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, 1997 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
POWERHOUSE 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. [ ]
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The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 2, 1998, was approximately $134,904,000 (based on the
last sale price of such stock as reported by NASDAQ National Market System on
such date).
The number of shares outstanding of the registrant's common stock, $.01 par
value ("Common Stock"), as of March 2, 1998, was 10,477,952.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Business 3
ITEM 2. Properties 28
ITEM 3. Legal Proceedings 28
ITEM 4. Submission of Matters to a Vote of Security Holders 29
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters 30
ITEM 6. Selected Financial Data 31
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk 41
ITEM 8. Financial Statements and Supplementary Data 42
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 67
PART III
ITEM 10. Directors and Executive Officers of the Registrant 67
ITEM 11. Executive Compensation 70
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 74
ITEM 13. Certain Relationships and Related Transactions 76
PART IV
ITEM 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 77
Signatures 79
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 laws and
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
Powerhouse Technologies, Inc. (the "Company") was incorporated in Delaware
in May 1991. The Company acts as a holding company for ten active corporations.
Unless the context otherwise requires, references in the form 10-K for fiscal
year ended 1997 ("Form 10-K") to the "Company" or "PTI" refer to Powerhouse
Technologies, Inc. and its subsidiaries; references to "AWI" refer to Automated
Wagering International, Inc., one of the Company's four 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 develops, manufactures and markets video lottery and casino
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,
Sunland Park 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 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
included 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 was completed in
1997. (See Note 2 to the Company's Consolidated Financial Statements.)
On March 21, 1997, the New Mexico legislature voted to allow certain types
of casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack at Sunland Park, New Mexico. Under this legislation, the
Company will be permitted to operate up to 300 video gaming machines at its
Sunland Park racetrack for up to twelve hours per day. The Company does not
anticipate that casino gaming at Sunland Park will be operational until the
third or fourth quarter of 1998. The implementation of racetrack gaming is,
however, subject to formation of a gaming control board, equipment procurements
and other regulatory conditions, including the granting of necessary licenses.
At December 31, 1997 the Company's investment in the racetrack was approximately
$20.8 million, and the Company anticipates expending an additional $8.0 million
for facility enhancements, gaming machines and related equipment in the future.
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 that state.
On November 14, 1997, the Company announced that AWI had been granted a new
five-year award, with options for up to an additional five years, to continue
operating Pennsylvania's lottery system. In its decision granting the award,
Pennsylvania Secretary of Revenue Robert A. Judge, Sr. accepted the
recommendation of its six-member Lottery review committee, which favored AWI on
all criteria. The Committee's report specifically ranked AWI superior in all
evaluation categories including technical and pricing. AWI has been the on-line
lottery provider for Pennsylvania since the inception of its lottery system in
1975 and operates 7,040 terminals throughout the State.
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On January 2, 1998, the Company announced that its name change to
Powerhouse Technologies, Inc. from Video Lottery Technologies, Inc., became
effective January 1, 1998 and that it had begun trading on the Nasdaq National
Market under the new ticker symbol PWRH.
On February 10, 1998, the Company announced the completion of a secondary
offering of approximately 14.5% of the Company's outstanding common stock
(approximately 1.5 million shares). The shares were marketed and sold
principally to a variety of institutional investors. The shares were offered by
an investor group headed by William Spier. Pursuant to an agreement with the
Company, Mr. Spier agreed to resign as a director of the Company effective upon
disposition of the shares. In addition, he is subject to certain restrictions on
his ability to acquire Company securities in the future.
Business of the Company
Powerhouse Technologies, Inc.
The Company conducts its operations primarily through four wholly-owned
subsidiaries, AWI, VLC, UWS (the latter more commonly known by the trade name of
its principal subsidiary, United Tote) and Sunland Park. The Company develops,
manufactures, sells and operates gaming and wagering systems in the on-line
lottery, video lottery and casino gaming and pari-mutuel wagering markets.
Automated Wagering International, Inc.
AWI develops, manufactures, installs and operates computer-based, on-line
systems and is presently operating systems for state lotteries in Delaware,
Florida, Maryland, Minnesota, Montana, Pennsylvania and South Dakota. An on-line
lottery system consists of terminals located in numerous retail outlets, a
telecommunications network, a central computer system and communications
equipment software as well as the software to operate the system and process
sales and validation of lottery game tickets. 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. AWI
typically maintains ownership of the lottery system and operates it for the
state in return for a percentage of lottery ticket sales. In foreign
jurisdictions, lottery equipment and systems are often sold and related software
is licensed to lottery authorities. The Company acquired AWI pursuant to an
asset purchase agreement in 1992. Internationally, AWI has sold and currently
supports and/or maintains on-line lottery systems to customers in Norway, Canada
and Chile.
Governments in approximately 80 countries have authorized lottery games,
such as lotto, numbers and keno as well as instant "scratch-off" games,
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. 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 1997, 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 1997.
There are many types of government-authorized lotteries in the world. The
Company categorizes traditional (as opposed to video) 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 lottery players make their own
selections. Various games of chance are offered involving the selection of
numbers from a field of possible numbers. A lottery player requests the desired
numbers and purchases the lottery ticket from the clerk-activated terminal
provided by the Company or other lottery vendor to a lottery ticket retailer.
The amount wagered per transaction is determined by individual lottery
authorities and is usually $.50 to $1.00 per wager. The lottery 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 to sell tickets on the lottery
authority's behalf. The data is entered either manually by keyboard or
automatically through a mark sense reader or scanner. The wager information is
then transmitted via communication lines to the
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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.
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 lottery 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 increasing automation of instant ticket
validation and accounting systems. Such games compete with the on-line games
provided on the Company's systems.
Typically 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 contracts, awarded through a competitive
bidding process pursuant to which the lottery vendor supplies, installs and
operates the lottery system 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 on-line lottery system sales
instead of long-term contracts. The Company or other vendor develops and
installs the on-line lottery system and trains lottery personnel in the
operation of the system for a fixed fee. Other services, such as equipment
maintenance and ticket stock production, may be available under separate
contracts.
United States. AWI derives revenue primarily from contracts with state
lottery organizations throughout the United States. Revenue consists primarily
of a contractual percentage of lottery ticket sales in each state as well as
revenue from installation and sales of on-line lottery systems and equipment.
The segment experiences fluctuations in revenue levels depending on relative
sizes of jackpots, the number of terminals on-line and the volume of tickets
sold in the states in which the Company operates as well as on the timing of
on-line lottery systems and equipment sales and installations. The Company
expects lottery services revenue to continue to be a significant component of
its total revenues. 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, 1997, the approximate number of retail
terminals installed in each jurisdiction, and the revenues generated by the
lottery operations.
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<TABLE>
<CAPTION>
Total On-Line
Date of Expiration Lottery Terminals Lottery
Com-mencement Date of Authority Operating at Revenues
of Current Current Extension December 31, 1997 in 1997(2)
Jurisdiction Contract Contract(1) Options (in millions)
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<S> <C> <C> <C> <C> <C>
Delaware 10/1994 9/2002 --- 470 $ 80
Florida(3) 4/1988 1/2000 --- 10,850 1,454
Maryland 7/1996 7/2001 1 three-year plus 3,880 1,038
2 one-year
Minnesota 5/1990 8/2002 --- 1,940 96
Montana 11/1996 11/1998 --- 620 22
Pennsylvania(4) 1/1989 12/1998 --- 7,040 1,298
South Dakota 7/1990 5/1999 six months 640 13
</TABLE>
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(1) Expiration dates do not reflect the exercise of the lottery authority's
extension options.
(2) Figures are provided for each state's fiscal year ended June 30, 1997.
(3) The Florida State Lottery accounted for 33% of AWI's total revenue during
1997. AWI has been selected for the award of a new five-year contract to
continue operating Florida's lottery system. A competitor of the Company
has protested the award. The lottery is expected to release its final order
regarding the protest in the near future. If the award is ultimately
upheld, the Florida Lottery may commence negotiations with the Company for
a new five-year contract. The Company will continue to operate the lottery
system until the implementation of the new contract under an interim
agreement. The current interim agreement expires upon the earlier of the
award and implementation of a new agreement or January 1, 2000.
(4) The Pennsylvania State Lottery has awarded AWI a new five-year contract
commencing January 1999 to continue operating Pennsylvania's lottery
system. The Pennsylvania State Lottery accounted for 24% of AWI's total
revenues during 1997.
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.
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
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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 $1,000
to $15,000 per minute for system downtime beyond a stipulated grace period are
common to the domestic market. Although the actual liquidated damages imposed
can be 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 subject AWI to damages. The Company
maintains errors and omissions coverage under risk management policies which
would cover certain but not all claims.
Various state on-line lottery contracts contain provisions under which AWI
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. Penalties paid or accrued by AWI
with respect to its contracts were approximately 1.3% of its revenues in 1997,
3.9% in 1996 and .2% in 1995.
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. In general, a 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 vender for all
terminations except for a material breach.
In addition to potentially significant capital requirements to manufacture
and install lottery systems, 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. (See Note 15 to Consolidated Financial Statements.)
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.
In September 1993, the Company introduced its MasterLink(R) system. The
Company's first U. S. application of the MasterLink(R) system was to the
Delaware Lottery which awarded a five-year contract to AWI in January 1994.
Since that time, the Company has introduced an enhanced version of its
MasterLink(R) system to five additional jurisdictions. The express purpose of
the MasterLink(R) system is to manage 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 MasterLink(R) 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 MasterLink(R) 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:
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Terminals. AWI designs and manufactures 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.
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.
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 MasterLink(R) 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.
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 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.
Game Design. An important factor in maintaining and increasing public
interest in lottery games is innovation in game design. The principal
characteristics of game design include frequency of drawing, types of
prizes, cost per play and setting of appropriate odds. The Company's
MasterLink(R) system and Ovation(TM) line of terminals are designed to
efficiently permit the development and rapid deployment of new games and
targeted on-line game-related promotions. For example, in 1996 the Company
introduced its keno module in Maryland, where keno accounts for over 20% of
total handle. 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.
Competition. Competition is intense in the traditional on-line lottery
business. It is not unusual in the United States for contract awards to be
challenged by unsuccessful vendors. Relatively few new or rebid on-line
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 29 of the 38 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.
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Video Lottery Consultants, Inc.
VLC develops, manufactures and markets video gaming machines, central
control systems and related services for the gaming machine industry. The gaming
machine industry includes both video lottery and casino gaming venues. Video
lottery gaming is the use of video gaming machines to provide low stakes gaming
entertainment 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 as well as restaurants and convenience stores. The gaming
machine industry is subject to governmental regulation and taxation and,
depending on the jurisdiction, may be monitored and controlled by a central
computer system. Video lottery gaming programs provide substantial incremental
sources of revenue to the governmental jurisdictions without increasing general
taxation.
In addition, VLC sells its 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 most other major casino jurisdictions.
Currently seven U. S. states, five states in Australia, eight Canadian
provinces, Iceland, Norway, Sweden and South Africa have authorized various
levels and forms of video lottery gaming. 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 $1,000. In addition, in most
jurisdictions, the payment of jackpots differs as compared to traditional gaming
machines. After inserting money into a video lottery gaming machine, the player
receives credits to play the machine. Player losses are deducted from the
credits and winnings are added to the credit, instead of any coins being dropped
into a tray. When the player is finished, the video lottery gaming 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 to a hopper.
Compared to most traditional lottery games, video lottery provides the potential
for a higher level of instant gratification for winners. Video lottery offers
players a payback percentage of 80% to 94%, which is lower than most traditional
casino games, but greater than traditional state lotteries where payback is
typically about 50%.
There are two basic private sector ownership structures in which video
lottery gaming is implemented:
(1) 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/distributors of coin-operated machine routes who contract
with location owners to install, service and maintain the gaming machines.
This private sector ownership structure has been adopted in Montana, South
Dakota, Louisiana, West Virginia, New Brunswick, Prince Edward Island,
Victoria and South Australia.
(2) Government sector ownership - This form of ownership is effective in
the Canadian provinces of Alberta, Saskatchewan, Newfoundland, Nova Scotia
and Quebec and in Northern Territories, Australia. The province of Ontario,
Canada has passed video lottery gaming legislation and is in the process of
implementation which is expected to occur in the latter half of 1998. 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.
In 1996 and 1997 certain jurisdictions, most notably Louisiana and Alberta,
Canada, allowed voters to decide on the continued operation of video lottery
locations and casinos in their cities and counties. In
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Louisiana, voters in approximately one-half of the state's parishes (counties)
voted to ban video lottery operations. Existing locations in these parishes will
be allowed to operate for approximately two years before the machines must be
removed. In Alberta, one city has voted to date, and voters there gave the local
casino seven days to remove machines. More cities in Alberta are expected to
carry out voting 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. 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 some of those and in several additional
states including Arizona, Connecticut, Iowa, Michigan, Minnesota, New Mexico,
North Dakota, Oregon and Wisconsin. Outside the United States, 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 $48.5 billion in U. S. gaming industry
revenue in 1997. This figure dwarfs the $5.9 billion spent on movies, the $12.5
billion spent on recorded music, the $7.2 billion spent at theme parks and other
amusement activities and the $15.5 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 indicators point toward 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 gaming 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 1998. 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 to 100,000 units by the year 2000.
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 in 1996. The Company recently was granted a license in New
South Wales, Australia which represents a 70,000 machine market. The Company
entered into technology agreements with Datacraft Technologies Pty Ltd,
pertaining to the manufacturing of the Company's gaming machines for use in
Australia. These agreements terminated in April 1997. The Company plans to
distribute its own gaming machines in Australia. Additional growth is expected
in Ontario, Canada 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. 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 distributor
agreements to market video gaming machines to casinos in Connecticut, Iowa,
Michigan, Minnesota, New Mexico, North Dakota, South Dakota and Wisconsin. The
Company has placed additional machines at Native American casinos in Arizona,
Mississippi, North Carolina and Oregon.
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The Company believes casino gaming at pari-mutuel racetracks may expand as
more jurisdictions pass legislation allowing gaming. The Company plans to
leverage the relationships developed with the pari-mutuel racetracks through
United Tote to attempt to gain entrance into these new markets. On March 21,
1997, the New Mexico legislature voted to allow casino gaming at pari-mutuel
racetracks in New Mexico, including the Company's racetrack at Sunland Park, New
Mexico. Under this legislation, the Company will be permitted to operate up to
300 video gaming machines at its Sunland Park racetrack for up to twelve hours
per day. The Company does not anticipate that casino gaming at Sunland Park will
be operational until the third or fourth quarter of 1998. The implementation of
racetrack gaming is, however, subject to formation of a gaming control board,
equipment procurements and other regulatory conditions, including the grant of
necessary licenses. At December 31, 1996 the Company's investment in the
racetrack was approximately $20.8 million, and the Company anticipates expending
an additional $8.0 million for facility enhancements, gaming machines and
related equipment in the future. 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 that state. There
can be no assurance that the Company will be able to satisfy the regulatory
conditions or be granted the necessary licenses or that the necessary
implementation can be completed on schedule. Further, casino gaming at
racetracks is a new business for the Company, and the Company has never before
owned or operated a casino. No assurance, therefore, can be given that the
Company's gaming operations at Sunland Park will be profitable to the Company.
Video Lottery Markets. The following table, as of December 31, 1997, sets
forth certain information concerning the number of Company 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>
Alberta, Canada 1992 Government GTECH 5,941 3,974 66.9
Atlantic Canada(4) 1990 Private/Government VLC 9,860 2,889 29.3
Delaware(5) 1995 Government AWI 335 275 82.1
Iceland 1991 Charitable VLC 500 450 90.0
Louisiana 1992 Private IGT 14,850 8,836 59.5
Montana(6) 1985 Private(11) None 16,150 4,785 29.6
Northern Territory 1996 Government VLC 400 80 20.0
Oregon(7) 1992 Government IGT(12) 9,074 4,368 48.1
Quebec 1994 Government VLC 15,339 6,530 42.6
Rhode Island(8) 1992 Government GTECH 1,628 440 27.0
Saskatchewan 1993 Government GTECH 3,566 1,148 32.2
South Australia 1994 Private VLC 9,259 1,000 10.8
South Dakota(9) 1989 Private VLC 8,045 7,641 95.0
Victoria, Australia(10) 1995 Private VLC 11,731 1,396 11.9
Victoria, Australia(10) 1995 Trust VLC 11,248 4,994 44.4
West Virginia 1997 Government GTECH 3,000 152 5.1
--------- ------- -----
Total 120,926 48,958 40.5
======= ====== ====
</TABLE>
- ----------
(1) Excludes several other jurisdictions in which the Company currently does
not participate, including Manitoba, Sweden, Queensland and Tasmania even
though the Company is licensed in Tasmania.
(2) Estimated number in operation as of December 1997.
(3) Number of VLC gaming machines sold may vary from number in operation.
(4) 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.
(5) VLC supplies video machines to Dover Downs (120) and Delaware Park (155).
IGT supplies video machines to Harrington Midway (60). There are also 2,245
mechanical spinning reel games at the three racetracks.
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<PAGE>
(6) 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.
(7) Total number of gaming machines and number of VLC gaming machines based on
contract with Oregon State Lottery.
(8) Video lottery operations are authorized at only two pari-mutuel facilities
to which the Company is one of four suppliers.
(9) Total number of gaming machines based on information provided by the South
Dakota Lottery. Number of VLC gaming machines based on VLC shipment
reports.
(10) Tattersall Sweep Consultation (the lottery) and TABCORP (the off-track
racing association) are the two approved operators in the state of
Victoria.
(11) Private includes coin operators and/or location owners.
(12) International Game Technology. In 1995, the system contract was awarded to
GTECH. Transition of the central system operation to GTECH has not yet been
completed.
Gaming Machines and Game Software. The Company through its VLC subsidiary,
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
poker, blackjack, bingo and keno and spinning reel games. 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 reliability 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 Series(TM),
VLC's next generation gaming machine, 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 Series(TM) has been approved by the State of Nevada
for sale in that state. The Company's gaming machines typically sell for between
$4,500 and $7,900, depending on the configuration and generation of the machine
and volume of purchases.
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.
The Company produces software chip sets with new gaming features for its
customers. The Company expects these new software chip sets 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.
Marketing and Distribution. The Company must obtain a license and approval
of its gaming machines before it can sell machines in either the casino or video
lottery markets. The following chart
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<PAGE>
shows the jurisdictions where VLC or the Company currently is licensed or
authorized to conduct business and where license applications are filed and
approval is pending:
<TABLE>
<CAPTION>
CURRENT JURISDICTIONS IN WHICH THE COMPANY OR CERTAIN SUBSIDIARIES ARE LICENSED TO
CONDUCT BUSINESS
----------------------------------------------------------------------------------------------------
UNITED STATES
Casino (c)/ Native American
Video Lottery Riverboat (r) Charitable Market INTERNATIONAL
- ------------- ------------- ---------- ------ -------------
<S> <C> <C> <C> <C>
Delaware Colorado (c) Mississippi Arizona Australia
Louisiana Indiana (r) Ak-Chin New South Wales
Montana Iowa (r) Fort McDowell South Australia
Oregon Louisiana (r) Gila River Western Australia
Rhode Island Mississippi (r) Tonto Apache Tasmania
South Dakota Nevada (c) White Mountain Apache Victoria
West Virginia New Jersey (c) Yavapai-Apache Northern Territory
South Dakota (c) Connecticut Canada
Mashantucket-Pequod Alberta
Mohegan New Brunswick
Louisiana Newfoundland
Coushatta Nova Scotia
Tunica-Biloxi Ontario
Michigan Prince Edward Island
Bay Mills Quebec
Minnesota Saskatchewan
Mississippi Iceland
Choctaw Norway
New Mexico Peru
Acoma South Africa
Pojoaque Mpumalanga
Pueblo of Isleta -----------------------
Pueblo of Sandia LICENSE
San Juan Pueblo APPLICATIONS FILED:
Santa Ana Taos
Tesque Pueblo Nova Scotia
North Carolina Pascua
Eastern Band of Yaqui, Arizona
Cherokee Gauteng, South Africa
Oregon Quebec (Casino)
Coquille Queensland, Australia
Cow Creek
Grande Ronde
Siletz
Umatilla
Umpqua
Warm Springs
Wisconsin
</TABLE>
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 distributors in Louisiana, South
Australia, New Jersey and a number of Native American markets. 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.
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<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.
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
encourage new jurisdictions to adopt a video lottery program and use such
systems. Similar technology can also be used by casinos 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:
Security. To ensure security of communications, VLC's machines have
sophisticated features, including encryption, sequencing and timing of data
transmissions.
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.
Compatibility. The Company's central control system allows gaming machines
made by other manufacturers to run on the system.
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 gaming machines. However, the
system can run in a real-time environment (on-line) should a jurisdiction
require this feature.
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.
Electronic Funds Transfer. The central control system is capable of
processing EFT functions which translate to easier and quicker funds
collection.
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, the Norwegian Red Cross and the Icelandic Gaming
Fund Raising in Iceland. The Company's MasterLink(R) system is state-of-the-art
technology, utilizing an IBM UNIX platform or DEC ALPHA platform as is the case
with ALC, and offers
- 14 -
<PAGE>
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 MasterLink(R) 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 MasterLink(R) 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. The Advanced Gaming System ("AGS") is being marketed to new as well as
existing customers. The AGS was successfully installed in Iceland in 1997.
Development work is underway to provide the Company's AGS to Tabcorp in
Victoria, Australia in mid-1998.
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 system side as both video lottery jurisdictions and casinos demand more
reporting features, downloadable games and additional forms of jackpotting and
linked progressives.
Competition. 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., Alliance Gaming, Atronic, Silicon Gaming,
Spielo Gaming International, WMS Industries, Casino Data Systems, Aristocrat and
GTECH.
Significant factors which influence the purchase of 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.
Route Operations. Through three of its subsidiaries, the Company 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.
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
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<PAGE>
significant share of the video lottery machine market in Montana. During the
year ended December 31, 1997, the route operations generated approximately $17.7
million or 9% of the Company's consolidated revenues.
The Company enters into agreements with owners of business establishments
to install video lottery gaming 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.
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.
United Wagering Systems, Inc.
The Company acquired UWS in 1994 pursuant to a stock purchase agreement.
United Tote develops, 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, betting terminals, proprietary software, tote boards and
other displays and video equipment. The products and services of United Tote 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. International customers typically purchase the hardware
and a license to use the proprietary software for the system's operation. United
Tote also provides wagering terminals for use in casino race/sportsbooks. See
Note 2 to the Consolidated Financial Statements
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
350 pari-mutuel wagering facilities in North America and numerous others
worldwide.
While on-track attendance and handle from pari-mutuel wagering at live
events 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.
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<PAGE>
On-track wagering is conducted on the premises of a racetrack where the live
race is taking place. Off-track wagering takes place somewhere other than at the
live 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 typically 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 a thousand 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.
Domestic Contracts. 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 the contract 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 if processed by the
totalisator. Liquidated damages paid or accrued by United Tote with respect to
its pari-mutuel contracts were approximately 1.0% of its revenues for 1997, 0.3%
for 1996 and 1.6% for 1995.
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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 provides pari-mutuel wagering services to over 120 of
approximately 350 pari-mutuel facilities in North America. The installed base of
terminals in use was approximately 8,200 at December 31, 1997.
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 123rd running of
the Kentucky Derby at Churchill Downs in 1997, where $15.9 million was wagered
at the track; an additional $60.7 million was wagered through hubs throughout
the country for another North American single-day record of $76.6 million total
combined system handle. United Tote recently signed multi-year contract
extensions to its existing totalisator service contracts with Churchill Downs
and Turfway Park racetrack, located in Florence, Kentucky.
International Sales. United Tote has customers in international
marketplaces, including Canada, 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.
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 1,600 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. Repair 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(TM) 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(TM) terminal thus
allows for significant labor savings and flexibility and versatility. Other
terminals in the Horizon System family are the portable wireless ULTIMA(TM); the
cashless account-betting PROFILE(TM); and a bill-accepting module to convert a
VERSA(TM) into a touch-screen, self-service terminal. Approximately 6,600
VERSA(TM) terminals are presently in service at customer locations. In 1995, an
enhanced version of the VERSA(TM) as well as a color version were developed.
Those new model terminals have been produced since 1996 and are in service at
customer locations.
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 product 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.
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Competition. 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's principal competitors are Autotote, AmTote and, at some
facilities, a limited number of other smaller, local and 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.
Sunland Park
The Company's racetrack operation is located in Sunland Park, New Mexico,
adjacent to El Paso, Texas. In 1997 the State of New Mexico recently voted to
allow casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack in Sunland Park, New Mexico. The legislation permits the
Company to operate up to 300 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 board to oversee the gaming and other regulatory matters
(including the grant of necessary licenses to the Company). Two million
residents live within a 100-mile radius of Sunland Park, which area includes the
cities of El Paso, Texas and Juarez, Mexico. The Company had architectural plans
developed for casino gaming at the racetrack facility and has initiated
construction. Current plans call for approximately $8.0 million of capital
expenditures for facility enhancements, gaming machines and related equipment.
Competition. 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. However, in 1998 the racing dates for The Downs at Albuquerque do
not conflict with Sunland Park. If the racing dates or schedules of either other
track are expanded or altered so that a direct conflict between Sunland Park and
the others occurs, it is likely that there would be some 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.
Manufacturing
The Company's primary manufacturing facility is located in Bozeman,
Montana. 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 conditions warrant and/or when contractually
required. The Company also has contracted with outside sources for the
manufacture of some of its components. The Company has historically experienced
low turnover among its work force.
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Research and Development
The future success of the Company depends to a large extent upon its
ability to design, manufacture and market technologically sophisticated products
that achieve high levels of player acceptance. The Company's business is
characterized by rapidly changing technology and frequent new product
introductions and enhancements. The development of a successful new product or
product design by a competitor would adversely affect sales of the Company's
products and force it to respond quickly with its own competing products. There
can be no assurance that the Company will be successful in identifying,
developing and marketing new products or enhancing its existing products. The
Company's business will be adversely affected if the Company experiences delays
in developing new products or enhancements or if such products or enhancements
do not meet and receive all regulatory approvals and/or gain customer
acceptance.
In 1997, the Company expended $9.8 million (net of capitalization) on
research and development activities as compared to $8.0 million in 1996 and $8.9
million in 1995. The Company capitalized approximately $1.0 million in 1997 and
$4.1 million in 1996 and $2.7 million in 1995 of software development costs in
conjunction with the development of the Company's MasterLink(TM) central system
software. In 1997 the Company implemented new modules and other significant
enhancements in a number of on-line lottery systems provided to domestic and
international customers. Research and development expenditures were
approximately 5.5%, 6.8% and 6.4% of consolidated revenues in 1997, 1996 and
1995, respectively. Additionally, the Company spends significant resources and
capital on improvement of existing products, services and techniques for current
customers.
The Company is currently conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
issue is pervasive and complex, as virtually every computer operation of the
Company, including both internal systems and systems delivered to customers,
will be affected in some way by the roll-over of the two-digit year value to
"00." Computer systems that do not properly recognize date-sensitive information
could generate erroneous data or cause a complete system failure. The Company
believes that, with modification of existing computer systems, updates by
vendors and conversion to new software in the ordinary course of its business,
the Year 2000 issue will not pose significant operational problems for the
Company's computer systems. However, if such modifications and conversions are
not completed timely or properly, the Year 2000 issue may have a material impact
on the business and operations of the Company. The costs of modifications and
conversions are not anticipated to be material, but will principally represent a
re-deployment of existing or otherwise planned resources. No assurance can be
given that the Company will successfully avoid any problems associated with the
Year 2000 issue.
Intellectual Property
The Company may seek and, in some cases, has sought, patents and copyrights
with respect to various aspects of its games and 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 or copyrights 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 its products to sign
confidentiality and 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.
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Employees
As of December 31, 1997, the Company employed approximately 1,380 people on
a full and part-time basis. Approximately 525, 200, and 480 were employed in the
on-line lottery, gaming machine and wagering systems and racetrack operations
segments, respectively. Another 175 people provided corporate manufacturing,
finance and administration and national marketing services to the operating
segments. Approximately 220 were 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 typically are conducted on
company subsidiaries, affiliates, officers, directors, and stockholders 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, state, provincial 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 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
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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.
The U. S. Congress has created the National Gambling Impact and Policy
Commission to conduct a comprehensive study of all matters relating to the
economic and social impact of gaming in the United States. The enabling
legislation provides that, not later than two years after the enactment of such
legislation, the commission would be required to issue a report containing its
findings and conclusions, together with recommendations for legislation and
administrative actions. Any such recommendations, if enacted into law, could
adversely affect the gaming industry and have a material adverse effect on the
Company's business, financial condition or results of operations.
From time to time, certain legislators have proposed the imposition of a
federal tax on gross gaming revenues. No specific proposals for the imposition
of such a federal tax are currently pending. However, no assurance can be given
that such a tax will not be imposed in the future. Any such tax could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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 state, provincial, 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 and approvals are obtained. An application
for a license or approval 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, removed VLC from the roll
of approved gaming manufacturers, which prohibited the Company from making
future sales of gaming equipment in Victoria. This decision was based on
concerns regarding the former CEO and then majority stockholder of the Company.
After severing all his business relationships with the Company, VLC applied and
was approved for placement on the roll of approved manufacturers in Victoria in
December 1993. The Alcohol, Racing and Gaming Board (RACJ) of Montreal, Quebec,
initially rejected VLC's application as a manufacturer of video lottery
equipment in December 1993. The RACJ reconsidered its earlier decision based on
assurances that the former CEO had also sold his entire stock ownership in the
Company in severing all business relationships with the Company. In March 1994,
the RACJ granted VLC a manufacturer license. VLC remains in good standing with
the Victoria Gaming Commission and the RACJ. Other than the above two licensing
matters, 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.
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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 authorized campaign
contributions to various candidates of political parties.
The process by which lottery contract awards are made may be subject to
intense scrutiny and review by federal, state and provincial 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 and associated
equipment for use or play in Nevada or for distribution outside of 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
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture or distribution of gaming
devices and equipment; (ii) the establishment and maintenance of responsible
accounting practices and procedures; (iii) 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; (iv) the prevention of
cheating and fraudulent practices; and (v) 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 (a "Registered Corporation") and has been found suitable to own the
stock of two wholly-owned subsidiaries, VLC and VLC of Nevada, Inc. (the "Nevada
Subsidiary") which are each licensed as a manufacturer and distributor. The
Nevada Subsidiary is also licensed as 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 VLC or the Nevada
Subsidiary without first obtaining licenses and approvals from the Nevada gaming
authorities. The Company, VLC 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 as
applicable.
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 equipment must be administratively approved by
the
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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 or 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, VLC and the Nevada Subsidiary 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, VLC and the Nevada Subsidiary are 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 VLC and the Nevada Subsidiary are 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
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 or VLC could (and revocation of any license would) have a
materially adverse effect on the Company's manufacturing and distribution of
gaming machines.
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, any of the following: 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, or in any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the
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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 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, VLC or
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, VLC, and the Nevada Subsidiary are 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.
- 25 -
<PAGE>
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 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
- 26 -
<PAGE>
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 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, 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
either by the regulatory agency or 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 4 of the Company's Consolidated Financial
Statements.
- 27 -
<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 38,000
square feet serving as a warehouse/assembly facility in the Bozeman area and
approximately 8,000 square feet serving as executive offices in Atlanta,
Georgia.
The Company's on-line lottery services subsidiary, AWI, leases facilities
in New Jersey located in a complex of which AWI occupies approximately 43,000
square feet and in Arden Hills, Minnesota, where AWI occupies approximately
13,000 square feet. In connection with its operations in the various
jurisdictions, AWI occupies approximately 40 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, Biloxi, Mississippi (1,000 square feet) and
Victoria, Australia (1,000 square feet), 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, Montana and one in Livingston, Montana, out of which
it operates its other two route businesses.
The Company also leases approximately 1,500 square feet of office space
near Baltimore, Maryland for the administrative offices of United Tote. United
Tote leases approximately 12,100 square feet in San Diego, California, which
primarily houses the subsidiary's research and development activities, and
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
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 August 29, 1997, the Court of Appeals affirmed the judgment
of the district court, and on September 29, 1997, the Court of Appeals issued an
order denying a rehearing in this matter. The plaintiff filed a petition for a
writ of certiorari with the United States Supreme Court which was denied on
February 23, 1998.
On December 1996, a purported class action was filed in the Court of
Chancery, Delaware State Court, directing the Company and certain officers and
directors of the company to fulfill their fiduciary obligations by effecting a
transaction for the acquisition of the Company. On January 2, 1997, the Company
and certain other officers and directors of the Company filed a motion to
dismiss the matter. This matter has been informally stayed for an indefinite
period of time by agreement of the parties.
In January 1998, a breach of contract claim was filed against the Company
and AWI in the U. S. District Court, Southern District of New York by MR
International, Inc. and American Lottery Systems. The plaintiffs allege that the
Company and AWI breached their obligations in a joint venture in the Rostov
Region of the Republic of Russia. The complaint seeks monetary damages. The
Company believes the claim is entirely without merit and intends to vigorously
defend the action.
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
as they are currently understood will not likely have a material adverse effect
on the financial position or results of operations of the Company.
- 28 -
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company's Annual Meeting of Stockholders was held on November 14, 1997,
and in connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
10,318,730 shares of the company's common stock were outstanding and entitled to
vote at the meeting, of which 9,848,520 were present in person or by proxy. At
the meeting the following matters were submitted to a vote by the stockholders,
with the results indicated below:
1. Election of one director to serve until the year 2000 Annual Meeting
of Stockholders.
Nominee For Withheld
John Hardesty 7,817,167 2,031,353
2. Ratification of appointment of KPMG Peat Marwick LLP as independent
auditors for the year ending December 31, 1997.
For Against Abstained/Not Voted
8,233,194 1,592,028 23,298
3. Amendment to the Company's 1991 Employee Stock Purchase Plan
eliminating certain restrictions and increasing the number of shares
available for issuance to Plan Participants for Purchase Period 1996
and for subsequent Purchase Periods by 500,000 shares, which increase
would result in a total of 700,000 shares available for issuance under
the plan:
For Against Abstained/Not Voted
4,663,628 2,416,283 68,375
4. Amendment to the Company's 1994 Stock Incentive Plan to increase the
number of available shares issuable thereunder by 500,000 shares,
which increase would result in a total of 1,500,000 shares issuable
under the plan, and to allow for the issuance of restricted stock in
lieu of cash compensation to non-employee directors:
For Against Abstained/Not Voted
4,058,276 3,009,675 80,335
5. Amendment to the Company's Certificate of Incorporation to change the
name of the Company to reflect more accurately the diversity of the
Company's operations.
For Against Abstained/Not Voted
7,223,840 2,540,944 41,348
- 29 -
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol PWRH. From July 24, 1991 until December 31, 1997, the Company's Common
Stock traded under the symbol VLTS. 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.
YEAR High Low
1997
Quarter ended December 31, 1997 $12.75 $8.75
Quarter ended September 30, 1997 $11.38 $5.94
Quarter ended June 30, 1997 $6.25 $3.50
Quarter ended March 31, 1997 $4.88 $3.25
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
As of March 2, 1998, there were approximately 701 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 11 to the Consolidated Financial
Statements.)
- 30 -
<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, 1997, 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, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997, 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 1997 1996 1995 1994 1993
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
On-line lottery $ 94,771 88,843 91,653 101,559 115,544
Gaming machine and route operations 75,221 60,186 61,398 68,571 59,069
Wagering systems and racetrack operations(1) 26,943 27,652 28,111 18,652 ---
-------- ------- ------- ------- -------
Total revenues 196,935 176,681 181,162 188,782 174,613
COSTS OF REVENUES
On-line lottery 62,558 59,333 59,438 62,397 67,985
Gaming machine and route operations 44,530 32,911 35,991 39,815 35,074
Wagering systems and racetrack operations 19,893 20,104 22,286 13,992 ---
-------- ------- ------- ------- -------
126,981 112,348 117,715 116,204 103,059
-------- ------- ------- ------- -------
Gross profit 69,954 64,333 63,447 72,578 71,554
OTHER OPERATING EXPENSES:
Selling, general and administrative 31,655 28,697 31,140 34,000 30,362
Research and development 9,788 7,969 8,888 8,513 6,629
Other charges --- 34,135 2,763 23,994 ---
Depreciation and amortization 21,995 23,822 22,587 20,694 18,033
-------- ------- ------- ------- -------
63,438 94,623 65,378 87,201 55,024
-------- ------- ------- ------- -------
Earnings (loss) from operations 6,516 (30,290) (1,931) (14,623) 16,530
-------- ------- ------- ------- -------
Other income (expense) (2,869) (2,694) (1,833) (242) (9,032)
-------- ------- ------- ------- -------
Earnings (loss) before income taxes and
extraordinary items 3,647 (32,984) (3,764) (14,865) 7,498
Income tax benefit (expense) 1,135 8,753 846 (1,303) (3,152)
-------- ------- ------- ------- -------
Net earnings(loss) from continuing operations 4,782 (24,231) (2,918) (16,168) 4,346
Reversal of (provision for) loss on discontinuance
of wagering systems operations, net(1) --- 5,482 (5,482) --- ---
-------- ------- ------- ------- -------
Net earnings (loss) before extraordinary items 4,782 (18,749) (8,400)
Extraordinary gain, net 13,269 4,014 --- --- ---
-------- ------- ------- ------- -------
Net earnings (loss) $ 18,051 (14,735) (8,400) (16,168) 4,346
======== ======= ======= ======== =======
Earnings (loss) per share data:
Basic:
Continuing operations $0.46 (2.28) (0.28) (1.56) 0.35
----- ----- ----- ----- ----
Net earnings (loss) $1.75 (1.39) (0.80) (1.56) 0.35
===== ===== ===== ===== ====
Diluted:
Continuing operations $0.46 (2.28) (0.28) (1.56) 0.35
----- ----- ----- ----- ----
Net earnings (loss) $1.72 (1.39) (0.80) (1.56) 0.35
===== ===== ===== ===== ====
Weighted average shares:
Basic 10,329 10,635 10,555 10,337 12,286
------ ------ ------ ------ ------
Diluted 10,489 10,635 10,555 10,337 12,293
====== ====== ====== ====== ======
</TABLE>
- 31 -
<PAGE>
<TABLE>
<CAPTION>
December 31,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 37,050 28,083 19,987 23,344 51,458
Total assets 161,397 168,043 165,851 174,032 139,513
Total long-term debt(1)(2)
(excluding current installments) 31,446 9,312 12,885 9,060 855
Stockholders' equity 82,146 72,231 86,448 94,112 108,215
</TABLE>
- ----------
(1) Wagering systems and racetrack operations revenue and costs since May 3,
1994. (See Note 2 to the Consolidated Financial Statements.)
(2) On January 30, 1997, the Company and EDS reached an agreement to settle all
claims against each other. 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 2 to the Consolidated Financial Statements.)
- 32 -
<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 1997 Year 1996
1997 1996 1995 Over 1996 Over 1995
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
On-line lottery 48.0 50.3 50.6 6.8 (3.2)
Gaming machine and route operations 38.2 34.1 33.9 24.9 (2.0)
Wagering systems and racetrack operations 13.8 15.6 15.5 (2.9) (1.4)
----- ----- -----
100.0 100.0 100.0 (11.4) (2.5)
----- ----- -----
Costs and expenses:
On-line lottery 31.8 33.6 32.8 5.6 (0.2)
Gaming machine and route operations 22.6 18.6 19.9 35.3 (8.6)
Wagering systems and racetrack operations 10.1 11.4 12.3 (1.0) (9.9)
Selling, general and administrative 16.0 16.2 17.1 10.1 (7.7)
Research and development 5.0 4.5 4.9 22.5 (10.1)
Other charges --- 19.3 1.5 (100.0) 1,117.9
Depreciation and amortization 11.2 13.5 12.5 (7.6) 5.3
----- ----- -----
96.7 117.1 101.0 (8.0) 13.0
----- ----- -----
Earnings (loss) from operations 3.3 (17.1) (1.0) (121.5) 1,489.5
Other expense, net (1.5) (1.5) (1.0) 7.4 50.0
----- ----- -----
Net earnings (loss) before income taxes,
discontinued operations and extraordinary
items 1.8 (18.6) (2.0) (110.9) 789.2
===== ===== =====
</TABLE>
As a holding company whose principal assets are the securities of its
on-line and video lottery and gaming subsidiaries, the Company's ability to meet
debt service obligations and pay operating expenses and dividends, if authorized
by the Company's board of directors, depends primarily on the receipt of
sufficient dividends from such on-line and video lottery and gaming
subsidiaries. In addition, gaming statutes and license requirements in the
jurisdictions in which the Company's subsidiaries currently operate or may
operate in the future may require the maintenance of minimum amounts of
statutory capital and place certain restrictions upon the amount of dividends
that the Company's subsidiaries may pay.
The success of the Company will be dependent, to a significant extent, upon
the continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an adverse
effect upon the Company's operations.
Revenue from the on-line lottery segment consists primarily of a
contractual percentage of lottery ticket sales in states in which the Company
operated as well as revenue from on-line lottery equipment sales and software
license fees. The segment revenue will experience fluctuations depending on
contract start and end dates and 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.
- 33 -
<PAGE>
Revenue from the gaming machine and route operations segment consists of
sales and lease of gaming machines, sales of parts, central control system
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 new or
expanded gaming operations or when the Company first enters a new jurisdiction,
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 subsequently decline
dramatically depending on the jurisdiction and gaming venue. The Company expects
gaming machine and 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.
The Company is actively seeking to expand its video and on-line lottery and
gaming operations into jurisdictions that have legalized gaming. There can be no
assurance, however, that the Company will be able to identify or capitalize on
any opportunities in suitable markets. The Company's ability to expand will be
dependent upon a number of factors, many of which are beyond the Company's
control, including negotiating acceptable terms, securing required state,
foreign, and local licenses, permits, and approvals, securing adequate financing
on acceptable terms, voter and other political approvals, demographic trends,
and consumers' gaming preferences. As a result, there can be no assurance that
the Company will be able to develop new markets for its products. See "Business
- -- Contracts." In addition, the Company may incur costs in connection with
pursuing new video and on-line lottery and gaming opportunities that it cannot
recover and may be required to expense certain of these costs, which may
negatively affect the Company's reported operating performance for the periods
during which such costs are expensed.
Revenue from wagering systems and racetrack operations is generated
primarily from a contractual percentage of handle processed through computerized
pari-mutuel wagering systems from over 120 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.
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.
- 34 -
<PAGE>
Other charges include special and unusual charges recorded by the Company
for restructurings, asset valuation impairments, liquidated damage assessments
and other contract losses. The Company excludes these other charges from the
calculation of gross profit due to the nature of each charge as disclosed in the
discussion of gross profit margin for each segment of the Company's operations.
Such other charges are considered special and unusual in nature and are not
associated with the revenue stream of any segment of the Company's operations.
Accordingly, the Company believes that the inclusion of such other charges in
the determination of gross profit would not be indicative of past, current or
future gross profit margins.
1997 Compared with 1996
Consolidated revenues increased by $20.3 million , or 11%, to $196.9
million from $176.6 million in 1996. The consolidated gross profit increased by
$5.6 million, or 9%, to $69.9 million from $64.3 million in 1996. Earnings from
operations were $6.5 million in 1997 as compared to a loss from operations of
$30.3 million in 1996. The 1996 loss from operations included $34.1 million of
special and unusual charges recorded by the Company discussed below. Absent the
special and unusual charges, 1996 earnings from operations would have been
approximately $3.8 million. Earnings from operations as a percentage of revenues
was 3.3% in 1997 as compared to 2.2% in 1996 without the special and unusual
charges.
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 transition of
the EDS services and related employees to the Company was completed in the
second quarter of 1997 and has resulted in lower operating costs and improved
customer service.
On-line Lottery
Total revenues from the on-line lottery segment increased by $5.9 million,
or 7%, to $94.7 million from $88.8 million in 1996. The increase reflects higher
revenues from certain domestic on-line lottery contracts as well revenues from
the Company's installation and sale of an on-line lottery system in Chile. 1996
on-line lottery revenues include approximately $7.3 million from lottery
contracts with the Arizona and Washington lottery authorities. Both contracts
terminated in 1996.
The Company expects the on-line lottery segment to remain a significant
segment of the Company, and the segment's growth is dependent upon management's
strategy to selectively bid on domestic lottery contracts and continue to pursue
international on-line lottery opportunities. On-line lottery contracts for
twelve state lotteries will be up for procurement over the next three years two
of which are the Company's. Due to the high cost of procuring new lottery
contracts, the Company intends to target those states which it believes will
establish a bidding process based exclusively on technical capability, price and
service. This strategy allows the Company to efficiently allocate its resources
so that it may also pursue international growth opportunities. The Company is
currently pursuing a number of jurisdictions worldwide that are expected to
implement on-line lottery programs within the next two years. In 1997, revenues
from lottery systems sales to international customers was $8.7 million as
compared to $3.1 million in 1996.
Additionally, the Company's sophisticated on-line lottery system
MasterLink(TM) affords the Company the ability to develop add-on products and
services. Given the maturity of the on-line lottery industry, states are in need
of ways to increase lottery ticket sales and reduce costs. The Company expects
to develop new products and services every year for its existing customers as
well as reduce operating costs.
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 September 2, 1997, the Florida Lottery notified the Company that
the Company had been selected as the most highly qualified bidder for the award
of a new five-year contract pursuant to a re-evaluation that resulted from an
earlier protest by a competitor, GTECH Corporation, of the Florida Lottery's
previous selection of the Company. GTECH Corporation protested the Florida
Lottery's re-selection of the Company as the most qualified bidder. On
- 35 -
<PAGE>
March 23, 1998, the Lottery dismissed the protest and re-awarded the contract to
the Company. GTECH filed its notice of appeal of this order on March 24. The
Florida Lottery may commence contract negotiations with the Company. GTECH has
petitioned the Lottery to stay these negotiations. On January 5, 1998 the
Company and the Florida Lottery entered into an interim contract to continue
operating the Lottery's on-line system until the earlier of either the award and
implementation of a new agreement or through January 1, 2000. Under the terms of
the Florida 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 gross profit margin for on-line lottery revenues was 34% in 1997 as
compared to 33% in 1996. The gross profit margin from on-line lottery service
revenues was 33% in 1997 and 1996. The gross profit on on-line lottery terminal
and system sales was 48% in 1997 and 12% in 1996. Gross profit margins from the
Company's lottery contract in Maryland, implemented in the third quarter of
1996, have been less than anticipated, however, the Company is working with the
Maryland Lottery to reduce operating costs and enhance revenues to the Company
and the lottery. The Company expects to increase gross profit margins for
on-line lottery revenues over time.
In 1996, the Company recorded approximately $31.0 million of special and
unusual charges associated with the on-line lottery segment. The charges
consisted of $18.0 million for inventory reserves and write-downs, $8.4 million
for contractual liabilities and settlement of customer disputes which arose
primarily during the Company's former relationship with EDS discussed earlier
and $4.6 million for impairment of intangible and other assets related to an
on-line lottery contract. These charges have been excluded in the determination
of gross profit due to their unusual nature and are not considered by the
Company to be indicative of anticipated future operating results.
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment increased by
$15.0 million, or 25%, to $75.2 million from $60.2 million in 1996. Revenue was
recognized on shipments of 7,047 units in 1997 as compared to 6,235 units in
1996. Revenues from route operations was $17.7 million in 1997 as compared to
$16.5 million in 1996. Revenue from leases of gaming machines was $11.0 million
in 1997 as compared to $10.7 million in 1996.
The increase in revenues over 1996 levels reflects increased sales in
international markets of Quebec, Canada and South Africa as well as domestic
jurisdictions of Nevada, New Jersey and Minnesota. These increased levels of
sales were offset by reductions in sales in international markets of Norway,
Peru and Alberta, Canada.
The Company expects the gaming machine and route operation segment to
remain a significant segment of the Company's operations. The growth and success
of the segment is dependent upon the Company's ability to expand its leading
position in the worldwide video lottery gaming market, penetrate established
casino markets such as Nevada and New Jersey and the growth of new markets. The
Company believes that new markets such as Ontario, Canada and South Africa, and
the replacement of older gaming machines and systems in Australia and North
America will provide for future growth opportunities for the Company.
Penetration and growth of sales to established casino markets such as Nevada and
New Jersey is primarily dependent on the Company's ability to gain visibility
and acceptance of its gaming machines in the markets while offering a
competitive price. The Company believes that its gaming machines are capable of
producing greater than average play and net win amounts reflecting their
superior graphics and playability. Developing casino opportunities at
pari-mutuel racetracks is dependent initially upon the enactment of legislation
to allow gaming at racetrack facilities. A small number of states, including New
Mexico, Iowa, West Virginia, Delaware, Rhode Island and Louisiana have enacted
legislation to allow gaming at racetracks and the Company anticipates the trend
to continue although there can be no assurance of it continuing.
The gross profit margin on gaming machine and route operations revenue was
41% in 1997 as compared to 46% in 1996. The decrease reflects the relative
higher revenues from sales in Quebec, Canada which have historically carried
lower gross profit margins for the Company. The gross profit margin from route
operations revenue was 27% in 1997 and 29% in 1996. Revenue from leasing of
gaming machines has minimal ongoing direct costs. Depreciation expense of gaming
machines under lease
- 36 -
<PAGE>
and revenue share agreements is recorded as a component of depreciation and
amortization expense in the Company's consolidated financial statements.
Although there can be no assurance given, the Company expects gross profit
margin levels in this segment to remain above 40%.
Wagering Systems and Racetrack Operations
Revenues from wagering systems service contracts was $17.6 million in 1997
as compared to $18.4 million in 1996. The decrease is the result of the closure
of two customer facilities in Wisconsin and Texas, the loss of two customers to
competitors, and decreased revenues from a Philippine customer resulting from
contractual handle rate decreases and a currency devaluation in Asia. These
decreases were partially offset by increased revenues generated from the start
up of live racing at Lone Star Park in Texas, additional services under existing
contracts, and increased fees as a result of increased levels of simulcasting in
the industry. In 1997, United Tote signed contracts with two new customers and
renewed contracts with seventeen existing customers. Included in contract
renewals in 1997 were extension of contracts with Churchill Downs, Turfway Park,
and the Red Mile in Kentucky. Pari-mutuel wagering systems equipment sales were
$2.5 million in 1997 as compared to $2.1 million in 1996. Racetrack operation
revenues were $6.8 million in 1997 and $7.2 million in 1996. The decrease
reflects the Company's decision in 1997 to hold fewer live racing days, which
are not profitable.
The gross profit from wagering systems service contracts was $6.2 million
in 1997 compared to $7.0 million in 1996. The decrease is the result of the
closure of two customer facilities in Wisconsin and Texas, the loss of two
customers to competitors, and decreased revenues from a Philippine customer
resulting from contractual handle rate decreases and the Asian currency
devaluation. Increased operating expenses related to implementation of a
comprehensive employee training program, and liquidated damages payments to two
customers also contributed to the decreased margins. Pari-mutuel wagering
systems equipment sales generated $1.2 million of gross profit in 1997 compared
with $.9 million in 1996. Gross profit for the racetrack operations was $(.3)
million in 1997 and 1996.
The Company expects the wagering systems segment to remain a significant
segment. Recent declines in general attendance at pari-mutuel facilities has
created increased pricing pressures for the Company and its pari-mutuel wagering
systems supplier competitors. The Company does not anticipate those pricing
pressures to decrease in the near future. Accordingly, the Company plans to
maintain profitability by improving customer service while maintaining or
reducing operating costs. Additionally, as discussed in the gaming machine and
route operations segment, a number of jurisdictions have recently enacted
legislation allowing casino style gaming at pari-mutuel racetracks and
facilities. The Company believes that this expansion of video gaming at
racetracks will increase attendance at racetracks. The Company provides wagering
systems and service to over 120 of the approximate 350 pari-mutuel facilities in
North America, including Churchill Downs which has consistently set new
attendance and wagering records with the Company's wagering system and services.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by $3.0
million, or 10%, to $31.7 million from $28.7 million in 1996. The Company
expended more capital and resources for marketing and proposal efforts in 1997
over 1996 levels. The increased expenditures were in the Company's on-line
lottery and gaming machine segments which account for over 86% of the Company's
1997 consolidated revenues. The Company anticipates 1998 selling, general and
administrative expenses to grow with anticipated business growth and future
development.
Research and Development
In 1997, the Company expended $9.8 million (net of capitalization) on
research and development activities as compared to $8.0 million in 1996. The
Company capitalized approximately $1.0 million in 1997 and $4.1 million in 1996
of software development costs in conjunction with the development of the
Company's MasterLink(R) central system software. In 1997 the Company implemented
new modules and other significant enhancements in a number of on-line lottery
systems provided to domestic and international customers. Research and
development expenditures were approximately 5.5% and 6.8% of consolidated
revenues in 1997 and 1996, respectively. The Company plans to increase research
and development efforts to maintain and improve its competitive position.
- 37 -
<PAGE>
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 continuing operations of $24.2 million in 1996 as compared to net loss from
continuing 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 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. The Florida
Lottery contract accounted for approximately 34% or more 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 33% in 1996 as compared to 36% 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 30% and 20% in 1996 and 1995,
respectively.
The Company paid or accrued approximately $81.6 million and $70.3 million
to EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses approximately $9.7 million and $2.7 million 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 the gaming machine and route operations segment decreased by
$1.2 million, or 2%, to $60.2 million from $61.4 million in 1995. The decrease
reflects significant reductions in sales in Louisiana and Quebec. The decreases
were offset by increased sales in international markets involving Norway, Peru,
Victoria and South Australia and Alberta, Canada, as well as increased sales in
domestic jurisdictions of Nevada and Delaware.
- 38 -
<PAGE>
Revenue was recognized on delivery of 6,235 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
delivered 1,175 gaming machines under lease arrangements to the Oregon, Rhode
Island and Delaware lotteries in 1996 as compared to 1,570 gaming machines
delivered to the Oregon, Rhode Island and Delaware lotteries in 1995.
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
29% in 1996 as compared to 28% 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.
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 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
profit of $.3 million in 1996 and $.2 million in 1995.
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.
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.
- 39 -
<PAGE>
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.
Liquidity and Capital Resources
In 1997 the Company generated $35.9 million of cash from operations as
compared to $18.7 million in 1996. Approximately $8.9 million was invested in
property, plant and equipment and intangible and other assets in 1997. The
amount includes approximately $4.7 million related to the manufacture, purchase
and installation of pari-mutuel wagering equipment by Company's wagering system
segment and approximately $1.0 million for additional enhancements to the
Company's MasterLink(TM) on-line lottery central system software.
In 1996 the Company withheld payments to EDS due to disputes with customers
over performance issues the Company had with EDS (see Note 2 to the Consolidated
Financial Statements). At December 31, 1996, the Company had a recorded balance
payable to EDS of $38.0 million which, in conjunction with the settlement of the
disputes in January 1997, was replaced with a note payable with a face value of
$27.0 million amortizing from January 1999 through 2004. The note payable is
secured by certain assets including on-line lottery equipment inventories with a
carrying value of approximately $.7 million at December 31, 1997. The note
payable provides for acceleration of payment on the note equal to 30% of the
sales price of the equipment as well as proceeds in excess of certain levels
from licensing the Company's MasterLink(TM) software.
The Company repaid long-term debt of $11.2 million in 1997 in addition to
paying off the December 31, 1996 revolving line of credit balance of $7.7
million. On February 28, 1998, the Company and First Bank, N.A. extended the
expiration date of the Company's revolving line of credit to August 31, 1998.
The revolving line of credit has $10.0 million available to the Company for
working capital.
Working capital, defined as current assets less current liabilities,
increased by $9.0 million to $37.1 million from the December 31, 1996 amount of
$28.1 million. The increase is primarily reflected in cash and cash equivalents
which were $13.8 million at December 31, 1997 as compared to $4.3 million at
December 31, 1996.
At December 31, 1997 as compared to 1996, the Company reflected both higher
trade accounts and notes receivable and accounts payable and accrued liabilities
reflecting relatively higher fourth quarter sales of gaming machines and related
parts to international jurisdictions, including South Africa and Quebec, Canada.
At December 31, 1997 the Company's balance of current deferred taxes was
$11.4 million as compared to deferred and refundable income taxes of $19.1
million at December 31, 1996. The Company received the refund amount of
approximately $3.6 million in March 1997. Additionally, the taxable portion of
the extraordinary gain recognized in the first quarter of 1997 related to the
settlement with EDS was offset with net operating loss carryforward amounts
generated in previous years. The utilization of the loss carryforward amounts
reduced related recorded deferred tax assets. The Company has approximately $8.9
million of remaining net operating loss carryforward amounts at December 31,
1997 of which the utilization of approximately $2.9 million is subject to
significant limitations including the generation of taxable income of the
Company's wagering systems segment.
The Company, in 1996, was named the successful bidder for a new on-line
lottery contract with the Florida Lottery. The award by the Florida Lottery was
unsuccessfully protested by a competitor and the competitor has filed an appeal
which has delayed contract negotiations. Under the new contract, AWI
- 40 -
<PAGE>
would provide services to the Florida Lottery for five more years with options
for two extensions of two additional years each. The existing contract had an
expiration date of June 30, 1996. AWI is continuing the operation of the current
on-line lottery system under the terms of the expired contract under temporary
extension.
In November 1997, the Company was awarded a new five-year contract
commencing in January 1999 to continue operating the Pennsylvania Lottery. The
current contract expires in December 1998.
Also, the Company has had architectural plans developed for casino gaming
at the racetrack facility in Sunland Park, New Mexico, and has initiated
construction. Current plans call for approximately $8 million of capital
expenditures for facility enhancements, gaming machines and related equipment.
Sizable capital expenditures in excess of current capital sources may be
required in advance of any anticipated capital generated by a new Florida or
Pennsylvania contract and the Company does not anticipate that any revenues will
be generated from casino gaming at Sunland Park until the third or fourth
quarter of 1998.
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. Historically, the Company has met its cash
flow requirements primarily with cash provided by operations, public offerings
of equity securities, and from borrowing from financial institutions. The
Company does not have any significant off balance sheet financing in the form of
operating leases at December 31, 1997. Primarily all operating leases disclosed
in Note 9 to the Consolidated Financial Statements are for office and
warehousing space.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
- 41 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Index to Consolidated Financial Statements
Independent Auditors' Report 43
Consolidated Financial Statements:
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 44
Balance Sheets as of December 31, 1997 and 1996 45
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 46
Statements of Cash flows for the years
ended December 31, 1997, 1996 and 1995 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.
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<PAGE>
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P. O. Box 7108
Billings, MT 59103
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Powerhouse Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Powerhouse
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997.
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 Powerhouse
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/S/ KPMG PEAT MARWICK LLP
Billings, Montana
February 20, 1998
except for the last paragraph of Note 11
as to which the date is February 28, 1998
- 43 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share data)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
REVENUES:
On-line lottery $ 94,771 88,843 91,653
Gaming machine and route operations 75,221 60,186 61,398
Wagering systems and racetrack operations 26,943 27,652 28,111
-------- ------- -------
Total revenues 196,935 176,681 181,162
COSTS OF REVENUES:
On-line lottery 62,558 59,333 59,438
Gaming machine and route operations 44,530 32,911 35,991
Wagering systems and racetrack operations 19,893 20,104 22,286
------- ------- -------
126,981 112,348 117,715
------- ------- -------
Gross Profit 69,954 64,333 63,447
OTHER OPERATING EXPENSES:
Selling, general and administrative 31,655 28,697 31,140
Research and development 9,788 7,969 8,888
Other charges --- 34,135 2,763
Depreciation and amortization 21,995 23,822 22,587
------- ------- -------
63,438 94,623 65,378
------- ------- -------
Earnings (loss) from operations 6,516 (30,290) (1,931)
------- ------- -------
OTHER INCOME (EXPENSE):
Interest and other income 1,021 1,060 1,244
Interest expense (3,890) (3,754) (3,077)
------- ------- -------
(2,869) (2,694) (1,833)
------- ------- -------
Earnings (loss) before income taxes and extraordinary
items 3,647 (32,984) (3,764)
Income tax benefit 1,135 8,753 846
------- ------- -------
Net earnings (loss) from continuing operations 4,782 (24,231) (2,918)
Reversal of (provision for) loss on discontinuance of
wagering systems operations, net --- 5,482 (5,482)
------- ------- -------
Net earnings (loss) before extraordinary items 4,782 (18,749) (8,400)
Extraordinary gain, net 13,269 4,014 ---
------- ------- -------
Net earnings (loss) $ 18,051 (14,735) (8,400)
======== ======= =======
EARNINGS (LOSS) PER SHARE DATA:
Basic:
Continuing operations $0.46 (2.28) (0.28)
Net earnings (loss) $1.75 (1.39) (0.80)
===== ===== =====
Diluted:
Continuing operations $0.46 (2.28) (0.28)
Net earnings (loss) $1.72 (1.39) (0.80)
===== ===== =====
Weighted average shares:
Basic 10,329 10,635 10,555
Diluted 10,489 10,635 10,555
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
- 44 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
(000s) (000s)
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,772 4,322
Restricted cash deposits 1,423 1,364
Accounts receivable, net 25,839 19,353
Current installments of notes receivable, net 3,192 2,818
Inventories 15,942 18,297
Prepaid expenses 1,037 1,027
Income tax refund receivable --- 3,551
Deferred income taxes 11,444 15,500
-------- -------
Total current assets 72,649 66,232
-------- -------
Property, plant and equipment 152,074 153,124
Less accumulated depreciation (88,914) (78,417)
-------- -------
Net property, plant and equipment 63,160 74,707
-------- -------
Restricted cash deposits 2,408 2,521
Notes receivable, excluding current installments 2,547 2,216
Goodwill, net 9,314 10,134
Intangible and other assets, net 11,319 12,233
-------- -------
$161,397 168,043
======== =======
LIABILITIES
Current liabilities:
Notes payable --- 7,650
Current installments of long-term debt $ 4,381 10,604
Accounts payable 9,513 6,646
Accrued expenses 21,705 13,249
-------- -------
Total current liabilities 35,599 38,149
-------- -------
Long-term debt, excluding current installments 31,446 9,312
Due to EDS --- 38,025
Deferred income taxes 12,206 10,326
-------- -------
Total liabilities 79,251 95,812
-------- -------
Commitments and contingencies (Note 15)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 8,087,272 shares; no
shares issued --- ---
Series A Junior Preferred stock, $.01 par value, convertible non-
cumulative. Authorized 1,912,728 shares 19 19
Common stock, $.01 par value. Authorized 25,000,000 shares 110 108
Paid-in capital 89,427 97,765
Deferred restricted stock compensation (217) (417)
Accumulated deficit (7,193) (25,244)
-------- -------
Total stockholders' equity 82,146 72,231
-------- -------
$161,397 168,043
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
- 45 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Series A Deferred
Preferred Common Restricted Total
Stock Stock Paid-in stock compen- Accumulated stockholders'
par value par value capital sation deficit equity
(000s) (000s) (000s) (000s) (000s) (000s)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 $19 106 97,637 (1,527) (2,109) 94,126
Net loss --- --- --- --- (8,400) (8,400)
Amortization of deferred restricted
stock compensation --- --- --- 324 --- 324
Rescission of deferred restricted stock
compensation --- --- (750) 750 --- ---
Stock issued under stock purchase
plan --- 1 397 --- --- 398
----- ----- ------ ------ ------- -------
December 31, 1995 19 107 97,284 (453) (10,509) 86,448
Net loss --- --- --- --- (14,735) (14,735)
Amortization of deferred restricted
stock compensation --- --- 133 36 --- 169
Stock issued under stock purchase
plan --- 1 348 --- --- 349
----- ----- ------ ------ ------- -------
December 31, 1996 19 108 97,765 (417) (25,244) 72,231
Net earnings --- --- --- --- 18,051 18,051
Stock options exercised and shares
issued under stock purchase plan --- 2 762 --- --- 764
Shares redeemed pursuant to
EDS settlement --- --- (9,100) --- --- (9,100)
Amortization of deferred restricted
stock compensation --- --- --- 200 --- 200
----- ----- ------ ------ ------- -------
December 31, 1997 $19 110 89,427 (217) (7,193) 82,146
===== ===== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Share Amounts 1995 1996 1997
-------------------------- --------------------------- ----------------------------------
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 1,912,728 10,633,544 1,912,728 10,682,109 1,912,728 10,829,184
Stock options exercised and
shares issued --- 98,565 --- 117,075 --- 194,222
Restricted stock issued (rescinded) --- (50,000) --- 30,000 --- ---
--------- ---------- --------- ---------- --------- ----------
End of year 1,912,728 10,682,109 1,912,728 10,829,184 1,912,728 11,023,406
========= ========== ========= ========== ========= ==========
</TABLE>
- ----------
(1) 1,912,728 shares of Series A Preferred Stock and 545,454 shares of Common
Stock are held in treasury as collateral for a note payable pursuant to
terms reached in a settlement agreement in 1997 (see Notes 2 and 11).
(2) See Note 16.
See accompanying notes to consolidated financial statements.
- 46 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $18,051 (14,735) (8,400)
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) 5,482
Depreciation and amortization 21,995 23,822 22,587
Other charges --- 34,135 2,763
Extraordinary gain, net (13,269) (4,014) ---
Other, net 337 79 (51)
Changes in operating assets and liabilities:
Sales of receivables --- 1,467 2,340
Receivables, net (7,191) 1,942 (7,503)
Inventories 5,709 (3,489) 6,923
Prepaid expenses (10) 235 103
Accounts payable 2,867 2,006 (12,616)
Accrued expenses 6,649 (10,854) (7,045)
Income taxes 806 (6,411) (2,640)
------- ------- -------
Net cash provided by operating activities 35,944 18,701 1,943
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on property, plant and equipment (6,977) (25,522) (19,047)
Expenditures on intangible and other assets (1,974) (10,037) (3,541)
Proceeds from sales of equipment 117 109 386
Change in restricted cash deposits (70) 700 182
------- ------- -------
Net cash used in investing activities (8,904) (34,750) (22,020)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable (7,650) (600) 8,250
Proceeds from issuance of long-term debt 643 4,365 24,287
Repayments of long-term debt (11,220) (13,079) (14,735)
Amounts payable to EDS --- 27,343 ---
Common stock sold under employee benefit plans 637 349 398
------- ------- -------
Net cash provided by (used in) financing activities (17,590) 18,378 18,200
------- ------- -------
Net increase (decrease) in cash and cash equivalents 9,450 2,329 (1,877)
Cash and cash equivalents, beginning of year 4,322 1,993 3,870
------- ------- -------
Cash and cash equivalents, end of year $13,772 4,322 1,993
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
- 47 -
<PAGE>
POWERHOUSE 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 Powerhouse Technologies, Inc. and subsidiaries (the "Company").
Prior to January 1, 1998 the Company was known as Video Lottery Technologies,
Inc. 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 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 contract services 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, generated under revenue sharing
agreements with route customers. Route operations revenue is recorded weekly as
the revenues are earned.
Revenue from racetrack operations primarily represents commissions on
wagers placed on live and simulcast pari-mutuel racing at the Company's
racetrack in Sunland Park, New Mexico, and is recorded on the day of each race.
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 cash 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.
Accounts and notes receivable. Accounts and notes receivable are recorded
at cost, less the related allowance for doubtful accounts. (See Note 5.)
Inventories. The Company manufactures inventories for sale and lease as
well as use in the provision of services under long-term contracts. Inventories
purchased and manufactured for use in the provision of services are transferred
to property, plant and equipment when placed in service pursuant to the terms of
such long-term contracts. 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 and allocated indirect manufacturing overhead.
Property, plant and equipment. Property, plant and equipment is stated at
cost. Equipment acquired under capital leases is recorded 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>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 through 2009, the expected period to be benefited.
Accumulated amortization was $3.0 million at December 31, 1997 and $2.2 million
at December 31, 1996.
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 ten years. Accumulated amortization of
intangible and other assets was approximately $6.9 million and $9.9 million at
December 31, 1997 and 1996, respectively. In 1997, a non-compete agreement with
the sellers of the Company's on-line lottery subsidiary purchased by the Company
in 1992 expired. Accordingly, the cost and accumulated amortization of $5.0
million were written off in 1997.
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" ("SFAS No. 121 "). SFAS No.
121 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 share. In the fourth quarter, 1997, the Company adopted the
accounting principles of the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share," issued in February, 1997, which changes the standards for computing
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity. SFAS No. 128 replaces Accounting Principles Board Opinion
15 and is effective for financial statements issued for periods ending after
December 15, 1997. The Company has a complex capital structure as defined under
SFAS No. 128. Consequently, the generation of earnings from continuing
operations results in a dual presentation of basic and diluted EPS. SFAS No. 128
requires restatement of prior period EPS
- 49 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
presentations. Diluted weighted average common shares includes potential common
stock of approximately 160,000 shares for the year ended December 31, 1997. The
Company had losses from continuing operations in 1996 and 1995. Accordingly,
potential common stock has been excluded from weighted average share
computations for those years because their inclusion would have been
anti-dilutive.
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 11 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 in the
consolidated financial statements of operations for options granted and employee
stock purchase shares issued pursuant to the Company's plans. (See Note 13.)
Reclassifications. Certain reclassifications have been made to the 1996 and
1995 amounts to conform to the 1997 presentation.
Accounting pronouncements not yet adopted. The Company has capitalized
start-up costs in conjunction with its long-term contracts in the on-line
lottery and wagering systems segments in accordance with Statement of Position
(SOP) 81-1. The American Institute of Certified Public Accountants (AICPA)
Accounting Standards Executive Committee (AcSEC) approved for issuance the SOP,
Reporting on the Costs of Start-Up Activities, which will require that start-up
costs (including organization costs) be expensed as incurred. The SOP was
approved by the FASB in February 1998 and it is anticipated that the final SOP
would be released in the second quarter of 1998 and be effective for fiscal
years beginning after December 15, 1998. Depending on the level of the Company's
future start-up activities, this change in accounting method may be material to
results of operations, however, would not affect the Company's cash flows. (See
Note 8.)
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.
Segment Information. In June 1997, the FASB issued Statement of Financial
Accounting Standards Number 131 (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. Earlier application is encouraged. The Company adopted SFAS No. 131 for
the year ended December 31, 1997. The adoption did not affect the Company's
historical presentation of segment data.
(2) EXTRAORDINARY ITEMS
In January 1994, Electronic Data Systems Corporation ("EDS") purchased
545,454 shares of the Company's Common Stock and 1,912,728 shares of the
Company's Series A Junior Preferred Stock ("Series A Preferred Stock"). In
conjunction with the stock sale to EDS in 1994, 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 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
- 50 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed to transition the EDS services to the Company. The settlement resulted in
a net of taxes extraordinary gain on debt extinguishment of approximately $13.3
million ($1.29 and $1.26 per basic and diluted share, respectively) for the
Company. The terms of the settlement included the redemption by the Company of
all of the Common and Series A Preferred Stock owned by EDS, the transfer to the
Company of certain inventories (approximately $1.2 million) and property, plant
and equipment (approximately $2.7 million) used in the provision of EDS services
to on-line lottery customers and the extinguishment of approximately $38.0
million of outstanding fees in exchange for a note payable with a present value
of $26.1 million. The note payable calls for interest payments only through 1998
with provisions for acceleration upon sale of assets securing the note, and
principal and interest payments in years three through maturity in 2004. The
note is secured by the redeemed Common Stock and Series A 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 was completed in 1997.
The Company paid or accrued approximately $81.6 million and $70.3 million
to EDS for costs and expenses in 1996 and 1995, respectively. Of those costs and
expenses approximately $5.1 million and $2.7 million were capitalized primarily
in conjunction with software development and deferred start-up costs in 1996 and
1995, respectively.
In May 1994, the Company completed the purchase of all of the outstanding
stock of United Wagering Systems, Inc. ("UWS"). The original purchase price of
$29.6 million included $19.6 million in cash and the issuance of $10.0 million
notes, payable over a three-year period. The Company also assumed liabilities of
approximately $23.4 million and, in connection with the transaction, recorded a
significant amount of goodwill. At the time of the acquisition of UWS, the
Company anticipated profits from the ongoing operations of UWS as well as
potential growth for pari-mutuel contracts and operations and favorable gaming
legislation in New Mexico and other jurisdictions.
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 $10.0 million, which had been issued in conjunction with the acquisition of
UWS in 1994, because of disputes related to the acquisition. In March 1996, the
Company reached an agreement with the sellers settling all outstanding claims
and disputes, including dismissal of all outstanding litigation, resulting in a
net of taxes extraordinary gain of $4.0 million ($.37 per basic and diluted
share) gain on debt extinguishment.
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.
Accordingly, 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 approximately $5.5 million ($.52 per basic and
diluted share), recorded in 1995, was reversed in the third quarter of 1996.
Concurrent with the reversal, the Company recorded an impairment charge on
long-lived assets of the wagering systems segment of approximately $2.8 million.
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 is now performed in the Company's Bozeman, Montana
facility. Costs and expenses recorded in the third quarter 1996 for the
restructuring plan were approximately $0.3 million.
(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
- 51 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Revenues:
On-line lottery $ 94,771 88,843 91,654
Gaming machine and route operations 80,084 64,530 62,889
Wagering systems and racetrack operations 26,960 27,652 28,111
Less intercompany revenues (4,880) (4,344) (1,492)
-------- ------- -------
Total revenues $196,935 176,681 181,162
======== ======= =======
Operating profit (loss):
On-line lottery $ 4,896 (29,449) (3,464)
Gaming machine and route operations 10,727 9,433 13,171
Wagering systems and racetrack operations (1,491) (3,995) (3,832)
General corporate expenses (7,866) (6,826) (8,011)
Intercompany profit 250 547 205
-------- ------- -------
Total operating profit (loss) $ 6,516 (30,290) (1,931)
======== ======= =======
Operating profit (loss) before "other charges":
On-line lottery $ 4,896 1,623 967
Gaming machine and route operations 10,727 9,433 11,894
Wagering systems and racetrack operations (1,491) (932) (3,569)
General corporate expenses (7,866) (6,826) (8,665)
Intercompany profit 250 547 205
-------- ------- -------
Total operating profit before "other charges" $ 6,516 3,845 832
======== ======= =======
Capital expenditures:
On-line lottery $ 1,043 16,271 8,079
Gaming machine and route operations 1,419 5,809 5,354
Wagering systems and racetrack operations 4,159 3,455 4,762
Corporate 548 403 1,353
Less intercompany step-up in basis (192) (416) (501)
-------- ------- -------
Total capital expenditures $ 6,977 25,522 19,047
======== ======= =======
Depreciation and amortization:
On-line lottery $ 12,509 14,248 14,242
Gaming machine and route operations 4,345 4,908 3,772
Wagering systems and racetrack operations 5,011 5,086 4,658
Corporate 563 501 621
Less depreciation on intercompany step-up basis (433) (921) (706)
-------- ------- -------
Total depreciation and amortization $ 21,995 23,822 22,587
======== ======= =======
Identifiable assets:
On-line lottery $ 46,380 62,350 77,548
Gaming machine and route operations 56,430 45,656 34,905
Wagering systems and racetrack operations 43,433 42,692 46,106
Corporate 16,621 19,067 9,546
Less intercompany step-up in basis (1,467) (1,722) (2,254)
-------- ------- -------
Total identifiable assets $161,397 168,043 165,851
======== ======= =======
</TABLE>
Operating profit (loss) before "other charges" excludes special and other
charges discussed in Note 14.
- 52 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gaming machine and route operations segment includes revenues from
royalties of approximately $0.6 million and $3.6 million in the years ended
December 31, 1996 and 1995, respectively. Revenues from sales of units pursuant
to royalty arrangements have minimal related direct costs. In 1996 and 1995 the
Company earned revenues under a royalty arrangement with an Australian company
which was terminated in 1997.
Total identifiable assets of the racetrack operations were approximately
$20.8 million, $22.7 million and $23.9 million at December 31, 1997, 1996 and
1995, respectively. Revenue related to racetrack operations was approximately
$6.8 million, $7.2 million and $8.0 million and net losses related to racetrack
operations were approximately $1.5 million, $1.6 million and $1.3 million in the
years ended December 31, 1997, 1996 and 1995, respectively.
A summary of revenues and related direct costs of revenues follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Revenues:
Services $128,136 126,543 127,634
Tangible products 57,752 39,438 46,728
Lease 10,700 6,800
-------- ------- -------
$196,935 176,681 181,162
======== ======= =======
Costs of revenues:
Services $ 89,430 86,864 87,394
Tangible products 37,551 25,484 30,321
Lease --- --- ---
-------- ------- -------
$126,981 112,348 117,715
======== ======= =======
Gross profit:
Services $ 38,706 39,679 40,240
Tangible products 20,201 13,954 16,407
Lease 11,047 10,700 6,800
-------- ------- -------
$ 69,954 64,333 63,447
========= ======= =======
</TABLE>
(4) REVENUE CONCENTRATION
The Company derives its revenues from equipment and system sales and
services to customers primarily in jurisdictions that have enacted governmental
legislation and/or regulatory controls over various types of gaming and wagering
activities. The Company recorded revenues from customers or distributors within
a specific gaming or wagering jurisdiction, subject to separately identifiable
governmental legislation, which accounted for more than 10% of the Company's
consolidated revenues as follows:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
Florida $31,528 30,203 35,247
Pennsylvania 23,042 23,164 22,101
Montana 20,700 19,748 19,523
Revenues from the on-line lottery and wagering systems segments of the
company are primarily derived from contracts with terms up to ten years with
varying options for extensions and renewals.
- 53 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's contract with the Florida Lottery expired in June 1996 and
the Company was named the successful bidder for a new on-line lottery contract.
The award by the Florida Lottery was unsuccessfully protested by a competitor
and the competitor has filed an appeal which has delayed contract negotiations.
Under the new award, the Company would provide services to the Florida Lottery
for five more years with options for extensions. The Company is continuing the
operation of the current on-line lottery system under the terms of the expired
contract under temporary extension. In November 1997, the Company was awarded a
new five-year contract commencing in January 1999 to continue operating the
Pennsylvania Lottery system. The current contract expires in December 1998.
Montana revenue includes total revenues from route operations of
approximately $17.7 million, $16.5 million and $15.3 million in the years ended
December 31, 1997, 1996 and 1995, respectively.
Export Sales. The Company had total export sales from the United States of
approximately $37.0 million, $28.6 million and $30.2 million during the years
ended December 31, 1997, 1996 and 1995, respectively.
(5) NOTES AND ACCOUNTS RECEIVABLE
A summary of receivables follows:
December 31,
------------
1997 1996
---- ----
(000s) (000s)
Trade $26,946 20,444
Notes receivable 5,964 5,260
------- ------
32,910 25,704
Less allowance for doubtful accounts (1,332) (1,317)
------- ------
$31,578 24,387
======= ======
The Company finances sales of gaming machine and wagering systems equipment
to certain customers meeting minimum credit standards. Installment notes bear
interest at rates of up to 18% and generally mature within one to seven years.
The Company estimates the fair value of gross notes receivable at December 31,
1997 to approximate carrying value of the associated notes receivable. This
estimate is based on current discount rates for instruments of similar credit
quality available in the secondary market.
At December 31, 1997, approximately 34% of the Company's receivables were
from various governments or their designated agencies.
Amounts charged to expense for estimated bad debts were approximately $.1
million, $.2 million and $.6 million in the years ended December 31, 1997, 1996
and 1995, respectively. The Company wrote off previously reserved doubtful
accounts of approximately $.1 million, $2.1 million and $20,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
- 54 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INVENTORIES
A summary of inventories, net of valuation reserves, follows:
December 31,
------------
1997 1996
---- ----
(000s) (000s)
Manufacturing:
Raw materials $ 6,703 5,462
Work-in-process 662 733
Finished goods 7,427 11,322
Customer service and other 1,150 780
------- ------
$15,942 18,297
======= ======
The Company had reserves for inventories of approximately $8.2 million and
$14.2 million at December 31, 1997 and 1996, respectively, primarily related to
finished goods. The Company charged to expense approximately $.1 million, $18.0
million and $1.0 million in the years ended December 31, 1997, 1996 and 1995,
respectively, for reserves and impairments of inventories. Of these charges,
$18.0 million and $0.5 million in the years ended December 31, 1996 and 1995,
respectively, related to the termination of three on-line lottery projects for
which inventory was specifically procured. As of December 31, 1997, on-line
inventory was approximately $1.6 million.
The Company wrote off previously reserved inventories of approximately $6.1
million, $9.0 million and $0.2 million in the years ended December 31, 1997,
1996 and 1995, respectively, as the applicable inventories were sold or
otherwise disposed of. At December 31, 1997 and 1996, respectively, the Company
had approximately 600 and 500 finished video gaming machines located in various
casino gaming locations, under trial arrangements with customers, included in
inventories.
(7) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
December 31,
------------
1997 1996
---- ----
(000s) (000s)
Wagering systems and on-line lottery equipment $108,985 103,573
Land, buildings and improvements 14,543 14,280
Machinery and equipment 6,605 5,931
Gaming operations equipment 20,220 27,676
Furniture and fixtures 1,721 1,664
-------- -------
$152,074 153,124
======== =======
In 1997 the Company transferred to inventory gaming operations equipment
with a net book value of approximately $2.2 million due to the expiration of
lease agreements. In 1996, the Company transferred on-line lottery equipment
with a net book value of approximately $2.4 million to inventories in
conjunction with the termination of an on-line lottery contract. During 1995,
the Company transferred approximately $1.0 million of game operations equipment
from inventory to property, plant and equipment in conjunction with leasing
activities and $3.9 million from inventory to property and equipment in
connection with installations of terminals under on-line lottery contracts.
Other additions to gaming operations equipment and on-line lottery equipment in
the three-years ended December 31, 1997, are included in the Consolidated
Statements of Cash Flows as expenditures on property, plant and equipment.
Gaming operations equipment at December 31, 1997 and 1996 includes video
gaming machines with an aggregate cost of approximately $13.4 million and $20.9
million, respectively, and a carrying value
- 55 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of approximately $7.8 million and $11.9 million, respectively, which are under
lease or revenue sharing agreements with customers. For the years ended December
31, 1997, 1996 and 1995, depreciation expense on this equipment was
approximately $2.3 million, $2.8 million and $2.0 million, respectively. Two
lease agreements provide rent payments to the Company based on a percentage of
net gaming receipts. One of the two agreements 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 terminal
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
delivered through December 31, 1997, are approximately as follows:
Year ending December 31, (000s)
1998 $6,355
1999 5,423
2000 4,753
2001 386
------
$16,917
=======
(8) INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets, net of amortization, follows:
December 31,
------------
1997 1996
---- ----
(000s) (000s)
Software development costs $ 8,849 9,059
Deferred start-up costs and other 2,470 3,174
------- ------
$11,319 12,233
======= ======
The Company capitalized approximately $1.0 million, $4.1 million and $2.7
million of software development costs in the years ended December 31, 1997, 1996
and 1995, respectively. The costs are primarily related to the development of
the MasterLink(TM) system.
Total amortization expense of intangible and other assets (including
Goodwill) was approximately $3.7 million, $4.2 million and $3.4 million in 1997,
1996 and 1995, respectively. Amortization of software development costs,
included in total amortization expense, was approximately $1.5 million, $1.3
million and $0.9 million in 1997, 1996 and 1995, respectively.
(9) LEASE OBLIGATIONS
The Company has noncancelable operating leases for office space, equipment
and vehicles which expire at various dates over the next six years. Future
minimum lease payments under noncancelable operating leases as of December 31,
1997, are approximately as follows:
Year ending December 31, (000s)
1998 $4,328
1999 2,270
2000 1,263
2001 572
2002 207
Thereafter 23
In 1997, 1996 and 1995, rental expense was approximately $4.7 million, $0.8
million and $0.6 million, respectively.
- 56 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) ACCRUED EXPENSES
A summary of accrued expenses follows:
December 31,
------------
1997 1996
(000s) (000s)
Labor and benefits $ 5,911 1,962
Deferred revenue and estimated costs to complete
long-term contract obligations 4,835 3,711
Other, combined 10,959 7,576
------- ------
$21,705 13,249
======= ======
(11) LONG-TERM DEBT
A summary of long-term debt, including capitalized lease obligations,
follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(000s) (000s)
<S> <C> <C>
Note payable at implicit rate of prime (8.5%) at December 31, 1997 with
interest only payments through 1998. Thereafter due in monthly
installments, including interest, through January 2004. Secured by
certain inventories, property and equipment, intangible
assets and treasury stock (See Note 2.) $25,850 ---
8.25% note payable in monthly installments including interest,
through September 2001 (See Note 2.) 4,940 5,729
7.2% to 12.25% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including interest
maturing through April 2002 1,152 1,753
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to others
(See Note 7.) 2,615 5,164
LIBOR (5.58%) at December 31, 1997) plus 3.25% notes payable in
equivalent monthly installments of $250,000 plus interest through
February 1998. Secured by stock of certain subsidiaries 1,270 7,270
------- ------
35,827 19,916
Less current installments 4,381 10,604
------- ------
Long-term debt, excluding current installments $31,446 9,312
======= ======
</TABLE>
- 57 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate maturities of long-term debt are as follows:
Year ending December 31, (000s)
1998 $4,381
1999 6,938
2000 6,829
2001 6,212
2002 5,520
Thereafter 5,947
-------
$35,827
Cash paid for interest was approximately $2.0 million, $2.6 million and
$2.8 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Based on interest rates currently available to the Company for borrowings
with similar terms and maturities, the fair value of long-term debt at December
31, 1997 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 2), the credit facility 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 28, 1998, and increase the line of credit from $17.5 million to $19.5
million. First Bank was granted 35,000 shares, with a value of approximately
$127,000, of the Company's common stock in conjunction with the amendment. At
December 31, 1997, $9.5 million of the revolving line of credit is committed
under the Company's bonding program and the balance of $10.0 million is
available for working capital. 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 bears interest at LIBOR (5.58% at December
31, 1997) plus 3.25% and carries a commitment fee of .25% on the unadvanced
amount. The credit agreement contains certain restrictive covenants, including
leverage and cash flow ratios, restricting a change in control, restricting the
payment of dividends and maintaining minimum stockholders' equity.
On February 28, 1998, the credit agreement with First Bank, N.A. was
amended to extend the expiration date of the revolving line of credit to August
31, 1998.
(12) INCOME TAXES
Income tax expense (benefit) from operations consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Current:
Federal $ 343 (3,533) (1,219)
State 1,281 70 ---
Foreign (14) --- 582
------- ------ ------
1,610 (3,463) (637)
------- ------ ------
Deferred:
Federal 5,348 (3,614) 307
State 555 (1,602) (516)
Foreign 33 (74) ---
------- ------ ------
5,936 (5,290) (209)
------- ------ ------
7,546 8,753 (846)
Less tax expense on extraordinary items 8,681 --- ---
------- ------ ------
$(1,135) (8,753) (846)
======= ====== ======
</TABLE>
- 58 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income tax expense (benefit) differs from the amount
which would be provided by applying the Federal statutory income tax rate of 35%
to income or loss from continuing operations before extraordinary items and
before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Current:
Computed expected tax expense (benefit) $1,276 (8,403) (3,236)
Extraordinary gain 7,683 (1,345) ---
State taxes, net of Federal impact 1,193 (996) (335)
Change in valuation reserve (3,000) 1,582 1,772
Tax exempt interest income --- --- (10)
Non-deductible expenses 281 219 371
Goodwill amortization 287 287 287
Foreign taxes 19 (74) 582
Foreign sales credit --- --- (277)
Other, net (193) (23) ---
------ ------ -----
$7,546 (8,753) (846)
====== ====== =====
</TABLE>
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(000s) (000s)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 507 501
Inventory reserves 3,237 4,844
Net operating loss carryforward and tax credits 7,867 13,643
Accrued liabilities 3,688 3,367
------- -------
Deferred tax assets 15,299 22,355
------- -------
Less valuation reserve (3,855) (6,855)
------- -------
Net deferred tax assets 11,444 15,500
------- -------
Deferred tax liabilities:
Fixed assets, principally depreciation (9,367) (7,798)
Deferred costs (3,202) (3,547)
Lease obligations 128 639
Other 235 380
------- -------
Net deferred tax liabilities (12,206) (10,326)
------- --------
Net deferred income tax asset (liability) $ (762) $ 5,174
======= ========
</TABLE>
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 and carryforwards 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, 1997, management has established a valuation reserve
for deferred tax assets for which it is more likely than not that the Company
will not realize the benefits of these deductible differences and carryforwards.
This valuation reserve is evaluated and adjusted as facts and circumstances
affecting the Company's tax situation evolve and the likelihood of recovery of
deferred tax assets changes. During the fourth quarter of 1997 the valuation
reserve was adjusted as a result of
- 59 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company's 1997 cumulative earnings substantiating that it is more likely
than not that a portion of the deductible differences will be realized.
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, 1997, the Company had approximately $1.6 million of
AMT credit carryforwards which are available to reduce future federal regular
income taxes over an indefinite period. In addition, at December 31, 1997, the
Company had approximately $8.9 million of net operating loss carryforwards
primarily for federal regular income tax purposes which expire in 2011.
Net cash received from prior period refunds was approximately $1.9 million
in 1997 and $2.4 million in 1996. Cash paid for income taxes was approximately
$1.5 million during 1995.
(13) BENEFIT PLANS
In May 1994, the Board of Directors adopted the 1994 Stock Incentive Plan
(the "Plan") which was approved by the Company's stockholders. 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"). In 1997, an additional 500,000
shares were authorized by a vote of stockholders bringing the total number of
shares authorized for issuance under the Plan to 1,500,000. At December 31,
1997, the remaining number of shares available for issuance under the Plan was
approximately 526,000. The Plan replaces the 1992 Stock Incentive Plan which
replaced the 1991 Stock Option Plan. No further stock options will 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 governed by pre-1994 plans. 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.
In February 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.
- 60 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted Average
Options Exercise Price
------- ----------------
Year ended December 31, 1995
----------------------------
Outstanding, beginning of year 1,211,369 $12.12
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
=========
Year ended December 31, 1997
----------------------------
Granted 232,000 5.58
Exercised (26,698) 7.23
Cancelled (126,208) 8.95
---------
Outstanding, end of year 1,002,683 8.04
=========
Exercisable, end of year 644,011 8.96
=========
Information regarding options outstanding and exercisable at December 31,
1997, follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of -------------------------------------------- -----------------------
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 - 5.00 299,800 $4.08 9.6 142,800 $4.23
$5.00 - 10.00 457,168 7.70 8.1 305,496 8.31
$10.00 - 15.00 201,715 12.85 6.2 186,715 13.06
$15.00 - 28.00 44,000 16.47 6.4 9,000 20.81
--------- -------
1,002,683 8.0 644,011
========= === =======
</TABLE>
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. In 1997, an additional
500,000 shares were authorized by a vote of stockholders bringing the total
number of shares authorized for issuance under the Stock Purchase Plan to
700,000. 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 132,524 shares
at $3.35 per share purchased in January of 1998 for the 1997 Purchase Period;
117,075 shares at $2.98 per share purchased in January of 1997 for the 1996
Purchase Period; and 98,565 shares at $4.04 per share purchased in January of
1996 for the 1995 Purchase Period. Under the Stock Purchase Plan, the Company
contributed approximately $149,000, $117,000 and $102,000 for 1997, 1996 and
1995, respectively. Remaining authorized shares available for issuance under the
plan were approximately 270,000 at December 31, 1997.
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock option and employee stock purchase
benefit plans. Accordingly, no compensation
- 61 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost has been recognized in the Company's consolidated statement of operations
for options granted and shares purchased under the plans. Had compensation cost
for the options granted and the shares of Common Stock issued under the
Company's employee stock purchase plan been determined based on the fair value
at the grant dates for awards under the plans consistent with the method of
Financial Accounting Standards Board Statement 123, the Company's net earnings
(loss) and per share amounts would have been as reflected in the pro-forma
amounts indicated below:
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
Net earnings (loss) $17,637 (15,352) (8,843)
======= ======= ======
Net earnings (loss) per share:
Basic $1.71 (1.44) (.84)
===== ===== ====
Diluted $1.68 (1.44) (.84)
===== ===== ====
The fair value of the options granted and shares issued under the Company's
employee stock purchase plans in the three years ending December 31, 1997 was
estimated using the Black-Scholes model with the following assumptions for 1997,
1996 and 1995: dividend yield of 0%; expected life of 5 years and a risk-free
interest rate of 6%. The volatility factor applicable to 1997 pro-forma amounts
is 129%. The volatility factor applicable to 1996 and 1995 pro-forma
calculations is 57%. The effects of applying Financial Accounting Standards
Board Statement No. 123 in this pro-forma disclosure may not be indicative of
future results.
In 1992, the Board of Directors adopted a 401(K) employee savings plan.
Employees are eligible to participate in the 401(K) plan after completing one
year of service, working more than 1,000 hours per year and having attained the
age of twenty-one years. Employer contributions are discretionary under the
plan. Employer contributions under the plan were approximately $607,000,
$237,000 and $206,000 for 1997, 1996 and 1995, respectively.
(14) OTHER CHARGES
A summary of other charges follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Inventory impairments $ --- 18,000 550
Customer disputes and contract liabilities --- 8,435 1,763
Restructuring charges and long-lived
assets impairments --- 7,700 450
------ ------ -----
$ --- 34,135 2,763
====== ====== =====
</TABLE>
In 1996 the Company recorded approximately $34.1 million of special charges
for restructuring costs and asset impairments, consisting of $18.0 million for
inventory value impairments 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 approximately $3.1 million related to the wagering
systems segment as discussed in Note 2. The impairment losses of long-lived
assets were measured based on the fair value of each asset. Fair value was
calculated based on the present value of expected future net cash flows. The
$4.6 million impairment related to an on-line lottery contract that did not meet
Company expectations of profitability levels. The $2.8 million impairment
discussed in Note 2 was a result of the Company's decision to replace a
- 62 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
predecessor model of a wagering systems terminal. Approximately $21.2 million 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.
During the three-year period ended December 31, 1996, the Company recorded
approximately $22.7 million of charges representing impairments to on-line
lottery equipment inventories. An aggressive revenue growth strategy in 1994 led
the Company to procure or commit to procure significant levels of inventory in
advance of obtaining a contract to operate an on-line lottery system in the
United Kingdom. The Company was notified in May 1994 that the contract was
awarded to a competitor. In the fourth quarter of 1994, the Company recorded a
$4.1 million charge representing costs to retrofit inventories related to the
United Kingdom procurement for which there was no other demand in the U. S.
market. The Company anticipated demand from a customer in Norway for a portion
of such inventories. The carrying value of inventories related to the on-line
lottery segment was approximately $19.3 million at December 31, 1994, and the
Company believed that potential market opportunities at that time indicated that
such inventory value would be recovered. In the second quarter of 1995, the
Company recorded an additional $0.6 million charge to inventories due to a
reduction in estimated demand by its Norway customer. The carrying value of
inventories related to the on-line lottery segment was approximately $15.9
million at December 31, 1995, and potential sales opportunities in various
international markets indicated that the remaining value could be recovered. In
the second quarter 1996, the Company recorded an additional charge of $1.1
million to inventories for another identified reduction in demand. In the fourth
quarter of 1996, the Company determined that the remaining inventory related to
the United Kingdom procurement had no remaining market value and charged to
expense approximately $10.4 million. At December 31, 1996, inventories related
to the on-line lottery segment had a carrying value of approximately $2.9
million.
The Company's domestic growth strategy led to the contracts being awarded
to the Company by the Arizona and Kentucky lottery authorities during 1995. The
Arizona lottery system was implemented in late 1995. However, a number of
factors, including a short development and installation period, led to the early
termination of the contract by the Arizona Lottery in 1996. The Company
recognized an impairment charge of $4.0 million on equipment inventory to reduce
the carrying value to net realizable value for used equipment. Also in 1996, the
Company and the Kentucky Lottery agreed to terminate efforts to finalize a
contract. The Company incurred approximately $2.5 million that was charged to
expense as a result of the agreement.
The United Kingdom, Arizona and Kentucky on-line inventory which the
Company had planned to place in service to perform specific contracts was
reviewed in light of existing market conditions and written down to its market
value. Following these charges and write-offs attributable to unsuccessful
business ventures, the Company revised its international strategy from selling
long-term service agreements to principally one of selling on-line lottery
equipment and licensing technology to use the equipment to partners. While this
strategy may result in lower gross revenues, costs of sales and operating
profits, it limits the Company's capital at risk and is considered by management
to be a more effective growth strategy at this time.
Domestically, the Company has adopted a strategy of selectively bidding
opportunities where the customer requirements best fit with the Company's
products and services. There can be no assurance that these revised strategies
will be successful.
In 1995, the Company recorded approximately $2.8 million of special and
other unusual charges associated with exit costs and charges and asset
impairments related to five contracts. In the second quarter of 1995, the
Company determined that continuing to expend capital resources on certain
domestic and international contract prospects was not in the best interests of
the Company and, to terminate such activities, recorded the necessary charges to
write down applicable investments in long-lived assets to fair value and to
record estimated liabilities. Approximately $2.5 million of such charges were
related to the on-line lottery segment and $0.3 million were related to the
wagering systems segment.
- 63 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain of its executive
officers that provide for lump sum severance payments and accelerated vesting of
options and restricted stock upon termination of employment under certain
circumstances or a change in control, as defined.
During 1996 and 1995, the Company sold notes receivable from gaming machine
equipment sales, with a face value of $1.5 million and $2.3 million,
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 $1.8 million at December
31, 1997. The Company has established reserves for estimated losses under the
recourse provisions of $.3 million at December 31, 1997. At December 31, 1997,
the Company had guaranteed or pledged security for the indebtedness of others in
the amount of approximately $2.6 million (including 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 14).
The Company is currently conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
issue is pervasive and complex, as virtually every computer operation of the
Company, including both internal systems and systems delivered to customers,
will be affected in some way by the roll-over of the two-digit year value to
"00." Computer systems that do not properly recognize date-sensitive information
could generate erroneous data or cause a complete system failure. The Company
believes that, with modification of existing computer systems, updates by
vendors and conversion to new software in the ordinary course of its business,
the Year 2000 issue will not pose significant operational problems for the
Company's computer systems. However, if such modifications and conversions are
not completed timely or properly, the Year 2000 issue may have a material impact
on the business and operations of the Company. The costs of modifications and
conversions are not anticipated to be material, but will principally represent a
re-deployment of existing or otherwise planned resources. No assurance can be
given that the Company will successfully avoid any problems associated with the
Year 2000 issue.
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At December 31, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $2.0 million of
restricted deposits and $7.5 million 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 a new on-line lottery contract with the Florida lottery.
The award by the Florida Lottery was unsuccessfully protested by a competitor
and the competitor has filed an appeal which has delayed contract negotiations.
The existing contract had an expiration date of June 30, 1996. The Company is
continuing the operation of the current on-line lottery system under
- 64 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the terms of the expired contract under temporary extension. The Company has
submitted a bid and been awarded a contract with the Pennsylvania Lottery for an
on-line lottery contract to replace the contract the Company currently has with
the lottery. The current contract expires in December 1998. Sizable capital
expenditures in excess of current capital sources may be required in advance of
any anticipated capital generated by a new Florida or Pennsylvania 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 Sunland Park, New Mexico is largely contingent upon the
implementation of gaming at the racetrack. On March 21, 1997, the New Mexico
legislature voted to allow casino gaming at pari-mutuel racetracks in New
Mexico, including the Company's racetrack in Sunland Park. The bill allows,
among other things, the operation of up to 300 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 the third or fourth quarter of 1998.
The Company has had architectural plans developed for casino gaming at the
racetrack facility and has initiated construction. The Company's investment in
the racetrack operations is approximately $20.8 million and current plans call
for approximately $8.0 million of capital expenditures for facility
enhancements, gaming machines and related equipment to be funded from
operations.
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.
International sales denominated in foreign currencies accounted for
approximately $20.3 million or 10% of the Company's consolidated revenues in
1997 and $16.6 million or 9% of consolidated revenues in 1996. Management can
give no assurances that changes in currency and exchange rates will not
materially affect the Company's revenues, costs, cash flows and business
practices and plans. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, delays in receiving payments on
accounts receivable balances, reimbursement approvals (both governmental and
private), difficulties in managing international operations, potentially adverse
tax consequences, restrictions on repatriation of earnings and the burdens of
complying with a wide variety of foreign laws and regulations. In addition, the
Company's foreign operations would be affected by general economic conditions in
the international markets in which the Company does business, such as a
prolonged economic downturn in Europe or the Asian-Pacific region. There can be
no assurances that such factors will not have a material adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, financial condition, results of operations or cash flows. The Company
has not historically attempted to hedge the risks of fluctuating exchange rates
given the currencies involved and the terms of payment granted to its customers.
In January 1998, a breach of contract claim was filed against the Company
and AWI in the U. S. District Court, Southern District of New York by MR
International, Inc. and American Lottery Systems. The plaintiffs allege that the
Company and AWI breached their obligations in a joint venture in the Rostov
Region of the Republic of Russia. The complaint seeks monetary damages. The
Company believes the claim is entirely without merit and intends to vigorously
defend the action.
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.
- 65 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) SUBSEQUENT EVENT
On February 10, 1998, the Company effected a secondary offering of
currently outstanding shares held by an investor group representing
approximately 14.5% of the Company's outstanding common stock (approximately 1.5
million shares). The shares were marketed and sold principally to a variety of
institutional investors. Pursuant to an agreement with the Company, the head of
the investor group William Spier resigned as a director of the Company. In
addition, the group is subject to certain restrictions regarding the ability to
acquire Company securities in the future. Approximately .2 million additional
shares were issued pursuant to the exercise of an option to cover
over-allotments by the underwriters.
- 66 -
<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:
Name Age Position
Richard R. Burt (2)(3) 51 Chairman and Director
James J. Davey (1)(2) 56 Vice Chairman and Director
Patricia W. Becker (1)(2)(3) 46 Director
John R. Hardesty 58 Director
Richard M. Haddrill(3) 44 President, Chief Executive Officer,
Treasurer and Director
Dennis V. Gallagher 45 General Counsel
Michael L. Eide 48 President, Video Lottery Consultants, Inc.
Susan J. Carstensen 34 Chief Financial Officer
- --------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive 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 the
owner of Patricia Becker & Associates, a consulting firm. She 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
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<PAGE>
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 treasurer and a trustee of the International Association
of Gaming Attorneys. Ms. Becker currently serves on the Board of Directors of
Fitzgeralds Gaming Company, a Nevada based company which owns casinos. (See Item
11 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 investments, J.G. Inmobiliaria SA De.CV
and Inmobiliaria San Pancho, Mexican corporations which hold real estate
investments; and Zona Virtual SA De.CV, a Mexican corporation which is an
internet provider and computer sales and service company in Puerto Vallerta,
Mexico. Mr. Hardesty serves as a director of 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.
Richard M. Haddrill was appointed as chief executive officer of the Company
on June 18, 1997 and as 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, on June 18, 1997 he was appointed chief
executive officer of the Company's Automated Wagering International, Inc.
("AWI") subsidiary, and has served as president of AWI since December 1996. Mr.
Haddrill joined the Company in December 1994 as the Company's executive vice
president of operations and chief financial officer. He served as chief
financial officer until May 15, 1997. In December 1994, Mr. Haddrill was also
appointed treasurer of the Company. In August 1995, Mr. Haddrill was appointed
to the Board of Directors of the Company's United Wagering Systems, Inc. ("UWS")
subsidiary, and assumed the position of chief executive officer of UWS in
February 1996. 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 the
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 secretary of the Company on May 15, 1997,
and as 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 1984.
Michael L. Eide has served as president and a director of the Company's
wholly-owned subsidiary, Video Lottery Consultants, Inc. ("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
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.
Susan J. Carstensen was appointed chief financial officer on May 15, 1997.
Ms. Carstensen was vice president, finance of the Company from November 7, 1996
to May 15, 1997. 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 managed the 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.
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<PAGE>
During fiscal year 1997, 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, Compensation of Executive
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. 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, which options will expire 3 months from his
resignation. (See Item 13 -- Certain Relationships and Related Transactions.)
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.
Section 16(a) - Beneficial Ownership Reporting Compliance
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 1997, 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 1997, except that
Michael L. Eide, president of VLC, filed a Form 4 with respect to an option to
purchase stock under the Company's stock incentive plan, and a Form 5 with
respect to his wife's purchase of stock under the Company's Employee Stock
Purchase Plan, after the due date for filing the Forms 4 and 5.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information for the year ended
December 31, 1997 and for years ended December 31, 1996 and 1995 concerning the
compensation of the chief executive officer as of December 31, 1997 and the
three most highly compensated executive officers of the Company (other than the
chief executive officer) who were serving as executive officers as of December
31, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Other Awards
Annual Compensation Annual ------ All Other
Name and --------------------------- Compen- Restricted Stock Options Compen-
Principal Position Year Salary $ Bonus $ sation $ Stock $(1) (Shares) sation $
- ------------------ ---- -------- ------- -------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Haddrill 1997 260,523 430,000 154,189(2) --- --- ---
President, Chief 1996 202,133 150,000 --- 133,200 140,000 ---
Executive Officer and 1995 200,000 150,000 --- --- --- ---
Treasurer
Michael L. Eide 1997 203,256 126,000 --- --- 8,000 ---
President - VLC 1996 203,256 40,000 --- --- 20,000 ---
1995 207,620 --- --- --- --- ---
Dennis V. Gallagher 1997 155,770 61,000 53,956(2) --- 20,000 ---
General Counsel
Susan J. Carstensen 1997 100,031 48,000 --- --- 18,000 ---
Chief Financial Officer 1996 69,276 5,000 --- --- --- ---
1995 55,308 --- 4,405(2) --- --- ---
</TABLE>
- -------------------
(1) With respect to Mr. Haddrill's restricted stock holdings, of the initial
grant in 1994 of 70,000 shares, 17,500 remained restricted as of December
31, 1997 with a market value of approximately $203,438 and such
restrictions on the 17,500 shares will lapse in November 1998. Mr. Haddrill
was also awarded 30,000 shares of restricted Common Stock in 1996, 20,000
of which remained restricted as of December 31, 1997 with a market value of
approximately $232,500 and such restrictions on 10,000 shares will lapse in
September 1998 and 1999. (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.
(2) Relocation allowance.
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.
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<PAGE>
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 to each of the executive officers
and directors named in the Summary Compensation Table above during 1997.
<TABLE>
<CAPTION>
OPTION GRANTS DURING 1997
Individual Grants
----------------- Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term(2)
Options Employees Price Expiration ----------------------------
Name Granted(3) in 1997 (per Share)(1) Date 5% 10%
- ------------------- ---------- ------------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael L. Eide 8,000 3.4% $3.81 02/27/07 19,181 48,609
Dennis V. Gallagher 20,000 8.6% $3.81 02/27/07 47,953 121,523
Susan J. Carstensen 10,000 4.3% $3.81 02/27/07 23,977 60,761
8,000 3.4% $9.91 09/18/07 49,840 126,305
</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 one year, 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, 1997. No options
were exercised by the named executives during the year ended December 31, 1997.
<TABLE>
<CAPTION>
Aggregated 1997 Option Exercises
and December 31, 1997 Option Values
Number of Unexercised Options
(in Common Shares) Value of Unexercised In-the-Money
at December 31, 1997 Options at December 31, 1997(1)
----------------------------- ---------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
----------------------------- ---------------------------------
<S> <C> <C>
Richard M. Haddrill 202,800/70,000 $832,893/$251,475
Michael L. Eide 58,666/21,334 $203,396/$144,304
Dennis V. Gallagher ---/20,000 ---/$156,250
Susan J. Carstensen ---/18,000 ---/$ 91,875
</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, 1997 was
$11.625, the average of the high and low reported sales price on the Nasdaq
National Market System on that date, which does not exceed the base price.
DEFINED BENEFIT AND LONG-TERM COMPENSATION PLAN
The Company does not have any defined benefit, actuarial or long-term
incentive plan.
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<PAGE>
EMPLOYMENT AND CERTAIN OTHER CONTRACTS
Employment Agreement with Richard M. Haddrill: Pursuant to the terms of an
employment agreement with Mr. Haddrill approved by the Board of Directors on
February 26, 1998, Mr. Haddrill serves the Company as its president and chief
executive officer. Unless sooner terminated pursuant to its terms, the
employment agreement terminates on January 1, 2002 and is subject to one-year
extensions thereafter. The employment agreement provides for a base salary of
$380,000. Mr. Haddrill is eligible to receive annual bonuses up to twice the
base salary if certain performance criteria are satisfied for such year. In
addition, Mr. Haddrill was awarded 100,000 shares of restricted Common Stock
that vest at the rate of one-fourth annually over the next four years beginning
on January 1, 1999 and options to purchase 50,000 shares of Common Stock at an
exercise price of $11.48 per share, the average of the closing value of the
Common Stock for the 30 trading days immediately preceding 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 shall revert to
the Company. 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. All such options become immediately exercisable, and all
restrictions on restricted stock held by Mr. Haddrill immediately lapse, upon a
"change in control" (as defined in the employment agreement) of the Company. In
addition, if Mr. Haddrill's employment is terminated for any reason other than
"cause" or if he terminates his employment for "good reason" (including
termination in certain circumstances following a change in control),then he is
entitled to receive all accrued but unpaid salary and bonus and to receive a
lump sum equal to two times the sum of the total base salary plus annual bonus,
as well as payment of certain benefits through the remaining term of the
employment agreement. Mr. Haddrill is entitled to the reimbursement of certain
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. 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.
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.
Agreement with Susan J. Carstensen: On December 5, 1996, the Company
entered into an agreement with Ms. Carstensen. 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.
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<PAGE>
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 $180,000 for 1997. The current contract with IEP Advisors
terminates in October 1998 unless terminated upon 30 days notice by the Company
or IEP.
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. During 1997 an
aggregate of approximately $2,000 was paid pursuant to the agreement.
In December 1995 the Company entered into a consulting agreement with
Patricia W. Becker, a director of the Company, for the period of two years
commencing January 16, 1995. In September 1997 the Board renewed the agreement
for an additional period of one year. 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 $133,000 during the fiscal year ended December 31, 1997
pursuant to the agreement.
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.
- 73 -
<PAGE>
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 2, 1998 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.
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Number of Shares Percent of Class
---------------- ----------------
Beneficially Owned(1) March 2, 1998(1)
--------------------- ----------------
<S> <C> <C> <C>
R. B. Haave Associates, Inc............................................ 1,017,700 (2) 9.71%
36 Grove St., New Canaan, CT 06840
Fir Tree Partners (Fir Tree, Inc. d/b/a Fir Tree Partners)............. 781,900 (3) 7.46%
1211 Ave of the Americas, 29th Floor
New York, NY 10036
Richard M. Haddrill+, ++............................................... 466,646 (4)(5) 3.98%
Michael L. Eide++...................................................... 202,473 (6)(7) 1.83%
John R. Hardesty+...................................................... 93,945 (8) .90%
Patricia W. Becker+.................................................... 30,000 (9) *
Richard R. Burt+....................................................... 30,000 (9) *
James Davey+........................................................... 26,243 (8) *
Dennis V. Gallagher++.................................................. 6,666 (10) *
Susan J. Carstensen ++................................................. 5,758 (11) *
All directors and executive officers as a group........................ 861,731 (4)(5)(6)(7)(8) 8.22%
(9)(10)(11)
</TABLE>
- ----------
+ Director of the Company
++ Executive Officer of the Company
* Denotes less than 1%
(1) Based on 10,477,952 shares of Common Stock outstanding as of the close of
business on March 2,1998 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 1,1998.
(2) 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, 1998, as
an amendment to the initial Schedule 13D, as filed on March 22, 1996.
(3) 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
- 74 -
<PAGE>
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.
(4) Includes 100,000 shares of restricted stock of the Company vesting in equal
installments on each of January 1, 1999, 2000, 2001 and 2002 and 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. The 100,000 shares of restricted stock
vesting through 2002 are subject to approval by stockholders.
(5) Includes options to purchase 252,800 shares of Common Stock, currently
exercisable or which will be exercisable within 60 days, granted pursuant
to the Company's 1994 Stock Incentive Plan. 50,000 of the options granted
are subject to approval of stockholders.
(6) Includes options to purchase 2,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1991 Stock Option Plan and
65,999 currently exercisable under the Company's 1994 Stock Option Plan.
(7) Includes 12,318 shares held by Mr. Eide's son as to which Mr. Eide
disclaims beneficial ownership.
(8) Includes options to purchase 7,500 shares of Common Stock currently
exercisable granted pursuant to the Company's 1994 Stock Incentive Plan and
options to purchase 15,000 shares of Common Stock currently exercisable
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee
Directors.
(9) 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.
(10) Includes options to purchase 6,666 shares of Common Stock granted under the
Company's 1994 Incentive Stock Plan currently exercisable or which will be
exercisable within 60 days.
(11) Includes options to purchase 3,333 shares of Common Stock granted under the
Company's 1994 Incentive Stock Plan currently exercisable or which will be
exercisable within 60 days.
- 75 -
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997 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:
William Spier served as a director of the Company from July 1991 until
February 13, 1998. On February 23, 1993, Mr. Spier, on behalf of himself and an
investor group (the "Spier Group") executed a Stockholders' Agreement with the
Company. The Stockholders' Agreement, among other things, limited the manner of
disposition of shares of Common Stock held by these parties, prohibited them
from soliciting proxies in opposition to the Board of Directors, subjected
certain proposals by these persons of merger or similar transactions to consent
by unaffiliated directors and stockholders, limited 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),
granted these persons the right to require the Company to register their shares
under the Securities Act of 1933, provided for the reimbursement of certain of
the expenses of these persons (estimated to be approximately $85,000), and
granted 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. Mr. Lyons resigned from the Board of
Directors on July 30, 1997. 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. Pursuant to the terms of the Stockholders'
Agreement, that agreement was to terminate when the aggregate ownership of
voting stock of the Company beneficially owned by the Spier Group is less than
5% of all then outstanding shares.
On December 3, 1997, the Company entered into an agreement with Mr. Spier
with respect to the exercise of his demand registration rights under the
Stockholder's Agreement, which provided that the registration include in the
offering all shares of Company's Common Stock held by Mr. Spier and the Spier
Group. It further provided that Mr. Spier resign as a director of the Company
effective immediately when the aggregate ownership of voting stock of the
Company beneficially owned by the Spier Group became less than 5% of all then
outstanding shares, and provided for a mutual release of claims, certain
restrictions on Mr. Spier's ability to acquire company securities in the future,
and the reimbursement of expenses to Mr. Spier in connection with the Company's
regulatory disclosure requirements consistent with Company policies and
procedures. The shares were marketed and sold principally to a variety of
institutional investors. The sale of all the Spier Group stock was completed on
February 10, 1998.
Except as otherwise disclosed herein, during 1997 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.
For certain additional information regarding transactions involving the
Company and its officers and directors, see "Item 10. Executive Compensation -
Compensation Committee Interlocks and Insider Participation."
- 76 -
<PAGE>
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, 1997, 1996 and 1995
Balance Sheets as of December 31, 1997 and 1996
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
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 June 18, 1997)
*10.3 1992 Video Lottery Technologies, Inc. Stock Incentive Plan
*10.4 1993 Video Lottery Technologies, Inc. 1993 Stock Option
Plan for Non-Employee Directors
*10.5 1994 Powerhouse Technologies, Inc. Stock Incentive Plan
(amended June 18, 1997 and February 13, 1998)
10.6 Form of Indemnification Agreement between the Company and
its directors and officers (incorporated by reference to
Exhibit 10.3 to the 1991 Registration Statement)
10.7 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.)
10.8 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.)
10.9 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.)
- 77 -
<PAGE>
10.10 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.)
10.11 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.)
10.12 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.)
10.13 Amendment No. 2 to First Bank National Association Credit
Agreement (incorporated by reference to Exhibit 10.15 to
the 1995 Form 10-K.)
10.14 Settlement Agreement - between Video Lottery Technologies,
Inc., and the Shelhamers (incorporated by reference to
Exhibit 10.16 to the 1995 Form 10-K.)
10.15 Master Settlement Agreement - between Video Lottery
Technologies, Inc. and Electronic Data Systems Corporation
(incorporated by reference to Form 8-K dated January 30,
1997.)
10.16 Amendment No. 3 to First Bank National Association Credit
Agreement (incorporated by reference to Exhibit 10.18 to
the 1996 Form 10-K)
10.17 Waiver and Amendment No. 4 to First Bank National
Association Credit Agreement (incorporated by reference to
Exhibit 10.19 to the 1996 Form 10-K)
10.18 Consent, Waiver and Amendment No. 5 to First Bank National
Association Credit Agreement (incorporated by reference to
Exhibit 10.20 to the 1996 Form 10-K)
*10.19 Letter Agreement and Waiver extending First Bank National
Association Credit Agreement
*10.20 International Equity Partners Related Party Consulting
Agreement dated September 18, 1997
10.21 Richard R. Burt Related Party Consulting Agreement
(incorporated by reference to Exhibit 10.22 to the 1996
Form 10-K)
*10.22 Patricia W. Becker Related Party Consulting Agreement dated
September 18, 1997
*10.23 Richard M. Haddrill Employment Agreement dated January 1,
1998
10.24 Dennis V. Gallagher Employment Agreement (incorporated by
reference to Exhibit 10.25 to the 1996 Form 10-K)
10.25 Michael L. Eide Employment Agreement (incorporated by
reference to Exhibit 10.26 to the 1996 Form 10-K)
10.26 Susan J. Carstensen Employment Agreement (incorporated by
reference to Exhibit 10.28 to the 1996 Form 10-K)
*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 22, 1997, reporting the change of the Company's
name to Powerhouse Technologies, Inc. effective January 1, 1998.
(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
- 78 -
<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.
POWERHOUSE TECHNOLOGIES, INC.
Date: March 30, 1998 /s/ RICHARD M. HADDRILL
------------------------------------
Richard M. Haddrill
President and Chief Executive Officer
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/ SUSAN J. CARSTENSEN Chief Financial Officer (Principal March 30, 1998
- ----------------------- Accounting Officer)
Susan J. Carstensen
/s/ RICHARD R. BURT Chairman and Director March 23, 1998
- -----------------------
Richard R. Burt
/s/ JAMES J. DAVEY Vice Chairman and Director March 30, 1998
- -----------------------
James J. Davey
/s/ RICHARD M. HADDRILL President, Chief Executive Officer March 30, 1998
- ----------------------- Treasurer and Director
Richard M. Haddrill
/s/ PATRICIA W. BECKER Director March 23, 1998
- -----------------------
Patricia W. Becker
/s/ JOHN R. HARDESTY Director March 23, 1998
- -----------------------
John R. Hardesty
- 79 -
Rev.1/1/98
POWERHOUSE TECHNOLOGIES, INC.
1991 EMPLOYEE STOCK PURCHASE PLAN
(Amended June 19, 1991, February 19, 1993,
December 18, 1996 and June 18, 1997)
ARTICLE I. INTRODUCTION
Section 1.01 Purpose. The purpose of the Powerhouse Technologies, Inc. 1991
Employee Stock Purchase Plan (the "Plan") is to provide employees of Powerhouse
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 Powerhouse 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 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
1
<PAGE>
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 Powerhouse 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 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)."
2
<PAGE>
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 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 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.
3
<PAGE>
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.
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
4
<PAGE>
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 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 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
5
<PAGE>
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 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 the sum of (a) the shares purchased for
Purchase Periods 1991, 1992, 1993, 1994, and 1995 totaling 180,208, (b) the
largest number of whole shares of Common Stock that can be purchased for
Purchase Period 1996 at
6
<PAGE>
the price specified in Section 4.02 with the entire credit balance in all
Participant's Stock Purchase Accounts as of the last business day of said
Purchase Period 1996 (117,075), and (c) up to 402,717 additional shares of
Common Stock reserved for issuance upon future purchases of shares by
Participants."
Section 10.04 Notices. Notices to the Committee should be addressed as
follows:
Powerhouse 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.
L"\user\bjork\stock\empl-pur\91amend
7
VIDEO LOTTERY TECHNOLOGIES, INC.
1992 STOCK INCENTIVE PLAN
1. Purpose.
-------
The purpose of this Plan is to strengthen Video Lottery Technologies,
Inc. (the "Company") by providing an incentive to its key employees and
directors and thereby encouraging them to devote their abilities and industry to
the success of the Company's business enterprise. It is intended that this
purpose be achieved by extending to directors, key employees, consultants and
advisors of the Company an added long-term incentive for high levels of
performance and unusual efforts through the grant of Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Units and Performance Shares (as each term is hereinafter defined).
2. Effect on Other Plans.
---------------------
Upon approval of this Plan by the stockholders of the Company pursuant
to Section 20, no further stock options shall be granted under the Video Lottery
Technologies, Inc. 1991 Stock Option Plan (the "1991 Plan"). All stock options
outstanding under the 1991 Plan shall continue to be governed by the terms of
the 1991 Plan and the relevant stock option agreement pertaining to each such
stock option. However, all Shares which would otherwise be available for future
stock option grants under the 1991 Plan on or after the date of stockholder
approval of this Plan (including, without limitation, Shares which would have
been available for future grants due to the forfeiture, expiration or
termination of stock options granted under the 1991 Plan) shall no longer be
available for stock option grants under the 1991 Plan and shall instead be
available for the grant of Options and Awards pursuant to the terms and
provisions of this Plan, as provided in Section 5.
3. Definitions.
-----------
For purposes of the Plan:
3.1 "Adjusted Fair Market Value" means, in the event of a Change
in Control, the greater of (i) the highest price per Share paid to holders of
the Shares in any
<PAGE>
transaction (or series of transactions) constituting or resulting in a Change in
Control or (ii) the highest Fair Market Value of a Share during the ninety (90)
day period ending on the date of a Change in Control.
3.2 "Agreement" means the written agreement between the Company
and an Optionee or Grantee evidencing the grant of an Option or Award and
setting forth the terms and conditions thereof.
3.3 "Award" means a grant of Stock Appreciation Rights,
Restricted Stock, a Performance Award or any or all of them.
3.4 "Awardee" means a person to whom any Stock Appreciation
Rights, Restricted Stock or Performance Award has been granted under the Plan.
3.5 "Board" means the Board of Directors of the Company.
3.6 "Cause" means the commission of an act of fraud or
intentional misrepresentation or an act of embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any Subsidiary.
3.7 "Change in Capitalization" means any increase or reduction in
the number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, cash dividend, property dividend, combination or exchange
of shares, repurchase of shares, change in corporate structure or otherwise.
3.8 A "Change in Control" shall mean the occurrence during the
term of the Plan of:
(i) 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
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<PAGE>
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
(i), a Person shall not be deemed to have made an acquisition of
Voting Securities if such Person: (a) 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; (b) acquires the Voting
Securities directly from the Company; (c) 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; (d)
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
(e) acquires Voting Securities in connection with a "Non-Control
Transaction" (as defined in paragraph (iii) below); or
(ii) The individuals who, as of August 26, 1992 are members
of the Board of Directors of the Company (the "Incumbent Board"),
cease for any reason to constitute at least two-thirds of the Board of
Directors of the Company; 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 two-thirds 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 of Directors (a "Proxy
Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
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<PAGE>
(iii) Approval by stockholders of the Company of:
(a) A merger, consolidation or reorganization involving the
Company (a "Business Combination"), unless
(1) 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, and
(2) 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
(3) 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 (40%) or more of the combined voting power
of the Surviving Corporation's then outstanding voting securities (a
transaction described in this subparagraph (a) shall be referred to as
a "Non-Control Transaction");
(b) A complete liquidation or dissolution of the Company; or
(c) An agreement for 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).
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<PAGE>
Notwithstanding the foregoing, (x) 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; and (y) if an Eligible
Employee's employment is terminated and the employer reasonably
demonstrates that such termination (A) was at the request of a third
party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control and who effectuates a Change
in Control or (B) otherwise occurred in connection with, or in
anticipation of, a Change in Control which actually occurs, then for
all purposes hereof, the date of a Change in Control with respect to
the Eligible Employee shall mean the date immediately prior to the
date of such termination of employment.
3.9 "Code" means the Internal Revenue Code of 1986, as amended.
3.10 "Committee" means a committee consisting of at least two (2)
Disinterested Directors appointed by the Board to administer the Plan and to
perform the functions set forth herein.
3.11 "Company" means Video Lottery Technologies, Inc.
3.12 "Director Option" means an Option granted pursuant to
Section 6.
3.13 "Disability" means a physical or mental infirmity which
impairs the Optionee's ability to perform substantially his or her duties for a
period of one hundred eighty (180) consecutive days.
3.14 "Disinterested Director" means a director of the Company who
is "disinterested" within the meaning of Rule 16b-3 under the Exchange Act.
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<PAGE>
3.15 "Division" means any of the operating units or divisions of
the Company designated as a Division by the Committee.
3.16 "Eligible Employee" means any officer or other key employee
or consultant or advisor of the Company or a Subsidiary designated by the
Committee as eligible to receive Options or Awards subject to the conditions set
forth herein.
3.17 "Employee option" means an Option granted pursuant to
Section 7.
3.18 "Exchange Act" means the Securities Exchange Act Of 1934, as
amended.
3.19 "Fair Market Value" on any date means the average of the
high and low sales prices of the Shares on such date on the principal national
securities exchange on which such Shares are listed or admitted to trading, or
if such Shares are not so listed or admitted to trading, the arithmetic mean of
the per Share closing bid price and per Share closing asked price on such date
as quoted on the National Association of Securities Dealers Automated Quotation
System or such other market in which such prices are regularly quoted, or, if
there have been no published bid or asked quotations with respect to Shares on
such date, the Fair Market Value shall be the value established by the Board in
good faith and in accordance with Section 422 of the Code.
3.20 "Grantee" means a person to whom an Award has been granted
under the Plan.
3.21 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
3.22 "1991 Plan" means the Video Lottery Technologies, Inc. 1991
Stock Option Plan.
3.23 "Nonemployee Director" means a director of the Company who
is not an employee of the Company or any Subsidiary and who is first elected or
appointed to serve as a director of the Company after August 26, 1992.
3.24 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
3.25 "Option" means a Employee Option, a Director Option, or
either or both of them.
-6-
<PAGE>
3.26 "Optionee" means a person to whom an Option has been granted
under the Plan.
3.27 "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with respect to the Company.
3.28 "Performance Awards" means Performance Units, Performance
Shares or either or both of them.
3.29 "Performance Cycle" means the time period specified by the
Committee at the time a Performance Award is granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
3.30 "Performance Shares" means Shares issued or transferred to
an Eligible Employee under Section 11.3 which are subject to restrictions that
lapse if and when certain prescribed performance goals are met.
3.31 "Performance Unit" means Performance Units granted under
Section 11.2.
3.32 "Restricted Stock" means Shares issued or transferred to an
Eligible Employee pursuant to Section 10 which are subject to restrictions which
lapse over time without regard to the performance of the Company, a Subsidiary
or a Division.
3.33 "Plan" means the Video Lottery Technologies, Inc. 1992 Stock
Incentive Plan.
3.34 "Shares" means the common stock, par value $.0l per share,
of the Company.
3.35 "Stock Appreciation Right" means a right to receive all or
some portion of the increase in the value of the Shares subject to an Option as
provided in Section 9.
3.36 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
3.37 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
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<PAGE>
3.38 "Ten-Percent Stockholder" means an Eligible Employee, who,
at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6)of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company, or of a Parent or a Subsidiary.
4. Administration.
--------------
4.1 The Plan shall be administered by the Committee which shall
hold meetings at such times as may be necessary for the proper administration of
the Plan. The Committee shall keep minutes of its meetings. A quorum shall
consist of not less than two members of the Committee and a majority of a quorum
may authorize any action. Any decision or determination reduced to writing and
signed by a majority of all of the members shall be as fully effective as if
made by a majority vote at a meeting duly called and held. Each member of the
Committee shall be a Disinterested Director. No member of the Committee shall be
liable for any action, failure to act, determination or interpretation made in
good faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence or
reckless disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Committee for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with defending
against, responding to, negotiation for the settlement of or otherwise dealing
with any claim, cause of action or dispute of any kind arising in connection
with any actions in administering this Plan or in authorizing or denying
authorization to any transaction hereunder.
4.2 Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to:
(a) determine those individuals to whom Employee Options
shall be granted under the Plan and the number of Incentive Stock Options and/or
Nonqualified Stock Options to be granted to each Eligible Employee and to
prescribe the terms and conditions (which need not be identical) of each
Employee Option, including the purchase price per Share subject to each Employee
Option, and make any amendment or modification to any Agreement consistent with
the terms of the Plan; and
(b) select those Eligible Employees to whom Awards shall be
granted under the Plan and to determine the number of Performance Units,
Performance Shares, Shares of
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<PAGE>
Restricted Stock, and/or Stock Appreciation Rights to be granted pursuant to
each Award, the terms and conditions of each Award, including the restrictions
or performance criteria relating to such Units, Shares or Rights, the maximum
value of each Performance Unit and Performance Share and make any amendment or
modification to any Agreement consistent with the terms of the Plan.
4.3 Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time:
(a) to construe and interpret the Plan and Options and
Awards granted thereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, but not limited to,
correcting any defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the manner and to the extent
it shall deem necessary or advisable to make the Plan fully effective, and all
decisions and determinations by the Committee in the exercise of this power
shall be final, binding and conclusive upon the Company, its Subsidiaries, the
Optionees and Grantees and all other persons having any interest therein;
(b) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee or Grantee on an individual basis
without constituting a termination of employment or service for purposes of the
Plan;
(c) to exercise its discretion with respect to the powers
and rights granted to it as set forth in the Plan; and
(d) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of the
Company with respect to the Plan.
5. Stock Subject to the Plan.
-------------------------
5.1 The maximum number of Shares that may be made the subject of
Options and Awards granted under the Plan is 360,940, plus all Shares that would
have been available for the granting of stock options under the 1991 Plan due to
the forfeiture, expiration or termination of stock options granted under the
1991 Plan, but for the prospective termination of that plan as provided in
Section 2. Upon a Change in Capitalization the maximum number of Shares shall be
adjusted in number and kind pursuant to Section 13. The Company shall
-9-
<PAGE>
reserve for the purposes of the Plan, out of its authorized but unissued Shares
or out of Shares held in the Company's treasury, or partly out of each, such
number of Shares as shall be determined by the Board.
5.2 Whenever any outstanding Option or Award or portion thereof
expires, is cancelled or is otherwise terminated for any reason, the Shares
allocable to the cancelled or otherwise terminated portion of the Option or
Award may again be the subject of Options or Awards granted hereunder. Whenever
a Stock Appreciation Right is exercised (for cash or Shares or a combination
thereof) the excess of the number of Shares in respect of which the Stock
Appreciation Right was granted over the number of Shares, if any, actually
issued or transferred to the Awardee as a result of such exercise may again be
the subject of Options or Awards granted hereunder; provided, however, that
future transactions involving such Shares (including without limitation, the
grant of Options or Awards in respect of such Shares) shall be eligible for the
exemptions provided under Rule 16b-3 promulgated under the Exchange Act only to
the extent permitted under that Rule with respect to such securities.
6. Option Grants for Nonemployee Directors.
---------------------------------------
6.1 Grant. Subject to the availability of an adequate number of
Shares designated under the Plan, each Nonemployee Director shall receive a
one-time grant of an Option to purchase 10,000 Shares (subject to adjustment as
provided in Section 13) effective as of the date which is the earlier of the
date on which he or she is initially elected to serve as a Director by vote of
the holders of Shares or the date on which he or she is initially appointed to
serve as a Director by the members of the Board, pursuant to the Company's
bylaws and articles of incorporation, as then in effect (a "Director Option").
6.2 Purchase Price. The purchase price for Shares under each
Director Option shall be equal to 100% of the Fair Market Value of such Shares
on the date immediately preceding the date of grant.
6.3 Vesting. Subject to Sections 6.4 and 8.4, each Director
Option shall become exercisable with respect to 50% of the Shares subject
thereto effective immediately as of the grant date and shall become exercisable
with respect to an additional 25% of the Shares subject thereto effective as of
each of the first and second anniversaries of the grant date; provided, however,
that the Optionee continues to serve as a
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<PAGE>
Director as of such dates. If an Optionee ceases to serve as a Director for any
reason, the Optionee shall have no rights with respect to that portion of a
Director option which has not then vested pursuant to the preceding sentence and
the Optionee shall automatically forfeit that portion of the Director Option
which remains unvested.
6.4 Duration. Each Director Option shall terminate on the date
which is the tenth anniversary of the grant date, unless terminated earlier as
follows:
(a) If an Optionee's service as a Director terminates for
any reason other than Disability, death or Cause, the Optionee may for a period
of three (3) months after such termination exercise his or her Option to the
extent, and only to the extent, that such Option or portion thereof was vested
and exercisable as of the date the Optionee's service as a Director terminated,
after which time the Option shall automatically terminate in full.
(b) If an optionee's service as a Director terminates by
reason of the Optionee's resignation or removal from the Board due to
Disability, the Optionee may, for a period of one (1) year after such
termination, exercise his or her Option to the extent, and only to the extent,
that such Option or portion thereof was vested and exercisable, as of the date
the Optionee's service as Director terminated, after which time the Option shall
automatically terminate in full.
(c) If an Optionee's service as a Director terminates for
Cause, the Option granted to the Optionee hereunder shall immediately terminate
in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director or within three (3)
months after termination of service as a Director as described in clause (a) or
(b) of this Section 6.4, the Option granted to the Optionee may be exercised at
any time within twelve (12) months after the Optionee's death by the person or
person to whom such rights under the Option shall pass by will, or by the laws
of descent or distribution, after which time the Option shall terminate in full;
provided, however, that an Option may be exercised to the extent, and only to
the extent, that the Option or portion thereof was exercisable on the date of
death or earlier termination of the Optionee's services as a Director.
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<PAGE>
7. Option Grants for Eligible Employees.
------------------------------------
7.1 Authority of Committee. Subject to the provisions of the Plan
and to Section 5.1 above, the Committee shall have full and final authority to
select those Eligible Employees who will receive Options (each a "Employee
Option"), the terms and conditions of which shall be set forth in an Agreement;
provided, however, that no person shall receive any Incentive Stock Options
unless he or she is an employee of the Company, a Parent or a Subsidiary at the
time the Incentive Stock Option is granted.
7.2 Purchase Price. The purchase price or the manner in which the
purchase price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement, provided that the
purchase price per Share under each Incentive Stock Option shall not be less
than 100% of the Fair Market Value of a Share on the date the Incentive Stock
Option is granted (110% in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder) and the purchase price per Share under each
Nonqualified Stock Option shall not be less than 75% of the Fair Market Value of
a Share on the date the Nonqualified Stock Option is granted.
7.3 Maximum Duration. Employee options granted hereunder shall be
for such term as the Committee shall determine, provided that an Incentive Stock
option shall not be exercisable after the expiration of ten (10) years from the
date it is granted (five (5) years in the case of an Incentive Stock Option
granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option shall not
be exercisable after the expiration of fifteen (15) years from the date it is
granted. The Committee may, subsequent to the granting of any Employee Option,
extend the term thereof but in no event shall the term as so extended exceed the
maximum term provided for in the preceding sentence.
7.4 Vesting. Subject to Section 8.4 hereof, each Employee Option
shall become exercisable in such installments (which need not be equal) and at
such times as may be designated by the Committee and set forth in the Agreement.
To the extent not exercised, installments shall accumulate and be exercisable,
in whole or in part, at any time after becoming exercisable, but not later than
the date the Employee Option expires. The Committee may accelerate the
exercisability of any Option or portion thereof at any time.
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7.5 Modification or Substitution. The Committee may, in its
discretion, modify outstanding Employee Options or accept the surrender of
outstanding Employee Options (to the extent not exercised) and grant new Options
in substitution for them. Notwithstanding the foregoing, no modification of an
Employee Option shall adversely alter or impair any rights or obligations under
the Employee Option without the Optionee's consent.
8. Terms and Conditions Applicable to All Options.
----------------------------------------------
8.1 Non-transferability. No Option granted hereunder shall be
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and distribution, and an Option may be exercised during the lifetime
of such Optionee only by the optionee or his or her guardian or legal
representative. The terms of such Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
8.2 Method of Exercise. The exercise of an option shall be made
only by a written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the number of
Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise by any one or a combination of the
following: (i) cash, (ii) transferring Shares to the Company upon such terms and
conditions as determined by the Committee or (iii) by delivering the Optionee's
promissory note (provided that the par value of the Shares subject to such
exercise shall be paid in cash), which shall provide for interest at a rate not
less than the minimum rate required to avoid the imputation of income, original
issue discount or a below-market-rate loan pursuant to Sections 483, 1274 or
7872 of the Code or any successor provisions thereto. The Optionee's promissory
note shall be a recourse liability of the optionee and may, at the discretion of
the Committee, be secured by a pledge of the Shares being purchased. Until such
person has been issued the Shares subject to such exercise, he or she shall
possess no rights as a stockholder with respect to such Shares. Notwithstanding
the foregoing, the Committee shall have discretion to determine at the time of
grant of each Employee Option or at any later date (up to and including the date
of exercise) the form of payment acceptable in respect of the exercise of such
Employee Option. The written notice pursuant to this Section 8.2 may also
provide instructions from the
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optionee to the Company that upon receipt of the purchase price in cash from the
Optionee's broker or dealer, designated as such on the written notice, in
payment for any Shares purchase pursuant to the exercise of an option, the
Company shall issue such Shares directly to the designated broker or dealer. Any
Shares transferred to the Company as payment of the purchase price under an
Option shall be valued at their Fair Market Value on the day preceding the date
of exercise of such Option. If requested by the Committee, the Optionee shall
deliver the Agreement evidencing the Option to the Secretary of the Company who
shall endorse thereon a notation of such exercise and return such Agreement to
the Optionee. No fractional Shares (or cash in lieu thereof) shall be issued
upon exercise of an Option and the number of Shares that may be purchased upon
exercise shall be rounded to the nearest number of whole Shares.
8.3 Rights of Option No Optionee shall be deemed for any purpose
to be the owner of any Shares subject to any Option unless and until (i) the
Option shall have been exercised pursuant to the terms thereof, (ii) the Company
shall have issued and delivered the Shares to the Optionee and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend and
other ownership rights with respect to such Shares.
8.4 Effect of Change in Control. Notwithstanding anything
contained in the Plan or an Agreement to the contrary, in the event of a Change
in Control, (i) all Options outstanding on the date of such Change in Control
shall become immediately and fully exercisable and (ii) an Optionee will be
permitted to surrender for cancellation within sixty (60) days after such Change
in Control, any Option or portion of an Option to the extent not yet exercised
and the Optionee will be entitled to receive a cash payment in an amount equal
to the excess, if any, of (x) (A) in the case of a Nonqualified Stock Option,
the greater of (1) the Fair Market Value, on the date preceding the date of
surrender, of the Shares subject to the Option or portion thereof surrendered or
(2) the Adjusted Fair Market Value of the Shares subject to the Option or
portion thereof surrendered or (B) in the case of an Incentive Stock Option, the
Fair Market Value, on the date preceding the date of surrender, of the Shares
subject to the Option or portion thereof surrendered, over (y) the aggregate
purchase price for such Shares under the Option or portion thereof surrendered;
provided, however, that in the case of an Option granted within six (6) months
prior to the Change in Control to any Optionee who may be subject to liability
under Section 16(b) of the
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Exchange Act,such Optionee shall be entitled to surrender for cancellation his
or her Option during the sixty (60) day period commencing upon the expiration of
six (6) months from the date of grant of any such Option.
9. Stock Appreciation Rights.
9.1 Grant. The Committee may, in its discretion, in connection
with the grant of an Employee Option, grant to Eligible Employees Stock
Appreciation Rights the terms and conditions of which shall be set forth in an
Agreement. A Stock Appreciation Right shall cover the same Shares covered by the
Option (or such lesser number of Shares as the Committee may determine) and
shall, except as provided in this Section 9, be subject to the same terms and
conditions as the related Option.
9.2 Time of Grant. A Stock Appreciation Right may be granted
either at the time of the related Option grant, or at any time thereafter during
the term of the Option.
9.3 Payment. A Stock Appreciation Right shall entitle the holder
thereof, upon exercise of the Stock Appreciation Right or any portion thereof,
to receive payment of an amount computed pursuant to Section 9.5.
9.4 Exercise. A Stock Appreciation Right shall be exercisable at
such time or times and only to the extent that the related Option is
exercisable, and will not be transferable except to the extent the related
Option may be transferable. A Stock Appreciation Right granted in connection
with an Incentive Stock Option shall be exercisable only if the Fair Market
Value of a Share on the date of exercise exceeds the purchase price of the
related Incentive Stock Option.
9.5 Amount Payable. upon the exercise of a Stock Appreciation
Right, the Grantee shall be entitled to receive an amount determined by
multiplying (A) the excess of the Fair Market Value of a Share on the date
preceding the date of exercise of such Stock Appreciation Right over the per
Share purchase price under the related Option, by (B) the number of Shares as to
which such Stock Appreciation Right is being exercised. Notwithstanding the
foregoing, the Committee may limit in any manner the amount payable with respect
to any Stock Appreciation Right by including such a limit in the Agreement
evidencing the Stock Appreciation Right at the time it is granted.
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9.6 Treatment of Related Options and Stock Appreciation Rights
Upon Exercise. Upon the exercise of a Stock Appreciation Right, the related
Option shall be cancelled to the extent of the number of Shares as to which the
Stock Appreciation Right is exercised, and upon the exercise of an Option
granted in connection with a Stock Appreciation Right or the surrender of such
Option pursuant to Section 8.4, the Stock Appreciation Right shall be cancelled
to the extent of the number of Shares as to which the Option is exercised or
surrendered.
9.7 Method of Exercise. Stock Appreciation Rights shall be
exercised by a Grantee only by a written notice delivered in person or by mail
to the Secretary of the Company at the Company's principal executive office,
specifying the number of Shares with respect to which the Stock Appreciation
Right is being exercised. If requested by the Committee, the Grantee shall
deliver the Agreement evidencing the Stock Appreciation Right being exercised
and the Agreement evidencing any related option to the Secretary of the Company
who shall endorse thereon a notation of such exercise and return such Agreement
to the Grantee.
9.8 Form of Payment. Payment of the amount determined under
Section 9.5 may be made in the discretion of the Committee, solely in whole
Shares in a number determined at their Fair Market Value on the date preceding
the date of exercise of the Stock Appreciation Right, or solely in cash, or in a
combination of cash and Shares. If the Committee decides to make full payment in
Shares and the amount payable results in a fractional Share, payment for the
fractional Share will be made in cash. Notwithstanding the foregoing, no payment
in the form of cash may be made upon the exercise of a Stock Appreciation Right
pursuant to Section 9.5 to an officer of the Company or a Subsidiary who is
subject to Section 16 of the Exchange Act, unless the exercise of such Stock
Appreciation Right is made during the period beginning on the third business day
and ending on the twelfth business day following the date of release for
publication of the Company's quarterly or annual statements of sales and
earnings.
9.9 Restrictions . No Stock Appreciation Right may be exercised
before the date six (6) months after the date it is granted.
9.10 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Awards of Stock Appreciation Rights
or accept the surrender of outstanding Awards of Stock Appreciation Rights (to
the extent
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not exercised) and grant new Awards in substitution for them. Notwithstanding
the foregoing, no modification of an Award shall adversely alter or impair any
rights or obligations under the Agreement without the Grantee's consent.
10. Restricted Stock.
----------------
10.1 Grant. The Committee may grant to Eligible Employees Awards
of Restricted Stock, and may issue Shares of Restricted Stock in payment in
respect of vested Performance Units (as hereinafter provided in Section 11.2),
which shall be evidenced by an Agreement between the Company and the Grantee.
Each Agreement shall contain such restrictions, terms and conditions as the
Committee may, in its discretion, determine and (without limiting the generality
of the foregoing) such Agreements may require that an appropriate legend be
placed on Share certificates. Awards of Restricted Stock shall be subject to the
terms and provisions set forth below in this Section 10.
10.2 Rights of Grantee. Shares of Restricted Stock granted
pursuant to an Award hereunder shall be issued in the name of the Grantee as
soon as reasonably practicable after the Award is granted provided that the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the discretion of the Committee, an escrow agreement and
any other documents which the Committee may require as a condition to the
issuance of such Shares. If a Grantee shall fail to execute the Agreement
evidencing a Restricted Stock Award, the appropriate blank stock powers and, in
the discretion of the Committee, an escrow agreement and any other documents
which the Committee may require within the time period prescribed by the
Committee at the time the Award is granted, the Award shall be null and void. At
the discretion of the Committee, Shares issued in connection with a Restricted
Stock Award shall be deposited together with the stock powers with an escrow
agent (which may be the Company) designated by the Committee. Unless the
Committee determines otherwise and as set forth in the Agreement, upon delivery
of the Shares to the escrow agent, the Grantee shall have all of the rights of a
stockholder with respect to such Shares, including the right to vote the Shares
and to receive all dividends or other distributions paid or made with respect to
the Shares.
10.3 Non-transferability. Until any restrictions upon the Shares
of Restricted Stock awarded to a Grantee shall have lapsed in the manner set
forth in Section 10.4, such Shares shall not be sold, transferred or otherwise
disposed of and shall not be pledged or otherwise hypothecated, nor shall they
be delivered to the Grantee.
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10.4 Lapse of Restrictions.
---------------------
(a) Generally. Restrictions upon Shares of Restricted Stock
awarded hereunder shall lapse at such time or times and on such terms and
conditions as the Committee may determine, which restrictions shall be set forth
in the Agreement evidencing the Award.
(b) Effect-of Change in Control. Notwithstanding anything
contained in the Plan, unless the Agreement evidencing the Award provides to the
contrary, in the event of a Change in Control, all restrictions upon any Shares
of Restricted Stock shall lapse immediately and all such Shares shall become
fully vested in the Grantee.
10.5 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Awards of Restricted Stock or accept
the surrender of outstanding Awards of Restricted Stock (to the extent not
exercised) and grant new Awards in substitution for them. Notwithstanding the
foregoing, no modification of an Award shall adversely alter or impair any
rights or obligations under the Agreement without the Grantee's consent.
10.6 Treatment of Dividends. At the time the Award of Shares of
Restricted Stock is granted, the Committee may, in its discretion, determine
that the payment to the Grantee of dividends, or a specified portion thereof,
declared or paid on such Shares by the Company shall be (i) deferred until the
lapsing of the restrictions imposed upon such Shares and (ii) held by the
Company for the account of the Grantee until such time. In the event of such
deferral, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at a rate per
annum as the Committee, in its discretion, may determine. Payment of deferred
dividends, together with interest accrued thereon, shall be made upon the
lapsing of restrictions imposed on such Shares, and any dividends deferred
(together with any interest accrued thereon) in respect of any Shares of
Restricted Stock shall be forfeited upon the forfeiture of such Shares.
10.7 Delivery of Shares. Upon the lapse of the restrictions on
Shares of Restricted Stock, the Committee shall cause a stock certificate to be
delivered to the Grantee with respect to such Shares, free of all restrictions
hereunder.
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11. Performance Awards.
------------------
11.1 Performance Objectives. Performance objectives for
Performance Awards may be expressed in terms of (i) earnings per Share, (ii)
pre-tax profits, (iii) net earnings or net worth, (iv) return on equity or
assets, (v) any combination of the foregoing, or (vi) any other standard or
standards deemed appropriate by the Committee at the time the Award is granted.
Performance objectives may be in respect of the performance of the Company and
its Subsidiaries (which may be on a consolidated basis), a Subsidiary or a
Division. Performance objectives may be absolute or relative and may be
expressed in terms of a progression within a specified range. Prior to the end
of a Performance Cycle, the Committee, in its discretion, may adjust the
performance objectives to reflect a Change in the Capitalization, a change in
the tax rate or book tax rate of the Company or any Subsidiary, or any other
event which may materially affect the performance of the Company, a Subsidiary
or a Division, including, but not limited to, market conditions or a significant
acquisition or disposition of assets or other property by the Company, a
Subsidiary or a Division.
11.2 Performance Units. The Committee may grant Performance Units
to Eligible Employees, the terms and conditions of which shall be set forth in
an Agreement between the Company and the Grantee. Each Performance Unit shall,
contingent upon the attainment of specified performance objectives within the
Performance Cycle, represent one (1) Share. Each Agreement shall specify the
number of the Performance Units to which it relates, the performance objectives
which must be satisfied in order for the Performance Units to vest, the
Performance Cycle within which such objectives must be satisfied.
(a) Vesting--and Forfeiture. A Grantee shall become vested
with respect to the Performance Units to the extent that the performance
objectives set forth in the Agreement are satisfied for the Performance Cycle.
(b) Payment of Awards. Payment of Performance Units to
Grantees in respect of vested Performance Units shall be made within sixty (60)
days after the last day of the Performance Cycle to which such Award relates
unless the Agreement evidencing the Award provides for the deferral of payment,
in which event the terms and conditions of the deferral shall be set forth in
the Agreement. Subject to Section 11.4, such payments may be made entirely in
Shares, entirely in cash, or in such combination of Shares and cash as
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the Committee in its discretion, shall determine at any time prior to such
payment; Provided, however, that if the Committee in its discretion determines
to make such payment entirely or partially in Shares of Restricted Stock, the
Committee must determine the extent to which such payment will be in Shares of
Restricted Stock at the time the Award is granted. Except as provided in Section
11.4, if payment is made in the form of cash, the amount payable in respect of
each vested Performance Unit shall be equal to the Fair Market Value of one (1)
Share on the last day of the Performance Cycle or on such other date (or the
average over some period) specified by the Committee and set forth in the
Agreement.
11.3 Performance Shares. The Committee, in its discretion, may
grant Awards of Performance Shares to Eligible Employees, which shall be
evidenced by an Agreement between the Company and the Grantee. Each Agreement
shall contain such restrictions, if any, and the terms and conditions as the
Committee may, in its discretion, require, and (without limiting the generality
of the foregoing) such Agreements may require that an appropriate legend be
placed on Share certificates. Awards of Performance Shares shall be subject to
the following terms and provisions:
(a) Rights of Grantee. The Committee shall provide at the
time an Award of Performance Shares is made, the time or times at which the
Performance Shares granted pursuant to such Award hereunder shall be issued in
the name of the Grantee; Provided, however, that no Performance Shares shall be
issued until the Grantee has executed an Agreement evidencing the Award, the
appropriate blank stock powers and, in the discretion of the Committee, an
escrow agreement and any other documents which the Committee may require as a
condition to the issuance of such Performance Shares. If a Grantee shall fail to
execute the Agreement evidencing an Award of Performance Shares, the appropriate
blank stock powers and, in the discretion of the Committee, an escrow agreement
and any other documents which the Committee may require within the time period
prescribed by the Committee at the time the Award is granted, the Award shall be
null and void. At the discretion of the Committee, Shares issued in connection
with an Award of Performance Shares shall be deposited together with the stock
powers with an escrow agent (which may be the Company) designated by the
Committee. Except as restricted by the terms of the Agreement, upon delivery of
the Shares to the escrow agent, the Grantee shall have, in the discretion of the
Committee, all of the rights of a stockholder with respect to such Shares,
including the right to vote the shares and to receive all dividends or other
distributions paid or made with respect to the shares.
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(b) Non-transferability. Until any restrictions upon the
Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee. The Committee may also
impose such other restrictions and conditions on the Performance Shares, if any,
as it deem appropriate.
(c) Lapse of Restrictions. Subject to Section 11.4,
restrictions upon Performance Shares awarded hereunder shall lapse and such
Performance Shares shall become vested at such time or times and on such terms,
conditions and satisfaction of performance objectives as the Committee may, in
its discretion, determine at the time an Award is granted.
(d) Treatment of Dividends. At the time the Award of
Performance Shares is granted, the Committee may, in its discretion, determine
that the payment to the Grantee of dividends, or a specified portion thereof,
declared or paid on Performance Shares issued by the Company to the Grantee
shall be (i) deferred until the lapsing of the restrictions imposed upon such
Performance Shares and (ii) held by the Company for the account of the Grantee
until such time. In the event of such deferral, there may be credited at the end
of each year (or portion thereof) interest on the amount of the account at the
beginning of the year at a rate per annum as the Committee, in its discretion,
may determine. Payment of deferred dividends, together with interest accrued
thereon as aforesaid, shall be made upon the lapsing of restrictions imposed on
such Performance Shares, except that any dividends deferred (together with any
interest accrued thereon) in respect of any Performance Shares shall be
forfeited upon the forfeiture of such Performance Shares.
(e) Delivery of Shares. Upon the lapse of the restrictions
on Performance Shares awarded hereunder, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such Shares, free of
all restrictions hereunder.
11.4 Effect of Change in Control. Notwithstanding anything
contained in the Plan or any Agreement to the contrary, in the event of a Change
in Control:
(a) With respect to the Performance Units, the Grantee shall
(i) become vested in a percentage of Performance Units as determined by the
Committee at the time of
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the Award of such Performance Units and as set forth in the Agreement and (ii)
be entitled to receive in respect of all Performance Units which become vested
as a result of a Change in Control, a cash payment within ten (10) days after
such Change in Control equal to the product of the Adjusted Fair Market Value of
a Share multiplied by the number of Performance Units which become vested in
accordance with this Section 11.4.
(b) With respect to the Performance Shares, all restrictions
shall lapse immediately on all or a portion of the Performance Shares as
determined by the Committee at the time of the Award of such Performance Shares
and as set forth in the Agreement.
(c) The Agreements evidencing Performance Shares and
Performance Units shall provide for the treatment of such Awards (or portions
thereof) which do not become vested as the result of a Change in Control,
including, but not limited to, provisions for the adjustment of applicable
performance objectives.
11.5 Non-transferability. No Performance Awards shall be
transferable by the Grantee otherwise than by will or the laws of descent and
distribution.
11.6 Modification or Substitution. Subject to the terms of the
Plan, the Committee may modify outstanding Performance Awards or accept the
surrender of outstanding Performance Awards and grant new Performance Awards in
substitution for them. Notwithstanding the foregoing, no modification of a
Performance Award shall adversely alter or impair any rights or obligations
under the Agreement without the Grantee's consent.
12. Effect of a Termination of Employment. The Agreement evidencing
--------------------------------------
the grant of each Employee Option and each Award shall set forth the terms and
conditions applicable to such Employee Option or Award upon a termination or
change in the status of the employment of the Optionee or Grantee by the
Company, a Subsidiary or a Division, as the Committee may, in its discretion,
determine at the time the Employee Option or Award is granted or thereafter.
13. Adjustment Upon Changes in Capitalization.
-----------------------------------------
(a) In the event of a Change in Capitalization, the Committee
shall conclusively determine the appropriate adjustments, if any, to the (i)
maximum number and class of
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Shares or other stock or securities with respect to which Options or Awards may
be granted under the Plan, (ii) the number and class of Shares or other stock or
securities which are subject to Director Options issuable under Section 6; and
(iii) the number and class of Shares or other stock or securities which are
subject to outstanding Options or Awards granted under the Plan, and the
purchase price therefor, if applicable.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 4222 and 424 of the Code.
(c) Any stock adjustment in the Shares or other stock or
securities subject to outstanding Director Options (including any adjustments in
the purchase price) shall be made only to the extent necessary to maintain the
proportionate interest of the Optionee and preserve, without exceeding, the
value of such Director Option.
(d) If, by reason of a Change in Capitalization, a Grantee of an
Award shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to, new, additional or different shares of stock or
securities, such new additional or different shares shall thereupon be subject
to all of the conditions, restrictions and performance criteria which were
applicable to the Shares subject to the Award or Option, as the case may be,
prior to such Change in Capitalization.
14. Effect of Certain Transactions. Subject to Sections 8.4, 10.4(b)
-------------------------------
and 11.4, in the event of (i) the liquidation or dissolution of the Company or
(ii) a merger or consolidation of the Company (a "Transaction"), the Plan and
the Options and Awards issued hereunder shall continue in effect in accordance
with their respective terms and each Optionee and Grantee shall be entitled to
receive in respect of each Share subject to any outstanding Options or Awards,
as the case may be, upon exercise of any Option or payment or transfer in
respect of any Award, the same number and kind of stock, securities, cash,
property, or other consideration that each holder of a Share was entitled to
receive in the Transaction in respect of a Share.
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15. Termination and Amendment of the Plan.
The Plan shall terminate on the day preceding the tenth
anniversary of the date of its adoption by the Board and no Option or Award may
be granted thereafter. The Board may sooner terminate the Plan and the Board may
at any time and from time to time amend, modify or suspend the Plan; provided,
however, that:
(a) No such amendment, modification, suspension or
termination shall impair or adversely alter any Options or Awards theretofore
granted under the Plan, except with the consent of the Optionee or Grantee, nor
shall any amendment, modification, suspension or termination deprive any
Optionee or Grantee of any Shares which he or she may have acquired through or
as a result of the Plan;
(b) To the extent necessary under Section 16(b) of the
Exchange Act and the rules and regulations promulgated thereunder or other
applicable law, no amendment shall be effective unless approved by the
stockholders of the Company in accordance with applicable law and regulations;
and
(c) The provisions of Section 6 shall not be amended more
often than once every six (6) months, other than to comport with changes in the
Code, the Employee Retirement Income Security Act of 1974, as amended, or the
rules and regulations promulgated thereunder.
16. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive arrangement
or as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
17. Limitation of Liability.
-----------------------
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(i) give any person any right to be granted an Option or Award
other than at the sole discretion of the Committee;
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(ii) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to terminate the
employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
18. Regulations and Other Approvals; Governing Law.
----------------------------------------------
18.1 Except as to matters of federal law, this Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of law principles.
18.2 The obligation of the Company to sell or deliver Shares with
respect to Options and Awards granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
18.3 The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not affect
the validity of the Plan.
18.4 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Employees granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
18.5 Each Option and Award is subject to the requirement that, if
at any time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
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18.6 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended, and is not otherwise exempt from
such registration, such Shares shall be restricted against transfer to the
extent required by the Securities Act of 1933, as amended, and Rule 144 or other
regulations thereunder. The Committee may require any individual receiving
Shares pursuant to an Option or Award granted under the Plan, as a condition
precedent to receipt of such Shares, to represent and warrant to the Company in
writing that the Shares acquired by such individual are acquired without a view
to any distribution thereof and will not be sold or transferred other than
pursuant to an effective registration thereof under said Act or pursuant to an
exemption applicable under the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
19. Miscellaneous.
-------------
19.1 Multiple Agreements. The terms of each option or Award may
differ from other Options or Awards granted under the Plan at the same time, or
at some other time. The Committee may also grant more than one option or Award
to a given Eligible Employee during the term of the Plan, either in addition to,
or in substitution for, one or more Options or Awards previously granted to that
Eligible Employee.
19.2 Withholding of Taxes. (a) The Company shall have the right
to deduct from any distribution of cash to any Optionee or Grantee, an amount
equal to the federal, state and local income taxes and other amounts as may be
required by law to be withheld (the "Withholding Taxes") with respect to any
Option or Award. If an Optionee or Grantee is to experience a taxable event in
connection with the receipt of Shares pursuant to an Option exercise or payment
of an Award (a "Taxable Event"), the Optionee or Grantee shall pay the
Withholding Taxes to the Company prior to the issuance, or release from escrow,
of such Shares. In satisfaction of the obligation to pay Withholding Taxes to
the Company, the
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<PAGE>
Optionee or Grantee may make a written election (the "Tax Election"), which may
be accepted or rejected in the discretion of the Committee, to have withheld a
portion of the Shares then issuable to him or her having an aggregate Fair
Market Value, on the date preceding the date of such issuance, equal to the
Withholding Taxes, provided that in respect of an Optionee or Grantee who may be
subject to liability under Section 16(b) of the Exchange Act either: (i) in the
case of a Taxable Event involving an option or an Award (A) the Tax Election is
made at least six (6) months prior to the date of the Taxable Event and (B) the
Tax Election is irrevocable with respect to all Taxable Events of a similar
nature occurring prior to the expiration of six (6) months following a
revocation of the Tax Election; or (ii) in the case of the exercise of an Option
(A) the Optionee makes the Tax Election at least six (6) months after the date
the Option was granted, (B) the Option is exercised during the ten (10) day
period beginning on the third business day and ending on the twelfth business
day following the release for publication of the Company's quarterly or annual
statement of sales and earnings (a "Window Period") and (C) the Tax Election is
made during the window Period in which the related Option is exercised or prior
to such Window Period and subsequent to the immediately preceding Window Period;
or (iii) in the case of a Taxable Event relating to the payment of an Award (A)
the Grantee makes the Tax Election at least six (6) months after the date the
Award was granted and (B) the Tax Election is made (x) in the case of a Taxable
Event occurring within a Window Period, during the Window Period in which the
Taxable Event occurs, or (y) in the case of a Taxable Event not occurring within
a window period, during the Window Period immediately preceding the Taxable
Event relating to the Award. Notwithstanding the foregoing, the Committee may,
by the adoption of rules or otherwise, (i) modify the provisions of this Section
19.2 (other than as regards Director Options) or impose such other restrictions
or limitations on Tax Elections as may be necessary to ensure that the Tax
Elections will be exempt transactions under Section 16(b) of the Exchange Act,
and (ii) permit Tax Elections to be made at such other times and subject to such
other conditions as the Committee determines will constitute exempt transactions
under Section 16(b) of the Exchange Act.
(b) If an optionee makes a disposition, within the meaning
of Section 424(c) of the Code and regulations promulgated thereunder, of any
Share or Shares issued to such Optionee pursuant to the exercise of an Incentive
Stock Option within the two-year period commencing on the day after the date of
the grant or within the one-year period commencing on the day after the date of
transfer of such
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Share or Shares to the Optionee pursuant to such exercise, the Optionee shall,
within ten (10) days of such disposition, notify the Company thereof, by
delivery of written notice to the Company at its principal executive office.
(c) The Committee shall have the authority, at the time of
grant of an Employee Option under the Plan or at any time thereafter, to award
tax bonuses to designated Optionees, to be paid upon their exercise of Employee
Options granted hereunder. The amount of any such payments shall be determined
by the Committee. The Committee shall have full authority in its absolute
discretion to determine the amount of any such tax bonus and the terms and
conditions affecting the vesting and payment thereof.
20. Effective Date. The effective date of the Plan shall be the date
---------------
of its adoption by the Board, subject only to the approval by the affirmative
vote of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting of stockholders duly held in
accordance with the applicable laws of the State of Delaware within twelve (12)
months of such adoption.
3677m
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VIDEO LOTTERY TECHNOLOGIES, INC.
1993 STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE.
(a) The purpose of the Video Lottery Technologies, Inc. Non-Employee
Stock Option Plan (the "Plan") is to provide a means by which nonemployee
directors of Video Lottery Technologies, Inc. (the "Company") may be granted an
option to purchase shares of common stock of the Company ("Shares").
(b) The Company has determined that the grant of options pursuant to
this Plan is an inducement essential to securing the services of persons best
qualified to serve as non-employee directors of the Company. The Company also
believes the Plan will assist the Company in retaining the services of such
persons and will provide incentives for such persons to exert maximum efforts
for the success of the Company.
(c) This Plan is intended to be an ongoing formula award plan (as
described in Rule 16b-3(c)(2)(ii) under the Securities Exchange Act of 1934 (the
"Exchange Act")) such that the awards granted hereunder shall not affect the
recipients' disinterested status for purposes of administering any stock-related
plans of the Company established pursuant to Rule 16b-3 under the Exchange Act.
<PAGE>
(d) The Company intends that the options issued under the Plan shall
be options which do not qualify as incentive stock options for purposes of
Section 422 of the Internal Revenue Code of 1986 (the "Code").
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board. The Board shall have
no authority, discretion or power to select the individuals who are or will be
eligible to receive options under this Plan (other than as a consequence of
exercising its power to nominate individuals for election to the Board and/or
appoint individuals to fill vacancies on the Board). The Board shall not have
any discretion to determine the amount, price or timing of any options granted
or to be granted hereunder, except in the sense of administering the Plan
pursuant to its express terms and except in accordance with the terms and
provisions of the Plan.
(b) Subject to the foregoing, the Board shall have the power:
(1) To construe and interpret the Plan and any option granted
hereunder and to establish, amend and revoke rules and regulations for
administration of the Plan. The Board, in the exercise of this power, may
correct any defect, omission or inconsistency in the Plan or in any option
agreement evincing an award under the Plan, in a manner and to the extent
it shall deem necessary or expedient to make the Plan fully effective; and
(2) To amend, modify, suspend or terminate the Plan; provided,
however, that:
(i) No such amendment, modification, suspension or termination
shall impair or adversely alter any options or rights theretofore
granted under the Plan, except with the consent of the optionee, nor
shall any
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<PAGE>
amendment, modification, suspension or termination deprive any
optionee of any Shares which he or she may have acquired through or as
a result of the Plan; and
(ii) The provisions of the Plan which establish the amount, price
and timing of option grants under the Plan shall not be amended more
often than once every six months, other than to comport with changes
in the Code, the Employee Retirement Income Security Act of 1974 or
the rules promulgated thereunder.
3. OPTION GRANTS.
Each director who is not an employee of the Company or any subsidiary and
who is (or was) first elected or appointed to serve as a director of the Company
after January 1, 1993 shall receive a one-time grant of an option to purchase
20,000 Shares (subject to adjustment as provided in Section 13 of the 1992 Stock
Incentive Plan) effective as of the date which is the later of the date on which
he or she is initially elected or appointed to serve as a director of the
Company (a "Director Option") and the effective date of the Plan. The exercise
price, vesting, duration and all other terms and conditions applicable to each
Director Option shall be determined in accordance with the provisions of the
1992 Stock Incentive Plan and shall be identical to the terms and conditions
applicable to Director Options granted pursuant to Section 6 of the 1992 Stock
Incentive Plan.
4. EFFECTIVE DATE.
The effective date of the Plan is February 23, 1993.
3
POWERHOUSE TECHNOLOGIES, INC.
1994 STOCK INCENTIVE PLAN
as amended June 18, 1997 and February 13, 1998
1. Purpose.
The purpose of this Plan is to strengthen Powerhouse Technologies, Inc.
(the "Company") by providing an incentive to its key employees and directors and
thereby encouraging them to devote their abilities and industry to the success
of the Company's business enterprise. It is intended that this purpose be
achieved by extending to directors, key employees, consultants and advisors of
the Company an added long-term incentive for high levels of performance and
unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock
Options, Stock Appreciation Rights, Restricted Stock, Performance Units and
Performance Shares (as each term is hereinafter defined).
2. Effect on Other Plans.
Upon approval of this Plan by the stockholders of the Company pursuant to
Section 20, no further stock options or other awards shall be granted under the
Powerhouse Technologies, Inc. 1992 Stock Incentive Plan (the "1992 Plan"). All
stock options outstanding under either the Powerhouse Technologies, Inc. 1991
Stock Option Plan (the "1991 Plan") or the 1992 Plan shall continue to be
governed by the terms of the 1991 Plan or the 1992 Plan, as the case may be, and
the relevant stock option agreement pertaining to each such stock option.
3. Definitions.
For purposes of the Plan, unless otherwise specified, capitalized terms shall
have the following meanings:
3.1 "Adjusted Fair Market Value" means, in the event of a Change in
Control, the greater of (i) the highest price per Share paid to
holders of the Shares in any transaction (or series of transactions)
constituting or resulting in a Change in Control or (ii) the highest
Fair Market Value of a Share during the ninety (90) day period ending
on the date of a Change in Control.
3.2 "Agreement" means the written agreement between the Company and an
Optionee or Grantee evidencing the grant of an Option or Award and
setting forth the terms and conditions thereof.
3.3 "Award" means a grant of Stock Appreciation Rights, Restricted Stock,
a Performance Award or any or all of them.
3.4 "Awardee" means a person to whom any Stock Appreciation Rights,
Restricted Stock or Performance Award has been granted under the Plan.
3.5 "Board" means the Board of Directors of the Company.
3.6 "Cause" means (a) for purposes of Section 6.4, the commission of an
act of fraud or intentional misrepresentation or an act of
embezzlement, misappropriation or conversion of assets of the Company
or any Subsidiary and (b) for all other purposes, the commission of an
act of fraud, dishonesty, unlawful or illegal conduct, gross
negligence, insubordination, failure to substantially perform one's
duties with the Company or any Subsidiary, or intentional
misrepresentation, or a violation of the Company's Code of Conduct or
similar set of standards of conduct and business practices adopted by
the Board or an act of embezzlement, misappropriation or conversion of
assets or opportunities of the Company or any Subsidiary, or a
determination by the Board that there is a reasonable basis for
concern
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that any regulatory authority, gaming or racing commission, lottery
agency or similar authority in any jurisdiction in which the Company
or any Subsidiary conducts or intends to conduct business, seek
licensing or submit a proposal to conduct business may find the person
unsuitable or unfit, or the failure of the person to provide
appropriate information to, or cooperate with any regulatory or other
governmental authority.
3.7 "Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a
change in value) in the Shares or exchange of Shares for a different
number or kind of shares or other securities of the Company, by reason
of a reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash
dividend, property dividend, combination or exchange of shares,
repurchase of shares, change in corporate structure or otherwise.
3.8 A "Change in Control" shall mean the occurrence during the term of the
Plan of:
(i) 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 Ruley13d-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 (i), a Person shall not be
deemed to have made an acquisition of Voting Securities if such
Person: (a) 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; (b) acquires the Voting Securities
directly from the Company; (c) 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; (d) 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 (e) acquires Voting
Securities in connection with a "Non-Control Transaction" (as
defined in paragraph (iii) below); or
(ii) The individuals who, as of June 1, 1994, are members of the Board
of Directors of the Company (the "Incumbent Board"), cease for
any reason to constitute at least two-thirds of the Board of
Directors of the Company; 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 two-thirds 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 of Directors (a "Proxy Contest") including by reason of any
agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(iii) Consummation or effectiveness of:
2
<PAGE>
(a) A merger, consolidation or reorganization involving the
Company (a "Business Combination"), unless
(1) 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, and
(2) 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
(3) 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 (40%) or more of the combined voting
power of the Surviving Corporation's then outstanding
voting securities (a transaction described in this
subparagraph (a) shall be referred to as a "Non-Control
Transaction");
(b) A complete liquidation or dissolution of the Company; or
(c) 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).
Notwithstanding the foregoing, (x) 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; and (y) if an Eligible Employee's employment is terminated
and the Eligible Employee reasonably demonstrates that such termination (A) was
at the request of a third party who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control and who effectuates a Change
in Control or (B) otherwise occurred in connection with, or in anticipation of,
a Change in Control which actually occurs, then for all purposes hereof, the
date of a Change in Control with respect to the Eligible Employee shall mean the
date immediately prior to the date of such termination of employment.
3.9 "Code" means the Internal Revenue Code of 1986, as amended.
3.10 "Committee" means a committee consisting of at least two (2) directors
who are Disinterested Directors and Outside Directors appointed by the
Board to administer the Plan and to perform the functions set forth
herein.
3.11 "Company" means Powerhouse Technologies, Inc.
3
<PAGE>
3.12 "Director Option" means an Option granted pursuant to Section 6.
3.13 "Disability" means a physical or mental infirmity which impairs the
Optionee's ability to perform substantially his or her duties for a
period of one hundred eighty (180) consecutive days.
3.14 "Disinterested Director" means a director of the Company who is
"disinterested within the meaning of Rule 16b-3 under the Exchange
Act.
3.15 "Division" means any of the operating units or divisions of the
Company designated as a Division by the Committee.
3.16 "Eligible Employee" means any officer or other employee or consultant
or advisor of the Company or a Subsidiary designated by the Committee
as eligible to receive Options or Awards subject to the conditions set
forth herein.
3.17 "Employee Option" means an Option granted pursuant to Section 7.
3.18 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
3.19 "Fair Market Value" means the average of the closing sales price of
the shares on the principal national securities exchange on which such
Shares are listed or admitted to trading, for the 20 trading days
preceding the date of grant. If such Shares are not so listed or
admitted to trading, the arithmetic mean of the per Share closing bid
price and per Share closing asked price on such date as quoted on the
National Association of Securities Dealers Automated Quotation system
or such other market in which such prices are regularly quoted, or, if
there have been no published bid or asked quotations with respect to
shares on such date, the Fair Market Value shall be the value
established by the Board in good faith and in accordance with Section
422 of the Code."
3.20 "Grantee" means a person to whom an Award has been granted under the
Plan.
3.21 "Incentive Stock Option" means an Option satisfying the requirements
of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
3.22 "Nonemployee Director" means a director of the Company who is not an
employee of the Company or any Subsidiary and who is first elected or
appointed to serve as a director of the Company after June 1, 1994.
3.23 "Nonqualified Stock Option" means an Option which is not an Incentive
Stock Option.
3.24 "Option" means an Employee Option, a Director Option, or either or
both of them.
3.25 "Optionee" means a person to whom an Option has been granted under the
Plan.
3.26 "Outside Director" means a director of the Company who is an "outside
directors" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
3.27 "Parent" means any corporation which is a parent corporation (within
the meaning of Section 424(e) of the Code) with respect to the
Company.
3.28 "Performance Awards" means Performance Units, Performance Shares or
either or both of them.
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<PAGE>
3.29 "Performance Cycle" means the time period specified by the Committee
at the time a Performance Award is granted during which the
performance of the Company, a Subsidiary or a Division will be
measured.
3.30 "Performance Objective" has the meaning set forth in Section 11.1.
3.31 "Performance Shares" means Shares issued or transferred to an Eligible
Employee under Section 11.3 which are subject to restrictions that
lapse if and when certain prescribed performance goals are met.
3.32 "Performance Unit" means Performance Units granted under Section 11.2.
3.33 "Restricted Stock" means Shares issued or transferred to an Eligible
Employee pursuant to Section 10 which are subject to restrictions
which lapse over time without regard to the performance of the
Company, a Subsidiary or a Division.
3.34 "Plan" means the Powerhouse Technologies, Inc. 1994 Stock Incentive
Plan.
3.35 "Pooling Period" means, with respect to a Pooling Transaction, the
period ending on the day after the first date on which the combined
entity resulting from the Pooling Transaction publishes thirty days of
combined operating results or, if the Board makes a determination,
such other period following the Pooling Transaction which the Board
reasonably determines is appropriate in connection with the Pooling
Transaction as a means of qualifying for and preserving "pooling of
interests" accounting treatment.
3.36 "Pooling Transaction" means an acquisition of or by the Company in a
transaction which is intended to be treated as a "pooling of
interests" under generally accepted accounting principles.
3.37 "Shares" means the common stock, par value $.01 per share, of the
Company.
3.38 "Stock Appreciation Right" means a right to receive all or some
portion of the increase in the value of the Shares subject to an
Option as provided in Section 9.
3.39 "Subsidiary" means any corporation which is a subsidiary corporation
(within the meaning of Section 424(f) of the Code) with respect to the
Company.
3.40 "Successor Corporation" means a corporation, or a parent or subsidiary
thereof within the meaning of Section 424(a) of the Code, which issues
or assumes a stock option in a transaction to which Section 424(a) of
the Code applies.
3.41 "Ten-Percent Stockholder" means an Eligible Employee, who, at the time
an Incentive Stock Option is to be granted to him or her, owns (within
the meaning of Section 422(b)(6) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, or of a Parent or a Subsidiary.
4. Administration.
4.1 The Plan shall be administered by the Committee which shall hold
meetings at such times as may be necessary for the proper
administration of the Plan. The Committee shall keep minutes of its
meetings. A quorum shall consist of not less than two members of the
Committee and a majority of a quorum may authorize any action. Any
decision or determination reduced to writing and signed by a majority
of all of the members of the Committee shall be as fully effective as
if made by a majority vote at a meeting duly called and held. Each
member of the Committee shall be a Disinterested Director and an
Outside Director. No member of the Committee shall be liable for any
action, failure to act,
5
<PAGE>
determination or interpretation made in good faith with respect to
this Plan or any transaction hereunder, except for liability arising
from his or her own willful misfeasance, gross negligence or reckless
disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Committee for all costs and expenses and, to the
extent permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiation for the
settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in
administering this Plan or in authorizing or denying authorization to
any transaction hereunder.
4.2 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time to:
(a) determine those individuals to whom Employee Options shall be
granted under the Plan and the number of Incentive Stock Options
and/or Nonqualified Stock Options to be granted to each Eligible
Employee and to prescribe the terms and conditions (which need
not be identical) of each Employee Option, including the purchase
price per Share subject to each Employee Option, and make any
amendment or modification to any Agreement consistent with the
terms of the Plan; and
(b) select those Eligible Employees to whom Awards shall be granted
under the Plan and to determine the number of Performance Units,
Performance Shares, Shares of Restricted Stock, and/or Stock
Appreciation Rights to be granted pursuant to each Award, the
terms and conditions of each Award, including the restrictions or
performance criteria relating to such Units, Shares or Rights,
the maximum value of each Performance Unit and Performance Share
and make any amendment or modification to any Agreement
consistent with the terms of the Plan.
4.3 Subject to the express terms and conditions set forth herein, the
Committee shall have the power from time to time:
(a) to construe and interpret the Plan and the Options and Awards
granted thereunder and to establish, amend and revoke rules and
regulations for the administration of the Plan, including, but
not limited to, correcting any defect or supplying any omission,
or reconciling any inconsistency in the Plan or in any Agreement,
in the manner and to the extent it shall deem necessary or
advisable to make the Plan fully effective, and all decisions and
determinations by the Committee in the exercise of this power
shall be final, binding and conclusive upon the Company, its
Subsidiaries, the Optionees and Grantees and all other persons
having any interest therein;
(b) to determine the duration and purposes for leaves of absence
which may be granted to an Optionee or Grantee on an individual
basis without constituting a termination of employment or service
for purposes of the Plan;
(c) to exercise its discretion with respect to the powers and rights
granted to it as set forth in the Plan; and
(d) generally, to exercise such powers and to perform such acts as
are deemed necessary or advisable to promote the best interests
of the Company with respect to the Plan.
5. Stock Subject to the Plan.
5.1 The maximum number of Shares that may be made the subject of Options
and Awards granted under the Plan is 1,500,000, which may be treasury
Shares, authorized but unissued Shares or Shares purchased in the
market for issuance upon the exercise of
6
<PAGE>
outstanding Options or the grant of Awards under the Plan; provided,
however, that such maximum number shall be increased to the extent
that any such shares granted under the Plan are purchased in the
market; and provided further that the maximum number of Shares that
any Eligible Employee may receive pursuant to the plan in respect of
Options and Awards may not exceed 400,000 Shares. Upon a Change in
Capitalization the maximum number of Shares (both in the aggregate
under the Plan and with respect to each Eligible Employee) shall be
adjusted in number and kind pursuant to Section 13. The Company shall
reserve for the purposes of the Plan, out of its authorized but
unissued Shares or out of Shares held in the Company's treasury, or
partly out of each, such number of Shares as shall be determined by
the Board.
5.2 Whenever any outstanding Option or Award or portion thereof expires,
is cancelled or is otherwise terminated for any reason, the Shares
allocable to the cancelled or otherwise terminated portion of the
Option or Award may again be the subject of Options or Awards granted
hereunder. Whenever a Stock Appreciation Right is exercised (for cash
or Shares or a combination thereof) the excess of the number of Shares
in respect of which the Stock Appreciation Right was granted over the
number of Shares, if any, actually issued or transferred to the
Awardee as a result of such exercise may again be the subject of
Options or Awards granted hereunder; provided, however, that future
transactions involving such Shares (including, without limitation, the
grant of Options or Awards in respect of such Shares) shall be
eligible for the exemptions provided under Rule 16b-3 promulgated
under the Exchange Act only to the extent permitted under that Rule
with respect to such securities.
6. Option grants for Nonemployee Directors.
6.1 Grant. Subject to the availability of an adequate number of Shares
designated under the Plan, each Nonemployee Director shall receive a
one-time grant of an Option to purchase 10,000 Shares (subject to
adjustment as provided in Section 13) effective as of the date which
is the earlier of the date on which he or she is initially elected to
serve as a Director by vote of the holders of Shares or the date on
which he or she is initially appointed to serve as a Director by the
members of the Board, pursuant to the Company's bylaws and articles of
incorporation, as then in effect (a "Director Option").
6.2 Purchase Price. The purchase price for shares under each Director
Option shall be equal to 100% of the Fair Market Value of such shares
on the date of grant.
6.3 Vesting. Subject to Sections 6.4 and 8.4, each Director Option shall
become exercisable with respect to 50% of the Shares subject thereto
effective immediately as of the grant date and shall become
exercisable with respect to an additional 25% of the Shares subject
thereto effective as of each of the first and second anniversaries of
the grant date; provided, that the Optionee continues to serve as a
Director as of such dates. If an Optionee ceases to serve as a
Director for any reason, the Optionee shall have no rights with
respect to that portion of a Director Option which has not then vested
pursuant to the preceding sentence and the Optionee shall
automatically forfeit that portion of the Director Option which
remains unvested.
6.4 Duration. Each Director Option shall terminate on the date which is
the tenth anniversary of the grant date, unless terminated earlier as
follows:
(a) If an Optionee's service as a Director terminates for any reason
other than Disability, death or Cause, the Optionee may for a
period of three (3) months after such termination exercise his or
her Option to the extent, and only to the extent, that such
Option or portion thereof was vested and exercisable as of the
date the Optionee's service as a Director terminated, after which
time the Option shall automatically terminate in full.
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(b) If an Optionee's service as a Director terminates by reason of
the Optionee's resignation or removal from the Board, in either
case, due to Disability, the Optionee may, for a period of one
(1) year after such termination, exercise his or her Option to
the extent, and only to the extent, that such Option or portion
thereof was vested and exercisable, as of the date the Optionee's
service as Director terminated, after which time the Option shall
automatically terminate in full.
(c) If an Optionee's service as a Director terminates for Cause, the
Option granted to the Optionee hereunder shall immediately
terminate in full and no rights thereunder may be exercised.
(d) If an Optionee dies while a Director or within three (3) months
after termination of service as a Director as described in clause
(a) or (b) of this Section 6.4, the Option granted to the
Optionee may be exercised at any time within twelve (12) months
after the Optionee's death by the person or person to whom such
rights under the Option shall pass by will, or by the laws of
descent or distribution, after which time the Option shall
terminate in full; provided, however, that an Option may be
exercised to the extent, and only to the extent, that the Option
or portion thereof was exercisable on the date of death or
earlier termination of the Optionee's services as a Director.
7. Option Grants for Eligible Employees.
7.1 Authority of Committee. Subject to the provisions of the Plan and to
Section 5.1 above, the Committee shall have full and final authority
to select those Eligible Employees who will receive Options (each, an
"Employee Option"), the terms and conditions of which shall be set
forth in an Agreement; provided, however, that no person shall receive
any Incentive Stock Options unless he or she is an employee of the
Company, a Parent or a Subsidiary at the time the Incentive Stock
Option is granted.
7.2 Purchase Price. The purchase price or the manner in which the purchase
price is to be determined for Shares under each Employee Option shall
be determined by the Committee and set forth in the Agreement,
provided that the purchase price per Share under each Employee Option
shall not be less than 100% of the Fair Market Value of a Share on the
date the Employee Option is granted (110% in the case of an Incentive
Stock Option granted to a Ten-Percent Stockholder).
7.3 Maximum Duration. Employee Options granted hereunder shall be for such
term as the Committee shall determine, provided that an Incentive
Stock Option shall not be exercisable after the expiration of ten (10)
years from the date it is granted (five (5) years in the case of an
Incentive Stock Option granted to a Ten-Percent Stockholder) and a
Nonqualified Stock Option shall not be exercisable after the
expiration of ten (10) years from the date it is granted. The
Committee may, subsequent to the granting of any Employee Option,
extend the term thereof but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
7.4 Vesting. Subject to Section 8.4 hereof, each Employee Option shall
become exercisable in such installments (which need not be equal) and
at such times as may be designated by the Committee and set forth in
the Agreement. To the extent not exercised, installments shall
accumulate and be exercisable, in whole or in part, at any time after
becoming exercisable, but not later than the date the Employee Option
expires. The Committee may accelerate the exercisability of any
Employee Option or portion thereof at any time.
7.5 Modification or Substitution. The Committee may, in its discretion,
modify outstanding Employee Options or accept the surrender of
outstanding Employee Options (to the extent
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not exercised) and grant new Options in substitution for them.
Notwithstanding the foregoing, no modification of an Employee Option
shall adversely alter or impair any rights or obligations under the
Employee Option without the Optionee's consent.
8. Terms and Conditions Applicable to All Options.
8.1 Non-transferability. No Option granted hereunder shall be transferable
by the Optionee to whom granted otherwise than by will or the laws of
descent and distribution, and an Option may be exercised during the
lifetime of such Optionee only by the Optionee or his or her guardian
or legal representative. The terms of such Option shall be final,
binding and conclusive upon the beneficiaries, executors,
administrators, heirs and successors of the Optionee.
8.2 Method of Exercise. The exercise of an Option shall be made only by a
written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the
number of Shares to be purchased and accompanied by payment therefor
and otherwise in accordance with the Agreement pursuant to which the
Option was granted. The purchase price for any Shares purchased
pursuant to the exercise of an Option shall be paid in full upon such
exercise by any one or a combination of the following: (i) cash or
(ii) transferring Shares to the Company upon such terms and conditions
as determined by the Committee. Until such person has been issued the
Shares subject to such exercise, he or she shall possess no rights as
a stockholder with respect to such Shares. Notwithstanding the
foregoing, the Committee shall have discretion to determine at the
time of grant of each Employee Option or at any later date (up to and
including the date of exercise) the form of payment acceptable in
respect of the exercise of such Employee Option and may establish
cashless exercise procedures which provide for the exercise of the
Option and sale of the underlying Share by a designated broker or
dealer. In that connection, the written notice pursuant to this
Section 8.2 may also provide instructions from the Optionee to the
Company that upon receipt of appropriate instructions from the
Optionee's broker or dealer, designated as such on the written notice,
the Company shall issue such Shares directly to the designated broker
or dealer. Any Shares transferred to the Company as payment of the
purchase price under an Option shall be valued at their Fair Market
Value on the day preceding the date of exercise of such Option. If
requested by the Committee, the Optionee shall deliver the Agreement
evidencing the Option to the Secretary of the Company who shall
endorse thereon a notation of such exercise and return such Agreement
to the Optionee. No fractional Shares (or cash in lieu thereof) shall
be issued upon exercise of an Option and the number of Shares that may
be purchased upon exercise shall be rounded to the nearest number of
whole Shares.
8.3 Rights of Optionees. No Optionee shall be deemed for any purpose to be
the owner of any Shares subject to any Option unless and until (i) the
Option shall have been exercised pursuant to the terms thereof, (ii)
the Company shall have issued and delivered the Shares to the Optionee
and (iii) the Optionee's name shall have been entered as a stockholder
of record on the books of the Company. Thereupon, the Optionee shall
have full voting, dividend and other ownership rights with respect to
such Shares.
8.4 Effect of Change in Control. Notwithstanding anything contained in the
Plan or an Agreement to the contrary (other than the last sentence of
this Section 8.4), in the event of a Change in Control, (i) all
Options outstanding on the date of such Change in Control shall become
immediately and fully exercisable, (ii) the termination of an
Optionee's employment following the Change in Control shall not affect
his rights under this Section 8.4, and (iii) an Optionee will be
permitted to surrender for cancellation within sixty (60) days after
such Change in Control, any Option or portion of an Option to the
extent not yet exercised and the Optionee will be entitled to receive
a cash payment in an amount equal to the excess, if any, of (x) (A) in
the case of a Nonqualified Stock Option, the greater of (1) the Fair
Market Value, on the date preceding the date of surrender, of the
Shares subject to the Option or
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portion thereof surrendered or (2) the Adjusted Fair Market Value of
the Shares subject to the Option or portion thereof surrendered or (B)
in the case of an Incentive Stock Option, the Fair Market Value, on
the date preceding the date of surrender, of the Shares subject to the
Option or portion thereof surrendered, over (y) the aggregate purchase
price for such Shares under the Option or portion thereof surrendered;
provided, however, that in the case of an Option granted within six
(6) months prior to the Change in Control to any Optionee who may be
subject to liability under Section 16(b) of the Exchange Act, such
Optionee shall be entitled to surrender for cancellation his or her
Option during the sixty (60) day period commencing upon the expiration
of six (6) months from the date of grant of any such Option. In the
case of a Change in Control which also constitutes a Pooling
Transaction and notwithstanding anything contained in the Plan or an
Agreement to the contrary, the Committee may, and with respect to
Director Options shall, take such actions which are specifically
recommended by an independent accounting firm retained by the Company,
to the extent reasonably necessary in order to assure that the Pooling
Transaction will qualify as such, including, but not limited to,
providing that (i) all Options or, in the alternative, such Options
held by Optionees specifically identified by the Committee, shall not
become immediately and fully exercisable on the date of the Change in
Control but rather shall become immediately and fully exercisable on
the date following the last day on which the Pooling Period expires
(whether or not the Optionee is then an employee or director of the
Company) and the holders of such Options shall only have the right to
surrender for cancellation Options or portion thereof for the cash
payment specified in clause (ii) of the first sentence of this Section
8.4 after the day following the expiration of the Pooling Period and
for a period of sixty (60) days thereafter (in which case, whether or
not the Optionee holding any such Options remains an employee or
director of the Company, any such Option shall not terminate and shall
remain exercisable for the greater of sixty (60) days after the
expiration of the Pooling Period and the date such Option would
otherwise terminate in accordance with the Plan and the relevant
Agreement), and/or (ii)the payment specified in this Section 8.4 shall
be paid in the form of cash, Shares or securities of a successor or
acquiror of the Company, or a combination of the foregoing, as
designated by the Committee.
9. Stock Appreciation Rights.
9.1 Grant. The Committee may, in its discretion, in connection with the
grant of an Employee Option, grant to Eligible Employees Stock
Appreciation Rights the terms and conditions of which shall be set
forth in an Agreement. A Stock Appreciation Right shall cover the same
Shares covered by the Option (or such lesser number of Shares as the
Committee may determine) and shall, except as provided in this Section
9, be subject to the same terms and conditions as the related Option.
9.2 Time of Grant. A Stock Appreciation Right may be granted either at the
time of the related Option grant, or at any time thereafter during the
term of the Option.
9.3 Payment. A Stock Appreciation Right shall entitle the holder thereof,
upon exercise of the Stock Appreciation Right or any portion thereof,
to receive payment of an amount computed pursuant to Section 9.5.
9.4 Exercise. A Stock Appreciation Right shall be exercisable at such time
or times and only to the extent that the related Option is
exercisable, and will not be transferable except to the extent the
related Option may be transferable. A Stock Appreciation Right granted
in connection with an Incentive Stock Option shall be exercisable only
if the Fair Market Value of a Share on the date of exercise exceeds
the purchase price of the related Incentive Stock Option.
9.5 Amount Payable. Upon the exercise of a Stock Appreciation Right, the
Grantee shall be entitled to receive an amount determined by
multiplying (A) the excess of the Fair Market
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Value of a Share on the date preceding the date of exercise of such
Stock Appreciation Right over the per Share purchase price under the
related Option, by (B) the number of Shares as to which such Stock
Appreciation Right is being exercised. Notwithstanding the foregoing,
the Committee may limit in any manner the amount payable with respect
to any Stock Appreciation Right by including such a limit in the
Agreement evidencing the Stock Appreciation Right at the time it is
granted.
9.6 Treatment of Related Options and Stock Appreciation Rights Upon
Exercise. Upon the exercise of a Stock Appreciation Right, the related
Option shall be cancelled to the extent of the number of Shares as to
which the Stock Appreciation Right is exercised, and upon the exercise
of an Option granted in connection with a Stock Appreciation Right or
the surrender of such Option pursuant to Section 8.4, the Stock
Appreciation Right shall be cancelled to the extent of the number of
Shares as to which the Option is exercised or surrendered.
9.7 Method of Exercise. Stock Appreciation Rights shall be exercised by a
Grantee only by a written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal executive office,
specifying the number of Shares with respect to which the Stock
Appreciation Right is being exercised. If requested by the Committee,
the Grantee shall deliver the Agreement evidencing the Stock
Appreciation Right being exercised and the Agreement evidencing any
related Option to the Secretary of the Company who shall endorse
thereon a notation of such exercise and return such Agreement to the
Grantee.
9.8 Form of Payment. Payment of the amount determined under Section 9.5
may be made in the discretion of the Committee, solely in whole Shares
in a number determined at their Fair Market Value on the date
preceding the date of exercise of the Stock Appreciation Right, or
solely in cash, or in a combination of cash and Shares. If the
Committee decides to make full payment in Shares and the amount
payable results in a fractional Share, payment for the fractional
Share will be made in cash. Notwithstanding the foregoing, no payment
in the form of cash may be made upon the exercise of a Stock
Appreciation Right pursuant to Section 9.5 to an officer of the
Company or a Subsidiary who is subject to Section 16 of the Exchange
Act, unless the exercise of such Stock Appreciation Right is made
during the period beginning on the third business day and ending on
the twelfth business day following the date of release for publication
of the Company's quarterly or annual statements of sales and earnings.
9.9 Restrictions. No Stock Appreciation Right may be exercised before the
date six (6) months after the date it is granted.
9.10 Modification or Substitution. Subject to the terms of the Plan, the
Committee may modify outstanding Awards of Stock Appreciation Rights
or accept the surrender of outstanding Awards of Stock Appreciation
Rights (to the extent not exercised) and grant new Awards in
substitution for them. Notwithstanding the foregoing, no modification
of an Award shall adversely alter or impair any rights or obligations
under the Agreement without the Grantee's consent.
10. Restricted Stock.
10.1 Grant. The Committee may grant to Eligible Employees and Nonemployee
Directors Awards of Restricted Stock, and may issue Shares of
Restricted Stock in payment in respect of vested Performance Units (as
hereinafter provided in Section 11.2), which shall be evidenced by an
Agreement between the Company and the Grantee. Each Agreement shall
contain such restrictions, terms and conditions as the Committee may,
in its discretion, determine, and (without limiting the generality of
the foregoing) such Agreements may
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require that an appropriate legend be place on Share certificates.
Awards of Restricted Stock shall be subject to the terms and
provisions set forth below in this Section 10.
10.2 Rights of Grantee. Shares of Restricted Stock granted pursuant to an
Award hereunder shall be issued in the name of the Grantee as soon as
reasonably practicable after the Award is granted provided that the
Grantee has executed an Agreement evidencing the Award, the
appropriate blank stock powers and, in the discretion of the
Committee, an escrow agreement and any other documents which the
Committee may require as a condition to the issuance of such Shares.
If a Grantee shall fail to execute the Agreement evidencing a
Restricted Stock Award, the appropriate blank stock powers and, in the
discretion of the Committee, an escrow agreement and any other
documents which the Committee may require within the time period
prescribed by the Committee at the time the Award is granted, the
Award shall be null and void. At the discretion of the Committee,
Shares issued in connection with a Restricted Stock Award shall be
deposited together with the stock powers with an escrow agent (which
may be the Company) designated by the Committee. Unless the Committee
determines otherwise and as set forth in the Agreement, upon delivery
of the Shares to the escrow agent, the Grantee shall have all of the
rights of a stockholder with respect to such Shares, including the
right to vote the Shares and to receive all dividends or other
distributions paid or made with respect to the Shares.
10.3 Non-transferability. Until any restrictions upon the Shares of
Restricted Stock awarded to a Grantee shall have lapsed in the manner
set forth in Section 10.4, such Shares shall not be sold, transferred
or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee.
10.4 Lapse of Restrictions.
(a) Generally. Subject to Section 16, restrictions upon Shares of
Restricted Stock awarded hereunder shall lapse at such time or
times and on such terms and conditions as the Committee may
determine, which restrictions shall be set forth in the Agreement
evidencing the Award.
(b) Effect of Change in Control. Notwithstanding anything contained
in the Plan, unless the Agreement evidencing the Award provides
to the contrary, in the event of a Change in Control, all
restrictions upon any Shares of Restricted Stock shall lapse
immediately and all such Shares shall become fully vested in the
Grantee.
10.5 Modification or Substitution. Subject to the terms of the Plan, the
Committee may modify outstanding Awards of Restricted Stock or accept
the surrender of outstanding Awards of Restricted Stock (to the extent
not exercised) and grant new Awards in substitution for them.
Notwithstanding the foregoing, no modification of an Award shall
adversely alter or impair any rights or obligations under the
Agreement without the Grantee's consent.
10.6 Treatment of Dividends. At the time the Award of Shares of Restricted
Stock is granted, the Committee may, in its discretion, determine that
the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on such Shares by the Company shall be (i)
deferred until the lapsing of the restrictions imposed upon such
Shares and (ii) held by the Company for the account of the Grantee
until such time. If dividends are to be deferred, the Committee shall
determine whether such dividends are to be reinvested in Shares (which
shall be held as additional shares of Restricted Stock) or held in
cash. If deferred dividends are to be held in cash, there may be
credited at the end of each year (or portion thereof) interest on the
amount of the account at the beginning of the year at a rate per annum
as the Committee, in its discretion, may determine. Payment of
deferred dividends, together with interest accrued thereon, shall be
made upon the lapsing of restrictions imposed on such Shares, and any
dividends deferred (together with any interest accrued thereon) in
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respect of any Shares of Restricted Stock shall be forfeited upon the
forfeiture of such Shares.
10.7 Delivery of Shares. Upon the lapse of the restrictions on Shares of
Restricted Stock, the Committee shall cause a stock certificate to be
delivered to the Grantee with respect to such Shares, free of all
restrictions hereunder.
11. Performance Awards.
11.1 Performance Objectives. Performance objectives for Performance Awards
(the "Performance Objectives") may be expressed in terms of (i)
earnings per Share, (ii) pre-tax profits, (iii) revenue, (iv) market
share, (v) net earnings or net worth, (vi) return on equity or assets,
or (vii) any combination of the foregoing. Performance objectives may
be in respect of the performance of the Company and its Subsidiaries
(which may be on a consolidated basis), a Subsidiary or a Division.
Performance objectives may be absolute or relative and may be
expressed in terms of a progression within a specified range. Prior to
the end of a Performance Cycle, the Committee, in its discretion, may
adjust the performance objectives to reflect a Change in the
Capitalization. The Performance Objectives with respect to a
Performance Cycle shall be established by the Committee prior to the
commencement of that Performance Cycle.
11.2 Performance Units. The Committee may grant Performance Units to
Eligible Employees prior to the commencement of the Performance Cycle
to which such Performance Units relate, the terms and conditions of
which shall be set forth in an Agreement between the Company and the
Grantee. Each Performance Unit shall, contingent upon the attainment
of specified performance objectives within the Performance Cycle,
represent one (1) Share. Each Agreement shall specify the number of
the Performance Units to which it relates, the Performance Objectives
which must be satisfied in order for the Performance Units to vest,
the Performance Cycle within which such objectives must be satisfied.
(a) Vesting and Forfeiture. A Grantee shall become vested with
respect to the Performance Units to the extent that the
Performance Objectives set forth in the Agreement are satisfied
for the specified Performance Cycle, provided that the
Compensation Committee has certified in writing that the
Performance Objectives and other terms of the relevant Award are
satisfied.
(b) Payment of Awards. Payment of Performance Units to Grantees in
respect of vested Performance Units shall be made within sixty
(60) days after the last day of the Performance Cycle to which
such Award relates unless the Agreement evidencing the Award
provides for the deferral of payment, in which event the terms
and conditions of the deferral shall be set forth in the
Agreement. Subject to Section 11.4, such payments may be made
entirely in Shares, entirely in shares of Restricted Stock,
entirely in cash, or in such combination of Shares, Restricted
Stock and cash as the Committee in its discretion, shall
determine at any time prior to such payment; provided, however,
that if the Committee in its discretion determines to make such
payment entirely or partially in Shares of Restricted Stock, the
Committee must determine the extent to which such payment will be
in Shares of Restricted Stock at the time the Award is granted.
Except as provided in Section 11.4, if payment is made in the
form of cash, the amount payable in respect of each vested
Performance Unit shall be equal to the average of the Fair Market
Value of one (1) Share during the ninety (90) day period ending
on the last day of the Performance Cycle.
11.3 Performance Shares. The Committee, in its discretion, may grant Awards
of Performance Shares to Eligible Employees prior to the commencement
of the Performance Cycle to which such Shares relate, the terms and
conditions of which, including the relevant
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Performance Objectives and Performance Cycle, shall be set forth in an
Agreement between the Company and the Grantee. Each Agreement may
require that an appropriate legend be placed on Share certificates.
Awards of Performance Shares shall be subject to the following terms
and provisions:
(a) Rights of Grantee. The Committee shall provide at the time an
Award of Performance Shares is made, the time or times at which
the actual Shares represented by such Award hereunder shall be
issued in the name of the Grantee; provided, however, that no
Performance Shares shall be issued until the Grantee has executed
an Agreement evidencing the Award, the appropriate blank stock
powers and, in the discretion of the Committee, an escrow
agreement and any other documents which the Committee may require
as a condition to the issuance of such Performance Shares. If a
Grantee shall fail to execute the Agreement evidencing an Award
of Performance Shares, the appropriate blank stock powers and, in
the discretion of the Committee, an escrow agreement and any
other documents which the Committee may require within the time
period prescribed by the Committee at the time the Award is
granted, the Award shall be null and void. At the discretion of
the Committee, Shares issued in connection with an Award of
Performance Shares shall be deposited together with the stock
powers with an escrow agent (which may be the Company) designated
by the Committee. Except as restricted by the terms of the
Agreement, upon delivery of the Shares to the escrow agent, the
Grantee shall have, in the discretion of the Committee, all of
the rights of a stockholder with respect to such Shares,
including the right to vote the Shares and to receive all
dividends or other distributions paid or made with respect to the
Shares.
(b) Non-transferability. Until any restrictions upon the Performance
Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 11.3(c) or 11.4, such Performance Shares shall
not be sold, transferred or otherwise disposed of and shall not
be pledged or otherwise hypothecated, nor shall they be delivered
to the Grantee. The Committee may also impose such other
restrictions and conditions on the Performance Shares, if any, as
it deems appropriate.
(c) Lapse of Restrictions. Subject to Section 11.4, restrictions upon
Performance Shares awarded hereunder shall lapse and such
Performance Shares shall become vested at such time or times and
on such terms, conditions and satisfaction of performance
objectives as the Committee may, in its discretion, determine at
the time an Award is granted, provided that the Committee has
certified in writing that the performance objectives and other
material terms of the relevant award were satisfied.
(d) Treatment of Dividends. At the time the Award of Performance
Shares is granted, the Committee may, in its discretion,
determine that the payment to the Grantee of dividends, or a
specified portion thereof, declared or paid on Performance Shares
issued by the Company to the Grantee shall be (i) deferred until
the lapsing of the restrictions imposed upon such Performance
Shares and (ii) held by the Company for the account of the
Grantee until such time. In the event of such deferral, there may
be credited at the end of each year (or portion thereof) interest
on the amount of the account at the beginning of the year at a
rate per annum as the Committee, in its discretion, may
determine. Absent a Committee determination, no such interest
shall be paid. Payment of deferred dividends, together with any
interest accrued thereon as aforesaid, shall be made upon the
lapsing of restrictions imposed on such Performance Shares,
except that any dividends deferred (together with any interest
accrued thereon) in respect of any Performance Shares shall be
forfeited upon the forfeiture of such Performance Shares.
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(e) Delivery of Shares. Upon the lapse of the restrictions on
Performance Shares awarded hereunder, or on such later dates as
the Committee may provide at the time of the granting of Awards
of Performance Shares, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such
Shares, free of all restrictions hereunder.
11.4 Effect of Change in Control. Notwithstanding anything contained in the
Plan or any Agreement to the contrary, in the event of a Change in
Control:
(a) With respect to the Performance Units, the Grantee shall (i)
become vested in a percentage of Performance Units as determined
by the Committee at the time of the Award of such Performance
Units and as set forth in the Agreement and (ii) be entitled to
receive in respect of all Performance Units which become vested
as a result of a Change in Control, a cash payment within ten
(10) days after such Change in Control equal to the product of
the Adjusted Fair Market Value of a Share multiplied by the
number of Performance Units which become vested in accordance
with this Section 11.4.
(b) With respect to the Performance Shares, all restrictions shall
lapse immediately on all or a portion of the Performance Shares
as determined by the Committee at the time of the Award of such
Performance Shares and as set forth in the Agreement.
(c) The Agreements evidencing Performance Shares and Performance
Units shall provide for the treatment of such Awards (or portions
thereof) which do not become vested as the result of a Change in
Control, including, but not limited to, provisions for the
adjustment of applicable Performance Objectives.
11.5 Non-transferability. No Performance Awards shall be transferable by
the Grantee otherwise than by will or the laws of descent and
distribution.
11.6 Modification or Substitution. No modification of a Performance Award
shall adversely alter or impair any rights or obligations under the
Agreement without the Grantee's consent.
12. Effect of a Termination of Employment.
The Agreement evidencing the grant of each Employee Option and each Award
shall set forth the terms and conditions applicable to such Employee Option or
Award upon a termination or change in the status of the employment of the
Optionee or Grantee by the Company, a Subsidiary or a Division (including a
termination or change by reason of the sale of a Subsidiary or a Division), as
the Committee may, in its discretion, determine at the time the Employee Option
or Award is granted or thereafter.
13. Adjustment Upon Changes in Capitalization.
(a) In the event of a Change in Capitalization, the Committee shall
conclusively determine the appropriate adjustments, if any, to the (i)
maximum number and class of Shares or other stock or securities with
respect to which Options or Awards may be granted under the Plan, (ii)
the maximum number of Shares with respect to which Options or Awards
may be granted to any Eligible Employee during the term of the Plan,
(iii) the number and class of Shares or other stock or securities
which are subject to Director Options issuable under Section 6; (iv)
the number and class of Shares or other stock or securities which are
subject to outstanding Options or Awards granted under the Plan, and
the purchase price therefor, if applicable; and (v) the Performance
Objectives.
(b) Any such adjustment in the Shares or other stock or securities subject
to outstanding Incentive Stock Options (including any adjustments in
the purchase price) shall be made in
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such manner as not to constitute a modification as defined by Section
424(h)(3) of the Code and only to the extent otherwise permitted by
Sections 422 and 424 of the Code.
(c) Any stock adjustment in the Shares or other stock or securities
subject to outstanding Director Options (including any adjustments in
the purchase price) shall be made only to the extent necessary to
maintain the proportionate interest of the Optionee and preserve,
without exceeding, the value of such Director Option.
(d) If, by reason of a Change in Capitalization, a Grantee of an Award
shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to, new, additional or different shares of stock
or securities, such new additional or different shares shall thereupon
be subject to all of the conditions, restrictions and performance
criteria which were applicable to the Shares subject to the Award or
Option, as the case may be, prior to such Change in Capitalization.
14. Effect of Certain Transactions.
Subject to Sections 8.4, 10.4(b) and 11.4, in the event of (i) the
liquidation or dissolution of the Company or (ii) a merger or consolidation of
the Company (a "Transaction"), the Plan and the Options and Awards issued
hereunder shall continue in effect in accordance with their respective terms and
each Optionee and Grantee shall be entitled to receive in respect of each Share
subject to any outstanding Options or Awards, as the case may be, upon exercise
of any Option or payment or transfer in respect of any Award, the same number
and kind of stock, securities, cash, property, or other consideration that each
holder of a Share was entitled to receive in the Transaction in respect of a
Share.
15. Termination and Amendment of the Plan.
The Plan shall terminate on the day preceding the tenth anniversary of the
date of its adoption by the Board and no Option or Award may be granted
thereafter. The Board may sooner terminate the Plan and the Board may at any
time and from time to time amend, modify or suspend the Plan; provided, however,
that:
(a) No such amendment, modification, suspension or termination shall
impair or adversely alter any Options or Awards theretofore granted
under the Plan, except with the consent of the Optionee or Grantee,
nor shall any amendment, modification, suspension or termination
deprive any Optionee or Grantee of any Shares which he or she may have
acquired through or as a result of the Plan;
(b) To the extent necessary under Section 16(b) of the Exchange Act and
the rules and regulations promulgated thereunder or other applicable
law, no amendment shall be effective unless approved by the
stockholders of the Company in accordance with applicable law and
regulations; and
(c) The provisions of Section 6 shall not be amended more often than once
every six (6) months, other than to comport with changes in the Code,
the Employee Retirement Income Security Act of 1974, as amended, or
the rules and regulations promulgated thereunder.
16. Certain Limitations.
Notwithstanding any other provision of the Plan to the contrary:
(i) stockholder approval shall be required for any material amendment
of the Plan to become effective (with materiality as determined
for purposes of Section 16(b) of the Exchange Act, the rules and
regulations promulgated thereunder, and the interpretations of
the Securities and Exchange Commission and its staff in
connection therewith);
16
<PAGE>
(ii) no amendment or adjustment of the exercise price of an Option or
Stock Appreciation Right (whether through amendment, cancellation
or replacement Grants, or other means of repricing of such
Options or Stock Appreciation Rights) in respect of an Option or
Stock Appreciation Right having an exercise price greater than
the Fair Market Value of a Share as of the date of such amendment
or adjustment shall be authorized under the Plan unless
stockholder approval of such repricing is obtained;
(iii)stockholder approval shall be required for any lapse or waiver
of restrictions on Shares of Restricted Stock not expressly
specified in the Agreement evidencing the Award; and
(iv) an Award of Shares of Restricted Stock shall provide for the
lapse of restrictions in no less than three years after the date
of the Award in respect of at least 50% of the Shares subject to
that Award.
However, the Committee shall have the discretion to act in respect of Options or
Awards in a manner not in compliance with the requirements of this Section 16.1
provided that the number of Shares which are the subject of such Options or
Awards does not exceed in the aggregate three percent (3%) of the maximum number
of Shares that may be made the subject of Options and Awards under the Plan as
set forth in Section 5.1.
17. Non-Exclusivity of the Plan.
Except as provided in Section 2, the adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
18. Limitation of Liability.
As illustrative of the limitations of liability of the Company, but not intended
to be exhaustive thereof, nothing in the Plan shall be construed to:
(i) give any person any right to be granted an Option or Award other
than at the sole discretion of the Committee;
(ii) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(iii)limit in any way the right of the Company to terminate the
employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any
particular rate of compensation or for any particular period of
time.
17
<PAGE>
19. Regulations and Other Approvals; Governing Law.
19.1 Except as to matters of federal law, this Plan and the rights of all
persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving
effect to conflicts of law principles.
19.2 The obligation of the Company to sell or deliver Shares with respect
to Options and Awards granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable
federal and state securities laws, and the obtaining of all such
approvals by governmental agencies as may be deemed necessary or
appropriate by the Committee.
19.3 The Plan is intended to comply with Rule 16b-3 promulgated under the
Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent
therewith. Any provisions inconsistent with such Rule shall be
inoperative and shall not affect the validity of the Plan.
19.4 The Board may make such changes as may be necessary or appropriate to
comply with the rules and regulations of any government authority, or
to obtain for Eligible Employees granted Incentive Stock Options the
tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
19.5 Each Option and Award is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan
is required by any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the
grant of an Option or Award or the issuance of Shares, no Options or
Awards shall be granted or payment made or Shares issued, in whole or
in part, unless listing, registration, qualification, consent or
approval has been effected or obtained free of any conditions as
acceptable to the Committee.
19.6 Notwithstanding anything contained in the Plan or any Agreement to the
contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration
statement under the Securities Act of 1933, as amended, and is not
otherwise exempt from such registration, such Shares shall be
restricted against transfer to the extent required by the Securities
Act of 1933, as amended, and Rule 144 or other regulations thereunder.
The Committee may require any individual receiving Shares pursuant to
an Option or Award granted under the Plan, as a condition precedent to
receipt of such Shares, to represent and warrant to the Company in
writing that the Shares acquired by such individual are acquired
without a view to any distribution thereof and will not be sold or
transferred other than pursuant to an effective registration thereof
under said Act or pursuant to an exemption applicable under the
Securities Act of 1933, as amended, or the rules and regulations
promulgated thereunder. The certificates evidencing any of such Shares
shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
18
<PAGE>
20. Miscellaneous.
20.1 Multiple Agreements. The terms of each Option or Award may differ from
other Options or Awards granted under the Plan at the same time, or at
some other time. The Committee may also grant more than one Option or
Award to a given Eligible Employee during the term of the Plan, either
in addition to, or in substitution for, one or more Options or Awards
previously granted to that Eligible Employee.
20.2 Withholding of Taxes. (a) The Company shall have the right to deduct
from any distribution of cash to any Optionee or Grantee, an amount
equal to the federal, state and local income taxes and other amounts
as may be required by law to be withheld (the "Withholding Taxes")
with respect to any Option or Award. If an Optionee or Grantee is to
experience a taxable event in connection with the receipt of Shares
pursuant to an Option exercise or payment of an Award (a "Taxable
Event"), the Optionee or Grantee shall pay the Withholding Taxes to
the Company prior to the issuance, or release from escrow, of such
Shares. In satisfaction of the obligation to pay Withholding Taxes to
the Company, the Optionee or Grantee may make a written election (the
"Tax Election"), which may be accepted or rejected in the discretion
of the Committee, to have withheld a portion of the Shares then
issuable to him or her having an aggregate Fair Market Value, on the
date preceding the date of such issuance, equal to the Withholding
Taxes, provided that in respect of an Optionee or Grantee who may be
subject to liability under Section 16(b) of the Exchange Act either:
(i) in the case of a Taxable Event involving an Option or an Award
(A)the Tax Election is made at least six (6) months prior to the date
of the Taxable Event and (B)the Tax Election is irrevocable with
respect to all Taxable Events of a similar nature occurring prior to
the expiration of six (6) months following a revocation of the Tax
Election; or (ii) in the case of the exercise of an Option (A) the
Optionee makes the Tax Election at least six (6) months after the date
the Option was granted, (B) the Option is exercised during the ten
(10) day period beginning on the third business day and ending on the
twelfth business day following the release for publication of the
Company's quarterly or annual statement of sales and earnings (a
"Window Period") and (C)the Tax Election is made during the Window
Period in which the related Option is exercised or prior to such
Window Period and subsequent to the immediately preceding Window
Period; or (iii)in the case of a Taxable Event relating to the payment
of an Award (A)the Grantee makes the Tax Election at least six (6)
months after the date the Award was granted and (B) the Tax Election
is made (x) in the case of a Taxable Event occurring within a Window
Period, during the Window Period in which the Taxable Event occurs, or
(y) in the case of a Taxable Event not occurring within a Window
Period, during the Window Period immediately preceding the Taxable
Event relating to the Award. Notwithstanding the foregoing, the
Committee may, by the adoption of rules or otherwise, (i) modify the
provisions of this Section 19.2 (other than as regards Director
Options) or impose such other restrictions or limitations on Tax
Elections as may be necessary to ensure that the Tax Elections will be
exempt transactions under Section 16(b) of the Exchange Act, and (ii)
permit Tax Elections to be made at such other times and subject to
such other conditions as the Committee determines will constitute
exempt transactions under Section 16(b) of the Exchange Act.
(b) If an Optionee makes a disposition, within the meaning of
Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise
of an Incentive Stock Option within the two-year period commencing on
the day after the date of the grant or within the one-year period
commencing on the day after the date of transfer of such Share or
Shares to the Optionee pursuant to such exercise, the Optionee shall,
within ten (10) days of such disposition, notify the Company thereof,
by delivery of written notice to the Company at its principal
executive office.
19
<PAGE>
(c) The Committee shall have the authority, at the time of grant
of an Employee Option under the Plan or at any time thereafter, to
award tax bonuses to designated Optionees, to be paid upon their
exercise of Employee Options granted hereunder. The amount of any such
payments shall be determined by the Committee. The Committee shall
have full authority in its absolute discretion to determine the amount
of any such tax bonus and the terms and conditions affecting the
vesting and payment thereof.
20.3.Interpretation. Unless otherwise expressly stated in the relevant
Agreement, any grant of an Award or Options is intended to be
performance-based compensation within the meaning of Section
162(m)(4)(C) of the Code. The Committee shall not be entitled to
exercise any discretion otherwise authorized hereunder with respect to
such Options or Awards if the ability to exercise such discretion or
the exercise of such discretion itself would cause the compensation
attributable to such Options or Awards to fail to qualify as
performance-based compensation.
21. Effective Date.
The effective date of the Plan shall be the date of its adoption by the
Board, subject only to the approval by the affirmative vote of the holders of a
majority of the securities of the Company present, or represented, and entitled
to vote at a meeting of stockholders duly held in accordance with the applicable
laws of the State of Delaware within twelve (12) months of such adoption.
20
First Bank
First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
February 28, 1998
Powerhouse Technologies, Inc.
2311 South Seventh Avenue
Bozeman, MT 59715
Attention: Mr. Jay Schuttler
Dear Jay:
We refer to that certain Credit Agreement dated as of February 16, 1995,
among VIDEO LOTTERY TECHNOLOGIES, INC., N/K/A POWERHOUSE 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") as amended by that certain
Amendment No. I 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, Waiver and Fourth Amendment to
Credit Agreement dated as of August 19, 1996 and Consent and Fifth Amendment to
Credit Agreement dated as of January 30, 1997 (as so amended, the "Credit
Agreement"). Capitalized terms not otherwise expressly defined herein shall have
the meanings set forth in the Credit Agreement.
Although neither the Borrower or the Administrative Bank believe that the
Transaction (as defined below) requires any approval or waiver of any term or
terms of the Credit Agreement by the Administrative Bank and the Bank, the
Borrower has requested that the Administrative Bank and the Bank waive the
Borrower's compliance with any provision of the Credit Agreement which would be
contravened by the Borrower's registration and sale (collectively the
"Transaction") of: (a) approximately 1,468,026 shares (the "Spier Shares") of
the Borrower's stock controlled by Mr. William Spier (the "Selling
Shareholders") and the Selling Shareholders' retention of the proceeds of such
sale; and (b) approximately 220,204 shares of the Borrower's stock for the
Borrower's own account (the "Borrower Shares") as an over allotment option as
required by the underwriters of the offering. In connection with such request,
the Borrower has represented and warranted to the Administrative Bank and the
Bank that:
1. neither the Borrower nor any of its Subsidiaries will purchase the
Spier Shares;
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 2
2. none of the Borrower's or any of its Subsidiaries' assets will otherwise
be paid to any of the Selling Shareholders except for the payment of expenses
incidental to the Transaction and any amounts owed to Mr. Spier in connection
with his status as a member of the Board of Directors of the Borrower; and
3. no Change of Control will result from the consummation of the
Transaction.
In addition, the Borrower has requested that the Administrative Bank and
the Bank to waive their rights (the "Bank Registration Rights") they may claim
under Section 1.b. of the Stock Agreement dated as of January 30, 1997 (the
"Stock Agreement") to require the Borrower to include the "PB Shares" (as
defined in the Stock Agreement) in the above described registration. It is noted
that for purposes of that Section 1.b of the Stock Agreement that there has not
been any foreclosure on the Pledged Shares as provided in that provision;
provided, however, that the Borrower hereby agrees with the Administrative Bank
and the Banks that the parenthetical clause beginning in the 7th line of Section
1 (b) of the Stock Agreement is amended in its entirety to read as follows:
"(all such Common Shares being referred to as the 'PB Subject Shares';
and together with the DR Subject Securities being sometimes hereinafter
referred to as the 'Subject Securities')."
Based on the above representations and warranties, the Administrative Bank
and the Bank hereby waive:
1. any Default or Event of Default that would arise under the Credit
Agreement as a result of the consummation of the Transaction so long
as no Change of Control results therefrom; and
2. the Bank Registration Rights in connection with such Transaction.
The waiver granted herein is limited to the Transaction 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 or of any other waiver of the Bank Registration
Rights.
Notwithstanding anything to the contrary contained in this letter waiver,
the Administrative Bank's and the Bank's waivers set forth herein are hereby
subject in all respects to the full and complete truth and accuracy of all of
the Borrower's representations and warranties contained and set forth herein,
irrespective of the occurrence or nonoccurence of any due diligence or other
inquiry
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 3
by the Administrative Bank or the Bank with respect thereto. Upon and in the
event of any misrepresentation or breach of warranty by the Borrower with
respect to any matter set forth herein, this letter waiver shall be deemed null
and void and of no effect ab initio.
If this letter waiver accurately sets forth the Administrative Bank's and
the Bank's agreements with the Borrower as to waivers described herein, please
execute the enclosed copy of this letter and return it to the undersigned.
Very truly yours,
FIRST BANK NATIONAL ASSOCIATION
By: /s/ Richard J. Mikos
------------------------------
Its: Vice President
------------------------------
POWERHOUSE TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Susan J. Carstensen
-----------------------------
Title: CFO
--------------------------
<PAGE>
First Bank
First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4302
February 28, 1998
Powerhouse Technologies, Inc.
231 1 South Seventh Avenue
Bozeman, MT 59715
Attention: Mr. Jay Schuttler
Dear Jay:
We refer to that certain Credit Agreement dated as of February 16, 1995,
among VIDEO LOTTERY TECHNOLOGIES, INC., N/K/A POWERHOUSE TECHNOLOGIES, INC., a
Delaware corporation (the "Borrower") and U.S. BANK NATIONAL ASSOCIATION, as the
successor by merger with First Bank National Association, as administrative bank
(the "Administrative Bank"), and U.S. BANK NATIONAL ASSOCIATION, as the
successor by merger with First Bank National Association, as the sole Bank party
(the "Bank") as amended by that certain Amendment No. I 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, Waiver and Fourth Amendment to Credit Agreement dated as of August 19,
1996 and Consent; Waiver and Fifth Amendment to Credit Agreement dated as of
January 30, 1997 (as so amended, the "Credit Agreement"). Capitalized terms not
otherwise expressly defined herein shall have the meanings set forth in the
Credit Agreement.
A. Amendment to Credit Agreement.
On the "Effective Date" (as defined below), the Administrative Bank and the
Bank hereby agree with the Borrower to amend the definition of "Termination
Date" appearing in ARTICLE I of the Credit Agreement by changing the date
"February 28, 1998" appearing therein to the date "August 31, 1998".
B. Waiver re Spier Transaction.
Although neither the Borrower or the Administrative Bank believe that the
Transaction (as defined below) requires any approval or waiver of any term or
terms of the Credit Agreement by the Administrative Bank and the Bank, the
Borrower has requested that the Administrative Bank
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 2
and the bank waive the Borrower's compliance with any provision of the Credit
Agreement which would be contravened by the Borrower's registration and sale
(collectively the "Transaction") of: (a) approximately 1,468,026 shares (the
"Spier Shares") of the Borrower's stock controlled by Mr. William Spier (the
"Selling Shareholders") and the Selling Shareholders' retention of the proceeds
of such sale; and (b) approximately 220,204 shares of the Borrower's stock for
the Borrower's own account (the "Borrower Shares") as an over allotment option
as required by the underwriters of the offering. In connection with such
request, the Borrower has represented and warranted to the Administrative Bank
and the Bank that:
1. neither the Borrower nor any of its Subsidiaries will purchase the
Spier Shares;
2. none of the Borrower's or any of its Subsidiaries' assets will
otherwise be paid to any of the Selling Shareholders except for the
payment of expenses incidental to the Transaction and any amounts owed
to Mr. Shier in connection with his status as a member of the Board of
Directors of the Borrower; and
3. no Change of Control will result from the consummation of the
Transaction.
Based on the above representations and warranties, the Administrative Bank
and the Bank hereby waive:
1. any Default or Event of Default that would arise under the Credit
Agreement as a result of the consummation of the Transaction so long
as no Change of Control results therefrom; and
2. the Bank Registration Rights in connection with such Transaction.
The waiver granted herein is limited to the Transaction 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 or of any other waiver of the Bank Registration
Rights. Notwithstanding anything to the contrary contained in this letter, the
Administrative Bank's and the Bank's waivers set forth herein are hereby subject
in all respects to the full and complete truth and accuracy of all of the
Borrower's representations and warranties contained and set forth herein,
irrespective of the occurrence or nonoccurrence of any due diligence or other
inquiry by the Administrative Bank or the Bank with respect thereto. Upon and in
the event of any misrepresentation or breach of warranty by the Borrower with
respect to any matter set forth herein, this letter waiver shall be deemed null
and void and of no effect ab initio.
C. Amendment to Stock Agreement and Waiver.
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 3
In addition, the Borrower has requested that the Administrative Bank and
the Bank waive their rights (the "Bank Registration Rights") they may claim
under Section 1.b. of the Stock Agreement dated as of January 30, 1997 (the
"Stock Agreement") to require the Borrower to include the "PB Shares" (as
defined in the Stock Agreement) in the above described registration. It is noted
that for purposes of that Section 1.b of the Stock Agreement that there has not
been any foreclosure on the Pledged Shares as provided in that provision;
provided, however, that the Borrower hereby agrees with the Administrative Bank
and the Banks that the parenthetical clause beginning in the 7th line of Section
1 (b) of the Stock Agreement is amended in its entirety to read as follows:
"(all such Common Shares being referred to as the 'PB Subject Shares;'
and together with the DR Subject Securities being sometimes hereinafter
referred to as the 'Subject Securities')."
If this letter accurately sets forth the Administrative Bank's and the
Bank's agreements with the Borrower as to amendments and waivers described
herein, please execute the enclosed copy of this letter and return it to the
undersigned.
This letter amendment shall be effective as of the date first above stated
on the date (the "Effective Date") on which the Administrative Bank receives a
copy of this letter amendment executed by the Borrower together with the
following:
(a) name change amendments to the UCC Financing Statements naming the
Borrower in a form provided by the Administrative Bank appropriately completed
and duly executed by the Borrower;
(b) a Consent and Acknowledgment in the form provided by the Administrative
Bank appropriately completed and duly executed by each Guarantor;
(c) such other documents, instruments or certificates as the Administrative
Bank may request.
By executing this letter amendment, the Borrower represents and warrants to
the Administrative Bank and the Bank that:
(a) The execution, delivery and performance by the Borrower of this letter
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
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 4
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 letter 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) Before and after giving effect to this letter 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 Letter amendment. The execution by the Borrower of this
letter amendment shall be deemed a representation that the Borrower has complied
with the foregoing condition.
(d) Before and after giving effect to this letter 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 Letter amendment shall be deemed a representation that
the Borrower has complied with the foregoing condition.
(e) 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 any Bank for payment of
the Obligations
By executing this letter amendment, the Borrower further agrees with us that:
(a) upon the Effective Date, each reference in the Credit Agreement to
"this Agreement," "hereunder," "hereof," "herein" or words of like import
referring to the Credit Agreement, and each reference to the "Credit Agreement,"
"thereunder," "thereof," "therein" or words of like import referring to the
Credit Agreement in any other Loan Document shall mean and be a reference to the
Credit Agreement as amended hereby;
(b) the execution, delivery and effectiveness of this letter amendment
shall not, except as expressly provided herein or therein, operate as a waiver
of any of our rights, powers or remedies
<PAGE>
Powerhouse Technologies, Inc.
February 28, 1998
Page 5
under the Credit Agreement or any other Loan Document, nor constitute a waiver
of any provision of the Credit Agreement or any such Loan Document; and
(c) the Borrower agrees to pay on demand all of our costs and expenses
incurred in connection with the preparation, reproduction, execution and
delivery of this letter amendment and the other documents to be delivered
hereunder or thereunder, including our reasonable attorneys' fees and legal
expenses.
Very truly yours,
U.S. BANK NATIONAL ASSOCIATION, as the
successor by merger to First Bank National Association
By: /s/ Richard J. Mikos
-------------------------------------------------
Its: Vice President
-------------------------------------------------
POWERHOUSE TECHNOLOGIES, INC.,
a Delaware corporation
By: /s/ Susan J. Carstensen
----------------------------
Title: CFO
-------------------------
<PAGE>
CONSENT
Each of the undersigned, being a guarantor of the obligations of Video
Lottery Technologies, Inc. (the "Borrower") to U. S. Bank National Association,
as the successor by merger to First Bank National Association (the "Lender"),
pursuant to one of the Subsidiary Guaranties dated as of February 16, 1995 (the
"Guaranty"), hereby:
(i) consents to the Borrower's execution and delivery of that certain
letter amendment dated February 28, 1998 (the "Amendment"), further
amending that certain Credit Agreement dated as of February 16, 1995 among
the Borrower, First Bank National Association, as administrative bank (the
"Administrative Bank"), and First Bank National Association ("the Bank") as
the only Bank party thereto 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, Waiver and Fourth Amendment to Credit
Agreement dated as of August 19,1996 and Consent, Waiver and Fifth
Amendment to Credit Agreement dated as of January 30, 1997 (as so amended,
the "Credit Agreement")and the other documents required to be executed and
delivered pursuant to the Amendment;
(ii) ratifies and confirms that the Loan Documents to which such Loan Party
is a party remain in full force and effect; and
(iii)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 undersigned the right to assert a defense, offset or
counterclaim to any claim by the Administrative Bank or the Bank for
payment of the Obligations.
Nothing in this Consent requires the Administrative Bank or the Bank to
obtain the consent of any of the undersigned to any future amendment,
modification or waiver to the Agreement or any other Loan Document except as
expressly required by the terms of the Loan Documents to which the undersigned
is a party.
This Consent may be executed in one or more counterparts, each of which
shall be deemed to be an original.
Dated as of February 28, 1998
Video Lottery Consultants, Inc.
By /s/ Janet M. Bjork
------------------------------------------
Its Assistant Secretary
------------------------------------------
Automated Wagering International, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
------------------------------------------
Raven's D&R Music, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
<PAGE>
Automatic Music Service of Billings, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
Automation First, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
United Wagering Systems, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
United Tote World Wide, Inc.
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
United Tote Company
By /s/ Susan J. Carstensen
------------------------------------------
Its Treasurer
-----------------------------------------
Consulting Agreement
--------------------
THIS AGREEMENT made this 18th day of September, 1997, between Video Lottery
Technologies, Inc., and its subsidiary corporations, 2311 South 7th Ave.,
Bozeman, MT 59715 (collectively the "Company"), and IEP Advisors, Inc., 1275
Pennsylvania Avenue NW, 10th Floor, Washington, DC 20004 ("IEP").
The parties agree as follows:
Section 1: Scope of Work. IEP shall assist the Company in expanding its
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international activities by:
A) Identifying potential new markets for the Company 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 the Company 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 the Company
and its affiliates in their international expansion plans.
Section 2: Compensation.
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A) In consideration of IEP's performing its services hereunder, the
Company shall pay IEP a monthly fee of $15,000, payable within twenty
(20) days after the submission by IEP of a monthly invoice with a
description of the services rendered during the preceding month by IEP
hereunder.
B) The Company 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 the Company with appropriate documentation to support
each expense.
Section 3: Term. Subject to the annual approval of this Agreement by the
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Company's Board of Directors, this Agreement will otherwise continue on a
month-to-month basis, and may be terminated by either party, for any reason,
upon 30 days written notice of intent to terminate to the other party.
Section 4: During the term hereof, IEP agrees to use its best efforts, skill,
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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 the Company or
otherwise interfere with IEP's ability to fully discharge its services
hereunder. IEP also agrees not to disclose, either during the term hereof or
thereafter, any unpublished or confidential proprietary information concerning
the business of the Company obtained by IEP hereunder.
<PAGE>
Section 5:
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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 the Company for any purpose.
B) This agreement is not assignable by IEP.
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 6. IEP hereby acknowledges that it has received and read the Company's
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Code of Conduct and agrees to abide by its provisions. IEP further agrees that
its employees and agents rendering services on behalf of the Company will be
provided a copy of the Code of Conduct and that such persons will likewise abide
by its provisions.
Section 7. It is understood that the IEP services to be provided hereunder shall
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be separate and distinct from (i) any services otherwise being or to be provided
by Richard R. Burt, (in his capacity as an individual and not as Chairman of
IEP), whose relationship with the Company 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 the Company.
Section 8. IEP understands that: (i) the Company and its directors, officers,
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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 the Company's Compliance Committee; ( in addition to
approval by the Board of Directors) 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
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parties hereto.
IEP ADVISORS INC. VIDEO LOTTERY TECHNOLOGIES, INC.
By: /s/Richard R. Burt By: /s/ Susan J. Carstensen
-------------------------- ----------------------------
Title: Chairman Title: CFO
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O:\USER\BJORK\LAW\IEP2-97.AGT
- 2 -
Consulting Agreement
--------------------
THIS AGREEMENT made this 18th day of September, 1997, between Video Lottery
Technologies, Inc., and its subsidiary corporations, 2311 South 7th Ave.,
Bozeman, MT 59715 (collectively the "Company"), and Patricia Becker, 1800
Wincanton Drive, Las Vegas, NV 89134 ("Consultant").
The parties agree as follows:
Section 1: Scope of Work. Consultant shall:
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A) 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.
Section 2: Compensation.
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A) In consideration of Consultant's performing services hereunder, the
Company shall pay Consultant an annual fee of $75,000 payable in equal
monthly installments within twenty (20) days after the end of each
calendar month during the term hereof.
B) In addition, Consultant shall receive $1,000 per day for each day in
which such services are performed upon submission by Consultant of a
monthly invoice with a description of the services rendered during the
preceding month.
C) The Company shall reimburse Consultant's actual expenses incurred in
carrying out the activities described in Section 1 above, including
costs of travel, telephone and post charges, and printing costs.
Consultant shall provide the Company with appropriate documentation to
support each expense payable within 15 days after the end of each
month. Such reimbursement of expenses shall be in accordance with
existing Company policy. Section 3: Term. The term of this Agreement
shall be one year commencing January 16, 1998, and terminating on
January 16, 1999. Notwithstanding the foregoing, either party may
terminate this agreement for any reason during the term, upon 90 days
written notice of intent to terminate to the other party.
Section 4: During the term hereof, Consultant agrees to use her best efforts,
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skill, knowledge and experience in the performance of the services hereunder;
and Consultant 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. Consultant also agrees not to disclose, either during
the term hereof or thereafter, any unpublished or confidential proprietary
information concerning the business of the Company obtained by Consultant
hereunder.
<PAGE>
Section 5:
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A) It is understood that Consultant will perform services hereunder as an
independent contractor, and not as an employee, agent or legal
representative of the Company for any purpose.
B) This agreement is not assignable by Consultant.
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 6. Consultant hereby acknowledges that she has received and read the
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Company's Code of Conduct and agrees to abide by its provisions.
Section 7. It is understood that the Consultant's services to be provided
- ----------
hereunder shall be separate and distinct from Consultant's duties and
responsibilities as a member of the Board of Directors of the Company.
Section 8. Consultant understands that: (i) the Company and its directors,
- ---------
officers, employees and consultants are subject to investigation and regulation
by governmental regulatory agencies; (ii) Consultant's engagement hereunder is
subject to review and approval by the Company's Compliance Committee; and (iii)
Consultant'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.
CONSULTANT VIDEO LOTTERY TECHNOLOGIES, INC.
/s/ Patricia Becker By: /s/ Susan J. Carstensen
- -------------------------------- ------------------------------
Patricia Becker
Title: CFO
------------------------------
O:\USER\BJORK\LAW\BECKER2-.AGT
- 2 -
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of the 1st day of January, 1998 (date
hereof) by and between Powerhouse 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 December 2, 1996 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, 2002, unless terminated sooner as
hereinafter provided (the "Employment Term"); provided, however, that the
Employment Term shall be extended automatically by one (1) year on the 31st day
of each December during the Employment Term, unless notice to the contrary is
provided by either party hereto not later than the 1st day of such December.
2. Duties. During the Employment Term the Executive shall serve as
President and Chief Executive Officer 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 positions. 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 the greater Bozeman,
<PAGE>
Montana, the greater Atlanta, Georgia or the greater 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 continue as
President of the Company and to assume the responsibilities of Chief Executive
Officer 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 $380,000
for each of the twelve-month periods ending December 31,
1998, December 31, 1999, December 31, 2000 and December 31,
2001, 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) during the Employment Term pay the Executive annual bonuses
of amounts up to two (2) times Base Salary 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 Executive 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;
(c) award the Executive as of February 26, 1998 restricted stock
(the "Restricted Stock Award") of 100,000 shares of the
Company's common stock, of which 25,000 shares shall fully
vest on January 1, 1999, 25,000 shares shall fully vest on
January 1, 2000, 25,000 shares shall fully vest on January
1, 2001 and 25,000 shares shall fully vest on January 1,
2002 (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
Company); and provided, further, that the Company and the
Executive acknowledge and agree that, (i) pursuant to the
Prior Employment Agreement, the Company awarded to the
Executive restricted stock of 30,000 shares of the Company's
common stock, of which 10,000 shares fully vested on
2
<PAGE>
September 9, 1997, 10,000 shares shall fully vest on
September 9, 1998 and 10,000 shares shall fully vest on
September 9, 1999, and (ii) pursuant to that certain
Employment Agreement dated as of November 1, 1994 by and
between the Company and the Executive (the "1994 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, 17,500 shares full
vested on November 1, 1997, and an additional 17,500 shares
shall fully vest on November 1, 1998 (unless the Executive's
employment shall have been terminated for any reason prior
to such vesting, in which case all unvested shares of such
restricted stock shall be forfeited, except 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);
(d) subject to the provisions of Section 4 hereof, as of
February 13, 1998, grant the Executive options to purchase
an aggregate of 50,000 shares of the Company's common stock
(the "Option Grant") all of which shall be fully vested as
of the date of grant. (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(d) and the provisions of
Section 22 hereof, the Company and the Executive acknowledge
and agree that (i) the Company granted to the Executive
pursuant to the 1994 Employment Agreement options (the "1994
Options") to purchase an aggregate of 140,000 shares of the
Company's common stock, which 1994 Options shall continue to
be governed by the terms and conditions of the 1994
Employment Agreement and (ii) the Company granted to the
Executive pursuant to the Prior Employment Agreement options
(the "1996 Options") to purchase an aggregate of 140,000
shares of the Company's common stock, which 1996 Options
shall continue to be governed by the terms and conditions of
the Prior Employment 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; and provided, further,
that in no
3
<PAGE>
event shall the exercise prices of the 1994 Options or the
1996 Options be reduced or modified; and
(e) consider (i) additional awards of restricted stock, or
equivalent consideration, to the Executive two (2) to three
(3) years from the date hereof, and (ii) annually additional
grants to the Executive of options to purchase shares of the
Company's common stock.
4. Stockholder Approval. The Restricted Stock Award and the Option
Grant shall be subject to, and conditioned upon, approval by the Company's
stockholders, at the next Annual Meeting of the Company's Stockholders (the
"Meeting"), of an amendment to the Plan increasing the maximum number of shares
that any Eligible Employee may receive pursuant to the Plan in respect of
Options and Awards (as such capitalized terms are defined in the Plan). Should
the Company's stockholders fail to approve such amendment at the Meeting, the
parties hereto shall, within thirty (30) days of the Meeting, agree upon
comparable consideration (such as phantom stock, stock appreciation rights or
loans to the Executive to purchase stock) to be substituted for the Restricted
Stock Award and the Option Grant.
5. 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
annual premiums of $11,400 for the Executive's split-dollar 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, including, without limitation, (i) an automobile in each of
two (2) locations, to be determined by the Executive, (ii) reimbursement for the
expenses of first-class or business-class air travel on all flights exceeding
ninety (90) minutes taken by the Executive on Company business, (iii)
reimbursement of up to $8,000 annually for financial, tax, accounting and
regulatory compliance professional fees incurred by the Executive, (iv)
reimbursement of the Executive's dues for memberships at the two (2) clubs at
which he currently holds membership, (v) reimbursement of the expense of the
Executive's annual physical examination and (vi) reimbursement of the expense of
the Executive's business and professional organization memberships.
6. 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
4
<PAGE>
expenses. 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.
7. 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.
8. Termination. The Executive's employment hereunder may be terminated
under the following circumstances:
(a) Death. The Executive's employment hereunder shall be terminated
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.
5
<PAGE>
Termination for Cause shall be by action of the Board after giving the Executive
and his legal advisors an opportunity to meet with 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 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 Board that such concerns are unfounded. However,
if at any time following three months after the start of the leave of absence,
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 8(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 (vii) hereof:
(i) the Executive is no longer serving as President and Chief
Executive Officer 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 positions (which assignment is not rescinded after the
Company receives written notice from the Executive providing a
reasonable description of such inconsistency);
(ii) after a Change in Control (as hereinafter defined in Section
8(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;
(iii) 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);
(iv) after a Change in Control, the insolvency or the filing (by
any party including the Company) of a petition for bankruptcy of
the Company;
(v) 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>
(vi) 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
(vii) the Executive determines within eighteen (18) months of a
Change in Control to terminate his employment with the Company.
(2) Any event or condition described in Section 8(d)(1)(i), (ii),
(iii) or (v) 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 8(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 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
7
<PAGE>
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 (40%)
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
(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.
8
<PAGE>
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.
9. 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 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, (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. If the Executive's employment is terminated by the Company for
Disability, the Company shall pay to the Executive (or to the Executive's legal
representatives) all such amounts earned or accrued hereunder through the
Termination Date, plus an amount equal to the Base Salary in effect as of the
Termination Date.
9
<PAGE>
(b) Subject to Section 9(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, or (ii) by the Executive for Good Reason,
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 10, 11 and 12 hereof, the Executive shall receive (i)
within ten days a lump sum cash amount equal to two (2) times the sum of (A) the
Executive's Base Salary at (y) the highest rate in effect at any time within the
ninety (90) day period ending on the date the Notice of Termination is given, or
(z) the rate in effect immediately prior to the Change in Control, whichever of
(y) or (z) is greater and (B) (y) the annual bonus paid to the Executive in the
year preceding the termination of Employment, or (z) the sum of the Earned Bonus
and the Accrued Bonus, whichever of (y) or (z) is greater 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 if 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. 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 9(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 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.
10
<PAGE>
(c) 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 to which the Executive is entitled in such event
pursuant to Section 9(b) hereof, and the shares of restricted stock and stock
options granted pursuant to the 1994 Employment Agreement, the Prior Employment
Agreement or this Agreement and outstanding prior to such termination of the
Executive's employment shall be treated as though the Change in Control occurred
immediately before the Termination Date.
(d) The amounts (other than any life insurance and medical, dental and
hospitalization coverage) provided for in this Section 9 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 9(b) 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 9
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).
(h) The Company shall consider purchasing some or all of the Company's
common stock owned by the Executive, upon terms to be negotiated by the Company
and the Executive.
11
<PAGE>
10. 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 10 shall survive the termination of this Agreement
and the termination of the Executive's employment hereunder.
11. 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 9 (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
11(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.
(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
12
<PAGE>
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 11(b).
12. 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.
13. Understanding and Remedies. For purposes of Sections 10, 11, 12 and 13
hereof, the term "Company" shall include Powerhouse Technologies, Inc.
("Powerhouse") as well as current and future majority-owned subsidiaries of
Powerhouse and all current and future joint ventures in which Powerhouse is
involved. It is understood by the Executive and the Company that the covenants
contained in this Section 13 and in Sections 10, 11 and 12 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 13 and Sections 10, 11 and 12 of this Agreement are
reasonable and valid. The 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
13
<PAGE>
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 10, 11, 12 and 13 of this Agreement shall
survive the termination of this Agreement and the termination of the Executive's
employment hereunder.
14. Relocation and Other Expenses. The Company shall reimburse the
Executive for all actual costs incurred by the Executive in connection with the
establishment of his personal residences in Las Vegas, Nevada, Atlanta, Georgia
or Bozeman, Montana (to be determined by the Executive no later than December
31, 1998), including, without limitation, moving expenses and the costs of
storing the Executive's furnishings, 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 reimburse the
Executive up to $4,000 per month for the expense of maintaining a second
residence in one of Las Vegas, Nevada, Atlanta, Georgia or Bozeman, Montana.
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.
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.
14
<PAGE>
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 9 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,
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 1994 Employment Agreement and the Prior
Employment Agreement.
15
<PAGE>
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.
POWERHOUSE TECHNOLOGIES, INC.
BY: /s/ Richard R. Burt
---------------------------
RICHARD R. BURT
Chairman of the Board
BY: /s/ Richard M. Haddrill
----------------------------
RICHARD M. HADDRILL
0126267.09
16
EXHIBIT 22.1
The following corporations are either direct or indirect, wholly-owned
subsidiaries of the Company:
Subsidiary Incorporation
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 and Stockholders
Powerhouse Technologies, Inc.:
We consent to the incorporation by reference in the registration statement
on Form S-8 of Powerhouse Technologies, Inc. 1991 Employee Stock Purchase Plan
of our report dated February 20, 1998, except for the last paragraph of note 11,
which is as of February 28, 1998, with respect to the consolidated balance
sheets of Powerhouse Technologies, Inc. and subsidiaries, as of December 31,
1997 and 1996, 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, 1997, which report appears in the Form 10-K of
Powerhouse Technologies, Inc. dated March 30, 1998.
/S/ KPMG PEAT MARWICK LLP
Billings, Montana
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
1996 RESTATED FOR EARNINGS (LOSS) PER SHARE AMOUNTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U. S. Dollars
<S> <C> <C>
<PERIOD-TYPE> Year Year
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 1,423 1,364
<SECURITIES> 0 0
<RECEIVABLES> 32,910 25,704
<ALLOWANCES> 1,332 1,317
<INVENTORY> 15,942 18,297
<CURRENT-ASSETS> 72,649 66,232
<PP&E> 152,074 153,124
<DEPRECIATION> 88,914 78,417
<TOTAL-ASSETS> 161,397 168,043
<CURRENT-LIABILITIES> 35,599 38,148
<BONDS> 35,827 27,567
0 0
19 19
<COMMON> 110 108
<OTHER-SE> 82,017 72,104
<TOTAL-LIABILITY-AND-EQUITY> 161,397 168,043
<SALES> 57,752 39,438
<TOTAL-REVENUES> 196,935 176,681
<CGS> 37,551 25,484
<TOTAL-COSTS> 126,981 112,348
<OTHER-EXPENSES> 0 34,135
<LOSS-PROVISION> 149 523
<INTEREST-EXPENSE> 3,890 3,754
<INCOME-PRETAX> 3,647 (32,984)
<INCOME-TAX> (1,135) (8,753)
<INCOME-CONTINUING> 4,782 (24,231)
<DISCONTINUED> 0 5,482
<EXTRAORDINARY> 13,269 4,014
<CHANGES> 0 0
<NET-INCOME> 18,051 (14,735)
<EPS-PRIMARY> 1.75 (1.39)
<EPS-DILUTED> 1.72 (1.39)
</TABLE>
