the Change in Control;
(iv) the failure by the Company to provide you with compensation and
benefits substantially comparable, in the aggregate, to those provided for under
the employee benefit plans, programs and practices in effect immediately prior
to the Change in Control (other than stock option and other equity based
compensation plans);
(v) the insolvency or the filing (by any party including the Company) of a
petition for bankruptcy of the Company;
(vi) Any material breach by the Company of any provision of this letter;
and
(vii) the failure of the Company to obtain an agreement, satisfactory to
you, from any successor or assign of the Company to assume and agree to perform
this Agreement.
Other than your employment being terminated as a result of a Change in
Control, under the terms and circumstances hereinabove described, your
employment with the Company will continue for an indefinite period but may be
terminated by the Company with or without cause. If such termination is without
cause, you will continue to be paid your then current salary for the next six
(6) months following termination, in accordance with the Company's customary
payroll practices. If you voluntarily terminate your employment or if your
employment is terminated for cause (as hereinafter defined), then no such
continued salary benefit will be paid.
It is understood that the Company, at any time, may terminate your
employment for "Cause." A termination for Cause is a termination evidenced by a
finding adopted in good faith by the Chief Executive Officer of the Company (the
"CEO") that you (i) willfully and continually failed to substantially perform
your duties with the Company (other than a failure resulting from your
incapacity due to physical or mental illness), (ii) engaged in willful
misconduct, (iii) have breached this Agreement in any material respect, (iv)
engaged in conduct that is dishonest, fraudulent, unlawful or grossly negligent
or conduct which is not in compliance with the Company's Code of Conduct or
similar applicable set of
<PAGE>
Mr. Eide
January 17, 1995
Page 3
standards of conduct and business practices, or (v) any regulatory authority,
gaming commission, lottery agency or similar authority in any jurisdiction in
which the Company is conducting business or intends to submit a proposal or
conduct business provides a reasonable basis for concern that it likely will
find you unsuitable or unfit to continue to act as a representative, officer,
director or employee of the Company, the Company has received notice from such
authority of such a finding or you fail to file appropriate applications with,
provide requested information to, or otherwise fail to cooperate with, any such
authority. No act, nor failure to act, on your part, shall be considered
"willful" for purposes of (ii) above unless you have acted or failed to act,
with an absence of good faith and without a reasonable belief that your action
or failure to act was in the best interest of the Company. Notwithstanding
anything contained in this Agreement to the contrary, no failure to perform by
you after notice of termination is given shall constitute Cause for purposes
hereof. Termination for Cause shall be by action of the Board after giving you
and your legal advisors an opportunity to meet with the Board, contest the basis
for termination, and to demonstrate that your continued employment is in the
best interests of the Company.
It is understood that either of the foregoing payments that may be payable
to you upon termination of your employment shall be in lieu of any other
severance payments ordinarily provided by the Company to employees under its
severance policy, but shall not otherwise affect any other benefits (including
COBRA and pension rights) and payments to which you may be entitled upon your
leaving the employ of the Company.
In connection with your continued employment with the Company, you will be
eligible to participate in the Company's 1994 Stock Incentive Plan and in any
bonus or executive incentive compensation plan as may be established or
maintained by the Company for its executives, subject to such factors and
discretionary bases as may be determined by the Company's Board of Directors or
its Compensation Committee.
Finally, you agree to continue to abide by the Company's Standard
Conditions of Employment, the form of which is attached hereto and to be
executed by you.
If you are prepared to continue your employment with the Company on the
basis of the foregoing terms and conditions, please acknowledge below and return
one copy of this letter to the Company, keeping another copy for your files.
<PAGE>
Mr. Eide
January 17, 1995
Page 4
It goes without saying that your services on behalf of the Company in the
past, and your continued efforts on its behalf, are very much appreciated.
Very truly yours,
/S/
J. Stephen Vanderwoude
ACCEPTED AND AGREED TO:
/S/ MICHAEL L. EIDE
- --------------------------------
EMPLOYEE
DATE:
--------------------------
JSV/jjd
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
STANDARD CONDITIONS OF EMPLOYMENT
The following are the Standard Conditions of Employment under which video
Lottery Technologies, Inc. and its subsidiaries (the "Company") hereby employs
the undersigned (the "Employee").
CODE OF CONDUCT/REGULATORY COMPLIANCE
A. Employee acknowledges that he/she has received a copy of and has read
the Company's Code of Conduct, and agrees to abide by its provisions.
B. Employee recognizes and acknowledges that, in the conduct of its
business. the Company and its directors, officers, employees and representatives
are regularly subject to continuous investigation and regulation by governmental
agencies. He/she agrees to cooperate fully with such investigations and comply
fully with all such regulations; and to provide and supplement in a timely
fashion such information as may be requested of Employee in connection
therewith.
C. Employee agrees to complete such forms and documents as may be required
by the Company and any governmental agencies in the conduct of the Company's
business; and to fully and truthfully disclose all information required therein.
<PAGE>
NONDISCLOSURE OF PROPRIETARY INFORMATION
A. Employee recognizes and acknowledges that during the term of his/her
employment, Employee will develop , have access to and come into Possession of
trade secrets and confidential information of the Company, including, without
limitation, software systems, technology, specifications, processes, programs
and documentation, methods and data which the Company owns, plans or develops,
whether for its own use or for use by its clients, developments, designs,
inventions and improvements, techniques, trade secrets and works of authorship,
customer lists, supplier lists, proposals, marketing plans and procedures, all
of which are confidential and are the sole property of the Company. Employee
further recognizes and acknowledges that in order to enable the Company to
perform services for its clients, those clients may furnish to the Company
confidential information concerning their business affairs, property, methods of
operation or other data, and that the goodwill afforded to the Company and its
employees requires keeping such services and information confidential. All of
these materials and information including, without limitation, those relating to
the Company's systems and the Company's clients, are referred to herein as
"Proprietary Information."
B. Employee agrees that during the term of his/her employment and at all
times thereafter, Employee will keep any and all Proprietary Information
confidential and will not disclose any Proprietary Information, directly or
indirectly, to any third person or entity, without the prior written consent of
the Company. Employee further agrees that during the term of his/her employment
and at all times thereafter, Employee will not use, handle, copy or duplicate,
2
<PAGE>
in part or in whole, any Proprietary Information, except as directed by the
Company and in the ordinary course of the Company's business.
C. Employee agrees that, upon request by the Company, and in any event
immediately upon termination of Employee's employment, Employee shall return to
the Company any and all property, keys, notes, memoranda, writings, lists,
files, reports, customer lists, correspondence, tapes, software, cards, surveys,
maps, logs, machines, technical data, work product or any other tangible product
or document or computer material of any kind whatsoever, and all copies thereof,
which has been produced or received by or otherwise submitted or made available
to Employee in connection with his/her employment with the Company.
D. Employee understands and agrees that all Proprietary Information is and
shall remain the sole property of the Company and that Employee has not and will
not appropriate for his/her own use or for the use of any third party any
Proprietary Information. Furthermore, Employee, without any separate
compensation or consideration of any kind, hereby assigns and agrees to assign
to the Company, its successors, assigns or nominees, Employee's entire right,
title and interest in any developments, designs, patents, inventions and
improvements, trade secrets, trademarks, copyrightable subject matter or other
Proprietary Information which Employee has made or conceived, or may make or
conceive, either solely or jointly with others, while in the employ of the
Company, or with the use of time, material or facilities of the Company or
relating to any actual or anticipated business, research, development, product,
service or activity of the Company known to Employee while employed at the
Company, or suggested by or resulting from any task assigned to Employee or work
3
<PAGE>
performed by Employee for or on behalf of the Company, whether or not such work
was performed prior to the date of Employee's employment.
NONCOMPETITION
Employee agrees that, because of the confidential and competitive-sensitive
nature of the Proprietary Information and because the use, or even the
appearance of the use, of the Proprietary Information in certain circumstances
may cause irreparable damage to the Company and its reputation, or to clients of
the Company, Employee will not, directly or indirectly, from the date of his/her
employment until the expiration of (6) months after the date on which Employee's
employment with the Company terminates for any reason whatsoever, own, manage,
operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including as
director, officer, consultant, representative, independent contractor, employee,
partner, or investor, with any business, enterprise, organization or other
individual or entity which solicits business, performs services or produces
goods which are comparable to or competitive with any business of the Company (a
"Competitor"); provided, however, that the foregoing restrictions shall not
prohibit Employee from owning publicly traded stock or other securities of a
Competitor, amounting to no more than one (it) percent of such stock or
securities.
NONSOLICITATION
Employee agrees that during the term of his/her employment and for a period
of one (1) year thereafter, Employee will not interfere with the
4
<PAGE>
Company's relationship with, or endeavor to employ or entice away from the
Company, any business, enterprise, organization or other individual or entity,
which or who is an employee, customer of or supplier of goods or services to the
Company, or which or who otherwise maintains a business relationship with the
Company.
REMEDIES
Employee acknowledges that any breach or violation of the nondisclosure,
noncompetition or nonsolicitation provisions of these Standard Conditions of
Employment will result in irreparable injury and damage to the Company and/or
the clients of the Company, which could not adequately be compensated by money
damages alone. Accordingly, Employee agrees that in the event of such a breach
or violation, or any threat of such a breach or violation (in addition to the
right to pursue other remedies, including, without limitation, damages), the
Company or, where appropriate, the client of the Company, will be entitled to
obtain in any court of competent jurisdiction an immediate injunction and
restraining order to prevent such a breach or violation by Employee and by any
third party acting for or with Employee, or to enforce these Standard Conditions
of Employment; and Employee hereby waives any and all rights to assert any claim
or defense that the Company has an adequate remedy of law thereunder.
NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in these Standard Conditions of Employment should be interpreted or
construed to confer upon Employee any right with respect to continuance of
Employee's employment with the Company for any fixed period of time, nor
5
<PAGE>
interfere in any way with the right of the Company or Employee to terminate the
employment relationship between the Company and Employee, with or without cause.
SURVIVAL OF CONDITIONS
These Standard Conditions of Employment shall survive any termination of
Employee's employment with the Company.
SEVERABILITY
If any provision of these Standard Conditions of Employment is determined
by a court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other part
or provision thereof.
Employee acknowledges that these Standard Conditions of Employment have
been presented to Employee in connection with the Company's offer to employ
Employee; and that Employee has carefully read, and fully understands, agrees
to, and accepts them as a condition of employment with the Company.
Date:__________ EMPLOYEE:
/S/MICHAEL L. EIDE
---------------------------------------
Signature
Michael L. Eide
---------------------------------------
Name Typed/printed
10/26/94
6
VIDEO LOTTERY TECHNOLOGIES, INC.
2311 South 7th Avenue
Bozeman, MT 59715
Tel. 406/585-6600
Fax 406/586-8211
March 1, 1997
Ms. Dena J. Rosenzweig
4772 Summerford Drive
Atlanta, GA 30338
RE: Extension of Employment Agreement
Dear Dena:
This letter will serve to extend the Letter Agreement (the "Agreement") between
Video Lottery Technologies, Inc. (the "Company") and you, dated November 12,
1997, as follows:
You agree to remain in the positions of Assistant Secretary of the Company and
as General Counsel and Secretary of AWI until March 31, 1997. Commencing April
1, 1997 and terminating May 31, 1997, you will be available, upon reasonable
notice and as mutually agreed, to provide services to the Company for up to ten
(10) days per month. As consideration of your agreement to continue to provide
services to the Company, you will be compensated in an amount equal to $22,222
per month commencing February 1, 1997, and terminating September 30, 1997.
All other dates in the agreement will be moved forward by two months to
correspond with the intent of this extension.
Except as specifically amended hereby, all of the terms, conditions and
covenants of the Agreement shall remain in full force and effect.
Please acknowledge your acceptance of this extension by signing and dating in
the space provided below.
Yours very truly,
VIDEO LOTTERY TECHNOLOGIES, INC.
/S/
Dennis V. Gallagher
General Counsel
ACCEPTED AND AGREED TO this 26 day of March, 1997.
------
/S/
Dena J. Rosenzweig
<PAGE>
4772 Summerford Drive
Atlanta, Georgia 30338
November 12, 1996
Mr. Richard Haddrill
President
Video Lottery Technologies, Inc.
115 Perimeter Center Place Suite 911
Atlanta, Georgia 30346
Dear Dick:
This letter of agreement will confirm the terms and conditions of my
continued employment with Video Lottery Technologies, Inc. (the "Company"),
currently in the positions of General Counsel, Assistant Secretary of the
Company and General Counsel, Secretary of Automated Wagering International, Inc.
("AWI"), by superseding and replacing my original employment agreement with the
Company, dated December 13, 1994 and additional employment agreement, dated July
5, 1995, as hereinafter provided.
Effective as of September 18, 1996, I will remain in the positions stated
above until January 31, 1997. During the months of February and March, 1997, I
will make myself available, upon reasonable notice and as the Company and I
mutually agree, to provide services to the Company for up to ten (10) days per
month.
In consideration of my continuing to expend my best efforts in the
performance of my duties on behalf of the Company for the period including
October 1, 1996 through January 31, 1997, the Company agrees to pay me an amount
equal to $16,667 per month, payable in accordance with the Company's customary
payroll practices, retroactive to October 1, 1996. In addition, commencing on
February 1, 1997 and terminating on July 31, 1997, the Company agrees to pay me
an amount equal to $22,222 per month, payable in accordance with the Company's
customary payroll practices.
Through March 31, 1996, I will continue to receive benefits. In addition, I
may continue to contribute to the Company's 401(k) plan through the date of my
salary continuation. I also will have the use of an administrative assistant at
least through January 31, 1997.
The Company will indemnify, defend and hold me harmless against any and all
losses, damages, liabilities, costs and expenses from any threatened or actual
proceeding, claim, suit, cause of action (whether civil, criminal,
administrative or investigative) which may arise, directly or indirectly from
services performed by me during February and March of 1997 in accordance with
such indemnities provided to the officers of the Company and are in addition to
indemnities pursuant to the Bylaws of the Company, provided to me during my
employment as an officer of the Company.
<PAGE>
Mr. Haddrill
November 12, 1996
page 2
The Company may assign or otherwise transfer this agreement and any and all
of its rights, duties, obligations or interests hereunder to any business entity
that at any time by merger, consolidation, or otherwise acquires all or
substantially all of the stock or assets of the Company.
If this letter accurately reflects our understanding, please
acknowledge your acceptance and agreement below.
Very truly yours,
/S/
Dena J. Rosenzweig
ACCEPTED AND AGREED TO:
VIDEO LOTTERY TECHNOLOGIES, INC.
/s/
- ---------------------------------
Richard Haddrill
President
DATE: 11/18/96
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
STANDARD CONDITIONS OF EMPLOYMENT
The following are the Standard Conditions of Employment under which video
Lottery Technologies, Inc. and its subsidiaries (the "Company") hereby employs
the undersigned (the "Employee").
CODE OF CONDUCT/REGULATORY COMPLIANCE
A. Employee acknowledges that he/she has received a copy of and has read
the Company's Code of Conduct, and agrees to abide by its provisions.
B. Employee recognizes and acknowledges that, in the conduct of its
business. the Company and its directors, officers, employees and representatives
are regularly subject to continuous investigation and regulation by governmental
agencies. He/she agrees to cooperate fully with such investigations and comply
fully with all such regulations; and to provide and supplement in a timely
fashion such information as may be requested of Employee in connection
therewith.
C. Employee agrees to complete such forms and documents as may be required
by the Company and any governmental agencies in the conduct of the Company's
business; and to fully and truthfully disclose all information required therein.
<PAGE>
NONDISCLOSURE OF PROPRIETARY INFORMATION
A. Employee recognizes and acknowledges that during the term of his/her
employment, Employee will develop , have access to and come into Possession of
trade secrets and confidential information of the Company, including, without
limitation, software systems, technology, specifications, processes, programs
and documentation, methods and data which the Company owns, plans or develops,
whether for its own use or for use by its clients, developments, designs,
inventions and improvements, techniques, trade secrets and works of authorship,
customer lists, supplier lists, proposals, marketing plans and procedures, all
of which are confidential and are the sole property of the Company. Employee
further recognizes and acknowledges that in order to enable the Company to
perform services for its clients, those clients may furnish to the Company
confidential information concerning their business affairs, property, methods of
operation or other data, and that the goodwill afforded to the Company and its
employees requires keeping such services and information confidential. All of
these materials and information including, without limitation, those relating to
the Company's systems and the Company's clients, are referred to herein as
"Proprietary Information."
B. Employee agrees that during the term of his/her employment and at all
times thereafter, Employee will keep any and all Proprietary Information
confidential and will not disclose any Proprietary Information, directly or
indirectly, to any third person or entity, without the prior written consent of
the Company. Employee further agrees that during the term of his/her employment
and at all times thereafter, Employee will not use, handle, copy or duplicate,
2
<PAGE>
in part or in whole, any Proprietary Information, except as directed by the
Company and in the ordinary course of the Company's business.
C. Employee agrees that, upon request by the Company, and in any event
immediately upon termination of Employee's employment, Employee shall return to
the Company any and all property, keys, notes, memoranda, writings, lists,
files, reports, customer lists, correspondence, tapes, software, cards, surveys,
maps, logs, machines, technical data, work product or any other tangible product
or document or computer material of any kind whatsoever, and all copies thereof,
which has been produced or received by or otherwise submitted or made available
to Employee in connection with his/her employment with the Company.
D. Employee understands and agrees that all Proprietary Information is and
shall remain the sole property of the Company and that Employee has not and will
not appropriate for his/her own use or for the use of any third party any
Proprietary Information. Furthermore, Employee, without any separate
compensation or consideration of any kind, hereby assigns and agrees to assign
to the Company, its successors, assigns or nominees, Employee's entire right,
title and interest in any developments, designs, patents, inventions and
improvements, trade secrets, trademarks, copyrightable subject matter or other
Proprietary Information which Employee has made or conceived, or may make or
conceive, either solely or jointly with others, while in the employ of the
Company, or with the use of time, material or facilities of the Company or
relating to any actual or anticipated business, research, development, product,
service or activity of the Company known to Employee while employed at the
Company, or suggested by or resulting from any task assigned to Employee or work
3
<PAGE>
performed by Employee for or on behalf of the Company, whether or not such work
was performed prior to the date of Employee's employment.
NONCOMPETITION
Employee agrees that, because of the confidential and competitive-sensitive
nature of the Proprietary Information and because the use, or even the
appearance of the use, of the Proprietary Information in certain circumstances
may cause irreparable damage to the Company and its reputation, or to clients of
the Company, Employee will not, directly or indirectly, from the date of his/her
employment until the expiration of (6) months after the date on which Employee's
employment with the Company terminates for any reason whatsoever, own, manage,
operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including as
director, officer, consultant, representative, independent contractor, employee,
partner, or investor, with any business, enterprise, organization or other
individual or entity which solicits business, performs services or produces
goods which are comparable to or competitive with any business of the Company (a
"Competitor"); provided, however, that the foregoing restrictions shall not
prohibit Employee from owning publicly traded stock or other securities of a
Competitor, amounting to no more than one (it) percent of such stock or
securities.
NONSOLICITATION
Employee agrees that during the term of his/her employment and for a period
of one (1) year thereafter, Employee will not interfere with the
4
<PAGE>
Company's relationship with, or endeavor to employ or entice away from the
Company, any business, enterprise, organization or other individual or entity,
which or who is an employee, customer of or supplier of goods or services to the
Company, or which or who otherwise maintains a business relationship with the
Company.
REMEDIES
Employee acknowledges that any breach or violation of the nondisclosure,
noncompetition or nonsolicitation provisions of these Standard Conditions of
Employment will result in irreparable injury and damage to the Company and/or
the clients of the Company, which could not adequately be compensated by money
damages alone. Accordingly, Employee agrees that in the event of such a breach
or violation, or any threat of such a breach or violation (in addition to the
right to pursue other remedies, including, without limitation, damages), the
Company or, where appropriate, the client of the Company, will be entitled to
obtain in any court of competent jurisdiction an immediate injunction and
restraining order to prevent such a breach or violation by Employee and by any
third party acting for or with Employee, or to enforce these Standard Conditions
of Employment; and Employee hereby waives any and all rights to assert any claim
or defense that the Company has an adequate remedy of law thereunder.
NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in these Standard Conditions of Employment should be interpreted or
construed to confer upon Employee any right with respect to continuance of
Employee's employment with the Company for any fixed period of time, nor
5
<PAGE>
interfere in any way with the right of the Company or Employee to terminate the
employment relationship between the Company and Employee, with or without cause.
SURVIVAL OF CONDITIONS
These Standard Conditions of Employment shall survive any termination of
Employee's employment with the Company.
SEVERABILITY
If any provision of these Standard Conditions of Employment is determined
by a court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other part
or provision thereof.
Employee acknowledges that these Standard Conditions of Employment have
been presented to Employee in connection with the Company's offer to employ
Employee; and that Employee has carefully read, and fully understands, agrees
to, and accepts them as a condition of employment with the Company.
Date: 12/21/94 EMPLOYEE:
--------------------
/S/DENA J. ROSENZWEIG
---------------------------------------
Signature
Dena J. Rosenzweig
---------------------------------------
Name Typed/printed
10/26/94
6
VIDEO LOTTERY TECHNOLOGIES, INC.
115 Perimeter Center Place. Suite 911
Atlanta, GA 30346
Tel. 404/481-1800
Fax 404/481-1899
December 5, 1996
Ms. Susan Carstensen
9711 Cougar Drive
Bozeman, MT 59715
Dear Susan:
This will confirm the terms and conditions of your employment with Video
Lottery Technologies, Inc. (the "Company"), in the position of Vice President of
Finance, Video Lottery Technologies, Inc.
In consideration of your expending your best efforts in the performance of
your duties on behalf of the Company, the Company agrees, in the event your
employment with the Company is terminated without good cause or you terminate
such employment for Good Reason (as hereinafter defined) within one (1) year
following the date of a Change in Control of the Company (as hereinafter
defined), to pay you an amount equal to one-half (1/2) your annual salary in
effect as of the date of the termination of such employment with the Company.
For the purposes hereof, a "Change in Control" of the Company shall have
the same meaning as that provided under Section 3.8 of the Company's 1994 Stock
Incentive Plan.
For the purposes hereof, "Good Reason" means the occurrence, within one (1)
year following such Change in Control, of any of the following events or
conditions.
(i) your no longer serving as Vice President of Finance, or your being
assigned any duties or responsibilities which are inconsistent with the status,
title, position or responsibilities of such position;
(ii) a reduction in your annual base salary;
(iii) the Company's requiring you to be based at any place outside a
30-mile radius from the principal location from which your served as an employee
of the Company immediately prior to the Change in Control and except for
reasonably required travel on the Company's business which is not materially
greater than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to provide you with compensation and
benefits substantially comparable, in the aggregate, to those provided for under
the employee benefit plans, programs and practices in effect immediately prior
to the Change in Control (other than
<PAGE>
stock option and other equity based compensation plans);
(v) the insolvency or the filing (by any party including the Company) of a
petition for bankruptcy of the Company;
(vi) any material breach by the Company of any provision of this letter;
and
(vii) the failure of the Company to obtain an agreement, satisfactory to
you, from any successor or assign of the Company to assume and agree to perform
this Agreement.
Other than your employment being terminated as a result of a Change in
Control, under the terms and circumstances hereinabove described, your
employment with the Company will continue for an indefinite period but may be
terminated by the Company with or without cause. If such termination is without
cause, you will continue to be paid your then current salary for the next six
(6) months following termination, in accordance with the Company's customary
payroll practices. If you voluntarily terminate your employment or if your
employment is terminated for cause (as hereinafter defined), then no such
continued salary benefit will be paid.
It is understood that the Company, at any time, may terminate your
employment for "Cause." A termination for Cause is a termination evidenced by a
finding adopted in good faith by the President of the Company that you (i)
willfully and continually failed to substantially perform you duties with the
Company (other than a failure resulting from your incapacity due to physical or
mental illness), (ii) engaged in willful misconduct, (iii) have breached this
Agreement in any material respect, (iv) engaged in conduct that is dishonest,
fraudulent, unlawful or grossly negligent or conduct which is not in compliance
with the Company's Code of Conduct or similar applicable set of standards of
conduct and business practices, or (v) any regulatory authority, gaming
commission, lottery agency or similar authority in any jurisdiction in which the
Company is conducting business or intends to submit a proposal or conduct
business provides a reasonable basis for concern that it likely will find you
unsuitable or unfit to continue to act as a representative, officer, director or
employee of the Company, the Company has received notice from such authority of
such a finding or you fail to file appropriate applications with, provide
requested information to, or otherwise fail to cooperate with, any such
authority. No act, nor failure to act, on your part, shall be considered
"willful" for purposes of (ii) above unless you have acted or failed to act,
with an absence of good faith and without a reasonable belief that your action
or failure to act was in the best interest of the Company. Notwithstanding
anything contained in this Agreement to the contrary, no failure to perform by
you after notice of termination is given shall constitute Cause for purposes
hereof. Termination for Cause shall be by action of the Board after giving you
and your legal advisors an opportunity to meet with the Board, contest the basis
for termination, and to demonstrate that your continued employment is in the
best interests of the Company.
It is understood that either of the foregoing payments that may be payable
to you upon termination of your employment shall be in lieu of any other
severance payments ordinarily provided by the Company to employees under its
severance policy, but shall not otherwise affect any other benefits (including
COBRA and pension rights) and payments to which you may be
<PAGE>
entitled upon your leaving the employ of the Company.
In connection with your employment with the Company, you will be eligible
or participate in any bonus or executive incentive compensation plan as may be
established to maintained by the Company for its executives, subject to such
factors and discretionary bases as may be determined by the Company's President,
Board of Directors or its Compensation Committee.
Finally, you agree to continue to abide by the Company's Standard
Conditions of Employment, the form of which is attached hereto and to be
executed by you.
If you are prepared to accept employment with the Company on the basis of
the foregoing terms and conditions, please acknowledge below and return one copy
of this letter to the Company, keeping another copy for your files.
Susan, your services on behalf of the Company in the past, and your
continued efforts on its behalf, are very much appreciated.
Very truly yours,
/S/
--------------------------------------------
Richard M. Haddrill
President of VLT, Inc.
ACCEPTED AND AGREED TO:
/S/
- -----------------------------
SUSAN CARSTENSEN
DATE: 2/10/97
----------------
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
STANDARD CONDITIONS OF EMPLOYMENT
The following are the Standard Conditions of Employment under which video
Lottery Technologies, Inc. and its subsidiaries (the "Company") hereby employs
the undersigned (the "Employee").
CODE OF CONDUCT/REGULATORY COMPLIANCE
A. Employee acknowledges that he/she has received a copy of and has read
the Company's Code of Conduct, and agrees to abide by its provisions.
B. Employee recognizes and acknowledges that, in the conduct of its
business. the Company and its directors, officers, employees and representatives
are regularly subject to continuous investigation and regulation by governmental
agencies. He/she agrees to cooperate fully with such investigations and comply
fully with all such regulations; and to provide and supplement in a timely
fashion such information as may be requested of Employee in connection
therewith.
C. Employee agrees to complete such forms and documents as may be required
by the Company and any governmental agencies in the conduct of the Company's
business; and to fully and truthfully disclose all information required therein.
<PAGE>
NONDISCLOSURE OF PROPRIETARY INFORMATION
A. Employee recognizes and acknowledges that during the term of his/her
employment, Employee will develop , have access to and come into Possession of
trade secrets and confidential information of the Company, including, without
limitation, software systems, technology, specifications, processes, programs
and documentation, methods and data which the Company owns, plans or develops,
whether for its own use or for use by its clients, developments, designs,
inventions and improvements, techniques, trade secrets and works of authorship,
customer lists, supplier lists, proposals, marketing plans and procedures, all
of which are confidential and are the sole property of the Company. Employee
further recognizes and acknowledges that in order to enable the Company to
perform services for its clients, those clients may furnish to the Company
confidential information concerning their business affairs, property, methods of
operation or other data, and that the goodwill afforded to the Company and its
employees requires keeping such services and information confidential. All of
these materials and information including, without limitation, those relating to
the Company's systems and the Company's clients, are referred to herein as
"Proprietary Information."
B. Employee agrees that during the term of his/her employment and at all
times thereafter, Employee will keep any and all Proprietary Information
confidential and will not disclose any Proprietary Information, directly or
indirectly, to any third person or entity, without the prior written consent of
the Company. Employee further agrees that during the term of his/her employment
and at all times thereafter, Employee will not use, handle, copy or duplicate,
2
<PAGE>
in part or in whole, any Proprietary Information, except as directed by the
Company and in the ordinary course of the Company's business.
C. Employee agrees that, upon request by the Company, and in any event
immediately upon termination of Employee's employment, Employee shall return to
the Company any and all property, keys, notes, memoranda, writings, lists,
files, reports, customer lists, correspondence, tapes, software, cards, surveys,
maps, logs, machines, technical data, work product or any other tangible product
or document or computer material of any kind whatsoever, and all copies thereof,
which has been produced or received by or otherwise submitted or made available
to Employee in connection with his/her employment with the Company.
D. Employee understands and agrees that all Proprietary Information is and
shall remain the sole property of the Company and that Employee has not and will
not appropriate for his/her own use or for the use of any third party any
Proprietary Information. Furthermore, Employee, without any separate
compensation or consideration of any kind, hereby assigns and agrees to assign
to the Company, its successors, assigns or nominees, Employee's entire right,
title and interest in any developments, designs, patents, inventions and
improvements, trade secrets, trademarks, copyrightable subject matter or other
Proprietary Information which Employee has made or conceived, or may make or
conceive, either solely or jointly with others, while in the employ of the
Company, or with the use of time, material or facilities of the Company or
relating to any actual or anticipated business, research, development, product,
service or activity of the Company known to Employee while employed at the
Company, or suggested by or resulting from any task assigned to Employee or work
3
<PAGE>
performed by Employee for or on behalf of the Company, whether or not such work
was performed prior to the date of Employee's employment.
NONCOMPETITION
Employee agrees that, because of the confidential and competitive-sensitive
nature of the Proprietary Information and because the use, or even the
appearance of the use, of the Proprietary Information in certain circumstances
may cause irreparable damage to the Company and its reputation, or to clients of
the Company, Employee will not, directly or indirectly, from the date of his/her
employment until the expiration of (6) months after the date on which Employee's
employment with the Company terminates for any reason whatsoever, own, manage,
operate, join, control, be employed by, or participate in the ownership,
management, operation or control of or be connected in any manner, including as
director, officer, consultant, representative, independent contractor, employee,
partner, or investor, with any business, enterprise, organization or other
individual or entity which solicits business, performs services or produces
goods which are comparable to or competitive with any business of the Company (a
"Competitor"); provided, however, that the foregoing restrictions shall not
prohibit Employee from owning publicly traded stock or other securities of a
Competitor, amounting to no more than one (it) percent of such stock or
securities.
NONSOLICITATION
Employee agrees that during the term of his/her employment and for a period
of one (1) year thereafter, Employee will not interfere with the
4
<PAGE>
Company's relationship with, or endeavor to employ or entice away from the
Company, any business, enterprise, organization or other individual or entity,
which or who is an employee, customer of or supplier of goods or services to the
Company, or which or who otherwise maintains a business relationship with the
Company.
REMEDIES
Employee acknowledges that any breach or violation of the nondisclosure,
noncompetition or nonsolicitation provisions of these Standard Conditions of
Employment will result in irreparable injury and damage to the Company and/or
the clients of the Company, which could not adequately be compensated by money
damages alone. Accordingly, Employee agrees that in the event of such a breach
or violation, or any threat of such a breach or violation (in addition to the
right to pursue other remedies, including, without limitation, damages), the
Company or, where appropriate, the client of the Company, will be entitled to
obtain in any court of competent jurisdiction an immediate injunction and
restraining order to prevent such a breach or violation by Employee and by any
third party acting for or with Employee, or to enforce these Standard Conditions
of Employment; and Employee hereby waives any and all rights to assert any claim
or defense that the Company has an adequate remedy of law thereunder.
NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in these Standard Conditions of Employment should be interpreted or
construed to confer upon Employee any right with respect to continuance of
Employee's employment with the Company for any fixed period of time, nor
5
<PAGE>
interfere in any way with the right of the Company or Employee to terminate the
employment relationship between the Company and Employee, with or without cause.
SURVIVAL OF CONDITIONS
These Standard Conditions of Employment shall survive any termination of
Employee's employment with the Company.
SEVERABILITY
If any provision of these Standard Conditions of Employment is determined
by a court of competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the validity or enforceability of any other part
or provision thereof.
Employee acknowledges that these Standard Conditions of Employment have
been presented to Employee in connection with the Company's offer to employ
Employee; and that Employee has carefully read, and fully understands, agrees
to, and accepts them as a condition of employment with the Company.
Date: 1/11/95 EMPLOYEE:
-------------------
/S/ SUSAN J. CARSTENSEN
---------------------------------------
Signature
Susan J. Carstensen
---------------------------------------
Name Typed/printed
10/26/94
6
EXHIBIT 22.1
The following corporations are either direct or indirect, wholly-owned
subsidiaries of the Company:
Subsidiary Incorporation
Automated Wagering (Europe), Ltd. United Kingdom
Automated Wagering International, Inc. Delaware
Automatic Music Service of Billings, Inc. Montana
Automation First, Inc. Montana
Nuevo Sol Turf Club, Inc. New Mexico
Raven's D&R Music, Inc. Montana
United Tote Canada, Inc. Canada
United Tote Company Montana
United Wagering Systems, Inc. Delaware
Video Lottery Consultants, Inc. Montana
VLC of Nevada, Inc. Nevada
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Independent Auditors' Consent
The Board of Directors
Video Lottery Technologies, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-86430) on Form S-8 of Video Lottery Technologies, Inc. of our report dated
February 28, 1997 relating to the consolidated balance sheets of Video Lottery
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of
Video Lottery Technologies, Inc.
KPMG Peat Marwick LLP
Billings, Montana
March 27, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,322
<SECURITIES> 0
<RECEIVABLES> 25,704
<ALLOWANCES> 1,317
<INVENTORY> 18,297
<CURRENT-ASSETS> 66,232
<PP&E> 153,124
<DEPRECIATION> 78,417
<TOTAL-ASSETS> 168,043
<CURRENT-LIABILITIES> 38,148
<BONDS> 27,567
0
19
<COMMON> 108
<OTHER-SE> 72,104
<TOTAL-LIABILITY-AND-EQUITY> 168,043
<SALES> 38,833
<TOTAL-REVENUES> 176,681
<CGS> 25,441
<TOTAL-COSTS> 112,347
<OTHER-EXPENSES> 34,135
<LOSS-PROVISION> 523
<INTEREST-EXPENSE> 3,754
<INCOME-PRETAX> (32,984)
<INCOME-TAX> (8,753)
<INCOME-CONTINUING> (24,231)
<DISCONTINUED> 5,482
<EXTRAORDINARY> 4,014
<CHANGES> 0
<NET-INCOME> (14,735)
<EPS-PRIMARY> (1.38)
<EPS-DILUTED> (1.38)
</TABLE>
