<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998
REGISTRATION NO. 333-41417
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POWERHOUSE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 81-0470853
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
2311 SOUTH SEVENTH AVENUE
BOZEMAN, MONTANA 59715
(406) 585-6600
(Address and telephone number of Registrant's principal executive offices)
RICHARD M. HADDRILL, PRESIDENT
POWERHOUSE TECHNOLOGIES, INC.
2311 SOUTH SEVENTH AVENUE
BOZEMAN, MONTANA 59715
(406) 585-6600
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<C> <C>
MICHAEL ROSENZWEIG, ESQ. WILLIAM E. WALLACE, JR., ESQ.
ROGERS & HARDIN LLP KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP
2700 INTERNATIONAL TOWER, PEACHTREE CENTER 425 PARK AVENUE
229 PEACHTREE STREET, N.E. NEW YORK, NEW YORK 10022-3598
ATLANTA, GEORGIA 30303 (212) 836-8000
(404) 522-4700
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
---------------
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
---------------
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value...... 1,688,230 $11.00 $18,570,530 $5,478.31(3)
======================================================================================================================
</TABLE>
(1) The Company has granted to the Underwriters a 45-day option to purchase up
to 220,204 shares of Common Stock solely to cover over-allotments, if any.
See "Plan of Distribution."
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
(3) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
PROSPECTUS
1,468,026 SHARES
[POWERHOUSE LOGO]
COMMON STOCK
---------------------
This Prospectus relates to 1,468,026 shares of the Common Stock, $.01 par
value per share ("Common Stock"), of Powerhouse Technologies, Inc. (the
"Company") (such shares of Common Stock and being hereinafter referred to as the
"Shares") being offered (the "Offering") on behalf of certain stockholders of
the Company (the "Selling Stockholders").
The Common Stock is quoted on the Nasdaq National Market System ("Nasdaq
NMS") under the symbol "PWRH". On January 14, 1998, the closing price of the
Common Stock on the Nasdaq NMS was $11.
---------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
---------------------
NEITHER THE NEVADA STATE GAMING CONTROL BOARD NOR THE NEVADA GAMING COMMISSION,
NOR THE MISSISSIPPI GAMING COMMISSION, NOR ANY OTHER GAMING AUTHORITY HAS PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE
SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2)(3) STOCKHOLDERS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Plan of Distribution." The Selling
Stockholders have also agreed to reimburse the Underwriters for their fees
and expenses in connection with this Offering up to $150,000.
(2) None of the proceeds from the sale of the Shares will be received by the
Company (assuming the Underwriters' over-allotment option is not exercised).
The Company has agreed to bear certain expenses (other than expenses of the
Underwriters and counsel and other advisors to the Selling Stockholders),
estimated to be $175,000, in connection with the registration of the Shares.
See "Selling Stockholders" and "Plan of Distribution".
(3) The Company has granted to the underwriters named herein (the
"Underwriters") a 45-day option to purchase up to 220,204 shares of the
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively.
See "Plan of Distribution".
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by counsel and subject to the
right of the Underwriters to reject any order in whole or in part and certain
other conditions. It is expected that delivery of certificates for the shares of
Common Stock subject to the Offering will be made on or about February , 1998
through the facilities of The Depository Trust Company or at the offices of Bear
Stearns Securities Corp., 1 Metrotech Center No., Brooklyn, New York 11201, as
agent for the Underwriters.
---------------------
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
[ARTWORK:
(1) Inside Front Cover: Graphic of a mercator projection of the world and an
image of racing horses overlaid by photographs of the Company's manufacturing
facility, Winning Touch(R) gaming machines and on-line lottery systems. Also
overlaid on the mercator projection is a picture of a lotto receipt from the
Maryland lottery.]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET SYSTEM OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET SYSTEM IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "PLAN OF DISTRIBUTION".
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected at the public reference facilities of the Commission located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at the New York
Regional Office of the Commission, Seven World Trade Center, Suite 1300, New
York, New York 10048, and at the Chicago Regional Office of the Commission, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
registration of the Shares. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus or in any
document incorporated by reference herein as to the contents of any contract or
other documents referred to herein or therein are not necessarily complete and,
in each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or such other documents, which may be
obtained from the Commission as indicated above upon payment of the fees
prescribed by the Commission. Each such statement is qualified in its entirety
by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Copies of such reports, proxy statements and other
information filed by the Company, other than exhibits to such documents unless
such exhibits are specifically incorporated herein by reference, are available
without charge upon written or oral request from the Chief Financial Officer of
the Company, 2311 South Seventh Avenue, Bozeman, Montana 59715, Telephone (406)
585-6600.
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997;
(c) The Company's Current Report on Form 8-K, filed with the
Commission on January 7, 1997;
(d) The Company's Current Report on Form 8-K, filed with the
Commission on February 7, 1997;
(e) The Company's Current Report on Form 8-K, filed with the
Commission on August 6, 1997;
(f) The Company's Current Report on Form 8-K, filed with the
Commission on December 31, 1997;
(g) The Company's Proxy Statement dated December 31, 1996 related to
the Annual Meeting of Stockholders held on January 10, 1997;
(h) The Company's Proxy Statement dated October 15, 1997 related to
the Annual Meeting of Stockholders held on November 14, 1997; and
(i) The description of the Common Stock contained in the Registration
Statement on Form 8-A filed with the Commission on June 3, 1991 under
Section 12(g) of the Exchange Act.
(ii)
<PAGE> 5
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of filing thereof. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Except for the historical information contained herein, the matters
discussed in this Prospectus under "Risk Factors," in addition to certain
statements contained elsewhere in this Prospectus or in the Company's filings
under the Exchange Act, are "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and are thus prospective.
Such forward-looking statements are subject to risks, uncertainties and other
factors which could cause actual future results or trends to differ materially
from future results or trends expressed or implied by such forward-looking
statements. The most significant of such risks, uncertainties and other factors
are discussed in this Prospectus under "Risk Factors" and prospective investors
are urged to carefully consider such factors. Updated information will be
periodically provided by the Company as required by the Securities Act and the
Exchange Act. The Company, however, undertakes no obligation to publicly release
the results of any revisions to such forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
---------------------
(iii)
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents
incorporated in this Prospectus by reference. Prospective investors should
carefully review the matters set forth under "Risk Factors" before making a
decision with respect to an investment in the Shares. Unless otherwise indicated
herein, all information in this Prospectus assumes the Underwriters'
over-allotment option will not be exercised and that no outstanding options or
warrants will be exercised. All references in this Prospectus Summary to the
term "EBITDA" (as defined) in reference to a business segment exclude any
allocation of corporate overhead.
THE COMPANY
Powerhouse Technologies, Inc. (formerly known as Video Lottery
Technologies, Inc.) (collectively, with its subsidiaries, the "Company") is a
diversified gaming company offering a broad selection of products and services
to a variety of customers, including domestic and international lottery
agencies, casino gaming companies, racetracks and route operators. The Company
is the leading worldwide developer and supplier of video lottery gaming machines
and system software and one of the leading developers and suppliers of
equipment, software systems and related services for on-line lotteries and
pari-mutuel systems. In addition, the Company owns and operates Sunland Park
racetrack in New Mexico and intends to open a casino at such facility with 300
gaming machines in the third or fourth quarter of 1998. For the fiscal year
ended December 31, 1996, the Company's total revenue and EBITDA (excluding
special and other charges of $34.1 million) were $176.7 million and $27.7
million, respectively, and for the nine month period ended September 30, 1997,
the Company's total revenue and EBITDA were $144.6 million and $22.2 million,
respectively.
The Company's subsidiary, Automated Wagering International, Inc. ("AWI"),
is the second largest supplier of on-line lottery services and equipment in the
United States. AWI designs, manufactures, assembles, installs, operates and
maintains on-line, computer-based networks for seven state lotteries in the
United States. AWI created the world's first on-line lottery system in 1971.
Over the past two and one-half years, AWI's technology has consistently received
the highest rating in procurements in which AWI competed to install and operate
on-line lottery systems. AWI attributes its recent success to its MasterLink(R)
on-line lottery system, which it believes is the most technologically advanced
system currently available, and to its ability to install systems quickly and
provide products and services which enable its customers to increase revenue and
lower operating costs. For the fiscal year ended December 31, 1996, AWI's total
revenue and EBITDA (excluding special and other charges of $31.0 million) were
$88.8 million and $15.8 million, respectively, and for the nine month period
ended September 30, 1997, AWI's total revenue and EBITDA were $71.7 million and
$12.7 million, respectively.
Through its Video Lottery Consultants division ("VLC"), the Company is the
leading supplier of video lottery gaming machines and central computer systems
with a worldwide market share of approximately 40% for video lottery gaming
machines in the markets in which it participates and approximately 57% for
central control systems. Video lottery gaming machines enhance revenue for
states and other jurisdictions by providing low stakes entertainment gaming. The
machines offer video versions of games such as poker, blackjack, bingo, keno,
and spinning reel games, and are generally located in age-controlled
establishments such as bars, taverns, racetracks and restaurants. Gaming
machines in a given jurisdiction are typically linked to a computer network or
central control system that provides security, accounting, integrity and other
administrative functions. Currently, seven states in the United States, five
states in Australia, eight Canadian provinces, Iceland, Norway, Sweden and South
Africa have authorized video lottery gaming either on a jurisdiction-wide basis
or in certain locations.
VLC attributes its success in the video lottery market to its superior
technology, game design and customer service. The Company's Winning Touch(R)
machine was the first gaming machine designed to be played solely by touching
the video monitor. Since the introduction of Winning Touch(R) in 1988, VLC has
placed over 55,000 Winning Touch(R) machines in video lottery venues worldwide.
In 1997, the Company introduced its Winning Touch(R) Power Series(TM) gaming
machine which offers superior graphics, sound and
1
<PAGE> 7
animation compared to traditional gaming machines. The Company believes that its
Power Series(TM) gaming machines will allow VLC to increase its penetration of
the casino markets. To date, the Company has installed over 2,250 Winning
Touch(R) gaming machines in over 200 casino properties worldwide. In addition,
VLC's Advanced Gaming System, which VLC is marketing to new and existing
customers, is the only central control system currently communicating with both
gaming machines and mechanical slot machines. This system is also able to
communicate with more machines manufactured by other suppliers than any other
control system and will include advanced functionality that will permit
progressive games and player tracking. For the fiscal year ended December 31,
1996, VLC's total revenue and EBITDA were $60.2 million and $14.4 million,
respectively, and for the nine month period ended September 30, 1997, VLC's
total revenue and EBITDA were $51.6 million and $11.8 million, respectively.
The Company, through its subsidiary United Wagering Systems, Inc. ("UWS" or
"United Tote"), is a leading provider of wagering systems, terminals and service
to over 120 of approximately 350 pari-mutuel facilities in North America.
Pari-mutuel systems control the acceptance of wagers, calculate odds and payout,
cash winning tickets and perform assorted management, accounting and reporting
functions. Each system consists of central processing computers and peripherals,
betting terminals, proprietary software, tote boards and other displays.
Excluding Sunland Park, for the fiscal year ended December 31, 1996, UWS's total
revenue and EBITDA (excluding special and other charges of $3.1 million) were
$20.5 million and $5.1 million, respectively, and for the nine month period
ended September 30, 1997, UWS's total revenue and EBITDA were $15.9 million and
$4.1 million, respectively.
UWS also owns and operates Sunland Park, a thoroughbred and quarter-horse
racetrack located in Sunland Park, New Mexico, adjacent to El Paso, Texas. The
racetrack typically hosts live racing from December through May of each year and
participates in an inter-track wagering network with other racetracks for the
entire year. The State of New Mexico recently enacted legislation permitting the
operation of up to 300 gaming machines at each pari-mutuel racetrack facility
within the state for up to twelve hours per day. The implementation of racetrack
gaming is, however, subject to formation of a gaming commission and other
regulatory conditions, including the grant of necessary licenses. Consequently,
the Company anticipates that its casino at Sunland Park will become operational
in the third or fourth quarter of 1998. Two million residents live within a
100-mile radius of Sunland Park, which area includes the cities of El Paso,
Texas and Juarez, Mexico. For the fiscal year ended December 31, 1996, Sunland
Park's total revenue and EBITDA were $7.2 million and $(0.9) million,
respectively, and for the nine month period ended September 30, 1997, Sunland
Park's total revenue and EBITDA were $5.4 million and $(0.5) million,
respectively.
The Company is focusing on the following key strategies in order to pursue
its growth objectives:
- Expand Leading Position in Worldwide Video Lottery Gaming Market: The
Company believes that new markets such as Ontario and South Africa,
and the replacement of older gaming machines and systems in markets
such as Australia and North America, will provide significant future
growth opportunities for VLC. For the fiscal year ended December 31,
1996 and the nine months ended September 30, 1997, VLC's total revenue
from international operations was $20.7 million and $11.7 million,
respectively. The Company believes its state-of-the-art technology,
the historically high net revenue performance of its gaming machines
and its solid reputation among its customers give the Company a
competitive advantage in the video lottery gaming market in the
foreseeable future.
- Develop Casino Opportunities at Racetracks: The Company believes that
a growing market exists for video lottery gaming at racetracks, which
have suffered from declining attendance in recent years due to the
proliferation of casino gaming outside of Las Vegas and Atlantic City.
To permit the racing industry to become more competitive, some states
have enacted legislation that allows video gaming devices at
racetracks, a trend that the Company believes will continue. The
Company intends to participate in this growth by supplying its gaming
machines and systems, partnering with or purchasing racetracks and
owning and operating its own facility, Sunland Park. The Company is
the only full service supplier of state-of-the-art gaming and
pari-mutuel systems
2
<PAGE> 8
and services to racetracks in North America and believes it has a
competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.
- Penetrate Casino Markets: The Company intends to leverage the
popularity of its Winning Touch(R) gaming machines to increase its
market penetration in traditional casino venues. With licenses in
virtually all major gaming jurisdictions, VLC is actively marketing its
gaming machines in casino markets worldwide as a high performance
product for replacing older machines. The Company believes that VLC's
new Power Series(TM) gaming machine is capable of producing greater
than average coin-in per day and net win per day than traditional
gaming machines due to its superior graphics, state-of-the-art sound
and playability.
- Selectively Bid on Domestic On-line Contracts and Aggressively Pursue
International On-line Opportunities: On-line lottery contracts for
twelve state lotteries will be up for procurement over the next three
years. Due to the high cost of procuring new contracts, AWI intends to
target those states which it believes will establish a bidding process
based exclusively on technical capability, price and service. This
strategy allows AWI to efficiently allocate its resources so that it
may also pursue international growth opportunities. AWI is currently
targeting approximately 14 jurisdictions worldwide that are expected to
implement on-line lottery programs within the next two years. In 1997,
AWI successfully implemented its MasterLink(R) on-line system for
Chile's Loteria de Concepcion, Canada's Atlantic Lottery Corporation
("ALC") and Norway's Norsk Tipping AS. For the fiscal year ended
December 31, 1996 and the nine months ended September 30, 1997, AWI's
total revenue from international operations was $3.1 million and $7.5
million, respectively.
- Emphasize Customer Service and Optimize Profitability of On-line and
Pari-mutuel Contracts: AWI's sophisticated MasterLink(R) central system
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.
AWI expects to develop new products and services every year for its
existing customers. New products may include additional games, lower
cost terminals or player tracking systems. In addition, AWI continues
to focus on reducing service costs. United Tote has successfully
upgraded its operations and improved customer service. United Tote has
demonstrated that its systems can process the large handles typically
found at the larger racetracks such as Churchill Downs. United Tote
believes that its emphasis on customer service and ability to design,
manufacture and operate pari-mutuel systems that are capable of
processing larger handle volumes will enable it to improve its
profitability and increase its market share.
The Company's principal executive offices are located at 2311 South Seventh
Avenue, Bozeman, Montana, 59715, and its telephone number is (406) 585-6600. At
the most recent annual meeting of stockholders on November 14, 1997, the
Company's stockholders approved all of the matters submitted for a vote of the
stockholders, including a change of the Company's name to Powerhouse
Technologies, Inc. The Company implemented this name change in January, 1998, at
which time its trading symbol was changed to "PWRH".
THE OFFERING
<TABLE>
<S> <C>
Shares to be Sold by the Selling Stockholders............... 1,468,026
Common Stock to be outstanding after this Offering(1)(2).... 10,345,428
NASD Symbol................................................. "PWRH"
</TABLE>
- ---------------
(1) As of January 1, 1998.
(2) Excludes 1,002,683 shares of Common Stock issuable upon exercise of stock
options outstanding at December 31, 1997, of which 644,011 were exercisable
at December 31, 1997 and of which an additional 21,668 will be exercisable
on or before January 31, 1998.
3
<PAGE> 9
SUMMARY FINANCIAL DATA
The following summary consolidated financial and operating data of the
Company is qualified in its entirety by the more detailed information in the
Company's Consolidated Financial Statements, including the related notes,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenues:
On-line lottery.................... $ 51,552 $115,544 $101,559 $ 91,653 $ 88,843 $ 65,790 $ 71,671
Gaming machine and route
operations....................... 59,299 59,069 68,571 61,398 60,186 43,560 51,627
Wagering systems and racetrack
operations(1).................... -- -- 18,652 28,111 27,652 21,534 21,322
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 110,851 174,613 188,782 181,162 176,681 130,884 144,620
Costs and Expenses:
On-line lottery.................... 32,757 67,985 62,397 59,438 59,333 42,596 48,244
Gaming machine and route
operations....................... 37,219 35,074 39,815 35,992 32,911 23,283 28,790
Wagering systems and racetrack
operations....................... -- -- 13,992 22,286 20,104 15,408 15,300
Selling, general and
administrative................... 15,873 30,362 34,000 31,139 28,697 21,618 22,983
Research and development........... 2,570 6,629 8,513 8,888 7,969 5,062 7,122
Other charges(2)................... -- -- 23,994 2,763 34,135 12,935 --
Depreciation and amortization...... 10,351 18,033 20,694 22,587 23,822 17,315 16,943
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 98,770 158,083 203,405 183,093 206,971 138,217 139,382
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations.... $ 12,081 $ 16,530 $(14,623) $ (1,931) $(30,290) $ (7,333) $ 5,238
Net earnings (loss) from continuing
operations....................... $ 8,349 $ 4,346 $(16,168) $ (2,918) $(24,231) $ (8,295) $ 1,374
Net earnings (loss)................ $ 8,349 $ 4,346 $(16,168) $ (8,400) $(14,735) $ 1,201 $ 14,643
Net Earnings (loss) per share from
continuing operations............ $ 0.74 $ 0.35 $ (1.54) $ (0.28) $ (2.27) $ (0.66) $ 0.13
Net earnings (loss) per share...... 0.74 0.35 (1.54) (0.79) (1.38) 0.10 1.41
Weighted average shares(3)......... 11,316 12,312 10,507 10,608 10,699 12,598 10,406
OTHER DATA
Adjusted EBITDA(4)................. $ 22,432 $ 34,563 $ 30,065 $ 23,419 $ 27,667 $ 22,917 $ 22,181
Cash provided (used) by:
Operations....................... 19,882 31,354 12,167 1,943 18,702 36,101 36,177
Investing Activities............. (48,198) (28,666) (15,097) (22,020) (34,750) (31,616) (6,688)
Financing Activities............. 42,963 (10,540) (1,931) 18,199 18,378 (5,693) (15,763)
BALANCE SHEET DATA
Working capital.................... $ 25,111 $ 51,458 $ 23,344 $ 19,987 $ 28,084 $ (5,364) $ 29,704
Total assets....................... 150,029 139,513 174,032 165,851 168,043 185,550 162,648
Total long-term debt(5)
(excluding current
installments).................... 3,006 855 9,060 12,885 9,312 12,315 32,028
Stockholders' equity............... $103,435 $108,215 $ 94,112 $ 86,448 $ 72,231 $ 87,766 $ 78,107
</TABLE>
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(1) Wagering systems and racetrack operations revenue and costs since May 3,
1994. See Note 2 to the Consolidated Financial Statements for the fiscal
year ended December 31, 1996.
(2) 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. In 1995,
the Company recorded approximately $2.8 million of special and other unusual
charges associated with exit costs and charges and asset
4
<PAGE> 10
impairments related to five contracts. In 1994, the Company recorded
approximately $24.0 million of special and other unusual charges consisting
of $6.7 million related to inventory and international contract investments
and $17.3 million for impairment of the goodwill attributable to the
acquisition of UWS.
(3) Common stock equivalents are excluded if antidilutive.
(4) Adjusted EBITDA consists of income from operations plus depreciation and
amortization plus the special or other charges described in Footnote 2.
Adjusted EBITDA should not be construed as an alternative to net income or
any other measure of the Company's performance under generally accepted
accounting principles or to cash flows generated by operating, investing and
financing activities as an indicator of the Company's cash flows or a
measure of its liquidity. Management believes that Adjusted EBITDA is a
useful adjunct to net income and other measurements under generally accepted
accounting principles and is a conventionally used financial indicator.
(5) On January 30, 1997, the Company and Electronic Data Systems Corporation
("EDS") reached an agreement to settle certain outstanding claims against
each other. The agreement, among other things, provided for the
extinguishment of outstanding fees of approximately $38.0 million in
exchange for a note payable of approximately $26.1 million which amortizes
between 1999 and 2004 and the return to the Company of approximately 2.5
million of the Company's preferred and common shares. The settlement
resulted in an extraordinary gain of $13.3 million. See Footnote 16 to the
Consolidated Financial Statements for the fiscal year ended December 31,
1996.
5
<PAGE> 11
RISK FACTORS
An investment in the Shares involves various risks. Prospective investors
are urged to carefully consider each of the following risks, in conjunction with
the other information contained in this Prospectus, before purchasing the Shares
in the Offering.
RISKS OF NEW AND EXPANDING BUSINESSES
The Company is actively seeking to expand its video and on-line lottery and
gaming operations into jurisdictions that have legalized or are expected to
legalize gaming in the future. 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.
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 recently enacted legislation, the Company
will be permitted to operate up to 300 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 commission, equipment procurements and other regulatory
conditions, including the grant of necessary licenses. At December 31, 1996 and
September 30, 1997, the Company's investment in the racetrack was approximately
$20.0 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.
COMPETITION
On-line Lottery. The on-line lottery market in the United States is mature
and highly competitive. 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. Management believes that
GTECH's resources significantly exceed those of the Company's. Expansion of the
business of the Company's AWI subsidiary in the United States will largely
depend on its ability to (i) obtain new contracts in jurisdictions where a
competitor currently operates the lottery, (ii) obtain contracts from states, if
any, that commence lottery operations in the future, and (iii) retain the
lottery contracts that are currently effective. On-line lottery contracts are
awarded through competitive bidding, both at commencement of lottery operations
and on expiration of existing contracts. AWI has in the past lost certain
contracts when submitted for rebid or been unsuccessful in obtaining certain
contracts previously held by competitors. AWI currently supplies on-line lottery
services to seven states and provides services to Norsk Tipping AS in Norway,
ALC in Canada and Sonda, S.A. in Chile.
Established on-line lotteries recently have also experienced a decline in
growth rates or, in some cases, a leveling or decrease of annual ticket sales
due, among other reasons, to the maturation of existing lottery games and
general economic conditions, as well as to the growth of land-based, river boat
and Native
6
<PAGE> 12
American-owned casinos, which compete indirectly with on-line lotteries. The
level of on-line lottery ticket sales may also be affected by the growth of
instant-ticket lottery games, which also compete with on-line lotteries. Since
the Company derives substantial revenues from domestic sales of lottery tickets,
the loss or nonrenewal of lottery contracts or decreased revenues from such
contracts due to decreased lottery ticket sales could have a material adverse
effect on the Company's business and financial condition.
Gaming Machine and Route Operations. The market for gaming machines,
related software and central control systems is extremely competitive, and there
are a number of established, well-financed and well-known companies producing
machines that compete with each of the product lines of the Company's VLC
subsidiary. Management believes that some of these competitors have greater
capital resources than the Company. In addition, other companies may enter the
video gaming market. Competition among gaming product manufacturers,
particularly with respect to sales of video gaming into new and emerging
markets, is based on competitive customer pricing and financing terms, appeal to
the player, quality of the product and having an extensive distribution and
sales network.
Wagering Systems and Racetrack Operations. Pari-mutuel wagering and
simulcasting in North America is also a highly competitive industry. The
Company's principal competitors in this segment are Autotote Corporation
("Autotote"), AmTote International, Inc. ("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. There can be no assurance that the Company will maintain or
improve its position in light of such competition.
The Company's Sunland Park racetrack competes in local and regional markets
with horse tracks, off-track betting, state-run lotteries, casinos and other
gaming facilities. Management believes that some of these competitors have
resources that exceed those of the Company. There can be no assurance that the
Company will maintain or improve its competitive position in the pari-mutuel
wagering industry in light of such competition.
In addition, once the Company implements its gaming operations at Sunland
Park, the Company's gaming operations will face competition from other casino
gaming venues in New Mexico, neighboring states and the rest of the United
States. Venues in Nevada, Mississippi and New Jersey, among others, currently
offer video gaming and mechanical slot machines. The failure to attract or
retain casino gaming customers at the Sunland Park racetrack, whether arising
from such competition or from other factors, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION
Most of the 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 on-line 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 a
Government Approval in all of the jurisdictions in which the Company's
applications have been acted upon (including Victoria, Australia and Quebec,
Canada, in which the Company's applications were initially denied and then
subsequently granted), there can be no assurance that required Government
Approvals will be given or renewed in the future. The failure of the Company to
obtain or maintain a Government Approval may have a material adverse effect on
the Company and any such failure in one jurisdiction may result in failures in
other jurisdictions, including those in which the Company has already received
Government Approval. Although the Company does not believe there is any basis
for a failure to obtain or maintain Government Approval, there can be no
assurance that all material Government Approvals will be obtained or maintained.
A significant percentage of the Company's consolidated revenues is derived from
sales to customers in jurisdictions that have enacted legislation permitting
various types of gaming.
7
<PAGE> 13
On-line Lottery. Each of the Company's on-line lottery contracts is a
product of state legislative initiative to create a lottery. Currently, 38
states have enacted legislation expressly providing for the creation of a state
lottery, including the seven states in which the Company currently operates.
This legislation generally authorizes the creation of the lottery as well as a
separate fund into which proceeds from the sale of lottery tickets are to be
deposited. The lottery fund is then used to disburse proceeds in connection with
winning tickets, to subsidize or fund certain special interests of the state
(such as educational or youth programs) and to pay costs incurred in operating
the lottery. While the continued funding of the expenses in running each lottery
(including payments due under each of the lottery contracts) is not based upon
funding from the respective state treasuries but rather upon lottery ticket
sales, the existence of the lottery is subject to continued legislative
authorization.
Gaming Machine and Route Operations. The manufacture, distribution and
operation of gaming machines, related software and central control systems are
subject to extensive federal, provincial, state and local regulation, including
licensing requirements. The Company and its key personnel are required to hold
various licenses from each jurisdiction in which the Company does business. In
addition, each of the Company's proprietary games must be approved in each
jurisdiction in which it is placed. Obtaining required licenses and approvals
can be time consuming and costly and there can be no assurance that any game
will be successfully approved in any jurisdiction. The failure of the Company or
any of its key personnel to obtain or retain a license in any jurisdiction could
have a material adverse effect on the Company or on the ability of the Company
and its key personnel to obtain or retain required licenses in other
jurisdictions. The Company cannot predict the nature of the regulatory scheme in
any jurisdiction that may authorize video gaming operations in the future. Any
such regulatory scheme may be burdensome to the Company, its key personnel and
its stockholders, including, possibly, requirements that the Company cannot
satisfy or limitations on the percentage of the Common Stock that a person may
hold without having to be approved by regulatory authorities.
United Wagering Systems, Inc. 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.
Racetrack Operations. The Company's Sunland Park operations are also
subject to extensive state and local regulation and taxation in New Mexico, and
any future wagering or racetrack activities in other jurisdictions may be
similarly regulated and taxed. State and local authorities require various
licenses, permits, and approvals to be held by the Company, and these
authorities may, among other things, revoke the license of any entity licensed
as a gaming corporation, the registration of any entity registered as a holding
company of a gaming corporation, or the license of any individual licensed as an
officer, director, control person, employee or stockholder of a licensed or
registered entity. Gaming licenses and related approvals are deemed to be
privileges under New Mexico law and the laws of other jurisdictions, and no
assurances can be given that existing licenses will not be revoked. Regulatory
changes or increases in applicable taxes or fees in New Mexico or the laws of
other jurisdictions in which the Company may operate could have a material
adverse effect on the Company. In addition, there can be no assurance that
regulations adopted or taxes imposed by New Mexico or other jurisdictions will
not have a material adverse effect on the Company.
A more complete description of the regulatory environment within which the
Company operates is set forth in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
PRODUCT 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 could 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
8
<PAGE> 14
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.
OPERATING HISTORY
The Company incurred net losses for each of its fiscal years ended December
31, 1994, 1995 and 1996, respectively. For the first nine months of fiscal year
1997, the Company reported net earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historically, the
Company has met its cash flow requirements primarily with cash provided by
operations, public offerings of equity securities and borrowings from financial
institutions. There can be no assurance that the Company will be profitable in
the future.
NEED FOR ADDITIONAL FINANCING
Whether the Company can execute its business strategy depends to a
significant degree on its ability to finance the development, marketing and
production of its products. There can be no assurance that funds will be
available to implement the Company's business strategy on terms acceptable to
the Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past, and
may fluctuate significantly in the future, due to a number of factors,
including, among others, the implementation, expiration and size of on-line
lottery contracts and gaming machine orders, the timing and market acceptance of
new products introduced by the Company, changes in the level of operating
expenses, technological advances and new product introductions by the Company's
competitors, competitive conditions in the industry, regulatory approval, the
seasonality of the on-line lottery, wagering systems and racetrack operations
and general economic conditions. Product development and marketing costs are
often incurred in periods before any revenues are recognized from the sales of
products, and gross margins are lower and operating expenses are higher during
periods in which such product development expenses are incurred and marketing
efforts are commenced. Also, the amount of revenues received by the Company
under its on-line lottery contracts is affected by a variety of factors,
including the size of the jackpots, weather and other factors unrelated to the
Company's performance under such lottery contracts. At its current stage of
operations, the Company's quarterly revenues and results of operations may be
materially affected by the receipt or loss of any one on-line lottery contract
or gaming machine order and by the timing of the delivery, installation and
regulatory approval of any lottery or gaming system. The Company believes that
period to period financial results may not be comparable and should not be
relied upon as indications of future performance. Also, fluctuations in
operating results may result in volatility in the price of the Company's Common
Stock.
DEPENDENCE ON KEY CUSTOMERS
Historically, the Company has generated a significant amount of gaming
machine and route operation revenues from customers in certain jurisdictions
with video lottery programs. Revenue from gaming machine sales is subject to
potentially significant fluctuations due to the timing of orders from new
jurisdictions, timing of replacement orders or expansion or contraction of
gaming in jurisdictions in which the Company operates. A significant amount of
the Company's on-line lottery revenues are derived from contracts ranging from
one to five years with varying options for extensions and renewals from seven
individual states. For the year ended December 31, 1996 revenues from customers
in three jurisdictions individually accounted for revenues in excess of 10% of
the Company's consolidated revenues, specifically: Florida Lottery ($30.2
million), Pennsylvania Lottery ($23.2 million) and various activities in Montana
($19.7 million). Loss of any significant current customers, or an inability to
further expand its customer base would adversely affect the Company.
9
<PAGE> 15
CERTAIN ASPECTS OF THE ON-LINE LOTTERY CONTRACTS
Each of the Company's on-line lottery contracts is terminable by each of
the state lotteries for cause, and the lottery contracts with respect to the
States of Delaware, Maryland, Minnesota, Montana, Pennsylvania and South Dakota
may be terminated by the state lotteries for their convenience, when it is in
their best interest or without cause.
The Company's on-line lottery contracts also generally contain demanding
implementation schedules and performance schedules. Failure to perform under
such contracts may result in substantial monetary liquidated damages, as well as
contract termination. Although the imposition of actual liquidated damages is
generally subject to negotiation, such provisions present an ongoing potential
for substantial expense. Damages, if assessed, are usually due within 30 days or
may be deducted from revenues otherwise earned from the lottery. Failure to
repair machines within a specified time period may also result in damages. In
addition, on-line lottery contracts may require the Company to post a
performance bond, which in some cases may be substantial, securing the Company's
performance under such contracts.
AWARD PROTESTS
The on-line lottery business is highly competitive and it is not unusual in
the United States for unsuccessful vendors to challenge contract awards. 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 unsuccessfully
protested the award and has filed an appeal. The Florida lottery accounted for
34% of AWI's total revenue during 1996. There can be no assurance that the award
to AWI in Florida will be upheld or that AWI will be able to negotiate a new
five-year contract with the Florida lottery.
ADVERSE LEGISLATIVE CHANGES
The lottery, video gaming, wagering and racetrack industries are subject to
extensive regulatory constraints. Legislative changes are usually required prior
to establishment of any new markets for lottery, gaming or wagering products or
services. Similarly, adverse legislative changes, whether as a result of
political or public attitudes toward lottery, gaming or wagering can quickly
close parts or all of existing markets for the Company's products or services or
result in unusual contract changes. The Company cannot predict the speed and
direction of future legislative actions in jurisdictions where the Company is
selling products or services or contemplating the sale of products or services.
INTERNATIONAL SALES
The Company believes its future growth will depend in large part on its
ability to generate international sales. There can be no assurance, however,
that the Company will be successful in generating international sales of its
products. Sales to customers in foreign countries may be subject to a number of
risks, including the risks that agreements may be difficult or impossible to
enforce and receivables difficult to collect through a foreign country's legal
system; foreign customers may have longer payment cycles; or foreign countries
could impose withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, embargoes or exchange controls, or adopt other restrictions on
foreign trade. In addition, the laws of certain countries do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company may also be exposed to increased foreign
currency risk and fluctuations in exchange rates could affect demand for the
Company's services. Failure of the Company's efforts to compete successfully or
to expand the distribution of its products in international markets could have a
material adverse effect on the Company's business, operating results and
financial condition.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
International sales denominated in foreign currencies accounted for
approximately $13.9 million or 10% of the Company's total revenues for the nine
months ended September 30, 1997 and $16.6 million or 9% of total revenues for
the fiscal year ended December 31, 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
10
<PAGE> 16
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.
DEPENDENCE ON KEY PERSONNEL
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.
HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS FROM SUBSIDIARIES
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.
ABILITY TO ISSUE PREFERRED SHARES WITHOUT STOCKHOLDER APPROVAL
The Company's authorized capital consists of 35,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's stockholders,
is authorized to designate and issue up to 10,000,000 shares of preferred stock
in such classes or series as it deems appropriate and to establish the rights,
preferences and privileges of such shares, including dividends, liquidation and
voting rights. Other than shares of the treasury preferred stock pledged to
secure certain indebtedness, no other class of preferred stock is currently
designated and there is no current plan to designate or issue any such
securities. If additional preferred stock was issued, the rights of holders of
preferred stock would be superior to the rights granted to the holders of the
Common Stock. Further, the ability of the Board of Directors to designate and
issue such shares could impede or deter an unsolicited tender offer or takeover
proposal regarding the Company and the issuance of additional shares having
preferential rights could adversely affect the voting power and other rights of
holders of Common Stock.
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on the Common Stock since its
inception and does not anticipate paying any dividends in the foreseeable
future. Earnings of the Company, if any, are expected to be used to finance the
development and expansion of the Company's business. Any future decision with
respect to dividends will depend on future earnings, future capital needs and
the Company's operating and financial condition, among other factors.
11
<PAGE> 17
YEAR 2000 COMPLIANCE
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.
OWNERSHIP LIMITATIONS ON SECURITIES OF THE COMPANY
Gaming authorities in one or more jurisdictions (the "Gaming Authorities")
may, at their discretion, require the holder of any security of the Company,
such as the Common Stock, to file applications, be investigated and be found
suitable to own such security of the Company. If a record or beneficial owner of
the Common Stock is required by a Gaming Authority to be found suitable, such
owner will be required to apply for a finding of suitability by such Gaming
Authority. As a general matter, assuming a passive investment intent, only
owners of specified percentages of the Company's voting securities are required
to be found suitable, absent unusual circumstances, which percentage is
typically 5% or above of any class of such securities. The applicant for a
finding of suitability generally must pay all costs of the investigation for
such finding of suitability, provide an initial deposit as determined by the
Gaming Authority to pay the anticipated costs and charges incurred in the
investigation and deposit such additional sums as are required by the Gaming
Authority to pay final costs and charges. If a Gaming Authority determines that
a holder is unsuitable to own the Common Stock or to have any other relationship
with the Company, then the Company can be sanctioned, including the loss of its
approvals, if without the prior approval of the Gaming Authorities, it: (i) pays
to the unsuitable person any dividend, interest, or any distribution whatsoever;
(ii) recognizes any voting right by such person in connection with such
securities; (iii) pays the unsuitable person remuneration in any form; (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation, or similar transaction; or (v) fails to
pursue all lawful efforts to require such person to relinquish his voting
securities including, if necessary, the immediate purchase of such voting
securities for cash at fair market value.
Any person who fails or refuses to apply for a finding of suitability
within the period of time required or prescribed by a Gaming Authority 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 holder of the
Shares found unsuitable and who holds, directly or indirectly, any beneficial
ownership of the Shares beyond such period of time prescribed by a Gaming
Authority may be guilty of a criminal offense.
CERTAIN ANTITAKEOVER EFFECTS
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law which, with certain exceptions, imposes certain
restrictions on mergers and other business combinations between the Company and
any holder of 15% or more of the Common Stock. These restrictions may make the
acquisition of control of the Company without the approval of the Company's
Board of Directors more difficult.
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<PAGE> 18
USE OF PROCEEDS
The Selling Stockholders will receive all of the net proceeds from the sale
of the Shares. If the Underwriters elect to exercise the over-allotment option,
the net proceeds to the Company from the Offering are estimated to be
approximately $2.1 million, assuming an offering price of $11 per share and
after deducting the estimated underwriting discounts and commissions and the
estimated expenses of the Offering payable by the Company. The Company intends
to segregate the net proceeds (if any) to it from the Offering in a separate
account and use such net proceeds for (i) the costs of the Offering
(approximately $0.2 million), and (ii) on-line lottery operations (approximately
$1.9 million).
PRICE RANGE OF COMMON STOCK
The principal United States market on which the Common Stock is traded is
the Nasdaq NMS where it is traded under the symbol "PWRH."
The following table sets forth on a per share basis the high and low
trading prices of the Common Stock for the fiscal quarters indicated, as
reported on the Nasdaq NMS.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 9 7/8 $ 7 1/8
2nd Quarter................................................. $ 9 5/8 $ 5 1/2
3rd Quarter................................................. $ 7 1/4 $ 4 47/64
4th Quarter................................................. $ 6 1/2 $ 3 1/2
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 7 3/8 $ 4 3/8
2nd Quarter................................................. $ 6 7/8 $ 3 3/4
3rd Quarter................................................. $ 4 3/4 $ 2 7/8
4th Quarter................................................. $ 5 3/4 $ 3
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter................................................. $ 4 7/8 $ 3 1/4
2nd Quarter................................................. $ 6 1/4 $ 3 1/2
3rd Quarter................................................. $11 3/8 $ 5 15/16
4th Quarter................................................. $12 3/4 $ 8 3/4
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter (through January 14, 1998)...................... $12 3/8 $10 1/2
</TABLE>
The closing price of the Common Stock on the Nasdaq NMS as of a recent date
is set forth on the cover page of this Prospectus. As of January 1, 1998, there
were approximately 538 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
plan to do so in the foreseeable future. The current policy of the Company's
Board of Directors is to reinvest earnings in the operation and expansion of the
Company's business. Further, the Company is a holding company and the operations
of the Company are conducted through its subsidiaries. Accordingly, the ability
of the Company to pay dividends on its Common Stock is dependent on the earnings
and cash flow of its subsidiaries and the availability of such cash flow to the
Company. In addition, certain covenants in the Company's loan agreements
restrict the Company's ability to declare or pay dividends.
13
<PAGE> 19
SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1996 are derived from the
consolidated financial statements of the Company and its subsidiaries, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1995 and 1996, and for each of the years in the three-year period
ended December 31, 1996, and the report thereon, are included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996. The
selected data presented below for the nine months ended September 30, 1997 are
derived from the financial statements of the Company and its subsidiaries as
reported in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, which are unaudited. The selected consolidated financial
data should be read in conjunction with the consolidated financial statements
and notes thereto of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenues:
On-line lottery.................... $ 51,552 $115,544 $101,559 $ 91,653 $ 88,843 $ 65,790 $ 71,671
Gaming machine and route
operations....................... 59,299 59,069 68,571 61,398 60,186 43,560 51,627
Wagering systems and racetrack
operations(1).................... -- -- 18,652 28,111 27,652 21,534 21,322
-------- -------- -------- -------- -------- -------- --------
Total revenues............ 110,851 174,613 188,782 181,162 176,681 130,884 144,620
Costs and Expenses:
On-line lottery.................... 32,757 67,985 62,397 59,438 59,333 42,596 48,244
Gaming machine and route
operations....................... 37,219 35,074 39,815 35,992 32,911 23,283 28,790
Wagering systems and racetrack
operations....................... -- -- 13,992 22,286 20,104 15,408 15,300
Selling, general and
administrative................... 15,873 30,362 34,000 31,139 28,697 21,618 22,983
Research and development........... 2,570 6,629 8,513 8,888 7,969 5,062 7,122
Other charges(2)................... -- -- 23,994 2,763 34,135 12,935 --
Depreciation and amortization...... 10,351 18,033 20,694 22,587 23,822 17,315 16,943
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 98,770 158,083 203,405 183,093 206,971 138,217 139,382
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations.... 12,081 16,530 (14,623) (1,931) (30,290) (7,333) 5,238
Other income (expense)............. 258 (9,032) (242) (1,833) (2,694) (2,160) (2,269)
Income tax benefit (expense)....... (3,990) (3,152) (1,303) 846 8,753 1,198 (1,595)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) from continuing
operations....................... 8,349 4,346 (16,168) (2,918) (24,231) (8,295) 1,374
Discontinued operations(1)......... -- -- -- (5,482) 5,482 5,482 --
Extraordinary gain, net............ -- -- -- -- 4,014 4,014 13,269
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)....... $ 8,349 $ 4,346 $(16,168) $ (8,400) $(14,735) $ 1,201 $ 14,643
Net earnings (loss) per share:
From continuing operations......... $ 0.74 $ 0.35 $ (1.54) $ (0.28) $ (2.27) $ (0.66) $ 0.13
From discontinued operations....... -- -- -- (0.51) 0.51 0.44 --
From extraordinary item............ -- -- -- -- 0.38 0.32 1.28
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per
share................... $ 0.74 $ 0.35 $ (1.54) $ (0.79) $ (1.38) $ 0.10 $ 1.41
======== ======== ======== ======== ======== ======== ========
Weighted average shares(3)......... 11,316 12,312 10,507 10,608 10,699 12,598 10,406
OTHER DATA
Adjusted EBITDA(4)............... $ 22,432 $ 34,563 $ 30,065 $ 23,419 $ 27,667 $ 22,917 $ 22,181
Cash provided (used) by:
Operations....................... 19,882 31,354 12,167 1,943 18,702 36,101 36,177
Investing Activities............. (48,198) (28,666) (15,097) (22,020) (34,750) (31,616) (6,688)
Financing Activities............. 42,963 (10,540) (1,931) 18,199 18,378 (5,693) (15,763)
</TABLE>
14
<PAGE> 20
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.................... $ 25,111 $ 51,458 $ 23,344 $ 19,987 $ 28,084 $ (5,364) $ 29,704
Total assets....................... 150,029 139,513 174,032 165,851 168,043 185,550 162,648
Total long-term debt(5)
(excluding current
installments).................... 3,006 855 9,060 12,885 9,312 12,315 32,028
Stockholders' equity............... $103,435 $108,215 $ 94,112 $ 86,448 $ 72,231 $ 87,766 $ 78,107
</TABLE>
- ---------------
(1) Wagering systems and racetrack operations revenue and costs since May 3,
1994. See Note 2 to the Consolidated Financial Statements for the fiscal
year ended December 31, 1996.
(2) 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. 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 1994, the Company recorded approximately $24.0 million
of special and other unusual charges consisting of $6.7 million related to
inventory and international contract investments and $17.3 million for
impairment of the goodwill attributable to the acquisition of UWS.
(3) Common stock equivalents are excluded if antidilutive.
(4) Adjusted EBITDA consists of income from operations plus depreciation and
amortization plus the special or other charges described in footnote 2.
Adjusted EBITDA should not be construed as an alternative to net income or
any other measure of the Company's performance under generally accepted
accounting principles or to cash flows generated by operating, investing and
financing activities as an indicator of the Company's cash flows or a
measure of its liquidity. Management believes that Adjusted EBITDA is a
useful adjunct to net income and other measurements under generally accepted
accounting principles and is a conventionally used financial indicator.
(5) On January 30, 1997, EDS reached an agreement to settle certain outstanding
claims against each other. The agreement, among other things, provided for
the extinguishment of outstanding fees of approximately $38.0 million in
exchange for a note payable of approximately $26.1 million which amortizes
between 1999 and 2004 and the return to the Company of approximately 2.5
million of the Company's preferred and common shares. The settlement
resulted in an extraordinary gain of $13.3 million. See Footnote 16 to the
Consolidated Financial Statements for the fiscal year ended December 31,
1996.
15
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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
-------------------------- NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
REVENUES:
On-line lottery..................................... 53.8% 50.6% 50.2% 50.3% 49.6%
Gaming machine and route operations................. 36.3 33.9 34.0 33.3 35.7
Wagering systems and racetrack operations........... 9.9 15.5 15.8 16.4 14.7
----- ----- ----- ----- -----
Total revenue............................. 100.0 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
On-line lottery..................................... 33.1 32.8 33.6 32.5 33.4
Gaming machine and route operations................. 21.1 19.9 18.6 17.8 19.9
Wagering systems and racetrack operations........... 7.3 12.3 11.4 11.8 10.6
Selling, general and administrative................. 18.0 17.1 16.2 16.5 15.9
Research and development............................ 4.5 4.9 4.5 3.9 4.9
Other charges....................................... 12.7 1.5 19.3 9.9 --
Depreciation and amortization....................... 11.0 12.5 13.5 13.2 11.7
----- ----- ----- ----- -----
Total costs and expenses.................. 107.7 101.0 117.1 105.6 96.4
----- ----- ----- ----- -----
Loss from operations................................ (7.7) (1.0) (17.1) (5.6) 3.6
Other (expense) income, net......................... (0.1) (1.0) (1.5) (1.7) (1.5)
----- ----- ----- ----- -----
Net earnings (loss) before income taxes,
discontinued operations and extraordinary items... (7.8)% (2.0)% (18.6)% (6.3)% 1.0%
===== ===== ===== ===== =====
</TABLE>
Wagering systems and racetrack operations revenue and costs relate to a
subsidiary which was acquired by the Company on May 3, 1994. Consequently,
certain percentages from 1994 are not comparable to 1995 and 1996.
Revenue from the on-line lottery segment consists primarily of a
contractual percentage of lottery ticket sales in states in which the Company
operated as well as revenue from on-line lottery equipment sales. 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.
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 video
lottery gaming operations or forms of casino gaming, and if the Company is
awarded a contract in any such jurisdictions, the segment may experience a surge
in sales revenue that may or may not decline dramatically depending on the
jurisdiction and gaming venue. The Company expects video lottery 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.
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
16
<PAGE> 22
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 ("SG&A") expenses consist of labor
costs, professional fees, repairs and maintenance expense, promotion and
advertising costs, occupancy and other costs, other than those included in costs
and expenses applicable to the determination of gross profit as defined above or
research and development as discussed below.
Research and development costs represent costs incurred to gain and develop
new knowledge applicable to the Company's various gaming systems inclusive of
software and hardware technology. Included in the costs are labor, material,
consulting, occupancy and other expenses associated with the research and
development efforts. Development costs are capitalized in accordance with
Statement of Financial Accounting Standards Board Statement No. 86 for certain
software developed for sale or lease.
Other charges include special and unusual charges recorded by the Company
for restructurings, asset valuation impairments, liquidated damage assessments
and other contract losses. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH 1996
Consolidated revenues increased by $13.7 million, or 10%, to $144.6 million
from $130.9 million in the first nine months of 1996. The overall gross profit
increased by $2.7 million, or 5%, to $52.3 million from $49.6 million in the
nine months ended September 30, 1996. The Company had net earnings before
extraordinary items of $1.4 million in the first nine months of 1997 as compared
to a net loss of $8.3 million in the first nine months of 1996. Included in the
first nine months of the 1996 results of operations were special, pre-tax
charges of $12.9 million related to the on-line lottery segment. Excluding the
special charges, net of estimated tax benefits, and extraordinary items, the
first nine months of 1996 would have reflected a net loss of approximately $0.5
million.
ON-LINE LOTTERY
Total revenues from the on-line lottery segment increased by $5.9 million,
or 9%, to $71.7 million in the first nine months of 1997 from $65.8 million in
the first nine months of 1996. Revenue from on-line lottery equipment and system
sales was $7.6 million in the first nine months of 1997 as compared to $2.6
million in the first nine months of 1996. The increase reflects increased
revenues from contracts with certain domestic
17
<PAGE> 23
on-line lotteries as well as additional revenue from the successful
implementation of an on-line lottery system in Chile. The $5.9 million increase
in on-line lottery revenues for the nine months ended September 30, 1997 is net
of a $7.3 million decline attributable to two state contracts terminated in
mid-1996. On-line lottery service revenues were $64.1 million in the nine months
ended September 30, 1997 and $63.2 million in the nine months ended September
30, 1996.
The Company's contract with the Washington State Lottery expired in June
1996, and the new contract was awarded to a competitor of the Company. The
expired contract accounted for approximately $5.7 million (6.5%) of the lottery
services revenue in 1996, $10.3 million (11.3%) in 1995 and $10.9 million
(10.8%) in 1994. The expiration date of the current contract with the Florida
Lottery was extended from June 30, 1996, as a result of a delay of the award of
a new contract. On 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 reevaluation that resulted from
an earlier protest by a competitor, GTECH Corporation, of the Florida Lottery's
previous selection of the Company. GTECH Corporation has protested the Florida
Lottery's re-selection of the Company as the most qualified bidder. Pending
resolution of the protest, the Company will commence contract negotiations with
the Florida Lottery. On January 5, 1998, the Company and the Florida Lottery
entered into an interim contract to operate 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 33% in the first
nine months of 1997 as compared to 35% in the first nine months of 1996. The
decrease is primarily attributable to lower margins attained on the revenues
from the contract with the Maryland Lottery implemented in the third quarter
1996. The Company anticipates the gross profit margin levels to improve as the
system operation matures; however, there can be no assurance of such
improvements. The expiration of the Company's contract with the Washington
Lottery in June 1996 also contributed to the decline in gross profit margins due
to the relatively higher margin levels from that contract. The Company recorded
other charges of approximately $9.8 million in the nine months ended September
30, 1996 associated with the on-line lottery segment. No such charges were
recorded in 1997. Such other charges represented estimated settlement and
contract rework costs associated with customer disputes stemming from
performance issues with Electronic Data Systems Corporation ("EDS") with which
the Company had contracted to perform certain services for the Company's
customers. Such other charges have been excluded from 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.
In 1996, the Company withheld certain payments to EDS primarily due to EDS
performance issues and related on-line lottery customer disputes. In mid-1996
the agreement between EDS and the Company was terminated and EDS filed a
complaint against the Company seeking payment of outstanding fees. On January
30, 1997, the Company and EDS settled all claims against each other and agreed
to transition the EDS services and personnel to the Company. The terms of the
settlement include the receipt by the Company of all of the common and preferred
stock of the Company owned by EDS (545,454 common and 1,912,728 preferred
shares), certain property, plant and equipment used in the provision of services
to on-line lottery customers and the extinguishment of approximately $38.0
million of outstanding fees payable to EDS in consideration of the Company's
$26.1 million promissory note. The note calls for interest payments only for the
first two years and principal and interest payments in years three through seven
(maturity). The note is secured by the 2,458,182 shares of redeemed common and
preferred stock, certain inventories, fixed assets and software technology, and
carries prepayment provisions upon the disposal of substantially all the assets
or stock of the Company's on-line lottery subsidiary. The transition of the EDS
services and related employees to the Company was completed in the second
quarter of 1997 and is expected to lower operating costs and improve customer
service.
18
<PAGE> 24
GAMING MACHINE AND ROUTE OPERATIONS
Revenue from the gaming machine and route operations segment increased by
$8.1 million, or 19%, to $51.6 million in the first nine months of 1997 from
$43.5 million in the first nine months of 1996.
Revenue was recognized on shipments of 4,122 units in the first nine months
of 1997 as compared to 3,252 units in 1996. Revenue from leasing and revenue
sharing arrangements was $8.5 million in the first nine months of 1997 as
compared to $7.8 million in 1996.
The following table reflects domestic and foreign revenue sources
representing 10% or more of the segment's revenues for the first nine months of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997 $ CHANGE % CHANGE
----- ----- -------- --------
<S> <C> <C> <C> <C>
JURISDICTION
DOMESTIC
Montana....................................... $ 2.5 $ 2.6 $ 0.1 4.0%
Montana routes................................ 12.2 13.2 1.0 8.2
Oregon........................................ 4.8 6.1 1.3 27.1
Other, combined............................... 8.7 18.0 9.3 106.8
----- ----- -----
28.2 39.9 11.7 41.5
----- ----- -----
INTERNATIONAL
Quebec........................................ 2.0 8.8 6.8 340.0
Other, combined............................... 13.3 2.9 (10.4) (78.2)
15.3 11.7 (3.6) (23.5)
----- ----- -----
$43.5 $51.6 $ 8.1 18.6%
===== ===== =====
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue as well as royalty and lease revenues was
44% in the first nine months of 1997 and 47% in the first nine months of 1996.
The decrease reflects relatively higher sales to Quebec which results in lower
gross profit margins for the Company. The gross profit margin from route
operations was 28% in the first nine months of 1997 and 29% in the first nine
months of 1996.
WAGERING SYSTEMS AND RACETRACK OPERATIONS
Revenue from the wagering systems and racetrack operation segments was
$21.3 million in the first nine months of 1997 as compared to $21.5 million in
the first nine months of 1996. Revenue from the racetrack operations in Sunland
Park, New Mexico was $5.4 million in the first nine months of 1997 as compared
to $5.5 million in the first nine months of 1996. Revenue from sales of wagering
systems equipment was $2.1 million in the first nine months of 1997 as compared
to $1.7 million in the first nine months of 1996.
The Company believes that a growing market exists for video lottery gaming
at pari-mutuel racetracks, which have suffered from declining attendance in
recent years due to the proliferation of casino gaming outside of Las Vegas and
Atlantic City. To permit the racing industry to become more competitive, some
states have enacted legislation that allows video gaming devices at racetracks,
a trend that the Company believes will continue. The Company intends to
participate in this growth by supplying its gaming machines and systems,
partnering with or purchasing racetracks and owning and operating its own
facility, Sunland Park. The Company is the only full service supplier of gaming
and pari-mutuel systems and services to racetracks in North America and believes
it has a competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.
The gross profit margin from wagering systems service revenue was 37% in
the first nine months of 1997 as compared to 39% in the first nine months of
1996. The decrease is attributable to increased operating costs in 1997 related
to start-up of operations for live racing at Lone Star Park in Texas, the newest
thoroughbred racetrack in North America as well as higher operating costs in
certain other states. Also contributing to the decrease is the closure of two
customer racetracks which carried relatively higher gross profit margins.
19
<PAGE> 25
Management does not anticipate any significant increase in gross profit margin
levels on service revenue in the near future. The gross profit margin from
equipment sales of $2.1 million was 49% in the first nine months of 1997 as
compared to 40% on $1.7 million of sales in the first nine months of 1996. The
Company experienced a negative gross profit from the racetrack operations of
approximately $0.1 million in the first nine months of 1997 and 1996.
The Company recorded other charges of approximately $3.1 million in the
nine months ended September 30, 1996 associated with its wagering systems
segment. No such charges were recorded in 1997. Approximately $2.8 million of
such other charges represented impairments of long-lived assets recorded in
conjunction with the Company's strategic decision to retain and operate the
wagering systems segment previously reported as discontinued. See Note 2 to the
Company's 1996 Consolidated Financial Statements. Additionally, the Company
consolidated the manufacturing operations of this segment to the Company's
Bozeman, Montana facility, which resulted in employee terminations and other
incremental costs of approximately $0.3 million. These other charges have been
excluded from 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.
SELLING, GENERAL AND ADMINISTRATIVE
Total SG&A expenses were $23.0 million in the nine months ended September
30, 1997 and $21.6 million in the nine months ended September 30, 1996. As a
percentage of revenues, SG&A expenses were 16% in the first nine months of 1997
as compared to 17% in 1996. The $1.4 million increase over 1996 levels reflects
increased personnel and related administrative costs associated with the
development of the Company's gaming machine sales and customer service efforts
as well as increased infrastructure costs related to the transition of on-line
lottery services from EDS to the Company.
RESEARCH AND DEVELOPMENT
Research and development expense, net of amounts capitalized for the
development of MasterLink(R) was $7.1 million in the first nine months of 1997
as compared to $5.1 million in the same period in 1996. The Company capitalized
$0.8 million in the first nine months of 1997 and $3.6 million in 1996. Total
research and development expenditures approximated 6% of consolidated revenues
in the first nine months of 1997 and 7% of consolidated revenues in 1996. The
new modules and significant enhancements related to the MasterLink(R) system in
1997 were implemented with the Minnesota, ALC, Norsk Tipping AS and Chile
on-line lottery systems in 1997.
1996 COMPARED WITH 1995
Total revenue in 1996 decreased by $4.5 million (3%) to $176.7 million from
$181.2 million in 1995. The overall gross profit increased by $0.9 million (1%)
to $64.3 million from $63.4 million in 1995. The Company had a net loss from
operations of $24.2 million in 1996 as compared to net loss from operations of
$2.9 million in 1995. The increase in loss reflects significant special and
other unusual charges recorded in 1996. Absent the special and other unusual
charges, the Company would have had net earnings before income taxes of $1.2
million in 1996 and a net loss before income taxes of $1.0 million in 1995. The
improvement reflects the $0.9 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%) 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.
20
<PAGE> 26
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 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 (7%) and $10.4 million (11%) 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 following describes the Company's accounting for "other" charges
related to the on-line lottery segment. Other charges include charges for
inventory impairments, restructurings, contract exit charges and long-lived
asset impairments. 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 installed pursuant to the terms of such
long-term contracts. The inventory charges discussed below have been excluded
from the determination of gross profit. Had these inventories been placed in
service under long-term contracts, depreciation expense would have been
recognized in accordance with the Company's accounting policy.
In 1996, the Company recorded approximately $31.0 million of special
charges related to the Company's on-line lottery segment, which consisted of
$18.0 million for inventory reserves and write-downs, $8.4 million for penalties
and contractual liabilities resulting from customer disputes and $4.6 million
for impairment of intangible and other assets in connection with an on-line
lottery contract. Approximately $9.8 million of the charges were recorded in the
first nine months of 1996. $8.0 million of those charges related to customer
disputes stemming from performance issues with EDS. The remaining $1.8 million
recorded in the first nine months represented charges for inventory impairments.
The $21.2 million of charges recorded in the fourth quarter of 1996 primarily
related to impairments of inventories and intangible assets.
During the three-year period ending 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
21
<PAGE> 27
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, due to a number of
factors, including a short development and installation period, the lottery had
a number of deficiencies that contributed 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
estimated 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 one of selling on-line lottery
equipment and licensing technology to use the equipment to partners who would
operate the lottery system. While this strategy may result in lower revenues,
costs of sales and operating profits, it is considered by management to be a
more effective growth strategy.
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 $2.5 million of
other charges associated with exit costs and asset impairments related to four
contracts. These charges have been excluded from the determination of gross
profit due to their nature, and they are not considered by the Company to be
indicative of anticipated future gross profits.
In 1996, the Company withheld certain payments to EDS primarily due to EDS
performance issues and related on-line lottery customer disputes. In mid-1996,
the agreement between EDS and the Company was terminated and EDS filed a
complaint against the Company seeking payment of outstanding fees. On January
30, 1997, the Company and EDS settled all claims against each other and agreed
to transition the EDS services and personnel to the Company. The terms of the
settlement include the receipt by the Company of all of the common and preferred
shares owned by EDS (545,454 common and 1,912,728 preferred shares) certain
property, plant and equipment used in the provision of services to on-line
lottery customers and the extinguishment of approximately $38.0 million of
outstanding fees in return for a $26.1 million note payable. The note payable
calls for interest payments only for the first two years and principal and
interest payments in years three through seven (maturity). The note is secured
by the 2,458,182 shares of redeemed Common and Preferred Stock, certain
inventories, fixed assets and software technology and carries prepayment
provisions upon the disposal of substantially all the assets or stock of the
Company's on-line lottery subsidiary. The transition of the EDS services and
related employees to the Company was completed in the second quarter of 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 $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.
22
<PAGE> 28
GAMING MACHINE AND ROUTE OPERATIONS
Revenue from gaming machine sales and route operations decreased by $1.2
million (2%) to $60.2 million from $61.4 million in 1995.
Revenue was recognized on delivery of 4,557 units in 1996 as compared to
7,772 in 1995. Included in the total units were approximately 917 and 1,562 of
royalty unit sales in 1996 and 1995, respectively. Revenues from sales of units
pursuant to royalty arrangements have minimal related direct costs. The Company
previously earned revenues from sales of units under a royalty arrangement with
an Australian company in certain Australian jurisdictions. The royalty
arrangement was terminated in mid-1997. Additionally, the Company shipped 1,175
gaming machines under lease arrangements to the Oregon, Rhode Island and
Delaware lotteries in 1996 as compared to 1,570 gaming machines shipped to the
Oregon, Rhode Island and Delaware lotteries in 1995.
The following table reflects domestic and international revenue sources
representing 10% or more of the segment's revenues for the years ended December
31, 1995 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996 $ CHANGE % CHANGE
----- ----- -------- --------
<S> <C> <C> <C> <C>
JURISDICTION
DOMESTIC
Montana....................................... $19.3 $19.7 $ 0.4 2.0%
Louisiana..................................... 9.0 1.4 (7.6) (84.4)
Oregon........................................ 6.0 7.1 1.1 18.3
Other......................................... 7.8 11.3 3.5 44.5
----- ----- -----
42.1 39.5 (2.6) (6.2)
----- ----- -----
INTERNATIONAL
Quebec........................................ 12.3 2.2 (10.1) (82.1)
Other......................................... 7.0 18.5 11.5 164.3
----- ----- -----
19.3 20.7 1.4 7.3
----- ----- -----
$61.4 $60.2 $(1.2) (2.0)%
===== ===== =====
</TABLE>
Montana revenue includes $16.5 and $15.3 million from route operations in
1996 and 1995, respectively.
In 1996, voters in approximately one-half of the state's parishes in
Louisiana voted to discontinue video lottery operations in those parishes.
Existing locations will be allowed to operate for approximately two years before
the gaming machines must be removed.
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as lease 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 $0.5 million or (2%) 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 $0.9 million offset by
an increase of $0.4 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
23
<PAGE> 29
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 Company
plans to continue to renew existing contracts at margins at least comparable to
existing contracts and plans to secure new contracts at comparable margins,
although no assurance can be given that existing contracts will be renewed or
new contracts will be entered into with comparable gross profit margins.
The gross profit margin from the wagering systems and racetrack operations
segment was 27% in 1996 as compared to 21% in 1995. The gross profit margins for
wagering systems services and equipment sales were 38% in 1996 and 30% in 1995.
The increase in margin is due to increases in the simulcasting and interface
revenues which carry higher margins, combined with lower operating expenses from
wagering systems. The Sunland Park racetrack operations yielded a negative gross
profit of $0.3 million in 1996 and $0.2 million in 1995.
The Company recorded other charges of approximately $3.1 million in 1996
associated with the Company's wagering systems segment. $2.8 million of the
charges represented impairments of long-lived assets recorded in conjunction
with the Company's strategic decision to retain and operate the wagering systems
segment previously reported as discontinued. $0.3 million of the charges related
to the consolidation of the manufacturing operations of that segment. In 1995,
the Company recorded $0.3 million of other charges associated with exit costs
for one contract. These charges have been excluded from the determination of
gross profit due to their nature, and they are not considered to be indicative
of anticipated future gross profits.
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, New Mexico. The recently enacted legislation will permit 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 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.
SELLING, GENERAL AND ADMINISTRATIVE
Total SG&A expenses decreased by $2.4 million (8%) 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% in 1996 as compared to 17%
in 1995. Management anticipates 1997 SG&A levels to be at or near 1996 levels
given the current level of activity. Should business development activities
increase in the next several fiscal quarters, the SG&A levels would follow.
RESEARCH AND DEVELOPMENT
In 1996, the Company expended $8.0 million (net of capitalization) on
research and development activities as compared to $8.9 million (net of
capitalization) in 1995. The Company capitalized approximately $4.1 million and
$2.7 million, respectively, of the development costs primarily in conjunction
with the development of the Company's MasterLink(R) system central system
software. The new modules and significant enhancements related to the
MasterLink(R) system in 1997 were implemented with the Minnesota, ALC, Norsk
Tipping AS and Chile on-line lottery systems in 1997. The Company expects to
continue to refine and enhance the Company's MasterLink(R) system in 1997 for
video and on-line lottery applications as well as continue the development and
enhancement of other on-line, video gaming and wagering systems hardware and
software products.
24
<PAGE> 30
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. Approximately $21.2
million of charges were recorded in the fourth quarter of fiscal year 1996,
primarily related to the Company's revised strategies and resulting estimates
concerning on-line lottery operations. The Company's revised strategies include
more selective bidding on both domestic and international opportunities.
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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $1.2 million to $23.8 million
from $22.6 million in 1995. The increase is attributable to approximately $25.5
million of new capital assets placed in service and $10.0 million of capitalized
deferred start-up and software development costs in 1996. The majority of
capital assets procured and manufactured in 1996 were placed in service in the
third quarter in conjunction with the on-line lottery implementation in Maryland
and the delivery of gaming machines under a lease agreement with the Oregon
Lottery.
1995 COMPARED WITH 1994
Total revenue in 1995 decreased by $7.6 million (4%) to $181.2 million from
$188.8 million in 1994. The overall gross profit decreased by $9.1 million (13%)
to $63.4 million from $72.5 million in 1994. The Company had a net loss from
operations of $2.9 million in 1995 as compared to $16.2 million in 1994. The
decrease in losses primarily reflects less special and other charges recorded.
The 1994 charges of $24.0 million represented goodwill impairment of $17.3
million and other charges primarily for inventories of $6.7 million. The Company
also experienced a decline in gross profit margins in 1995 from 1994 levels.
ON-LINE LOTTERY
Revenue from the on-line lottery segment decreased by $9.9 million (10%) to
$91.7 million from $101.6 million in 1994. Included in the on-line lottery
revenue in 1995 and 1994 is $5.3 million and $9.9 million, respectively, of
revenue from international on-line lottery equipment sales. Revenue from the
Company's contract with the Florida Lottery of $35.2 million decreased by $2.4
million from 1994 primarily reflecting a decline in the contractual fee rate.
Also, included in 1994 revenue is $3.1 million from contracts with two off-track
betting corporations in the state of New York that expired in December 1994.
The gross profit margin of the on-line lottery segment was 35% in 1995 as
compared to 39% in 1994. The gross profit margin on services revenue in the
on-line lottery segment was 36% in 1995 as compared to 39% in 1994. The decrease
is primarily attributable to a contractual reduction in the fee structure with
the Florida Lottery in 1995. The gross profit margin on on-line central system
and equipment sales was 20% and 32% in 1995 and 1994, respectively.
In 1995, the Company recorded approximately $2.5 million of other charges
associated with exit costs and asset impairments related to four contracts. $0.5
million of the charges were to record an additional reserve on the United
Kingdom lottery equipment due to a change in market value. In the fourth quarter
1994, the Company recorded a special charge of approximately $5.9 million, which
amount represents reserves and writeoffs for inventory of $4.1 million and
write-offs and accruals of foreign contract investments and commitments of $1.8
million. The Company had purchased inventory in anticipation of a contract in
the United Kingdom that was not awarded to the Company. The 1994 inventory
charge represented the initial
25
<PAGE> 31
adjustment associated with the retrofitting of inventories for alternative
markets. These special charges have been excluded from the determination of
gross profit due to their nature, and they are not considered to be indicative
of anticipated future gross profits.
GAMING MACHINE AND ROUTE OPERATIONS
Revenue from gaming machine sales and route operations decreased by $7.2
million (11%) to $61.4 million from $68.6 million in 1994.
Revenue was recognized on delivery of 7,772 units in 1995 as compared to
10,008 in 1994. Included in the total units were approximately 1,562 and 2,792
of royalty unit sales in 1995 and 1994, respectively. Additionally, the Company
shipped 1,570 gaming machines under lease arrangements to the Oregon, Rhode
Island and Delaware lotteries in 1995 as compared to 400 gaming machines shipped
to the Oregon Lottery in 1994.
The following table reflects domestic and international revenue sources
representing 10% of the segment's revenues for the years ended December 31, 1994
and 1995 (amounts in millions):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1994 1995 $ CHANGE % CHANGE
JURISDICTION ----- ----- -------- --------
<S> <C> <C> <C> <C>
DOMESTIC
Montana...................................... $17.9 $19.3 $ 1.4 7.8%
Louisiana.................................... 12.0 9.0 (3.0) (25.0)
Other........................................ 13.8 13.8 0 0
----- ----- -----
43.7 42.1 (1.6) (3.6)
INTERNATIONAL
Quebec....................................... 10.5 12.3 1.8 17.1
Other........................................ 14.4 7.0 7.4 105.7
----- ----- -----
24.9 19.3 (5.6) (22.5)
----- ----- -----
$68.6 $61.4 $(7.2) (10.5)%
===== ===== =====
</TABLE>
Montana revenue includes $15.3 and $15.4 million from route operations in
1995 and 1994, respectively.
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as lease revenue, decreased
slightly to 41% from 42% in 1994. The decrease is primarily attributable to a
revenue decline from the lower royalty unit sales under a technology transfer
agreement between the Company and a Victoria, Australia
manufacturer/distributor. The royalty revenue has nominal direct cost
components. The gross profit margin from route operations was 28% in 1995 as
compared to 29% in 1994.
WAGERING SYSTEMS AND RACETRACK OPERATIONS
Revenue from the wagering systems and racetrack operations was $28.1
million in 1995 compared to $18.7 million for the eight months ended December
31, 1994. The gross profit margin decreased to 21% in 1995 from 25% in the eight
months ended in 1994.
In 1995, the Company recorded $0.3 million of other charges associated with
exit charges related to one contract. In 1994, the Company recorded $18.1
million of special charges related to the wagering systems segment, $17.3
million of which represented a goodwill impairment charge and $0.8 million of
which was to accrue the exit costs related to one contract. These charges have
been excluded from the determination of gross profit due to their nature, and
they are not considered to be indicative of anticipated future gross profits.
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of UWS. The original purchase price of $29.6 million included
$19.6 million in cash and the issuance of $10.0 million of
26
<PAGE> 32
promissory notes, payable over a three-year period. The Company also assumed
liabilities of approximately $23.4 million and, in connection with the
transaction, recorded goodwill of approximately $30.3 million. 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 the fourth quarter of 1994 and the first quarter of 1995, certain
negative developments affecting UWS and the pari-mutuel wagering industry became
increasingly apparent. These developments included significant declines in gross
revenues and gross margins at pari-mutuel wagering and other facilities due to
pricing pressures and increased competition from other forms of gaming (which
declines the Company believed were permanent), significant unanticipated capital
investment of approximately $15.0 million to meet customer commitments and the
failure of various state legislative initiatives authorizing the introduction of
gaming devices at tracks to materialize as anticipated. The Company took steps
to restructure the business of UWS, including changing management, reducing
costs and renegotiating contracts to the extent possible in an attempt to
mitigate these negative developments. These developments in the aggregate
indicated to the Company that the purchase price it had paid for UWS exceeded
UWS's value, and that, therefore, the goodwill associated with the wagering
systems segment was not recoverable from future operations. As a result, an
impairment of $17.3 million was recorded in the fourth quarter of 1994. The
impairment was determined by using the present value of estimated future
operating cashflows of the wagering segment. After the impairment charge,
approximately $11.7 million of goodwill associated with the racetrack operations
segment of UWS remained.
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to sellers in the aggregate principal
amount of $10.0 million, which had been issued in conjunction with the
acquisition of UWS in May 1994, because of disputes related to the acquisition.
On March 25, 1996, the Company reached an agreement with the sellers settling
all outstanding claims and disputes, including dismissal of all outstanding
litigation, resulting in an approximate $4.0 million gain on debt
extinguishment. This gain was recorded in the Company's 1996 statement of
operations.
SELLING, GENERAL AND ADMINISTRATIVE
Total SG&A expenses decreased by $2.9 million (9%) to $31.1 million from
$34.0 million in 1994. The decrease is primarily attributable to lower legal and
professional fees as well as reduced business development expenses. Business
development expenses are primarily lobbying, political contributions, trade
shows, travel, meals and lodging. As a percentage of sales, SG&A expenses were
17% in 1995 as compared to 18% in 1994.
RESEARCH AND DEVELOPMENT
In 1995, the Company expended $8.9 million (net of capitalization) on
research and development activities as compared to $8.5 million (net of
capitalization) in 1994. The Company capitalized approximately $2.7 million and
$5.2 million, respectively, of the development costs primarily in conjunction
with the development of the MasterLink(R) system software.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $1.9 million to $22.6 million
from $20.7 million in 1994. The increase is attributable to approximately $19.0
million of new capital assets placed in service and $3.5 million of capitalized
deferred start-up and software development costs in 1995. Approximately $8.1
million was placed in service in November and December of 1995 in conjunction
with the Arizona on-line lottery implementation and start-up and the delivery of
approximately 300 gaming machine terminals to the Oregon and Delaware lotteries
as part of the leasing programs with those jurisdictions. Approximately $2.4
million of the $3.5 million capitalized deferred start-up and software
development costs were capitalized in the fourth quarter 1995 in conjunction
with the Arizona on-line lottery implementation and start-up and significant
enhancements to the MasterLink(R) system.
27
<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Working capital, defined as current assets less current liabilities,
increased by $1.6 million to $29.7 million at September 30, 1997 from $28.1
million at December 31, 1996. Cash generated from operations of $36.2 million in
the nine months ended September 30, 1997 was used to repay interest-bearing debt
of approximately $16.5 million, invest in additional long-lived capital assets
of approximately $7.3 million and increase cash and cash equivalent balances by
$13.7 million to a balance of $18.0 million at September 30, 1997.
Inventory levels decreased by $3.9 million to $14.4 million from $18.3
million at December 31, 1996. The reduction primarily reflects sales of on-line
lottery equipment to international jurisdictions. 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
installed pursuant to the terms of such long-term contracts.
Management believes that its position to obtain capital resources improved
during the first nine months of 1997 as a result of the Company's improved cash
and debt positions. Total liabilities decreased by $11.3 million in the first
nine months of 1997 due to the settlement between the Company and EDS and due to
the repayments made on interest-bearing debt noted above. Included in the
repayments of interest-bearing debt in the first nine months of 1997 is the
pay-down of the Company's revolving line of credit with First Bank, N.A. Of the
$19.5 million revolving line of credit, $9.5 million is committed to the
Company's bonding program and $10.0 million is available for working capital
needs. At September 30, 1997 none of the $10.0 million was drawn by the Company.
The Company's revolving line of credit agreement with First Bank, N.A. expires
in February 1998. The credit agreement contains certain restrictive covenants,
including requirements with respect to leverage and cash flow ratios, change in
control, payments-of-dividends restrictions and minimum stockholders' equity
covenants. The Company expects to extend or replace the credit facility prior to
its expiration; however, its extension or replacement cannot be assured.
During 1996, 1995 and 1994, the Company sold notes receivable from gaming
machine equipment sales, with a face value of $1.5 million, $2.3 million and
$4.3 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
$4.7 million at December 31, 1996. At September 30, 1997, the Company had a
reserve of $0.3 million established for any losses under the recourse provisions
which reflects a $0.1 million reduction from the December 31, 1996 balance of
$0.4 million. At December 31, 1996, the Company had guaranteed or pledged
security for the indebtedness of others in the amount of approximately $5.8
million (including $4.7 million notes receivable sold to banks and other third
parties).
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 legislation in the state. 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 recently enacted
legislation will permit 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 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 casino gaming at Sunland
Park 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. Current plans call for approximately $8 million of
capital expenditures for facility enhancements, gaming machines and related
equipment.
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.
Under the new contract, AWI would provide services to the Florida Lottery for
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<PAGE> 34
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. 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.
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<PAGE> 35
BUSINESS
OVERVIEW
The Company is a diversified gaming company offering a broad selection of
products and services to a variety of customers, including domestic and
international lottery agencies, casino gaming companies, racetracks and route
operators. The Company is the leading worldwide developer and supplier of video
lottery gaming machines and system software and one of the leading developers
and suppliers of equipment, software systems and related services for on-line
lotteries and pari-mutuel systems. In addition, the Company owns and operates
Sunland Park racetrack in New Mexico and intends to open a casino at such
facility with 300 gaming machines in approximately mid-1998.
Automated Wagering International, Inc. AWI designs, manufactures,
assembles, installs, operates and maintains on-line, computer-based networks for
state lotteries in Delaware, Florida, Maryland, Minnesota, Montana, Pennsylvania
and South Dakota. An on-line lottery network consists of lottery terminals
located in numerous retail outlets, a central computer system, computer software
and communications equipment. In the United States, AWI's products and services
are typically marketed to lottery authorities through long-term contracts,
awarded through a competitive bidding process, pursuant to which AWI maintains
ownership of the lottery network and operates it for the state in return for a
percentage of ticket sales. In foreign jurisdictions, lottery equipment is often
sold and related software is often licensed to lottery authorities for a fixed
price.
Video Lottery Consultants, Inc. VLC designs, develops, manufactures and
markets gaming machines, central control system software and related services
for the gaming machine industry. The gaming machine industry includes both video
lottery operations and casino gaming. Video lottery gaming is the use of gaming
machines to provide low stakes entertainment gaming to enhance revenue for
states and other jurisdictions. The machines, offering video versions of games
such as poker, blackjack, bingo and keno and spinning reel games, are generally
located in age-controlled establishments such as bars, taverns and restaurants.
Centralized computer systems typically monitor compliance with governmental
regulation and taxation in this segment of the industry. Both VLC and AWI market
these centralized computer systems, with AWI concentrating on those systems that
also run the jurisdiction's on-line lottery. Video lottery gaming programs
provide substantial incremental sources of revenue to the governmental
jurisdictions without increasing general taxation. Currently seven states in the
United States, five states in Australia, eight Canadian provinces, Iceland,
Norway, Sweden and South Africa have authorized video lottery gaming on a
jurisdiction-wide basis. In addition, VLC sells its Winning Touch(R) 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 United States, as well as in all other major
casino jurisdictions.
United Wagering Systems, Inc. UWS designs, manufactures, operates and
sells computerized pari-mutuel wagering systems commonly referred to as
"totalisators" for horse and greyhound racetracks, off-track wagering facilities
and jai alai frontons in North America, South America, Spain, the Caribbean and
the Philippines. A totalisator system supports pari-mutuel wagering by
controlling the acceptance of wagers, calculating odds and payout, cashing
winning tickets, and performing assorted management, accounting and reporting
functions. Each system consists of central processing computers and peripherals,
betting terminals, proprietary software, tote boards and other displays and
color video generation equipment. The products and services of UWS are typically
marketed to domestic facilities under long-term service contracts. Compensation
is usually based on a minimum fee plus a percentage of the wagering volume of
the facility. Foreign users typically purchase the hardware and license the
software for systems operations. UWS also provides wagering terminals for use in
casino race/sportsbooks.
Sunland Park. The racetrack operation located in Sunland Park, New Mexico,
typically hosts live racing from December until May of each year. Additionally,
the racetrack facility participates in an inter-track wagering network with
other racetracks for the entire year, either as a host track during live racing
or as a guest track when the live racing is located at another track.
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<PAGE> 36
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, New Mexico. The recently enacted legislation will permit the
Company to operate up to 300 gaming machines at its Sunland Park racetrack for
up to twelve hours per day. The Company does not does not anticipate that any
revenues will be generated from the approved gaming until the third or fourth
quarter of 1998.
BUSINESS STRATEGY
The Company is focusing on the following key strategies in order to pursue
its growth objectives:
- Expand Leading Position in Worldwide Video Lottery Gaming Market: The
Company believes that new markets such as Ontario and South Africa, and
the replacement of older gaming machines and systems in markets such as
Australia and North America, will provide significant future growth
opportunities for VLC. For the fiscal year ended December 31, 1996 and
the nine months ended September 30, 1997, VLC's total revenue from
international operations was $20.7 million and $11.7 million,
respectively. The Company believes its state-of-the-art technology, the
historically high net revenue performance of its gaming machines and
its solid reputation among its customers give the Company a competitive
advantage in the video lottery gaming market in the foreseeable future.
- Develop Casino Opportunities at Racetracks: The Company believes that
a growing market exists for video lottery gaming at racetracks, which
have suffered from declining attendance in recent years due to the
proliferation of casino gaming outside of Las Vegas and Atlantic City.
To permit the racing industry to become more competitive, some states
have enacted legislation that allows video gaming devices at
racetracks, a trend that the Company believes will continue. The
Company intends to participate in this growth by supplying its gaming
machines and systems, partnering with or purchasing racetracks and
owning and operating its own facility, Sunland Park. The Company is the
only full service supplier of state-of-the-art gaming and pari-mutuel
systems and services to racetracks in North America and believes it has
a competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.
- Penetrate Casino Markets: The Company intends to leverage the
popularity of its Winning Touch(R) gaming machines to increase its
market penetration in traditional casino venues. With licenses in
virtually all major gaming jurisdictions, VLC is actively marketing its
gaming machines in casino markets worldwide as a high performance
product for replacing older machines. The Company believes that VLC's
new Power Series(TM) gaming machine is capable of producing greater
than average coin-in per day and net win per day than traditional
gaming machines, due to its superior graphics, state-of-the-art sound
and playability.
- Selectively Bid on Domestic On-line Contracts and Aggressively Pursue
International On-line Opportunities: On-line lottery contracts for
twelve state lotteries will be up for procurement over the next three
years. Due to the high cost of procuring new contracts, AWI intends to
target those states which it believes will establish a bidding process
based exclusively on technical capability, price and service. This
strategy allows AWI to efficiently allocate its resources so that it
may also pursue international growth opportunities. AWI is currently
targeting approximately 14 jurisdictions worldwide that are expected to
implement on-line lottery programs within the next two years. In 1997,
AWI successfully implemented its MasterLink(R) on-line system for
Chile's Loteria de Concepcion, Canada's ALC and Norway's Norsk Tipping
AS. For the fiscal year ended December 31, 1996 and the nine months
ended September 30, 1997, AWI's total revenue from international
operations was $3.1 million and $7.5 million, respectively.
- Emphasize Customer Service and Optimize Profitability of On-line and
Pari-mutuel Contracts: AWI's sophisticated MasterLink(R) central system
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.
AWI expects to develop new products and services every year for its
existing customers. New products may include additional games, lower
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<PAGE> 37
cost terminals or player tracking systems. In addition, AWI continues
to focus on reducing service costs. United Tote has successfully
upgraded its operations and improved customer service. United Tote has
demonstrated that its systems can process the large handles typically
found at the larger racetracks such as Churchill Downs. United Tote
believes that its emphasis on customer service and ability to design,
manufacture and operate pari-mutuel systems that are capable of
processing larger handle volumes will enable it to improve its
profitability and increase its market share.
AWI
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 based on relative sizes
of awards or jackpots, the number of terminals on-line and tickets sold in the
states in which the Company operates and 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
November 30, 1997, the approximate number of retail terminals installed in each
jurisdiction, and the revenues generated by the lottery operations.
<TABLE>
<CAPTION>
TOTAL ON-LINE
DATE OF EXPIRATION LOTTERY TERMINALS LOTTERY TOTAL REVENUES
COMMENCEMENT DATE AUTHORITY OPERATING AT REVENUES IN PER TERMINAL
OF CURRENT OF CURRENT EXTENSION JUNE 30, 1997(2) IN 1997(2)
JURISDICTION CONTRACT CONTRACT(1) OPTIONS 1997 (IN MILLIONS) (IN THOUSANDS)
- ------------ ------------ --------------- ------------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Delaware 10/94 9/02 -- 337 $ 79.9 $237.1
Florida(3) 4/88 1/00 -- 8,240 1,454.2 176.5
Maryland 7/96 7/01 1 three-year plus 3,895 1,038.3 266.6
2 one-year
Minnesota 5/90 8/02 -- 1,918 96.0 50.1
Montana 11/96 11/98 -- 341 22.2 65.1
Pennsylvania(4) 1/89 12/98 -- 4,888 1,298.4 265.6
South Dakota 7/90 05/99 six months 363 12.5 34.4
</TABLE>
- ---------------
(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 34% of AWI's total revenues during
1996. 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
unsuccessfully protested the award and has filed an appeal. If the award is
upheld, the Company will begin negotiations with the Florida Lottery for the
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 26.1% of AWI's total revenues
during 1996.
International Operations. In February 1991, AWI entered into a contract
with Norsk Tipping AS, the national lottery and soccer pool organization for the
Kingdom of Norway for the purchase of terminals, communications equipment, a
central control system, software and knowledge transfer. Norsk Tipping AS has
ordered and AWI has provided approximately 4,700 on-line terminals from 1991
through September 30, 1997. In September 1997, AWI completed the successful
implementation of its MasterLink(R) on-line system in Chile, for the Loteria de
Concepcion.
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
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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 by the additional equipment or games
and revenues from existing equipment, although there is no assurance this will
continue to be the case. The potential additional terminals and new games are
agreed to in the bidding process and as such are taken into consideration when
determining the vendor's fee in the original bid.
AWI's contracts with the state lotteries contain provisions for assertion
of liquidated damages against AWI for failure to meet certain performance
standards. These conditions include aggressive implementation schedules and
ongoing performance standards and failure to perform may result in substantial
monetary liquidated damages, as well as contract termination. Liquidated damages
ranging from $5,000 to $250,000 per day for late system start-up and from $1,700
to $15,000 per minute for system downtime beyond a stipulated grace period are
common to the domestic market. Although the actual liquidated damages imposed
are generally subject to negotiation, such provisions present an ongoing
potential for substantial expense. Damages, if assessed, are usually due within
30 days or may be deducted from revenues otherwise earned from the lottery.
Failure to repair terminals within a specified time period may subject AWI to
damages. The Company maintains errors and omissions coverage under risk
management policies which would cover certain but not all claims.
Typically, state lottery contracts also reserve the right to terminate the
contract for cause (i.e., failure of the vendor to substantially perform any
material requirement) after notice and a cure period. The state also reserves
the right to cancel a contract if the state enacts a statute which removes the
authority or ability of the state to conduct a lottery. 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 vendor for all
terminations except for a material breach.
Lottery contracts generally require the vendor to post a substantial bond
securing its performance. The terms of such bonds may require significant
collateral in the form of cash, cash equivalents or lines of credit.
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 during the year ended December 31, 1996 were
approximately 3% of its revenues.
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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:
- 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 contains 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(R) on-line 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
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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.
VLC
The following table, as of September 30, 1997, sets forth certain
information concerning the number of Company (through VLC) and non-Company video
lottery gaming machines in operation in the jurisdictions that currently have
video lottery operations:
<TABLE>
<CAPTION>
CENTRAL VLC SHARE
COMMENCEMENT OWNERSHIP CONTROL NUMBER OF --------------------
JURISDICTION(1) DATE STRUCTURE SYSTEM TERMINALS(2) TERMINALS(3) %
- --------------- ------------ ------------------ ------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Montana(4)................... 1985 Private(5) None 16,150 4,785 29.6%
South Dakota(6).............. 1989 Private VLC 8,045 7,641 95.0
Atlantic Canada(7)........... 1990 Private/Government VLC 9,860 2,889 23.3
Saskatchewan................. 1993 Government GTECH 3,566 1,148 32.2
Quebec....................... 1994 Government VLC 15,351 6,530 42.5
Oregon(8).................... 1992 Government IGT(9) 8,713 4,431 50.9
Louisiana.................... 1992 Private IGT 14,850 8,836 59.5
Alberta, Canada.............. 1992 Government GTECH 5,919 3,964 67.0
Iceland...................... 1991 Charitable VLC 500 450 90.0
Rhode Island(10)............. 1992 Government GTECH 1,622 440 27.1
South Australia.............. 1994 Private VLC 9,259 1,000 10.8
Victoria, Australia(11)...... 1995 Private VLC 11,731 1,396 11.9
Victoria, Australia(11)...... 1995 Trust VLC 11,248 4,994 44.4
Delaware(12)................. 1995 Government AWI 335 275 82.1
Northern Territory........... 1996 Government VLC 400 80 20.0
W. Virginia.................. 1997 Government GTECH 3,000 150 5
Norway....................... 1996 Charitable VLC 300 300 100
------- ------
Total............... 120,849 49,309 40.8%
======= ====== =====
</TABLE>
- ---------------
(1) Excludes several jurisdictions in which the Company does not participate,
including Manitoba, Sweden, Tasmania and Queensland.
(2) In operation as of June 1997.
(3) Number of VLC gaming machines sold may vary from number in operation.
(4) Total number of video lottery gaming machines and number of VLC gaming
machines based on number of gaming machines licensed, according to the
Montana Gambling Control Division and VLC shipment reports.
(5) Private includes coin operators and/or location owners.
(6) Total number of gaming machines based on information provided by the South
Dakota Lottery. Number of VLC gaming machines based on VLC shipment
reports.
(7) Total number of gaming machines and number of VLC gaming machines based on
information provided by ALC. Atlantic Canada encompasses the provinces of
New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island. New
Brunswick and Prince Edward Island have adopted a private ownership
structure, while in the provinces of Newfoundland and Nova Scotia, the
gaming machines are owned by the government or its appointed agent.
(8) Total number of gaming machines and number of VLC gaming machines based on
contract with Oregon State Lottery.
(9) International Game Technology. In 1995, the system contract was awarded to
GTECH. Transition of the central system operation to GTECH has not yet been
completed.
(10) Video lottery operations are authorized at only two pari-mutuel facilities
to which the Company is one of four suppliers.
(11) Tattersall Sweep Consultation (the lottery) and TABCORP (the off-track
racing association) are the two approved operators in the state of
Victoria.
(12) VLC supplies video machines to Dover Downs (120) and Delaware Park (155).
IGT supplies video machines to Harrington Midway (60). There are also 2,245
mechanical spinning reel games at the three racetracks.
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
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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 similar for both industries. The knowledge and experience
acquired through its video lottery operations should enable VLC to further
enhance the superior play ability 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.
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Marketing and Distribution. The Company must obtain a license and machine
approval before it can sell machines in either the casino or video lottery
markets. The following chart shows the jurisdictions where VLC currently is
licensed and license applications that have been filed and for which approval is
pending:
CURRENT JURISDICTIONS IN WHICH THE COMPANY OR CERTAIN SUBSIDIARIES ARE LICENSED
TO CONDUCT BUSINESS
<TABLE>
<CAPTION>
LICENSING
APPLICATION
UNITED STATES INTERNATIONAL FILED
- ------------------------------------------------------------------------------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Powerhouse Casino (c)/ Charitable Native American Australia New Mexico
Riverboat (r) Market New South Wales Acoma
South Australia Pojoaque
- ----------------- ----------------- ----------------- ----------------- Western Australia Pueblo of Isleta
Delaware Colorado (c) Mississippi Arizona Tasmania Pueblo of Sandia
Louisiana Indiana (r) Ak-Chin Victoria San Juan Pueblo
Montana Iowa (r) Fort McDowell Northern Territory Quebec (Casino)
Oregon Louisiana (c) Gila River Canada
Rhode Island Louisiana (r) Tonto Apache Alberta
South Dakota Mississippi (r) White Mountain New Brunswick
West Virginia Nevada (c) Apache Newfoundland
New Jersey (c) Yavapai-Apache Nova Scotia
South Dakota (c) Connecticut Ontario
Louisiana Prince Edward Is.
Tunica-Biloxi Quebec
Michigan Saskatchewan
Bay Mills Iceland
Minnesota Norway
Mississippi Peru
Choctaw South Africa
New Mexico Mpumalanga
Santa Ana
North Carolina
Eastern band of
Cherokee
Oregon
Coquille
Grande Ronde
Siletz
Umatilla
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 the Native American markets of the mid-western United
States. In deciding whether to use a distributor in a new jurisdiction, the
Company will consider a variety of factors, including existing relationships
with operators and location owners, the ability of a distributor to service the
market after the sale, the distributor's financial condition, any regulatory
constraints and the long-term economics to the Company of direct sales as
opposed to sales to distributors.
The Company'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
37
<PAGE> 43
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 submission 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, Quebec, ALC's 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
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 gaming machines and spinning
reel slot machines as well as the on-line lottery.
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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 is being marketed to new as well as existing
customers.
Product Research and Development. Video gaming customers look for a variety
of features in video gaming products. The technology in current machines will
develop and improve over time, forcing manufacturers to invest in ongoing game
development. VLC's Winning Touch(R) gaming machine contains libraries with
numerous game variations and allows for swift reprogramming to provide the
newest games. In addition to offering expansive product lines, casinos require
customized services for specific requests, including video graphics, game
development and floor space design.
As video gaming becomes more widespread and players become accustomed to
the ever-improving graphics and interactive features of video games, the Company
believes that 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 occurring on the
central systems side as both video lottery jurisdictions and casinos demand more
reporting features, downloadable games and additional forms of jackpotting and
linked progressives.
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 significant share of the video lottery
machine market in Montana. During the year ended December 31, 1996, the route
operations generated approximately $16.5 million or 9% of the Company's
consolidated revenues.
The Company enters into agreements with owners of business establishments
to install video lottery and amusement machines at their businesses. The number
of machines per location is determined by available space, customer base,
competition, preference of the owner of the establishment, and, in the case of
video lottery gaming machines, licensing limitations. The agreements typically
provide for revenue sharing with the location owner based upon a percentage of
the net revenues generated by the Company's machines. In certain instances, the
Company or one of its subsidiaries may assist the location owner with obtaining
financing relating to the location, including providing a guaranty of such
financing. The agreements require the Company to install, maintain and service
machines installed at the location.
UWS
Contracts
Domestic. UWS provides pari-mutuel wagering services to most North
American customer facilities under long-term service contracts, typically with
5-7 year terms under which the Company provides the pari-mutuel wagering
computer system, as well as the operations, maintenance and supervisory
personnel necessary to operate the system, while the mutuel clerks who issue
tickets on the teller-operated terminals to the patrons of the facility are
employed by the facility. Under such service contracts, the Company at all times
retains ownership of the equipment and is entitled to liquidated damages in the
event a customer cancels without cause.
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Service contract revenues received by UWS 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.
UWS makes certain warranties regarding the operation and reliability of its
wagering systems. In the event of system failure, UWS is generally responsible
for certain liquidated damages, subject to a maximum daily and/or annual amount.
In some instances, UWS may be liable for tickets paid in error or for
counterfeit tickets. Liquidated damages paid or accrued by UWS with respect to
its pari-mutuel contracts during the year ended December 31, 1995 were
approximately 1.6% of its revenue for fiscal 1995 and such liquidated damages
during the year ended December 31, 1996 were less than 0.3% of its revenues for
fiscal 1996.
With the growth of simulcasting, many of UWS'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 UWS
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.
UWS 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 September 30, 1997.
In some limited instances, North American facilities purchase a pari-mutuel
wagering system from UWS. In such cases, the Company usually enters into
separate service and maintenance agreements for the system.
Until recent years, UWS 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, UWS has demonstrated its ability to perform at large customer
facilities. The capabilities of UWS'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. UWS
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. UWS has customers in international marketplaces,
including Jamaica, Spain, Mexico, Argentina, Ecuador and the Philippines.
Internationally, there has been growth in the utilization of on-line wagering
systems in established markets. As economic and political situations improve,
new market opportunities open up for U.S. suppliers in less developed countries
where there is an increasing demand for advanced technology.
Wagering systems for facilities outside of North America have generally
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, UWS 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 UWS
serviced facilities.
Products
UWS 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, UWS 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. Inspection and maintenance
services are performed at the Montana headquarters of the Company.
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The newest wagering system developed by UWS, 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 were produced in 1996 and are in service at customer locations.
UWS believes that its ability to attract new and retain existing wagering
system customers depends in part on the continuous incorporation of innovative
technological advances to improve its products lines. The Company maintains a
development program directed toward new products and the improvement and
refinement of its present products to expand their uses and applications.
SUNLAND PARK
The racetrack operation of UWS, Sunland Park, is located in Sunland Park,
New Mexico, adjacent to El Paso, Texas. 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 recently enacted
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 commission 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 has 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.
MANUFACTURING
The Company's 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
demand exceeds the capacity of its Bozeman facility as well as when
contractually required. The Company also has contracted with outside sources for
the manufacture of some of its components. The Company has experienced low
turnover among its work force, high quality of finished goods and low labor
costs.
COMPETITION
On-line Lottery. 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. Although a growing number of jurisdictions
permit lotteries, relatively few new or rebid contracts are awarded each year.
Although price is a significant competitive factor, other important competitive
factors are the ability to optimize lottery revenues through game design;
customer marketing support; the dependability, security, technological
sophistication and upgrade capability of the network; and the experience and
reputation of the vendor.
AWI's principal competitor in the on-line lottery business, GTECH, is
significantly larger, having supplied lottery systems to 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
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position. Other competitors include International Lottery and Totalizer Systems,
Inc., Scientific Games, Inc., Autotote Corporation, International des Jeux
(Lotto France), EssNet/Alcatel and several other companies.
In jurisdictions with on-line and video lottery gaming products, the
products may compete with each other for entertainment dollars spent on
wagering.
Video Gaming and Route Operations. The Company competes with domestic and
foreign manufacturers of video gaming equipment and providers of traditional
on-line lottery systems and casino-based gaming systems in the sale of its
gaming machines and central control system software. Many of the Company's
competitors have greater financial and other resources than the Company. The
Company faces competition from companies marketing complete video lottery gaming
systems and from companies marketing only video lottery gaming machines as well
as increasing competition in the casino gaming market. Among the Company's
competitors are International Game Technology, Inc., Bally Gaming, 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.
The Company's route operations compete directly with other machine route
businesses, including numerous small route operators and several route operators
similar in size to the Company's route operations, and with companies selling
video lottery gaming machines directly to location owners. The principal factors
of competition for route operations are the reputation of the route operator and
the quality and earnings potential of the machines offered by the route
operator, the service provided by the route operator and the terms of its
agreement with the location owner.
Wagering Systems and Racetrack Operations. Because of the highly regulated
nature of the pari-mutuel industry and critical functions of the products
supplied, vendors must meet thresholds of reliability, customer service and
reputation ahead of product design and price. Unexpected shutdown of a wagering
system could result in significant loss of revenues so customers will typically
only utilize wagering systems from suppliers with proven abilities at similar
size wagering facilities (both in terms of number of terminals and total
handle).
UWS'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 does not have direct competition for horse racing in the El
Paso area, although there is an operating greyhound racing facility in Juarez,
Mexico which also offers sports/race wagering on simulcast racing events and
sporting events. Ruidoso Downs, a horse racing facility in Ruidoso Downs, New
Mexico, competes in the same general market as Sunland Park, but currently the
racing dates at the two tracks do not conflict. Also, The Downs at Albuquerque,
New Mexico, historically has competed to some extent against Sunland Park,
commencing in January and continuing through the end of Sunland Park's season.
If the racing dates or schedules of either other track are expended or altered
so that a direct conflict between Sunland Park and the others occurs, it is
likely that there would be a significant effect on operations and revenues of
Sunland Park.
While Texas permits pari-mutuel wagering, there are no pari-mutuel
racetracks in direct competition with Sunland Park's geographic area, although
there has been some effect upon the number and quality of horses available to
run at Sunland Park. Sunland Park also competes against other forms of
entertainment, including sporting events. The States of New Mexico and Texas
currently authorize limited forms of gambling, such as a state lottery, bingo,
and Native American casinos, all of which compete for the leisure dollar and
which have had a significant negative effect on attendance and handle at Sunland
Park in recent years.
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INTELLECTUAL PROPERTY
The Company may seek and, in some cases, has sought, patents on some of the
technology used in its products. No assurance can be given that any patent
applications filed will be granted, that the patents will not be infringed or
that other parties will not develop similar technology that will not violate the
patents. The Company believes that its technical know-how, trade secrets and the
creative skills of its personnel are more important to its success than any
benefit which patent protection may afford. The Company typically requires
persons such as customers, employees, licensees and subcontractors who have
access to proprietary information concerning its products to sign non-disclosure
agreements, which prohibit the use of this information other than for the
specific purpose for which it is provided, and the Company relies on such
agreements, other security measures and trade-secret laws to protect such
proprietary information.
The Company has pending applications for registration of trademarks in
connection with its products in the United States, Australia and other foreign
countries. The Company intends to file additional applications to register
trademarks in the United States and other key jurisdictions as considered
necessary. The Company also relies on the laws of trade secrets and copyright to
protect its proprietary rights to its central control system software and
various other software programs.
EMPLOYEES
As of September 30, 1997, the Company employed approximately 1,250 people
on a full and part-time basis. Approximately 510, 170, and 380 were employed in
the on-line lottery, gaming machine and wagering systems and racetrack
operations segments, respectively. Another 190 people provide corporate
manufacturing, finance and administration and national marketing services to the
operating segments. Of the total 1,250 people, approximately 120 are part-time
employees in the wagering systems and racetrack operations segment.
The Company has no collective bargaining agreements with any of its
employees and believes that its overall relations with employees are good.
PROPERTIES
The Company's executive offices, principal manufacturing and distribution
facilities occupy approximately 82,000 square feet in a building owned by the
Company and located in Bozeman, Montana. The Company leases approximately 26,000
square feet serving as a warehouse/assembly facility in the Bozeman area 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 46,000
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, primarily for product sales and support as
well as assembly, repair and storage of video gaming machine products. Also in
Bozeman, Montana, the Company leases approximately 5,300 square feet out of
which it operates one of its route businesses. The Company also owns two
buildings, one in Billings and one in Livingston, Montana, out of which it
operates its other two route businesses. The Company leases sales and service
offices in Biloxi, Mississippi, Victoria and New South Wales, Australia and
Dover, Delaware.
The Company also leases approximately 2,600 square feet of office space
near Baltimore, Maryland for the administrative offices of UWS. UWS leases
approximately 12,100 square feet in San Diego, California, which primarily
houses the subsidiary's research and development activities. UWS leases
approximately 2,900 square feet of space in Winnipeg, Canada, for administrative
and repair services. The Company's racetrack facility in Sunland Park, New
Mexico, rests on approximately 153 acres and contains in excess of 330,000
square feet inclusive of the grandstand, stables, barns, offices, etc. The
racetrack itself is a one-mile oval track.
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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 plaintiffs have filed a petition
for a writ of certiorari with the United States Supreme Court, and the petition
was placed on the docket on January 6, 1998.
On December 9, 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.
Although the Company is a party in various other claims and legal actions
arising in the ordinary course of business, in the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not likely have a material adverse effect on the financial position or
results of operations of the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive officers
and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard R. Burt(2).............. 50 Chairman and Director
Richard M. Haddrill............. 44 President and Chief Executive Officer, Treasurer and Director
James J. Davey(1)(2)............ 56 Vice Chairman and Director
Patricia W. Becker(1)(2)........ 45 Director
John R. Hardesty................ 57 Director
William Spier(1)(2)(3).......... 62 Director
Dennis V. Gallagher............. 45 General Counsel and Secretary
Michael L. Eide................. 47 President, Video Lottery Consultants, Inc.
Susan J. Carstensen............. 35 Chief Financial Officer
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Spier has agreed to resign immediately as director of the Company and
not acquire additional shares of the Common Stock for seven years if the
beneficial ownership of the Selling Stockholders is reduced below 5% of the
total Common Stock outstanding as a result of dispositions. If such
beneficial ownership is reduced below 2% of the total Common Stock
outstanding as a result of dispositions, then Mr. Spier and the Company will
grant each other general releases. See "Selling Stockholders."
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 Boards 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.
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 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 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.
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
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served as president of the Company's on-line lottery services subsidiary, AWI.
From 1986 to October 1992, Mr. Davey was the director for the Oregon State
Lottery. From 1985 to 1986, Mr. Davey was deputy director and assistant director
of administration for the Oregon State Lottery. From 1980 through 1984, Mr.
Davey served as administrator for the Oregon Department of Revenue.
Patricia W. Becker was appointed to the Board of Directors effective
January 18, 1995 to fill a newly-created position thereon. Ms. Becker is a
consultant to the Company and serves as chair of its Compliance Committee. Ms.
Becker served as the chief of staff to Bob Miller, Governor of Nevada, from
October 1993 to January 1995. Prior to that, she was senior vice president,
general counsel and secretary of Harrah's Casino Hotels from June 1989 to July
1993 and vice president, general counsel and secretary from 1984 to 1989. Ms.
Becker was Deputy and Chief Deputy Attorney General assigned to the Nevada
Gaming Division from 1979 until she was appointed to the State Gaming Control
Board, where she served until September 1984. Ms. Becker is a vice chair for the
Gaming Law Section of the American Bar Association, a past president of the
Nevada Trial Lawyers Association and general counsel and a trustee of the
International Association of Gaming Attorneys. Ms. Becker currently serves on
the Board of Directors of Fitzgeralds Gaming Company, a Nevada based company
which owns casinos.
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. He 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.
William Spier became a director of the Company in July 1991. Mr. Spier was
chairman of DeSoto, Inc., a detergent and household cleaning products
manufacturer, from May 1991 to September 27, 1996 and chief executive officer of
DeSoto, Inc., from May 1991 to January 1994 and from September 1995 to September
27, 1996. He has been president and chairman of Sutton Holding Corp., a New York
based investment company, since 1989. Since 1982 Mr. Spier has been a private
investor. Prior to that time, he was vice chairman of Phibro-Salomon Inc., an
investment banking firm. Mr. Spier is also acting chief executive officer of
Integrated Technology USA, Inc., a developer and marketer of computer
peripherals and telecommunication devices. Mr. Spier is also a director of
Keystone Consolidated Industries, Inc., a manufacturer of steel and wire rod
products, Geotek Communications, Inc., a wireless telecommunications company and
Integrated Technology USA, Inc.
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 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 was manager, cost and financial
accounting for Martin Marietta Astronautics Group in Denver, Colorado from May
1991 through February 1995. From August 1985 through May 1991 Ms. Carstensen was
with the accounting firm of Ernst & Young in Denver, Colorado.
46
<PAGE> 52
SELLING STOCKHOLDERS
The following table sets forth the name and the number of shares of Common
Stock beneficially owned and offered hereby by each of the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY
NAME OF SELLING STOCKHOLDERS OWNED AND OFFERED HEREBY
- ---------------------------- -----------------------------------
<S> <C>
William Spier(1)............................................ 222,252
Video Investment Partners, L.P............................ 207,629
Gabriel Capital, L.P...................................... 222,459
Asgard Ltd................................................ 148,307
LBN Investment Associates, L.P............................ 148,307
Parkway M&A Capital Corporation........................... 74,153
Homer Noble............................................... 74,153
Alpine Associates, Ltd.................................... 370,766
------------
Total............................................. 1,468,026
============
</TABLE>
- ---------------
(1) At the time the Selling Stockholders acquired their shares of Common Stock
in 1992, they granted Mr. Spier sole investment and voting power with
respect to these shares. In February, 1993, on behalf of all of the Selling
Stockholders, Mr. Spier entered into an agreement with the Company (the
"Shareholders Agreement") providing for, among other things, registration
rights with respect to the Common Stock owned by the Selling Stockholders
and the right to board representation. Mr. Spier has exercised the right
under the Shareholders Agreement to have the Selling Stockholders' Common
Stock registered and the Selling Stockholders' shares are being offered for
sale pursuant to this Prospectus. During 1996 and 1997, Mr. Spier and
William P. Lyons, who was appointed to the Board of Directors pursuant to
the Shareholders Agreement as a designee of the Selling Stockholders,
disagreed with the Company on a number of issues involving corporate
governance, corporate management, board and board committee composition,
strategic planning and objectives, executive compensation, and transactions
between the Company and certain directors. In late 1996 and during the first
half of 1997, Mr. Spier made a proposal to acquire the Company, which was
not accepted by the Company's Board of Directors and was subsequently
withdrawn by Mr. Spier. In June 1997, the Board of Directors did not
renominate Mr. Lyons for another term as a director and Mr. Lyons
subsequently resigned as of July 30, 1997. Mr. Spier has advised the Company
that he believes that the Company's addition of Mr. Hardesty to the Board of
Directors in 1996 and its failure to renominate Mr. Lyons constitute
breaches of the Shareholders Agreement. The Company believes it has acted
properly. Mr. Spier (and, prior to his resignation, Mr. Lyons) dissented
from each of the proposals supported by the other members of the Board of
Directors in the Company's Proxy Statement for its Annual Meeting of
Stockholders held on November 14, 1997 and objected to the dissemination of
the Proxy Statement. In connection with the offering of Shares by the
Selling Stockholders, Mr. Spier and the Company entered into an agreement
providing that, if the beneficial ownership of the Selling Stockholders is
reduced below 5% of the outstanding Common Stock as a result of
dispositions, then (i) Mr. Spier will resign immediately as a director of
the Company, and (ii) Mr. Spier will not acquire additional shares of Common
Stock for seven years. The agreement further provides that if the beneficial
ownership of the Selling Stockholders is reduced below 2% of the outstanding
Common Stock as a result of dispositions, then the Selling Stockholders and
the Company will release each other with respect to any claims they may have
against each other. In addition, the agreement requires the Selling
Stockholders in certain circumstances to reimburse the Company for certain
of its expenses incurred in connection with this Offering. In light of the
substantial public disclosure regarding the above-described disagreements
between Messrs. Spier and Lyons, on the one hand, and the Company, on the
other, Mr. Spier believes that this Prospectus and the Registration
Statement of which it is a part, including all documents incorporated
therein by reference, accurately disclose as of the date hereof all material
information relevant to a decision with respect to an investment in the
Shares.
47
<PAGE> 53
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Selling Stockholders, the Company,
Gerard Klauer Mattison & Co., Inc. ("Gerard Klauer") and Ladenburg Thalmann &
Co. Inc. ("Ladenburg") (Gerard Klauer and Ladenburg being referred to
collectively as the "Underwriters"), the Selling Stockholders have agreed to
sell to each of the Underwriters, and each of the Underwriters severally has
agreed to purchase from the Selling Stockholders, the shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc...........................
Ladenburg Thalmann & Co. Inc................................
---------
Total............................................. 1,468,026
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase from the Selling
Stockholders all of the shares of Common Stock offered hereby (other than those
subject to the over-allotment option described below), if any such shares are
purchased. In the event of a default by an Underwriter, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the nondefaulting Underwriter may be increased or the Underwriting Agreement may
be terminated.
The Company has been advised by the Underwriters that they propose to offer
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of per share.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 45th day subsequent to the date of this Prospectus, to
purchase up to 220,204 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise such option only to cover
over-allotments, if any, incurred in the sale of the shares of Common Stock. To
the extent that the Underwriters exercise such option, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the percentage it is required to
purchase of the total number of shares of Common Stock in the above table.
The Company and its directors and executive officers have agreed that they
will not offer, sell or contract to sell or otherwise dispose of, directly or
indirectly, or announce the offering of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 120 days after the date of this Prospectus, except for (i) the shares
of Common Stock offered hereby, (ii) the issuance of shares by the Company
pursuant to stock options, (iii) the issuance of shares or options by the
Company pursuant to employee benefit, stock option or ownership plans of the
Company outstanding or in effect on the date of this Prospectus, and (iv) the
issuance of options pursuant to an employee stock option plan that is adopted
during such 120-day period on substantially the same terms as any such plan in
effect on the date of this Prospectus (so long as such options may not be
exercised prior to the end of such 120-day period) without the prior written
consent of the Underwriters.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act or contribute to payments the
Underwriters may be required to make in respect thereof. In addition, the
Selling Stockholders have agreed to reimburse the Underwriters' expenses up to
$150,000.
48
<PAGE> 54
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Common Stock in
the open market to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase the Common Stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market maker
generally may not exceed 30% of its average daily trading volume in the Common
Stock during a specified two month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
The Selling Stockholders have engaged Ladenburg to provide to the Selling
Stockholders investment advisory services in connection with a possible
acquisition of the Company by the Selling Stockholders. In connection therewith,
the Selling Stockholders made a proposal to acquire the Company which was
subsequently withdrawn. Ladenburg has received customary fees in connection with
the services rendered to the Selling Stockholders.
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Stock offered
hereby will be passed upon for the Company by Rogers & Hardin LLP, Atlanta,
Georgia. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Kaye, Scholer, Fierman, Hays & Handler, LLP, New
York, New York.
EXPERTS
The consolidated financial statements of Powerhouse Technologies, Inc. and
subsidiaries as of December 31, 1995 and 1996 and for the years ended December
31, 1994, 1995 and 1996 have been included in this Prospectus in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
49
<PAGE> 55
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements (audited):
Independent Auditors' Report.............................. F-2
Consolidated Financial Statements:
Statements of Operations for the years ended December
31, 1996, 1995 and 1994............................... F-3
Balance Sheets as of December 31, 1996 and 1995........ F-4
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994...................... F-5
Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994............................... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Financial Statements (unaudited):
Statements of Earnings for the nine months ended September
30, 1997 and 1996, three months ended September 30,
1997 and 1996.......................................... F-24
Balance Sheets for the years ended September 30, 1997 and
December 31, 1996...................................... F-25
Statement of Stockholders' Equity for the nine months
ended September 30, 1997............................... F-26
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996............................ F-27
Notes to Financial Statements............................. F-28
</TABLE>
All schedules are omitted because the information prescribed thereon is not
applicable or required or is furnished in the consolidated financial statements
or notes thereto.
F-1
<PAGE> 56
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, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Powerhouse
Technologies, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
Billings, Montana
February 28, 1997
F-2
<PAGE> 57
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
On-line lottery.................................... $ 88,842,968 $ 91,653,710 $101,559,326
Gaming machine and route operations................ 60,186,249 61,397,937 68,571,177
Wagering systems and racetrack operations.......... 27,651,989 28,110,605 18,651,802
------------ ------------ ------------
Total revenues............................. 176,681,206 181,162,252 188,782,305
------------ ------------ ------------
COSTS AND EXPENSES:
On-line lottery.................................... 59,332,807 59,438,258 62,396,996
Gaming machine and route operations................ 32,910,623 35,991,531 39,814,825
Wagering systems and racetrack operations.......... 20,103,761 22,286,127 13,991,770
Selling, general and administrative................ 28,697,610 31,139,361 34,000,545
Research and development........................... 7,969,025 8,887,785 8,513,137
Other charges...................................... 34,135,000 2,762,667 23,994,000
Depreciation and amortization...................... 23,822,437 22,587,049 20,694,018
------------ ------------ ------------
Total costs and expenses................... 206,971,263 183,092,778 203,405,291
------------ ------------ ------------
Loss from operations................................. (30,290,057) (1,930,526) (14,622,986)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income.......................... 1,059,794 1,243,471 1,445,688
Interest expense................................... (3,753,555) (3,077,183) (1,687,441)
------------ ------------ ------------
(2,693,761) (1,833,712) (241,753)
------------ ------------ ------------
Loss before income taxes and extraordinary items..... (32,983,818) (3,764,238) (14,864,739)
Income tax benefit (expense)......................... 8,752,842 846,374 (1,303,034)
------------ ------------ ------------
Net loss from operations............................. (24,230,976) (2,917,864) (16,167,773)
Reversal of (provision for) loss on discontinuance of
wagering systems operations, net................... 5,482,279 (5,482,279) --
------------ ------------ ------------
Net loss before extraordinary items.................. (18,748,697) (8,400,143) (16,167,773)
Extraordinary gain, net.............................. 4,014,050 -- --
------------ ------------ ------------
Net loss............................................. $(14,734,647) $ (8,400,143) $(16,167,773)
============ ============ ============
Net earnings (loss) per share:
From continuing operations......................... $(2.27) $(.28) $(1.54)
From discontinued operations....................... .51 (.51) --
From extraordinary items........................... .38 -- --
------------ ------------ ------------
$(1.38) $(.79) $(1.54)
============ ============ ============
Weighted average shares outstanding.................. 10,698,926 10,608,472 10,506,687
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 58
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,321,884 $ 1,992,667
Restricted short-term deposits............................ 1,364,231 3,768,385
Accounts receivable, net.................................. 19,352,571 22,254,361
Current installments of notes receivable, net............. 2,818,371 2,814,814
Inventories............................................... 18,296,801 26,399,936
Prepaid expenses.......................................... 1,027,256 1,261,963
Income tax refund receivable.............................. 3,551,415 2,431,068
Deferred income taxes..................................... 15,499,722 7,732,606
------------ ------------
Total current assets.............................. 66,232,251 68,655,800
------------ ------------
Property, plant and equipment............................... 153,123,865 132,325,663
Less accumulated depreciation............................. (78,416,733) (60,493,819)
------------ ------------
Net property, plant and equipment................. 74,707,132 71,831,844
------------ ------------
Restricted cash deposits.................................... 2,521,075 817,024
Notes receivable, excluding current installments............ 2,216,074 3,101,503
Goodwill, net............................................... 10,133,364 10,952,241
Intangible and other assets, net............................ 12,232,860 10,492,573
------------ ------------
$168,042,756 $165,850,985
============ ============
LIABILITIES
Current liabilities:
Notes payable............................................. $ 7,650,000 $ 8,250,000
Current installments of long-term debt.................... 10,604,402 9,588,708
Accounts payable.......................................... 6,645,855 15,490,638
Accrued expenses.......................................... 13,247,658 15,339,707
------------ ------------
Total current liabilities......................... 38,147,915 48,669,053
------------ ------------
Long-term debt, excluding current installments.............. 9,312,371 12,884,564
Due to EDS.................................................. 38,025,010 --
Other liabilities........................................... -- 10,000,000
Deferred income taxes....................................... 10,326,000 7,849,206
------------ ------------
Total liabilities................................. 95,811,296 79,402,823
------------ ------------
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued.................................. -- --
Series A Junior Preferred stock, $.01 par value, convertible
non-cumulative. Authorized 1,912,728 shares............... 19,127 19,127
Common stock, $.01 par value. Authorized 25,000,000
shares.................................................... 108,292 106,821
Paid-in capital............................................. 97,764,970 97,284,358
Deferred restricted stock compensation...................... (417,129) (452,991)
Accumulated deficit......................................... (25,243,800) (10,509,153)
------------ ------------
Total stockholders' equity........................ 72,231,460 86,448,162
------------ ------------
$168,042,756 $165,850,985
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 59
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
PREFERRED COMMON RESTRICTED TOTAL
STOCK STOCK PAID-IN STOCK COMPEN- ACCUMULATED STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL SATION DEFICIT EQUITY
--------- --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993............. $ -- $123,188 $ 94,032,726 $ -- $ 14,058,763 $108,214,677
Net loss...................... -- -- -- -- (16,167,773) (16,167,773)
Restricted stock issued....... -- 1,700 1,694,550 (1,696,250) -- --
Amortization of deferred
restricted stock
compensation................ -- -- -- 169,714 -- 169,714
Stock redemption.............. -- (24,582) (65,117,241) -- -- (65,141,823)
Stock issued, net of issue
costs....................... 19,127 5,455 66,427,887 -- -- 66,452,469
Stock issued under stock
purchase plan............... -- 337 272,299 -- -- 272,636
Stock options exercised....... -- 237 326,420 -- -- 326,657
------- -------- ------------ ----------- ------------ ------------
December 31, 1994............. 19,127 106,335 97,636,641 (1,526,536) (2,109,010) 94,126,557
Net loss...................... -- -- -- -- (8,400,143) (8,400,143)
Amortization of deferred
restricted stock
compensation................ -- -- -- 323,545 -- 323,545
Rescission of deferred
restricted stock
compensation................ -- (500) (749,500) 750,000 -- --
Stock issued under stock
purchase plan............... -- 986 397,217 -- -- 398,203
------- -------- ------------ ----------- ------------ ------------
December 31, 1995............. 19,127 106,821 97,284,358 (452,991) (10,509,153) 86,448,162
Net loss...................... -- -- -- -- (14,734,647) (14,734,647)
Deferred restricted stock
compensation................ -- 300 132,900 35,862 -- 169,062
Stock issued under stock
purchase plan............... -- 1,171 347,712 -- -- 348,883
------- -------- ------------ ----------- ------------ ------------
December 31, 1996............. $19,127 $108,292 $ 97,764,970 $ (417,129) $(25,243,800) $ 72,231,460
======= ======== ============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNTS OUTSTANDING SERIES A COMMON SERIES A COMMON SERIES A COMMON
BALANCE PREFERRED STOCK STOCK PREFERRED STOCK STOCK PREFERRED STOCK STOCK
- --------------------------- --------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year.......... -- 12,318,805 1,912,728 10,633,544 1,912,728 10,682,109
Sale of stock.............. 1,912,728 545,454 -- -- -- --
Stock issued under stock
purchase plan............ -- 33,742 -- 98,565 -- 117,075
Stock redemption........... -- (2,458,182) -- -- -- --
Restricted stock issued
(rescinded).............. -- 170,000 -- (50,000) -- 30,000
Stock options exercised.... -- 23,725 -- -- -- --
---------- ---------- --------- ---------- --------- ----------
End of year................ 1,912,728 10,633,544 1,912,728 10,682,109 1,912,728 10,829,184
========== ========== ========= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 60
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(14,734,647) $ (8,400,143) $(16,167,773)
Adjustments to reconcile net loss to net cash
provided by operating activities:
(Reversal of) provision for loss on sale of
wagering systems operations............... (5,482,279) 5,482,279 --
Depreciation and amortization............... 23,822,437 22,587,049 20,694,018
Other charges............................... 34,135,000 2,762,667 23,994,000
Extraordinary gain, net..................... (4,014,050) -- --
Other, net.................................. 78,447 (50,856) 4,418
Changes in operating assets and liabilities:
Sales of receivables........................ 1,466,952 2,339,710 4,311,874
Receivables, net............................ 1,942,256 (7,502,586) (6,312,382)
Inventories................................. (3,488,868) 6,923,294 (26,066,800)
Prepaid expenses............................ 234,707 103,334 (27,995)
Accounts payable............................ 2,006,279 (12,616,174) 18,538,836
Accrued expenses............................ (10,853,878) (7,044,732) (7,152,483)
Deferred and refundable income taxes........ (6,410,669) (2,640,409) 351,387
------------ ------------ ------------
Net cash provided by operating activities........ 18,701,687 1,943,433 12,167,100
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (25,522,476) (19,046,937) (13,332,480)
Expenditures on intangible and other noncurrent
assets ..................................... (10,037,063) (3,540,804) (7,058,678)
Acquisition of business operations, net of cash
acquired.................................... -- -- (26,969,161)
Proceeds from sales of equipment............... 109,440 386,063 357,287
Change in restricted cash deposits............. 700,103 181,728 7,298,152
Maturities (purchases) of available-for-sale
securities, net of purchases................ -- -- 24,607,595
------------ ------------ ------------
Net cash used in investing activities............ (34,749,996) (22,019,950) (15,097,285)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable to
banks....................................... (600,000) 8,250,000 --
Proceeds from issuance of long-term debt....... 4,364,424 24,286,477 213,900
Repayments of long-term debt................... (13,078,791) (14,735,245) (4,055,255)
Amounts payable to EDS......................... 27,343,010 -- --
Common stock sold under employee benefit
plans....................................... 348,883 398,203 599,293
Sale of stock, net............................. -- -- 66,452,469
Redemption of common stock..................... -- -- (65,141,823)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 18,377,526 18,199,435 (1,931,416)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 2,329,217 (1,877,082) (4,861,601)
------------ ------------ ------------
Cash and cash equivalents, beginning of year..... 1,992,667 3,869,749 8,731,350
------------ ------------ ------------
Cash and cash equivalents, end of year........... $ 4,321,884 $ 1,992,667 $ 3,869,749
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 61
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").
All significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition. Revenue from the sale of 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 deposits. Cash deposits expected to be refunded or released
within one year are considered restricted short-term deposits. The deposits are
primarily for bonds that are required by customers for proposals and long-term
contracts.
Inventories. 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 installed 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, allocated indirect manufacturing overhead as well as initial
tooling and other setup charges.
Accounts and Notes Receivable. Accounts and notes receivable are recorded
at cost, less the related allowance for impaired notes receivable. (See Note 5.)
Property, Plant and Equipment. Property, plant and equipment is stated at
cost. Equipment under capital leases is stated at the lower of the present value
of minimum lease payments at the beginning of the lease term or the fair market
value of the asset at the inception of the lease.
F-7
<PAGE> 62
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
ITEM ESTIMATED LIFE
---- --------------
<S> <C>
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
</TABLE>
Equipment under capital leases is depreciated on a straight-line basis over
the shorter of the lease term or estimated useful life of the asset.
The Company in 1996 reclassified approximately $2,400,000 of on-line
lottery equipment from property, plant and equipment to inventories held for
sale. (See Note 15.)
Goodwill, Intangible and Other Assets. Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over the expected periods to be benefited, currently
estimated at 15 years from acquisition date May 1994 (see Note 2). Intangible
and other assets are stated at cost net of accumulated amortization. Intangible
and other assets are amortized over their respective economic useful lives
ranging up to 10 years. Accumulated amortization of Goodwill, Intangible and
other assets was approximately $12,100,000 and $7,594,000 at December 31, 1996
and 1995, respectively. In 1994, the Company recorded impairment losses on
goodwill based on estimates of discounted future operating cash flows related to
the asset. In June 1995, the Company adopted Statement of Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" (the "Statement"). The
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum of
these expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the asset is considered "impaired"
and an impairment loss is recognized. Measurement of the impairment loss amount
is based on the fair value of the asset. Fair value is measured based on the
present value of the expected future net cash flows calculated using a discount
rate commensurate with the risks involved.
Foreign Currency Translations and Transactions. Gains and losses from
foreign currency transactions and remeasurements are included in results of
operations.
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. The current and noncurrent portions of these deferred tax assets and
liabilities are classified in the balance sheet based on the respective
classification of the assets and liabilities which give rise to such deferred
income taxes.
Earnings per Common Share. Earnings per common share is computed by
dividing net earnings by the weighted average number of common shares
outstanding and the common stock equivalents of convertible preferred stock and
stock options outstanding using the treasury stock method. Common stock
equivalents are excluded from the loss per share calculation when the effect is
antidilutive.
Fair Value of Financial Instruments. The carrying value of financial
instruments, consisting primarily of cash, accounts receivable and accounts
payable, approximates fair value due to the liquid nature of the instruments.
(See Notes 5 and 10 for fair value estimates of notes receivable and long-term
debt.)
F-8
<PAGE> 63
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock based compensation plans. The Company applies Accounting Principles
Board Opinion 25 and related interpretations in accounting for its stock based
compensation plan. Accordingly, no compensation cost has been recognized for
options granted under the plans. (See Note 12.)
Reclassifications. Certain reclassifications have been made to the 1995
and 1994 amounts to conform to the 1996 presentation. (See Note 2.)
Accounting Pronouncements Not Yet Adopted. The Company has capitalized
start-up costs in conjunction with their long-term contracts in the on-line
lottery and wagering systems segments in accordance with Statement of Position
(SOP) 81-1. The AICPA Accounting Standards Executive Committee (AcSEC) approved
for issuance the SOP, Reporting on the Costs of Start-Up Activities, which will
require that costs incurred during a start-up activity (including organization
costs) be expensed as incurred. Before issuance, the SOP must be reviewed and
cleared by the FASB. If cleared by the FASB, 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. (See Note 8.) Depending on the level of
the Company's start-up activities, this change in accounting method may be
material.
Management Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(2) DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED/EXTRAORDINARY ITEM
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"). UWS is involved in
the design, manufacture, operation, sale and lease of computerized wagering
systems, primarily pari-mutuel wagering systems, and the ownership and operation
of a racetrack facility. The original purchase price of $29,600,000 included
$19,600,000 in cash and the issuance of $10,000,000 notes, payable over a
three-year period.
During the fourth quarter 1994 and the first quarter 1995, certain negative
developments affecting UWS and the pari-mutuel wagering industry became
increasingly apparent. These developments included a significant decline in the
gross revenues at pari-mutuel wagering and other facilities, sharp reductions in
gross margins and the failure of various state legislative initiatives
authorizing the introduction of gaming devices at tracks to occur as
anticipated. The Company's investment in Goodwill, net of amortization,
attributable to the wagering systems segment of UWS of $17,300,000 was written
off in the fourth quarter of 1994, leaving approximately $11,700,000 of Goodwill
associated with the racetrack operations segment of UWS.
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to the sellers in the aggregate amount
of $10,000,000 made in conjunction with the acquisition of UWS in May 1994. On
March 25, 1996, the Company reached an agreement with the sellers settling all
outstanding claims and disputes, including dismissal of all outstanding
litigation, resulting in a $4,014,050 gain on debt extinguishment. (See Note
10.)
The Company, in the fourth quarter 1995, made a decision to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico. The Company entered into
a non-binding letter of intent in the fourth quarter 1995 for the sale of this
segment; however, this transaction was abandoned because final terms could not
be negotiated. The Company continued to review other potential opportunities for
the sale of this operation through the second quarter 1996; however, due to
operational improvements and industry and market conditions, the Company decided
to no longer actively pursue the disposal of the wagering systems segment. In
accordance with the requirements outlined in Financial Accounting Standards
Board Emerging Issues Task Force issue No. 90-16 "Accounting for Discontinued
Operations Subsequently Retained," the results of
F-9
<PAGE> 64
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations of the wagering systems segment have been reclassified to continuing
operations in all periods presented. The estimated provision for loss on
disposal of $5,482,279, recorded in 1995, was reversed in the third quarter
1996. Concurrent with the reversal, the Company recorded an impairment charge on
certain long-lived assets of the wagering systems segment of approximately
$2,800,000. Additionally, in 1996 the Company implemented a restructuring plan
of the manufacturing and repair and maintenance operations of the wagering
systems segment inclusive of closing a facility in Shepherd, Montana. The
manufacturing of wagering system terminals will be performed in the Company's
Bozeman, Montana facility. Costs and expenses recorded in the third quarter 1996
for the restructuring plan were approximately $300,000.
(3) BUSINESS SEGMENTS
The Company operates principally in three business segments: the sale,
design, manufacture, installation and operation of on-line lotteries; the
design, manufacture, marketing and leasing of gaming machines and central
control systems and related services; and the design, manufacture, sale and
operation of computerized pari-mutuel wagering systems for dog and horse racing
tracks. These segments operate throughout the United States and on a limited
international basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
On-line lottery...................................... $ 88,842,968 $ 91,653,710 $101,559,326
Gaming machine and route operations.................. 64,530,676 62,889,528 83,249,299
Wagering systems and racetrack operations............ 27,651,989 28,110,605 18,651,802
Less intercompany revenues......................... (4,344,427) (1,491,591) (14,678,122)
------------ ------------ ------------
Total revenues............................. $176,681,206 $181,162,252 $188,782,305
============ ============ ============
Operating profit (loss):
On-line lottery...................................... $(29,449,203) $ (3,464,191) $ (1,166,855)
Gaming machine and route operations.................. 9,432,769 13,171,240 18,216,598
Wagering systems and racetrack operations............ (3,994,922) (3,831,614) (21,384,805)
General corporate expenses........................... (6,825,851) (8,010,609) (9,284,023)
Interco profit..................................... 547,150 204,648 (1,003,901)
------------ ------------ ------------
Total operating profit (loss).............. $(30,290,057) $ (1,930,526) $(14,622,986)
============ ============ ============
Operating profit (loss) before "other" charges:
On-line lottery...................................... $ 1,622,909 $ 967,167 $ 4,777,145
Gaming machine and route operations.................. 9,432,769 11,894,459 18,216,598
Wagering systems and racetrack operations............ (932,052) (3,568,947) (3,334,805)
General corporate expenses........................... (6,825,851) (8,665,186) (9,284,023)
Interco profit..................................... 547,150 204,648 (1,003,901)
------------ ------------ ------------
Total operating profit before "other"
charges.................................. $ 3,844,925 $ 832,141 $ 9,371,014
============ ============ ============
</TABLE>
F-10
<PAGE> 65
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Capital expenditures:
On-line lottery...................................... $ 16,270,712 $ 8,079,300 $ 7,080,663
Gaming machine and route operations.................. 5,809,103 5,353,786 2,403,181
Wagering systems and racetrack operations............ 3,455,358 4,762,307 3,846,948
Corporate............................................ 402,877 1,352,647 1,284,709
Less intercompany step-up in basis................. (415,574) (501,103) (1,283,021)
------------ ------------ ------------
Total capital expenditures................. $ 25,522,476 $ 19,046,937 $ 13,332,480
============ ============ ============
Depreciation and amortization:
On-line lottery...................................... $ 14,247,555 $ 14,242,014 $ 13,237,470
Gaming machine and route operations.................. 4,908,125 3,772,100 3,424,638
Wagering systems and racetrack operations............ 5,085,807 4,657,756 3,836,063
Corporate............................................ 501,481 620,931 486,193
Less depreciation on intercompany step-up basis.... (920,531) (705,752) (290,346)
------------ ------------ ------------
Total depreciation and amortization........ $ 23,822,437 $ 22,587,049 $ 20,694,018
============ ============ ============
Identifiable assets:
On-line lottery...................................... $ 62,349,531 $ 77,547,719 $ 68,292,863
Gaming machine and route operations.................. 45,656,205 34,904,859 47,149,696
Wagering systems and racetrack operations............ 42,692,115 46,106,131 49,261,426
Corporate............................................ 19,066,692 9,546,562 11,770,845
Less intercompany step-up in basis................. (1,721,787) (2,254,286) (2,443,218)
------------ ------------ ------------
Total identifiable assets....................... $168,042,756 $165,850,985 $174,031,612
============ ============ ============
</TABLE>
Intercompany revenues and expenses from transactions between subsidiaries
are eliminated in consolidation. Operating profit is defined as revenues less
cost of sales, direct and allocable selling, general and administrative
expenses, research and development expenses, and depreciation and amortization
expense attributable to a segment.
Included in the on-line lottery segment is revenue from equipment sales of
approximately $4,408,000, $5,314,000 and $9,940,000 and costs and expenses
associated with equipment sales revenue of approximately $3,062,000, $4,267,000
and $8,235,000 in the years ended December 31, 1996, 1995 and 1994,
respectively.
The gaming machine segment includes operating lease revenue of
approximately $10,726,000, $6,783,000 and $6,047,000 and revenues from royalties
of approximately $627,000, $3,600,000 and $7,200,000 in the years ended December
31, 1996, 1995 and 1994, respectively.
Included in the wagering systems segment is revenue from equipment sales of
approximately $2,140,000, $2,124,000 and $2,330,000 and costs and expenses
associated with equipment sales revenue of approximately $1,295,000, $1,133,000
and $1,143,000 in the years ended December 31, 1996, 1995 and eight months ended
December 31, 1994, respectively.
Revenue related to racetrack operations was approximately $7,153,000,
$7,968,000 and $4,821,000 and operating losses related to racetrack operations
were approximately $(1,569,000), $(1,327,000), and $(874,000) in the years ended
December 31, 1996, 1995 and the eight months ended December 31, 1994,
respectively.
Total identifiable assets of the racetrack operations were approximately
$22,710,000, $23,889,000 and $22,255,000 at December 31, 1996, 1995 and 1994,
respectively.
F-11
<PAGE> 66
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) REVENUE CONCENTRATION
The Company had revenues from customers or distributors within a specific
jurisdiction which accounted for more than 10% of the Company's gaming machine
and route operations revenues approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Montana........................ $19,748,000 32.8 $19,523,000 31.2 $17,927,000 26.1
Quebec......................... 2,169,000 3.6 12,291,000 19.6 10,532,000 15.4
Louisiana...................... 1,389,000 2.3 8,999,000 14.4 12,044,000 17.6
Oregon......................... 7,090,000 11.7 6,054,000 9.7 4,327,000 6.3
</TABLE>
Montana revenue includes total revenues from route operations of
approximately $16,548,000, $15,269,000 and $15,422,000 in the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company derives on-line lottery revenue from contracts ranging from one
to five years with varying options for extensions and renewals and from on-line
lottery system software and equipment sales from customers in ten individual
states and three international jurisdictions. For the years ended December 31,
1996, 1995 and 1994, the following customers accounted for more than 10% of the
Company's on-line lottery revenue:
<TABLE>
<CAPTION>
1996 1995 1994
CONTRACT ------------------ ------------------ ------------------
EXPIRATION AMOUNT % AMOUNT % AMOUNT %
---------- ----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Florida............... 6/96 $30,203,000 34.0 $35,247,000 38.5 $37,692,000 37.1
Pennsylvania.......... 12/98 23,164,000 26.1 22,101,000 24.1 22,229,000 21.9
</TABLE>
The Company's contract with the Washington State Lottery expired in June
1996. The expired contract accounted for approximately $5,739,000 (6.5%) of the
lottery services revenue in 1996, $10,382,000 (11.3%) in 1995 and $10,930,000
(10.8%) in 1994. The expiration date of the current contract with the Florida
Lottery was extended from June 30, 1996, as a result of a delay of the award of
a new contract. On October 31, 1996, the Company was notified by the Florida
Lottery that the Company has been selected as the most highly qualified bidder
for the award of a new five-year on-line lottery contract. A competitor, GTECH
Corporation, has protested the Florida Lottery's selection of the Company.
Pending resolution of the protest, the Company will commence contract
negotiations. Under the terms of the request for proposal, sizable capital
expenditures in excess of current credit facilities would be required to fulfill
its terms. The availability of and terms of new financing are subject to
numerous uncertainties and cannot be reasonably predicted.
Export Sales. The Company had total export sales from the United States of
approximately $28,600,000, $30,200,000 and $38,500,000 during the years ended
December 31, 1996, 1995 and 1994, respectively.
F-12
<PAGE> 67
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES AND ACCOUNTS RECEIVABLE
A summary of receivables follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Trade................................................. $ 20,438,177 $ 23,423,223
Notes receivable...................................... 5,260,118 7,783,514
Accrued interest...................................... 5,415 113,621
------------ ------------
25,703,710 31,320,358
Less allowance for doubtful accounts.................. (1,316,694) (3,149,680)
Less current portion.................................. (22,170,942) (25,069,175)
------------ ------------
$ 2,216,074 $ 3,101,503
============ ============
</TABLE>
The Company finances sales of gaming machine equipment to certain customers
meeting minimum credit standards. Installment notes bear interest at interest
rates of up to 18% and generally mature within one to five years.
At December 31, 1996, approximately 39% of the Company's receivables were
from various governments or their designated agencies. The Company estimates the
fair value of gross notes receivable at December 31, 1996 to approximate
carrying value. This estimate is based on current discount rates for instruments
of similar credit quality available in the secondary market.
Amounts charged to expense for estimated bad debt expenses were
approximately $217,000, $528,000 and $1,275,000 in the years ended December 31,
1996, 1995 and 1994, respectively. The Company wrote off previously reserved
doubtful accounts of approximately $2,050,000, $20,000 and none for the years
ended December 31, 1996, 1995 and 1994, respectively. In 1994, the Company
recorded as part of the purchase accounting entries of the UWS purchase (see
Note 2) approximately $1,073,000 of allowance for doubtful accounts.
(6) INVENTORIES
A summary of inventories, net of valuation reserves, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Manufacturing:
Raw materials......................................... $ 5,461,972 $15,159,742
Work-in-process....................................... 733,436 673,082
Finished goods........................................ 11,321,877 8,602,181
Customer service and other.............................. 779,516 1,964,931
----------- -----------
$18,296,801 $26,399,936
=========== ===========
</TABLE>
The Company had reserves for inventories of approximately $14,200,000 and
$5,200,000 at December 31, 1996 and 1995, respectively, primarily related to
finished goods. The Company charged to expense for reserves and impairments of
inventories approximately $18,000,000, $1,023,000 and $4,392,000 in the years
ended December 31, 1996, 1995 and 1994, respectively. Of these charges,
$18,000,000, $550,000 and $4,100,000 in the years ended December 31, 1996, 1995
and 1994, respectively, related to the termination of three on-line lottery
projects for which inventory was specifically procured. As of December 31, 1996,
the remaining on-line equipment balance was approximately $2,900,000. The
Company wrote off previously reserved inventories of approximately $9,000,000,
$215,000 and none in the years ended December 31, 1996, 1995 and 1994,
F-13
<PAGE> 68
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. At December 31, 1996, the Company had approximately 500 finished
gaming machines located in various casino gaming locations, under trial
arrangements with customers, included in inventory.
(7) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Wagering systems and on-line lottery equipment........ $103,572,304 $ 88,207,880
Land, buildings and improvements...................... 14,280,158 14,201,871
Machinery and equipment............................... 5,931,264 5,046,108
Game operations equipment............................. 27,676,069 23,507,049
Furniture and fixtures................................ 1,664,070 1,362,755
------------ ------------
$153,123,865 $132,325,663
============ ============
</TABLE>
In 1996, the Company transferred on-line lottery equipment with a net book
value of approximately $2,400,000 to inventories held for sale in conjunction
with the termination of an on-line lottery contract. During 1995 and 1994, the
Company transferred approximately $1,030,000 and $1,221,000, respectively, of
game operations equipment from inventory to property, plant and equipment in
conjunction with leasing activities and $3,900,000 and none, respectively, from
inventory to property and equipment in connection with installations of
terminals under on-line lottery contracts. Other additions to game operations
equipment and on-line lottery equipment in the three-years ended December 31,
1996, are included in the Consolidated Statement of Cash Flows.
Game operations equipment at December 31, 1996 and 1995 includes gaming
machines with an aggregate cost of approximately $20,866,000 and 16,972,000,
respectively, and carrying value of approximately $11,900,000 and $10,837,000,
respectively, which is being leased to customers. For the years ended December
31, 1996, 1995 and 1994, depreciation expense on this equipment was
approximately $2,830,000, $2,021,000 and $1,710,000, respectively. Two lease
agreements provide rent payments to the Company based on a percentage of net
gaming receipts. One agreement is on a month-to-month basis, the other is for a
five-year period ending in December 2000 with provisions for three one-year
extensions. Another agreement is a master lease whereby individual terminal
shipment lease terms are for one year, with four consecutive automatic one-year
renewals with decreasing lease payments, with an option by the lessee to
terminate the lease at the end of each such year. Future lease receipts, by the
Company, under the contractual lease agreements, assuming renewals, based on the
terminals accepted through December 31, 1996, are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997................................................. $ 7,292,000
1998................................................. 5,167,000
1999................................................. 4,235,000
2000................................................. 3,565,000
2001................................................. 386,000
-----------
$20,645,000
===========
</TABLE>
Lease income was approximately $10,726,000, $6,783,000 and $6,047,000 in
1996, 1995 and 1994, respectively.
F-14
<PAGE> 69
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets, net of amortization, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Software development costs.............................. $ 9,059,037 $ 6,679,014
Deferred start-up costs and other....................... 2,646,043 2,260,780
Non-compete agreements.................................. 527,780 1,552,779
----------- -----------
$12,232,860 $10,492,573
=========== ===========
</TABLE>
The Company capitalized approximately $4,124,000, $2,675,000 and $5,154,000
of software development costs in the years ended December 31, 1996, 1995 and
1994, respectively. The costs are primarily related to the development of the
MasterLink(R) system.
Total amortization expense of intangible and other assets (including
Goodwill) was approximately $4,229,000, $3,454,000 and $3,091,000 in 1996, 1995
and 1994, respectively. Amortization of software development costs, included in
total amortization of intangible and other assets, was approximately $1,266,000,
$941,000 and $233,000 in 1996, 1995 and 1994, respectively.
Management estimates that all capitalized development and deferred start-up
costs will be recovered through operations. Should plans for a jurisdiction,
product or product enhancements be abandoned or otherwise expire, the related
costs are expensed. (See Note 15.)
(9) LEASE OBLIGATIONS
The Company has noncancelable operating leases for office space, equipment
and vehicles which expire at various dates over the next five years. Future
minimum lease payments under noncancelable operating leases as of December 31,
1996, including leases to be assumed by the Company in conjunction with the
settlement agreement between the Company and Electronic Data Systems Corporation
("EDS") (see Note 16), are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997................................................ $2,754,000
1998................................................ 2,276,000
1999................................................ 968,000
2000................................................ 518,000
2001................................................ 93,000
==========
</TABLE>
In 1996, 1995 and 1994, rental expense was approximately $752,000, $633,000
and $1,709,000, respectively.
F-15
<PAGE> 70
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) LONG-TERM DEBT
A summary of long-term debt, including capitalized lease obligations,
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
8.25% note payable in monthly installments including
interest, through September 2001 (see Note 2)............. $ 5,728,870 --
7.2% to 10.4% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including interest,
maturing through November 1999............................ 1,753,139 3,753,272
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to others
(see Note 7).............................................. 5,164,764 5,200,000
LIBOR plus 2.25% notes payable in equivalent monthly
installments of $250,000 plus interest through February
1998. Secured by stock of subsidiaries.................... 7,270,000 13,520,000
----------- ----------
19,916,773 22,473,272
Less current installments................................... 10,604,402 9,588,708
----------- ----------
Long-term debt, excluding current installments.............. $ 9,312,371 12,884,564
=========== ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997................................................... $10,604,402
1998................................................... 4,417,997
1999................................................... 2,252,298
2000................................................... 1,638,507
2001................................................... 1,003,569
===========
</TABLE>
Cash paid for interest was approximately $2,567,000, $2,762,000 and
$1,524,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Based on borrowing rates currently available to the Company for borrowings
with similar terms and maturities, the fair value of long-term debt at December
31, 1996 approximates carrying value.
The Company maintains a credit facility with First Bank, N.A. In
conjunction with the Company's settlement with EDS, effective January 30, 1997
(see Note 16), the credit agreement with First Bank, N.A. was amended to, among
other things, allow for the pari passu securitization of certain assets of the
Company by EDS, extend the maturity date of the revolving line of credit to
February 18, 1998, and increase the line of credit from $17,500,000 to
$19,500,000. In addition to the revolving line of credit, the facility is
structured with two three-year term loans payable through February 1998. The
revolving line of credit which matures February 28, 1998, bears interest at
LIBOR (5.59% at December 31, 1996) plus 2.25% and carries a commitment fee of
.25% on the unadvanced amount. The credit agreement contains certain restrictive
covenants including leverage and cash flow ratios, change in control, payments
of dividend's restrictions and minimum stockholders' equity. Primarily as a
result of the termination of the agreement with EDS in July 1996, the Company
was in default of certain provisions of the credit agreement. The defaults have
been waived by First Bank, N.A. As of December 31, 1996, the Company had
utilized $17,150,000 (including $9,500,000 allocated for irrevocable letters of
credit for the Company's bonding program) of the revolving line of credit.
F-16
<PAGE> 71
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
Income tax expense (benefit) from operations consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal..................................... $(3,532,520) $(1,218,616) $ 645,838
State....................................... 70,000 -- (285,448)
Foreign..................................... -- 581,583 591,257
----------- ----------- ----------
(3,462,520) (637,033) 951,647
----------- ----------- ----------
Deferred:
Federal..................................... (3,614,436) 306,354 157,622
State....................................... (1,602,006) (515,695) 193,765
Foreign..................................... (73,880) -- --
----------- ----------- ----------
(5,290,322) (209,341) 351,387
----------- ----------- ----------
$(8,752,842) $ (846,374) $1,303,034
=========== =========== ==========
</TABLE>
The provision for income tax (benefit) expense differs from the amount
which would be provided by applying the Federal statutory income tax rate to
loss from operations before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax (benefit)................. $(8,402,621) $(3,236,281) $(5,202,659)
Goodwill impairment............................. -- -- 6,055,002
Extraordinary gain.............................. (1,344,718) -- --
State taxes, net of Federal impact.............. (995,804) (335,202) (59,594)
Increase in valuation reserve................... 1,582,000 1,772,254 --
Tax exempt interest income...................... -- (10,159) (107,621)
Non-deductible expenses......................... 218,703 371,200 507,002
Goodwill amortization........................... 286,607 286,607 471,011
Foreign taxes................................... (73,880) 581,583 591,257
Foreign sales credit............................ -- (276,376) (473,000)
Other, net...................................... (23,129) -- (478,364)
----------- ----------- -----------
$(8,752,842) $ (846,374) $ 1,303,034
=========== =========== ===========
</TABLE>
F-17
<PAGE> 72
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................ $ 500,971 $ 1,217,481
Inventory reserves..................................... 4,843,591 2,076,717
Provision for discontinued operations.................. -- 2,168,241
Net operating loss carryforward........................ 10,774,111 1,639,562
Tax credits............................................ 1,321,006 1,321,006
Accrued liabilities.................................... 3,367,418 3,034,974
----------- -----------
Deferred tax assets.................................... 20,807,097 11,457,981
----------- -----------
Less valuation reserve................................. (5,307,375) (3,725,375)
----------- -----------
Net deferred tax assets................................ 15,499,722 7,732,606
----------- -----------
Deferred tax liabilities:
Fixed assets, principally depreciation................. (7,797,992) (6,830,385)
Deferred costs......................................... (3,546,568) (2,094,356)
Lease obligations...................................... 638,883 1,075,535
Other.................................................. 379,677 --
----------- -----------
Net deferred tax liabilities........................... (10,326,000) (7,849,206)
----------- -----------
Net deferred income tax asset (liability).............. $ 5,173,722 $ (116,600)
=========== ===========
</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 are deductible. Management considers the scheduled
reversal of deferred tax liabilities, taxes paid in carryback years, projected
future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods the net deferred tax assets are deductible, at
December 31, 1996, management believes it is more likely than not that the
Company will realize the benefits of these net deductible differences. In 1994,
the Company recorded as part of the purchase accounting entries of the UWS
purchase (see Note 2) approximately $1,772,000 of valuation reserve for deferred
income taxes related to net operating losses of UWS acquired.
The Tax Reform Act of 1986 expanded the corporate alternative minimum tax
(AMT). Under the Act, the Company's tax liability is the greater of its regular
tax or the AMT. The Company is subject to the AMT primarily due to depreciation
limitations for AMT purposes. The AMT actually paid will be allowed as a credit
against regular tax in the future to the extent future regular tax expense
exceeds AMT. At December 31, 1996, the Company has approximately $1,321,000 of
AMT credit carryforwards which are available to reduce future federal regular
income taxes over an indefinite period. In addition, at December 31, 1996, the
Company has approximately $27,200,000 of net operating loss carryforwards
primarily for federal regular income tax purposes which expire in 2011. A
significant amount of the net operating loss carryforward balance is anticipated
to be utilized in 1997, primarily as a result of the gain on extinguishment of
debt discussed in Note 16.
Net cash received from prior period refunds was approximately $2,442,000 in
1996. Cash paid for income taxes was approximately $1,516,000 and $2,254,000
during 1995 and 1994, respectively.
F-18
<PAGE> 73
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) BENEFIT PLANS
On May 16, 1994, the Board of Directors adopted the 1994 Stock Incentive
Plan (the "Plan") which was approved by the Company's stockholders on June 15,
1994. The Plan provides for the granting of options, stock appreciation rights,
restricted stock, performance units and performance shares to employees,
consultants and advisors of the Company and the granting of options to
non-employee directors of the Company (collectively or individually, "Awards").
The total number of shares authorized for issuance under the Plan was 1,000,000.
At December 31, 1996, the remaining number of shares available for issuance
under the Plan was 189,500. The Plan replaces the 1992 Stock Incentive Plan
which replaced the 1991 Stock Option Plan. No further stock options will be
granted under the 1991 and 1992 plans. All stock options presently outstanding
under the 1991 and 1992 plans will continue to be governed by the terms of the
1991 Stock Option Plan and 1992 Stock Incentive Plan.
Options granted under the Plan are designated as either incentive stock
options or as non-incentive stock options. The term of the option may not exceed
10 years from the date the option is granted or 15 years in the case of
non-incentive stock options. Incentive stock options owned by stockholders with
more than 10% of the total combined voting power of all classes of stock of the
Company shall be granted at an option price of not less than 100% of the fair
market value at the grant date, and the term of the option may not exceed 5
years from the date of grant.
On February 23, 1993, the Board of Directors adopted a Non-Employee Stock
Option Plan whereby non-employee directors of the Company elected or appointed
after January 1, 1993 shall receive a one-time grant of options to acquire
20,000 shares of Common Stock. The exercise, pricing, vesting, duration and all
other terms and conditions applicable to each option granted under the
Non-Employee Stock Option Plan shall be in accordance with the provisions of the
1992 Stock Incentive Plan.
All options currently outstanding are 100% exercisable no later than 4
years after grant date.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Outstanding, beginning of year............................ 511,214 $14.23
Granted................................................. 782,500 11.10
Exercised............................................... (23,725) 13.77
Cancelled............................................... (58,620) 14.16
---------
Outstanding, end of year.................................. 1,211,369 12.12
=========
Exercisable, end of year.................................. 372,690 14.54
========= =======
YEAR ENDED DECEMBER 31, 1995
Granted................................................. 70,000 $ 8.33
Exercised............................................... -- --
Cancelled............................................... (361,587) 14.20
---------
Outstanding, end of year.................................. 919,782 11.45
=========
Exercisable, end of year.................................. 539,657 12.44
========= =======
</TABLE>
F-19
<PAGE> 74
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------
<S> <C> <C>
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
========== =======
</TABLE>
Information regarding options outstanding and exercisable at December 31,
1996, follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
------------------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE ----------------
WEIGHTED AVERAGE REMAIN LIFE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER EXERCISE PRICE (YRS) NUMBER EXERCISE PRICE
-------------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$3.00 - 5.00............. 200,000 $ 4.24 9.9 98,333 $ 4.25
$5.00 - 10.00............ 438,333 7.69 8.3 234,160 8.53
$10.00 - 15.00........... 241,256 13.03 6.2 206,256 13.07
$15.00 - 28.00........... 44,000 16.47 7.4 9,000 20.81
------- -------
$3.00 - 28.00............ 923,589 8.76 8.0 547,749 9.67
======= ======= === ======= =======
</TABLE>
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 cost has been recognized in the
Company's consolidated statement of operations for options granted and shares
purchased under such plans. Had compensation cost for the options granted and
the shares of Common Stock issued under the Company's plan been determined based
on the fair value at the grant dates for awards under the stock option plan and
purchases under the stock purchase plan consistent with the method of Financial
Accounting Standards Board Statement 123, the Company's net loss and loss per
share amounts would have been as reflected in the pro-forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net loss.................................................. $(15,352,162) $(8,843,278)
============ ===========
Loss per share............................................ $ (1.43) $ (.83)
============ ===========
</TABLE>
The fair value of the options granted in 1996 and 1995 was estimated using
the Black-Scholes model with the following assumptions for 1996 and 1995:
dividend yield of 0%; expected life of 5 years; volatility of 57% and a
risk-free interest rate of 6%. The effects of applying Financial Accounting
Standards Board Statement No. 123 in this pro-forma disclosure may not be
indicative of future results. Statement 123 does not apply to awards prior to
1995 and additional awards in future years are anticipated.
A stock purchase plan was established in 1991, which is available to all
permanent full-time employees. The Stock Purchase Plan provides for the purchase
of the Company's Common Stock through payroll deductions of up to 3% of an
employee's current compensation. In addition, the Company may make cash
contributions to each employee's stock purchase account in an amount up to 50%
of each payroll deduction credited to the account. The Board of Directors has
authorized 200,000 shares of the Company's Common Stock for issuance under the
Stock Purchase Plan. Under the Stock Purchase Plan, the Company will offer to
sell shares of its Common Stock at the end of each one year period (the
"Purchase Period"), which begins January 1 and ends December 31 of each year.
Shares will be purchased at the lesser of 85% of the fair market value of the
Company's Common Stock on the first or last day of the Purchase Period. There
were 117,075 shares at $2.98 per share purchased in January of 1997 for the 1996
Purchase Period; 98,565 shares at $4.04 per share purchased in January of 1996
for the 1995 Purchase Period; and 33,742 shares at $8.08 per share
F-20
<PAGE> 75
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchased in January of 1995 for the 1994 Purchase Period. Under the Stock
Purchase Plan, the Company contributed approximately $117,000, $102,000 and
$91,000 for 1996, 1995 and 1994, respectively.
In 1992, the Board of Directors adopted a 401(k) employee savings plan.
Employer contributions are discretionary under the plan. Employer contributions
under the plan were approximately $237,000, $206,000 and $357,000 for 1996, 1995
and 1994, respectively.
(13) COMMITMENTS AND CONTINGENCIES
During 1996, 1995 and 1994, the Company sold notes receivable from gaming
machine equipment sales, with a face value of $1,466,952, $2,339,710 and
$4,311,874, respectively, to banks and other third parties. The notes are
secured by the underlying equipment. The receivables sold are subject to
recourse provisions in the event of default by the primary obligor. The
outstanding balance of the notes receivable sold with recourse was approximately
$4,678,000 at December 31, 1996. The Company has established reserves for
estimated losses under the recourse provisions. At December 31, 1996, the
Company had guaranteed or pledged security for the indebtedness of others in the
amount of approximately $5,801,000 (including $4,678,000 notes receivable sold
to banks and other third parties).
The Company is obligated to provide services and/or equipment under certain
of its contracts. In addition, the various state on-line lottery and video
gaming contracts contain provisions under which the Company may be subject to
monetary penalties for central computer downtime, terminal failures, delays in
servicing inoperable terminals within specified time periods and ticket stock
shortages among other things. The Company accrues any net losses in fulfilling
the terms of these contracts when the loss is probable and can be reasonably
estimated (see Note 15). At December 31, 1996 and 1995, respectively, the
Company had accrued liabilities of approximately $3,115,000 and $2,859,000
representing progress billings and estimated costs to fulfill its obligations to
deliver products and services under certain customer contracts.
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At December 31, 1996, the Company had collateral in
support of the various bonds outstanding consisting of $3,350,000 of restricted
deposits and $9,500,000 of irrevocable standby letters of credit. Should the
Company fail to meet contractually specified obligations during the contract
term, the lottery authority may assess damages and exercise its right to collect
on the applicable bond. The Company has had disputes with customers over
implementation schedules, deliverables and other issues. The Company works with
these customers to resolve these differences; however, should the Company be
unable to resolve any disputes in a mutually satisfactory manner, the Company
may suffer negative consequences in its relationships with these and other
customers and its pursuit of future business. The ultimate cost to the Company
of such damages (if any) would be net of its claims under risk management
policies in effect as appropriate.
Historically, the Company has met its cash flow requirements primarily with
cash provided by operations, public offerings of equity securities, and from
borrowings from financial institutions. The Company, in 1996, was named the
successful bidder for on-line lottery contracts with the Minnesota and Florida
lottery authorities. The negotiations for a new contract with the Minnesota
Lottery have been initiated. The award by the Florida Lottery has been protested
by a competitor. If the award is upheld, the Company will begin negotiations of
a new contract. Sizable capital expenditures in excess of current capital
sources may be required in advance of any anticipated capital generated by the
Florida contract, accordingly, the Company may need additional financing, the
availability and the terms of which are subject to various uncertainties, with
no assurance that such financing can be obtained.
The recovery of a significant amount of the Company's investment in the
racetrack operations in New Mexico is largely contingent upon the implementation
of gaming legislation in the state. On March 21 the New Mexico legislature voted
to allow casino gaming at pari-mutuel racetracks in New Mexico, including the
Company's racetrack in Sunland Park, New Mexico. The bill, which is anticipated
to be signed by the state's
F-21
<PAGE> 76
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Governor, 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
late 1997 or early 1998.
A significant percentage of the Company's consolidated revenues are derived
from sales to customers in jurisdictions that have enacted legislation
permitting various types of gaming. Such enacted legislation may change due to
political and economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
As previously reported, a purported class action, alleging violations of
the federal antitrust laws, was filed in June 1994, in the federal district
court in South Dakota against the Company and certain video lottery machine
operators in South Dakota by a group of other video lottery machine operators,
alleging, among other things, a combination and conspiracy to unlawfully
restrain trade in video lottery machines by fixing lease prices for such
machines, allocating territories and refusing to deal with other operators.
Unspecified treble damages were sought, along with injunctive relief to bar the
alleged practices. On November 6, 1996, the court granted the Company's and
other defendants' motion for summary judgment and dismissed, with prejudice, all
claims of the plaintiffs. In December 1996, plaintiffs filed an appeal of this
ruling with the Eighth Circuit of the U.S. Court of Appeals. The Company cannot
predict the outcome of the appeal.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not have a material adverse effect on its consolidated financial position
or results of operations.
(14) STOCKHOLDERS' EQUITY
In January 1994, EDS purchased 545,454 shares of the Company's Common Stock
and 1,912,728 shares of Series A Junior Preferred Stock (Series A Preferred
Stock), each at a share price of $27.50. The Series A Preferred Stock carries
dividend rights equal to the Company's Common Stock, is non-voting, and is
convertible to 1,912,728 shares of Common Stock after ninety days prior written
notice (see Note 16).
In February 1994, the Company completed a transaction with an investor
group represented by William Spier, a director of the Company. As a result of
this transaction, the Company repurchased 2,458,182 shares of its Common Stock
at a cash price of, in effect, $26.50 per share.
(15) OTHER CHARGES
A summary of other charges follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Inventory Impairments........................... $18,000,000 $ 550,000 $ 4,099,000
Customer Disputes and Contract Liabilities...... 8,435,000 1,762,667 2,595,000
Restructuring Charges and Long-Lived Assets
Impairments................................... 7,700,000 450,000 17,300,000
----------- ---------- -----------
$34,135,000 $2,762,667 $23,994,000
=========== ========== ===========
</TABLE>
In 1996 the Company recorded approximately $34,100,000 of special charges
for restructuring costs and asset impairments, consisting of $18,000,000 for
inventory value impairments primarily related to the on-line
F-22
<PAGE> 77
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lottery segment, $8,400,000 associated with on-line lottery customer disputes
and contract liabilities, $4,600,000 for impairment of intangible and other
assets for an on-line lottery contract and approximately $3,100,000 related to
the wagering systems segment of United Wagering Systems, 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 $4,600,000 impairment related to an on-line lottery
contract that did not meet Company expectations of profitability levels. The
$2,800,000 impairment discussed in Note 2 was a result of the Company's decision
to replace a predecessor model of a wagering systems terminal. Approximately
$21,200,000 of the charges were recorded in the fourth quarter of 1996,
primarily related to the Company's revised strategies and resulting estimates
regarding on-line lottery operations.
In 1996, the Company recorded approximately $31,000,000 of special charges
related to the Company's on-line lottery segment, which consisted of $18,000,000
for inventory reserves and write-downs, $8,400,000 for penalties and contractual
liabilities resulting from customer disputes and $4,600,000 for impairment of
intangible and other assets in connection with an on-line lottery contract.
Approximately $9,800,000 of the charges were recorded in the first nine months
of 1996, $8,000,000 of those charges related to customer disputes stemming from
performance issues with EDS. The remaining $1,800,000 recorded in the first nine
months represented charges for inventory impairments. The $21,200,000 of charges
recorded in the fourth quarter of 1996 primarily related to impairments of
inventories and intangible assets.
During the three-year period ending December 31, 1996, the Company recorded
approximately $22,700,000 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
$4,100,000 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 $19,300,000 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 $550,000 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 $15,900,000 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 $1,100,000 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
$10,400,000. At December 31, 1996, inventories related to the on-line lottery
segment had a carrying value of approximately $2,900,000.
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, due to a number of
factors, including a short development and installation period, the lottery had
a number of deficiencies that contributed to the early termination of the
contract by the Arizona Lottery in 1996. The Company recognized an impairment
charge of $4,000,000 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 $2,500,000 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
F-23
<PAGE> 78
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 one of selling on-line lottery
equipment and licensing technology to use the equipment to partners who would
operate the lottery system. While this strategy may result in lower revenues,
costs of sales and operating profits, it is considered by management to be a
more effective growth strategy.
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 $2,500,000 of
other charges associated with exit costs and asset impairments related to four
on-line lottery contracts.
In 1995, the Company recorded approximately $2,763,000 of special and other
unusual charges associated with exit costs and charges and asset impairments
related to five contracts. In the 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 $2,500,000 of such charges were related to
the on-line lottery segment and $263,000 were related to the wagering systems
segment.
In the fourth quarter 1994, the Company revised its international and
domestic operations strategies. The revision of the international operations to
a strategy of alliances in selective markets and developments in the
international market place resulted in a special charge of $6,694,000
representing reserves and write-offs for inventory of $4,099,000 and write-offs
and accruals of foreign contract investments and commitments of $2,595,000. In
addition to the $6,694,000 of charges, the Company recorded an impairment charge
of approximately $17,300,000 related to the goodwill attributable to the
acquisition of UWS (See Note 2.) Events and circumstances discussed in Note 2
indicated that the goodwill may not be recoverable. Accordingly, the impairment
of goodwill was determined using the present value of estimated future operating
cash flows of the wagering systems segment. The Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS No. 121) in the second quarter of
1995. Accordingly, impairments of long-lived assets recorded subsequent to the
adoption of SFAS No. 121 were based on the fair value of such assets measured as
the present value of expected future net cash flows after a determination that
the undiscounted net cash flows were less than the carrying value thereof.
In addition to the restructuring charges discussed above, the Company's
1994 consolidated statement of operations includes approximately $3,115,000 of
unusual reserves and write-offs recorded in the fourth quarter 1994. Included in
the amount is approximately $1,000,000 of inventory adjustments which resulted
from the Company's reevaluation of future customer needs and product
obsolescence, $450,000 for severance charges, $1,025,000 for estimated
settlements of disputed obligations and $640,000 for write-down of intangible
assets.
(16) EDS RELATIONSHIP/SUBSEQUENT EVENT
In conjunction with the stock sale to EDS in 1994 as discussed in Note 14,
the Company entered into a ten-year agreement with EDS which, among other
things, called for EDS to provide to the Company enhanced computing,
communications, system and engineering and field maintenance services under the
lottery services subsidiary's on-line lottery contracts. In 1996, the Company
withheld certain payments to EDS primarily due to EDS performance issues and
related on-line lottery customer disputes. In mid-1996 the contract with EDS was
terminated and EDS filed a complaint against the Company seeking payment of
outstanding fees. On January 30, 1997, the Company and EDS settled all claims
against each other and agreed to transition the EDS services to the Company. The
settlement resulted in a net of taxes extraordinary gain on debt extinguishment
of approximately $13,280,000 for the Company. The terms of the settlement
include the receipt by the Company of all of the common and preferred shares
owned by EDS (545,454 common and 1,912,728 preferred shares) certain property,
plant and equipment used in the provision of EDS services to on-
F-24
<PAGE> 79
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
line lottery customers and the extinguishment of approximately $38,000,000 of
outstanding fees in return for a $26,100,000 note payable. The note payable
calls for interest payments only for the first two years and principal and
interest payments in years three through seven (maturity). The note is secured
by the 2,458,182 shares of redeemed Common and Preferred Stock, certain
inventories, fixed assets and software technology and carries prepayment
provisions upon the disposal of substantially all the assets or stock of the
Company or certain of its subsidiaries.
The transition of the EDS services and related employees to the Company is
anticipated to be completed in the second quarter of 1997. The following
schedule reflects pro-forma amounts as if the settlement had occurred at
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, SETTLEMENT/EXTRA- 1996,
1996 REPORTED ORDINARY GAIN, NET PRO-FORMA
------------- ------------------ ---------------
<S> <C> <C> <C>
Current assets............................. $ 66,232,251 $ (3,470,000) $ 62,762,251
Non-current assets......................... 101,810,505 2,700,000 104,510,505
------------ ------------ ------------
Total assets..................... $168,042,756 $ (770,000) $167,272,756
============ ============ ============
Current liabilities........................ $ 38,147,915 $ 7,000,000 $ 45,147,915
Non-current liabilities.................... 57,663,381 (11,950,000) 45,713,381
------------ ------------ ------------
Total liabilities................ $ 95,811,296 $ (4,950,000) $ 90,861,296
============ ============ ============
Stockholders equity exclusive of
accumulated deficit...................... $ 97,475,260 $ (9,100,000) $ 88,375,260
Accumulated deficit........................ (25,243,800) 13,280,000 (11,963,800)
------------ ------------ ------------
Stockholders' equity....................... 72,231,460 4,180,000 76,411,460
------------ ------------ ------------
Total liabilities and equity..... $168,042,756 $ (770,000) $167,272,756
============ ============ ============
Shares outstanding:
Common................................... 10,829,184 (545,454) 10,283,730
Preferred................................ 1,912,728 (1,912,728) --
============ ============ ============
</TABLE>
The Company paid or accrued approximately $81,600,000, $70,300,000 and
$69,400,000 to EDS for costs and expenses in 1996, 1995 and 1994, respectively.
Of those costs and expenses approximately $5,087,000 (net of $4,600,00
impairment charge discussed in Note 15), $2,675,000 and $4,406,000 were
capitalized primarily in conjunction with software development and deferred
start-up costs in 1996, 1995 and 1994, respectively. Included in trade accounts
payable are current balances due to EDS of approximately $1,200,000 and
$10,682,000 at December 31, 1996 and 1995, respectively.
F-25
<PAGE> 80
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
On-line lottery................................... $ 71,671 $ 65,790 $22,764 $20,437
Gaming machine and route operations............... 51,627 43,560 20,126 13,107
Wagering systems and racetrack operations......... 21,322 21,534 6,585 7,390
-------- -------- ------- -------
Total revenues............................ 144,620 130,884 49,475 40,934
-------- -------- ------- -------
COSTS AND EXPENSES:
On-line lottery................................... 48,244 42,596 15,932 15,235
Gaming machine and route operations............... 28,790 23,283 12,235 7,222
Wagering systems and racetrack operations......... 15,300 15,408 4,396 4,996
Selling, general and administrative............... 22,983 21,618 7,743 6,409
Research and development.......................... 7,122 5,062 2,279 1,938
Other charges..................................... -- 12,935 -- 4,700
Depreciation and amortization..................... 16,943 17,315 5,102 5,853
-------- -------- ------- -------
Total costs and expenses.................. 139,382 138,217 47,687 46,353
-------- -------- ------- -------
Earnings (loss) from operations..................... 5,238 (7,333) 1,788 (5,419)
-------- -------- ------- -------
OTHER INCOME (EXPENSE):
Interest and other income......................... 709 751 319 311
Interest expense.................................. (2,978) (2,911) (968) (735)
-------- -------- ------- -------
(2,269) (2,160) (649) (424)
-------- -------- ------- -------
Earnings (loss) before income taxes and
extraordinary items............................... 2,969 (9,493) 1,139 (5,843)
Income tax (expense) benefit........................ (1,595) 1,198 (549) 532
-------- -------- ------- -------
Net earnings (loss) before extraordinary items...... 1,374 (8,295) 590 (5,311)
Reversal of provision for loss on discontinuance of
wagering systems operations....................... -- 5,482 -- 5,541
-------- -------- ------- -------
Net earnings (loss) before extraordinary items...... 1,374 (2,813) 590 230
Extraordinary gain, net............................. 13,269 4,014 -- --
-------- -------- ------- -------
Net earnings (loss)................................. $ 14,643 $ 1,201 $ 590 $ 230
======== ======== ======= =======
Net earnings (loss) per share:
Before extraordinary items........................ $ .13 $ (.66) $ .06 $ .02
Discontinued operations........................... -- .44 -- --
From extraordinary items.......................... 1.28 .32 -- --
-------- -------- ------- -------
$ 1.41 $ .10 $ .06 $ .02
======== ======== ======= =======
Weighted average shares............................. 10,406 12,598 10,524 12,595
======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 81
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,048 $ 4,322
Restricted short-term deposits............................ 765 1,364
Accounts receivable, net.................................. 21,863 19,353
Current installments of notes receivable, net............. 2,559 2,818
Inventories............................................... 14,354 18,297
Prepaid expenses.......................................... 1,418 1,027
Income tax refund receivable.............................. -- 3,551
Deferred income taxes..................................... 11,178 15,500
-------- --------
Total current assets.............................. 70,185 66,232
-------- --------
Property, plant and equipment............................... 150,991 153,124
Less accumulated depreciation............................. (84,715) (78,417)
-------- --------
Net property, plant and equipment................. 66,276 74,707
-------- --------
Restricted cash deposits.................................... 2,437 2,521
Notes receivable, excluding current installments............ 2,718 2,216
Goodwill, net............................................... 9,519 10,134
Intangible and other assets, net............................ 11,513 12,233
-------- --------
$162,648 $168,043
======== ========
LIABILITIES
Current liabilities:
Notes payable............................................. $ -- $ 7,650
Current installments of long-term debt.................... 6,095 10,604
Accounts payable.......................................... 5,275 6,646
Accrued expenses.......................................... 24,612 13,249
Income taxes payable...................................... 4,499 --
-------- --------
Total current liabilities......................... 40,481 38,149
-------- --------
Long-term debt, excluding current installments.............. 32,028 9,312
Other liabilities........................................... -- 38,025
Deferred income taxes....................................... 12,032 10,326
-------- --------
Total liabilities................................. $ 84,541 $ 95,812
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued.................................. $ -- $ --
Series A Junior Preferred stock, $.01 par value, convertible
non-cumulative. Authorized 1,912,728 shares............... 19 19
Common stock, $.01 par value. Authorized 25,000,000
shares.................................................... 109 108
Paid-in capital............................................. 88,847 97,765
Deferred restricted stock compensation...................... (267) (417)
Accumulated deficit......................................... (10,601) (25,244)
-------- --------
Total stockholders' equity........................ 78,107 72,231
-------- --------
$162,648 $168,043
======== ========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 82
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED COMMON RESTRICTED TOTAL
STOCK STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL COMPENSATION DEFICIT EQUITY
--------- --------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996.......... $19 $108 $97,765 $(417) $(25,244) $72,231
Net earnings............... -- -- -- -- 14,643 14,643
Stock options
exercised/shares
issued................... -- 1 182 -- -- 183
Shares redeemed pursuant to
EDS settlement........... -- -- (9,100) -- -- (9,100)
Amortization of deferred
restricted stock
compensation............. -- -- -- 150 -- 150
--- ---- ------- ----- -------- -------
September 30, 1997......... $19 $109 $88,847 $(267) $(10,601) $78,107
=== ==== ======= ===== ======== =======
</TABLE>
1997 SHARE DATA
<TABLE>
<CAPTION>
TREASURY STOCK
SERIES A COMMON -----------------
PREFERRED STOCK PREFERRED STOCK SERIES A COMMON
BALANCE ISSUED ISSUED STOCK STOCK
------- --------------- --------------- -------- ------
<S> <C> <C> <C> <C>
Beginning of period....................... 1,913 10,829 -- --
Stock options exercised/shares issued..... -- 42 -- --
Shares redeemed pursuant to EDS
settlement.............................. -- -- (1,913) (545)
----- ------ ------ ----
End of period............................. 1,913 10,871 (1,913) (545)
===== ====== ====== ====
</TABLE>
F-28
<PAGE> 83
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 14,642 $ 1,201
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Reversal of provision for loss on discontinuance of
operations.......................................... -- (5,482)
Depreciation and amortization........................ 16,943 17,315
Other charges........................................ -- 12,935
Extraordinary gain, net.............................. (13,269) (4,014)
Other, net........................................... 211 --
Changes in operating assets and liabilities:
Receivables, net....................................... (2,678) (2,845)
Inventories............................................ 7,296 (4,109)
Prepaid expenses....................................... (391) (244)
Accounts payable....................................... (1,371) 1,658
Due to EDS............................................. -- 26,495
Accrued expenses....................................... 9,397 (5,749)
Income taxes........................................... 5,397 (1,060)
-------- --------
Net cash provided by operating activities................... 36,177 36,101
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,824) (23,928)
Expenditures on intangible and other non-current assets... (1,511) (9,860)
Proceeds from sales of equipment.......................... 87 22
Restricted cash deposits.................................. 560 2,150
-------- --------
Net cash used in investing activities....................... (6,688) (31,616)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable............................. (7,650) (750)
Proceeds from issuance of long-term debt.................. 643 4,364
Repayments of long-term debt.............................. (8,812) (9,307)
Proceeds from stock options exercised..................... 56 --
-------- --------
Net cash used in financing activities....................... (15,763) (5,693)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 13,726 (1,208)
Cash and cash equivalents, beginning of period.............. 4,322 1,993
-------- --------
Cash and cash equivalents, end of period.................... $ 18,048 $ 785
======== ========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 84
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation. The consolidated financial statements include the accounts
of Powerhouse Technologies, Inc. and its subsidiaries (collectively the
"Company"). All significant inter-company balances and transactions have been
eliminated in consolidation.
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of operations and cash flows for the nine-month periods
ended September 30, 1997 and 1996 and the consolidated statement of
stockholders' equity for the nine-month period ended September 30, 1997 have
been prepared by the Company, without audit. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position, results of operations and cash flows as of and
for the periods indicated have been made. The December 31, 1996 consolidated
balance sheet was derived from consolidated financial statements audited by KPMG
Peat Marwick LLP in connection with the Company's annual audit.
Earnings (Loss) Per Common Share. Earnings per common share is computed by
dividing net earnings by the weighted average number of common shares
outstanding and the common stock equivalents of convertible preferred stock and
stock options outstanding using the treasury stock method. Common stock
equivalents are excluded from the loss per share calculation when the effect is
anti-dilutive.
Accounting Pronouncements Not Yet Adopted. In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which simplifies 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 per SFAS No. 128. Consequently, the generation of earnings
from continuing operations will result in a dual presentation of basic and
diluted EPS. The Statement requires restatement of prior period EPS
presentations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Statement 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. Statement
131 is effective for financial statements for periods beginning after December
15, 1997. Earlier application is encouraged. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. Statement 131 need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application shall be reported in
financial statements for interim periods in the second year of application.
(2) EDS SETTLEMENT
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"), each at
a share price of $27.50. The Series A Preferred Stock was convertible to an
equal number of shares of Common Stock after ninety days prior written notice.
F-30
<PAGE> 85
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 primarily due to EDS performance issues and related on-line
lottery customer disputes. In mid-1996 the contract with EDS was terminated and
EDS filed a complaint against the Company seeking payment of outstanding fees.
On January 30, 1997, the Company and EDS settled all claims against each other
and agreed to transition the EDS services to the Company. The settlement
resulted in a net of taxes extraordinary gain on debt extinguishment of
approximately $13,269,000 for the Company. The terms of the settlement include
the repurchase by the Company of all of the Common and Series A Preferred Stock
owned by EDS (545,454 common and 1,912,728 preferred shares), the return to the
Company of certain inventories (approximately $1,200,000) and property, plant
and equipment (approximately $2,700,000) used in the provision of EDS services
to on-line lottery customers and the extinguishment of approximately $38,000,000
of outstanding fees in return for a note payable with a present value of
$26,100,000. The note payable calls for interest payments only for the first two
years and principal and interest payments in years three through seven
(maturity). The note is secured by the 2,458,182 shares of repurchased 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 substantially completed in the second quarter of 1997.
(3) BUSINESS COMBINATION AND SETTLEMENT
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"), which included
United Tote and Sunland Park. The original purchase price included the issuance
of $10,000,000 notes, payable over a three-year period.
During the fourth quarter 1994 and the first quarter 1995, certain negative
developments affecting United Tote and the pari-mutuel wagering industry became
increasingly apparent. During 1995, the Company did not pay principal and
interest obligations under the terms of the promissory notes to the sellers. On
March 25, 1996, the Company reached an agreement with the sellers settling all
outstanding claims and disputes, including dismissal of all outstanding
litigation, resulting in a $4,014,000 extraordinary gain on debt extinguishment.
The Company, in the fourth quarter 1995, decided to sell UWS, exclusive of
Sunland Park; however, due to operational improvements and industry and market
conditions, the Company subsequently decided to no longer actively pursue the
disposal of the wagering systems segment. In accordance with the requirements
outlined in Financial Accounting Standards Board Emerging Issues Task Force
issue No. 90-16 "Accounting for Discontinued Operations Subsequently Retained,"
the results of operations of the wagering systems segment have been reclassified
to continuing operations in all periods presented.
F-31
<PAGE> 86
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVENTORIES
A summary of inventory follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Manufacturing:
Raw materials............................................. $ 5,278,000 $ 5,462,000
Work-in-process........................................... 330,000 733,000
Finished goods............................................ 6,779,000 11,322,000
Ticket paper................................................ 1,547,000 610,000
Customer service and other.................................. 420,000 170,000
----------- -----------
$14,354,000 $18,297,000
=========== ===========
</TABLE>
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Note payable at prime 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)............................... $25,738,000 $ --
8.25% note payable in monthly installments, including
interest, through September 2001 (see Note 3)............. 5,115,000 5,729,000
7.2% to 11.0% capital lease obligations, due in monthly
installments of $4,573 to $26,567 including interest,
maturing through May 2002................................. 1,314,000 1,753,000
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to
others.................................................... 3,186,000 5,164,000
LIBOR plus 3.25% notes payable in equivalent monthly
installments of $250,000 plus interest through February
1998. Secured by stock of certain subsidiaries............ 2,770,000 7,270,000
----------- -----------
38,123,000 19,916,000
Less current installments................................... 6,095,000 10,604,000
----------- -----------
Long-term debt, excluding current installments.............. $32,028,000 $ 9,312,000
=========== ===========
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING SEPTEMBER 30,
- ----------------------------------
<S> <C>
1998............................................ $6,095,000
1999............................................ 6,299,000
2000............................................ 7,165,000
2001............................................ 6,646,000
2002............................................ 5,808,000
Thereafter...................................... 6,110,000
</TABLE>
The Company maintains a $19,500,000 revolving line of credit with First
Bank, N.A., of which $9,500,000 is committed under the Company's bonding program
and the balance of $10,000,000 is available for working capital. At September
30, 1997, the full $10,000,000 was available to the Company to draw on.
F-32
<PAGE> 87
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) COMMITMENTS AND CONTINGENCIES
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 legislation in the state. 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 parimutuel
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 mid-1998. The Company has had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8,000,000 of
capital expenditures for facility enhancements, gaming machines and related
equipment.
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.
The Company periodically sells notes receivable from gaming machine
equipment sales 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 $2,962,000 at September
30, 1997. The Company has established reserves for estimated losses under the
recourse provisions. At September 30, 1997, the Company had guaranteed or
pledged security for the indebtedness of others in the amount of approximately
$3,860,000 (including $2,962,000 notes receivable sold to banks and other third
parties).
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At September 30, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $2,750,000 of restricted
deposits and $9,500,000 of irrevocable standby letters of credit. First Bank, N.
A., requires the Company to maintain $2,000,000 of restricted deposits as
collateral for the irrevocable 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.
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. AWI is continuing
the operation of the current on-line lottery system under the terms of the
expired contract under an interim agreement. The Company has submitted a bid to
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
F-33
<PAGE> 88
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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/or economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
The Company is involved in various 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.
F-34
<PAGE> 89
[ARTWORK:
(2) Inside Back Cover: Photograph of the AWI Ovation(R) retail terminal with
the phrases "AWI Ovation(R) retail terminal" and "AWI On-Line Lottery Systems
and Services"; Photograph of the VLC Winning Touch(R) Power Series(TM) gaming
machine with the phrases "VLC Winning Touch(R) Power Series(TM) gaming machine"
and "VLC Video Gaming Machines and Central Control Systems"; Photograph of the
United Tote wagering terminal with the phrases "United Tote wagering terminal"
and "United Tote Pari-Mutuel Wagering Systems and Services"; Artist's rendering
of the Company's Sunland Park Casino with the phrases "Artist's rendering of
Sunland Park Casino" and "Sunland Park Casino."]
<PAGE> 90
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. ii
Incorporation of Certain Documents by
Reference........................... ii
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 27
Management............................ 42
Selling Stockholders.................. 44
Plan of Distribution.................. 45
Legal Matters......................... 46
Experts............................... 46
</TABLE>
======================================================
======================================================
1,468,026 SHARES
POWERHOUSE LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
GERARD KLAUER MATTISON
& CO., INC.
LADENBURG THALMANN
& CO. INC.
, 1998
======================================================
<PAGE> 91
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid in connection with
the issuance and distribution of the securities being registered hereby, other
than underwriting discounts and commissions, and all such expenses will be borne
by the Registrant. All amounts are estimates except for the SEC registration fee
and the NASD filing fee. It is estimated that the Registrant will incur the
following expenses in connection with the offering of the securities being
registered.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 5,478.31
-----------
NASD Filing Fee............................................. 2,357.22
-----------
Accounting Fees and Expenses................................ 35,000.00
Blue Sky Fees and Expenses.................................. -0-
Legal Fees and Expenses..................................... 75,000.00
Printing and Mailing Expenses............................... 120,000.00
Transfer Agent Fees and Expenses............................ 1,000.00
Miscellaneous Expenses...................................... 10,000.00
-----------
Total............................................. $248,835.53
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL") allows a
corporation to eliminate or limit the personal liability of directors of a
corporation to the corporation or to any of its stockholders for monetary
damages for a breach of fiduciary duty as a director, except (i) for breach of
the director's duty of loyalty, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
certain unlawful dividends and stock repurchases, or (iv) for any transaction
from which the director derived an improper personal benefit.
Section 145 of the DGCL provides that in the case of any action other than
one by or in the right of the corporation, a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
in such capacity on behalf of another corporation or enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 145 of the DGCL provides that in the case of an action by or in the
right of a corporation to procure a judgment in its favor, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any action or suit by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation in such capacity on behalf of another corporation
or enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted under standards similar to those set forth in the
proceeding paragraph, except that no indemnification may be made in respect of
any action or claim as to which such person shall have been adjudged to be
liable to the corporation unless a court determines that such person is fairly
and reasonably entitled to indemnification.
Article 11 of the Company's Certificate of Incorporation limits the
personal liability of directors to the fullest extent permissible under the
DGCL. Article VIII of the Company's Bylaws provides for indemnification of
directors and officers to the fullest extent permissible under the DGCL.
II-1
<PAGE> 92
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
4.1 -- Certificate of Incorporation of Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-18 (Registration No. 33-41000) (the 1991
Registration Statement) and Exhibit 4.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993).
4.2 -- Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the 1991 Registration Statement).
4.3 -- Specimen form of the Company's Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the 1991
Registration Statement).
4.4 -- Agreement dated December 3, 1997 between the Company and
William Spier.
5.1 -- Opinion of Rogers & Hardin LLP.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.1 -- Consent of Rogers & Hardin LLP [included in Exhibit 5.1].
</TABLE>
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.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in the post-effective amendment by those paragraphs is contained
in periodic reports filed by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 93
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bozeman, State of Montana, on this 5th day of
February, 1998.
POWERHOUSE TECHNOLOGIES, INC.
By: /s/ RICHARD M. HADDRILL
------------------------------------
Richard M. Haddrill
President and Chief Executive
Officer
In accordance with requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in their
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD R. BURT Chairman and Director February 5, 1998
- -----------------------------------------------------
Richard R. Burt
/s/ JAMES J. DAVEY Vice Chairman and Director February 5, 1998
- -----------------------------------------------------
James J. Davey
/s/ RICHARD M. HADDRILL President, Chief Executive February 5, 1998
- ----------------------------------------------------- Officer, Treasurer and
Richard M. Haddrill Director
/s/ SUSAN CARSTENSEN Chief Financial Officer February 5, 1998
- ----------------------------------------------------- (Principal Accounting
Susan Carstensen Officer)
/s/ WILLIAM SPIER Director February 5, 1998
- -----------------------------------------------------
William Spier
/s/ PATRICIA W. BECKER Director February 5, 1998
- -----------------------------------------------------
Patricia W. Becker
Director
- -----------------------------------------------------
John R. Hardesty
</TABLE>
II-4
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
- ----------- ---------------------- ------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement..............................
4.1 -- Certificate of Incorporation of Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-18 (Registration No. 33-41000) (the 1991
Registration Statement) and Exhibit 4.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)..........................................
4.2 -- Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the 1991 Registration Statement).....................
4.3 -- Specimen form of the Company's Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the 1991
Registration Statement).....................................
4.4 -- Agreement dated December 3, 1997 between the Company and
William Spier...............................................
5.1 -- Opinion of Rogers & Hardin LLP..............................
23.1 -- Consent of KPMG Peat Marwick LLP............................
23.1 -- Consent of Rogers & Hardin LLP [included in Exhibit 5.1]....
</TABLE>
- ---------------
* To be filed by amendment.
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.
<PAGE> 1
EXHIBIT 1.1
1,468,026 Shares
POWERHOUSE TECHNOLOGIES, INC.
Common Stock
UNDERWRITING AGREEMENT
February __, 1998
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
As Representatives of the
several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
The persons named in Schedule I (the "SELLING STOCKHOLDERS")
acting severally and not jointly and William Spier, as authorized
representative of the Selling Stockholders, individually and on behalf of the
Selling Stockholders ("Spier") propose to sell an aggregate of 1,468,026 shares
(the "FIRM SHARES") of the Common Stock, $0.01 par value per share (the "COMMON
STOCK"), of Powerhouse Technologies, Inc., a Delaware corporation (the
"COMPANY"), to you and to the other underwriters named in Schedule II
(collectively, the "UNDERWRITERS"), for whom Gerard Klauer Mattison & Co.,
Inc., a New York corporation ("GKM") and Ladenburg Thalmann & Co. Inc. are
acting as representatives (the "REPRESENTATIVES"). The Company has also agreed
to grant to you and the other Underwriters an option (the "OPTION") to purchase
up to an additional 220,204 shares of Common Stock, respectively (the "OPTION
SHARES") on the terms and for the purposes set forth in Section 1(b). The Firm
Shares and Option Shares are hereinafter collectively referred to as the
"SHARES."
<PAGE> 2
The initial public offering price per share for the Shares
and the purchase price per share for the Shares to be paid by the several
Underwriters shall be agreed upon by the Company, the Selling Stockholders and
the Representatives, acting on behalf of the several Underwriters, and such
agreement shall be set forth in a separate written instrument substantially in
the form of Exhibit A hereto (the "PRICE DETERMINATION AGREEMENT"). The Price
Determination Agreement may take the form of an exchange of any standard form
of written telecommunication among the Company, the Selling Stockholders and
the Representatives and shall specify such applicable information as is
indicated in Exhibit A hereto. The offering of the Shares shall be governed by
this Agreement, as supplemented by the Price Determination Agreement. From and
after the date of the execution and delivery of the Price Determination
Agreement, this Agreement shall be deemed to incorporate, and, unless the
context otherwise indicates, all references contained herein to "this
Agreement" and to the phrase "herein" shall be deemed to include, the Price
Determination Agreement.
Spier, as authorized representative of the Selling
Stockholders, individually and on behalf of the other Selling Stockholders, has
executed and delivered a Custody Agreement in the form attached as Exhibit B
(collectively, the "CUSTODY AGREEMENT") pursuant to which such Selling
Stockholders have placed their Firm Shares in custody and appointed the persons
designated therein as attorneys-in-fact (collectively, the "ATTORNEYS") with
authority to execute and deliver this Agreement on behalf of such Selling
Stockholders and to take certain other actions with respect thereto and hereto.
The Company and the Selling Stockholders, acting severally
and not jointly, and Spier, as authorized representative of the Selling
Stockholders, individually and on behalf of the other Selling Stockholders
confirm as follows their respective agreements with the Representatives and the
several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the respective
representations, warranties and agreements of the Company, the Selling
Stockholders and Spier herein contained and subject to all the terms and
conditions of this Agreement, (i) the Selling Stockholders agree to sell to the
several Underwriters, and (ii) each of the Underwriters, severally and not
jointly, agrees to purchase from the Selling Stockholders, at the purchase
price per share for the Firm Shares to be agreed upon by the Company, the
Selling Stockholders and the Representatives, in accordance with Section 1(c)
hereof and set forth in the Price Determination Agreement, the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule II, plus
such additional number of Firm Shares which such Underwriter may become
obligated to purchase pursuant to Section 9 hereof. Sched ule II may be
attached to the Price Determination Agreement.
2
<PAGE> 3
(b) Subject to all the terms and conditions of
this Agreement, the Company grants the Option to the several Underwriters to
purchase, severally and not jointly, up to 220,204 Option Shares from the
Company, respectively, at the same price per share as the Under writers shall
pay for the Firm Shares. The Option may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters and may be
exercised in whole or in part at any time (but not more than once) on or before
the 45th day after the date of this Agreement (or, if the Company has elected
to rely on Rule 430A, on or before the 45th day after the date of the Price
Determination Agreement), upon written or telegraphic notice (the "OPTION
SHARES NOTICE") by the Representatives to the Company no later than 12:00 noon,
New York City time, at least two and no more than five business days before the
date specified for closing in the Option Shares Notice (the "OPTION CLOSING
DATE") setting forth the aggregate number of Option Shares to be purchased and
the time and date for such purchase. On the Option Closing Date, the Company
shall issue and sell to the Underwriters the number of Option Shares set forth
in the Option Shares Notice, and each Underwriter shall purchase such
percentage of the Option Shares as is equal to the percentage of Firm Shares
that such Underwriter is purchasing, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares.
(c) The initial public offering price per share
for the Firm Shares and the purchase price per share for the Firm Shares to be
paid by the several Underwriters shall be agreed upon and set forth in the
Price Determination Agreement. In the event such price has not been agreed upon
and the Price Determination Agreement has not been executed by the close of
business on the fourteenth business day following the date on which the
Registration Statement (as hereinafter defined) becomes effective, this
Agreement shall terminate forthwith, without liability of any party to any
other party except that Section 7 shall remain in effect.
2. Delivery and Payment. Delivery of the Firm Shares
shall be made to the Representatives for the accounts of the Underwriters
against payment of the purchase price by wire transfer payable in New York
Clearing House to the Custodian for disbursement in accordance with the
instructions of the Attorney to such account or accounts as Spier, on behalf of
the Selling Stockholders, shall designate no later than three business days
prior to the Closing Date. Such payment shall be made at 10:00 a.m., New York
City time, on the third business day (the fourth business day, should the
offering be priced after 4:30 p.m., EST) after the date on which the first bona
fide offering of the Shares to the public is made by the Underwriters or at
such time on such other date, not later than seven business days after such
date, as may be agreed upon by the Selling Stockholders and the Representatives
(such date is hereinafter referred to as the "CLOSING DATE").
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above)
shall take place at the offices specified in the preceding paragraph, at the
time and date (which may be the Closing Date) specified in the Option Shares
Notice.
3
<PAGE> 4
Certificates evidencing the Shares shall be in definitive
form and shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
3. Representations and Warranties of the Company. The
Company represents and warrants to, and covenants with, each Underwriter that,
except as set forth in the Registration Statement:
(a) The Company meets the requirements for use
of Form S-3 and a registration statement (Registration No. 333-41417) on Form
S-3 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "ACT"), and the rules and regulations
(collectively referred to as the "RULES AND REGULATIONS") of the Securities and
Exchange Commission (the "COMMISSION") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("RULE 430A")
of the Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. The
term "REGISTRATION STATEMENT" means the registration statement as amended at
the time it becomes or became effective (the "EFFECTIVE DATE"), including
financial statements and all exhibits and any information deemed to be included
by Rule 430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "RULE 462 REGISTRATION
STATEMENT"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "PROSPECTUS" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement
at the Effective Date. Any reference herein to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and
include the uments incorporated by reference therein pursuant to Item 12 of
Form S-3 which were filed under the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), on or before the Effective Date or the date of such
preliminary prospectus or the Prospectus, as the case may be. Any reference
herein to the terms "amend," "amendment" or "supplement" with respect to the
Registration Statement, any preliminary prospectus or the Prospectus shall be
deemed to refer to and include the filing of any ument under the Exchange Act
after the Effective Date, or the date of any
4
<PAGE> 5
preliminary prospectus or the Prospectus, as the case may be, and deemed to be
incorporated therein by reference.
(b) On the Effective Date, the date the
Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included or incorporated by reference in the Prospectus, did or will
comply with all applicable provisions of the Act, the Exchange Act, the rules
and regulations thereunder (the "EXCHANGE ACT RULES AND REGULATIONS") and the
Rules and Regulations and will contain all statements required to be stated
therein in accordance with the Act, the Exchange Act, the Exchange Act Rules
and Regulations and the Rules and Regulations. On the Effective Date and when
any post-effective amendment to the Registration Statement becomes effective,
no part of the Registration Statement or any such amendment did or will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, in light of the circumstances under which they were
made. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein not misleading, in light of the
circumstances under which they were made. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions
made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement or Prospectus or any
amendment or supplement thereto. For all purposes of this Agreement, the
amounts of the selling concession and reallowance set forth in the Prospectus
constitute the only information relating to any Underwriter furnished in
writing to the Company by the Representatives specifically for inclusion in the
preliminary prospectus, the Registration Statement or the Prospectus. The
Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
preliminary prospectus, the Prospectus or any other materials, if any,
permitted by the Act. The Commission has not issued any order preventing or
suspending the use of the preliminary prospectus or instituted proceedings for
that purpose.
(c) The documents which are incorporated by
reference in the preliminary prospectus and the Prospectus or from which
information is so incorporated by reference, when they become effective or were
filed with the Commission, as the case may be, complied in all material
respects with the requirements of the Act or the Exchange Act, as applicable,
the Exchange Act Rules and Regulations and the Rules and Regulations; and any
uments so filed and incorporated
5
<PAGE> 6
by reference subsequent to the Effective Date shall, when they are filed with
the Commission, conform in all material respects with the requirements of the
Act and the Exchange Act, as applicable, the Exchange Act Rules and Regulations
and the Rules and Regulations.
(d) The only subsidiaries (as defined in the
Rules and Regulations) of the Company are the subsidiaries listed on Exhibit C
hereto (the "SUBSIDIARIES"). The Company and each of its Subsidiaries is, and
at the Closing Date will be, a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation. The
Company and each of its Subsidiaries has, and at the Closing Date will have,
full power and authority to conduct all the activities conducted by it, to own
or lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and
each of its Subsidiaries is, and at the Closing Date will be, duly licensed or
qualified to do business in and in good standing as a foreign corporation in
all jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such licensing or
qualification necessary. All of the outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued, and are fully paid
and non-assessable and are owned by the Company free and clear of all liens,
encumbrances and claims whatsoever. Except for the stock of the Subsidiaries
and as disclosed in the Registration Statement, the Company does not own, and
at the Closing Date will not own, directly or indirectly, any shares of stock
or any other equity or long-term debt securities of any corporation or have any
equity interest in any firm, partnership, joint venture, association or other
entity. Complete and correct copies of the certificate of incorporation and of
the by-laws of the Company and each of its Subsidiaries and all amendments
thereto have been delivered to the Representatives, and no changes therein will
be made subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date.
(e) The outstanding shares of Common Stock,
including the Firm Shares, have been, and the Option Shares to be issued and
sold by the Company upon such issuance will be, duly authorized, validly
issued, fully paid and nonassessable and will not be subject to any preemptive,
first refusal, or similar right. The description of the Common Stock included
in or incorporated by reference in the Registration Statement and the
Prospectus is now, and at the Closing Date will be, complete and accurate in
all respects. Except as set forth in the Prospectus, the Company does not have
outstanding, and at the Closing Date will not have outstanding, any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
any shares of Common Stock, any shares of capital stock of any Subsidiary or
any such warrants, convertible securities or obligations. Upon the issuance and
delivery pursuant to the terms of this Agreement, the Underwriters will acquire
good and marketable title to the Option Shares, free and clear of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever.
6
<PAGE> 7
(f) The financial statements and schedules
included or incorporated by reference in the Registration Statement or the
Prospectus present fairly the consolidated financial condition of the Company
as of the respective dates thereof and the consolidated results of operations
and cash flows of the Company for the respective periods covered thereby, all
in conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act, the Exchange Act, the Exchange Act Rules and
Regulations or the Rules and Regulations to be included in the Registration
Statement or the Prospectus. KPMG Peat Marwick LLP (the "ACCOUNTANTS") who have
reported on such financial statements and schedules, are independent
accountants with respect to the Company as required by the Act and the Rules
and Regulations. The statements included in the Registration Statement with
respect to the Accountants pursuant to Rule 509 of Regulation S-K of the Rules
and Regulations are true and correct in all material respects.
(g) The Company maintains a system of internal
accounting control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(h) Subsequent to the respective dates as of
which information is given in the Registration Statement and the Prospectus and
prior to the Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company, or in the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and its Subsidiaries, arising for any reason
whatsoever, (ii) neither the Company nor any of its Subsidiaries has incurred,
nor will it incur any material liabilities or obligations, direct or
contingent, nor has it entered into, nor will it enter into any material
transactions other than pursuant to this Agreement and the transactions
referred to herein and (iii) the Company has not and will not have paid or
declared any dividends or other distributions of any kind on any class of its
capital stock.
(i) The Company is not an "investment company"
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(j) Except as set forth in the Registration
Statement and the Prospectus, there are no actions, suits or proceedings
pending or threatened against or affecting the Company
7
<PAGE> 8
or any of its Subsidiaries or any of their respective officers in their
capacity as such, before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might materially
and adversely affect the Company or any of its Subsidiaries or its business,
properties, business prospects, condition (financial or otherwise) or results
of operations. Neither the Company nor any of its Subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
authorization, approval, order, license, certificate, franchise or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would adversely affect the condition (financial or
otherwise), earnings, business, position, prospects, value, operation,
properties or results of operations of the Company and any of its Subsidiaries
taken as a whole. There are no pending investigations known to the Company
involving the Company or any of its Subsidiaries by any governmental agency
having jurisdiction over the Company or its Subsidiaries or their respective
businesses or operations. The disclosures in the Registration Statement
concerning the effects of federal, state, local and foreign laws, rules and
regulations on each of the Company's and any of its Subsidiaries' businesses as
currently conducted and as proposed to be conducted are correct in all material
respects and do not omit to state a material fact required to be stated therein
or necessary to make the statements contained therein not misleading in light
of the circumstances under which they were made.
(k) Each of the Company and its Subsidiaries
has, and at the Closing Date will have, (i) all governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as contemplated in the Prospectus, (ii) complied in all respects with
all laws, regulations and orders applicable to it or its business and (iii)
performed all obligations required to be performed by it, and is not, and at
the Closing Date will not be, in default under any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note agreement,
lease, contract or other agreement or instrument (collectively, a "CONTRACT OR
OTHER AGREEMENT") to which it is a party or by which its property is bound or
affected. To the best knowl edge of the Company and each of its Subsidiaries,
no other party under any Contract or Other Agreement to which it is a party is
in default in any respect thereunder. Each of the Company and its Subsidiaries
is not now, and at the Closing Date will not be, in violation of any provision
of its certificate of incorporation or by-laws.
(l) No consent, approval, authorization or
order of, or any filing or declaration with, any court or governmental agency
or body is required in connection with the authorization, issuance, transfer,
sale or delivery of the Securities by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company or in
connection with the taking by the Company of any action contemplated hereby or
thereby, except as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the National Association of Securities
8
<PAGE> 9
Dealers, Inc. (the "NASD") in connection with the purchase and distribution by
the Underwriters of the Shares to be sold by the Company.
(m) The Company has and will have full
corporate power and authority to enter into this Agreement. This Agreement has
been duly authorized, executed and delivered by the Company and constitutes a
valid and binding agreement of the Company and is enforceable against the
Company in accordance with the terms hereof, except as rights to
indemnification and contribution hereunder may be limited by applicable law and
public policy and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors rights generally or by general equitable principles. The
performance of this Agreement and the consummation of the transactions
contemplated hereby and the application of the net proceeds from the offering
and sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company or any of its Subsidiaries pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
(x) the certificate of incorporation or by-laws of the Company or any of its
Subsidiaries, or (y) any contract or other agreement to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of its properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries, except for violations,
defaults, breaches or accelerations which would not result in a material
adverse effect in the financial condition of the Company and its Subsidiaries.
(n) Each of the Company and its Subsidiaries
has good and marketable title to all properties and assets described in the
Prospectus to be owned respectively by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company or its
Subsidiaries. Each of the Company and its Subsidiaries has valid, subsisting
and enforceable leases for the properties described in the Prospectus to be
leased by it, with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such properties by the
Company and such Subsidiaries.
(o) There is no ument or contract of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All such contracts to which the Company or
any Subsidiary is a party have been duly authorized, executed and delivered by
the Company or such Subsidiary, constitute valid and binding agreements of the
Company or such
9
<PAGE> 10
Subsidiary and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
(p) To the best knowledge of the Company, no
statement, representation, warranty or covenant made by the Company in this
Agreement or made in any certificate or ument required by this Agreement to be
delivered to the Representatives was or will be, when made, inaccurate, untrue
or incorrect.
(q) Neither the Company nor any of its
directors, officers or controlling persons has taken, directly or indirectly,
any action intended to cause or result in, or which might reasonably be
expected to cause or result in, or which has constituted, stabilization or
manipulation, under the Act or otherwise, of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(r) No holder of securities of the Company has
rights to register any securities of the Company because of the filing of the
Registration Statement.
(s) The Shares are duly authorized for listing,
subject to official notice of issuance, on the Nasdaq National Market System.
(t) Neither the Company nor any of its
Subsidiaries is involved in any material labor dispute nor, to the knowledge of
the Company, is any such dispute threatened.
(u) The Company and its Subsidiaries own, or
are licensed or otherwise have the full exclusive right to use, all material
trademarks and trade names which are used in or necessary for the conduct of
their respective businesses as described in the Prospectus. Neither the Company
nor any of its Subsidiaries has received any notice of any claims asserted by
any person with respect to the use of any such trademarks or trade names, or
challenging or questioning the validity or effectiveness of any such trademark
or trade name. The use, in connection with the business and operations of the
Company and its Subsidiaries of such trademarks and trade names does not, to
the Company's knowledge, infringe on the rights of any person. Except as set
forth in the Prospectus, the Company and its Subsidiaries are not obligated or
under any liability whatsoever to make any payment by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any trademark,
service mark or trade name with respect to the use thereof or in connection
with the conduct of their respective businesses or otherwise.
(v) Neither the Company, its Subsidiaries nor,
to the best of the Company's knowledge, any of their respective officers,
directors, partners, employees, agents or affiliates or any other person acting
on behalf of the Company or any of its Subsidiaries have, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal
10
<PAGE> 11
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, official or
employee of any governmental agency (domestic or foreign), instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is or may be in a
position to help or hinder the business of the Company or any of its
Subsidiaries (or assist the Company or any of its Subsidiaries in connection
with any actual or proposed transaction) which (i) might subject the Company or
any of its Subsidiaries or any other such individual or entity to any damage or
penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
or any of its Subsidiaries or (iii) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company
or any of its Subsidiaries.
(w) Each of the Company and its Subsidiaries
(i) has paid all federal, state, local and foreign taxes for which it is
liable, including, but not limited to, withholding taxes and amounts payable
under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended
(the "CODE"), and has furnished all information returns it is required to
furnish pursuant to the Code, (ii) has established adequate reserves for all of
such taxes which are not immediately due and payable and (iii) does not have
any tax deficiency or claims outstanding, assessed or, to the Company's
knowledge, threatened against it.
(x) Each of the Company and its Subsidiaries
maintains insurance policies and surety bonds, including, but not limited to,
general liability and property insurance, which insure the Company, its
Subsidiaries and their respective employees against losses and risks reasonably
insured against by comparable businesses. Neither the Company nor any of its
Subsidiaries (i) has failed to give notice or present any insurance claim with
respect to any matter, including, but not limited to, the Company's or any of
its Subsidiaries' business, property or employees, under any insurance policy
or surety bond in a due and timely manner, (ii) has any disputes or claims
against any underwriter of such insurance policies or surety bonds or has
failed to pay any premiums due and payable thereunder or (iii) has failed to
comply with all material terms and conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances which would
relieve any insurer of its obligation under any such insurance policy or surety
bond to satisfy in full any valid claim of the Company or any of its
Subsidiaries.
(y) Except as described in the Prospectus,
neither the Company nor any of its Subsidiaries maintains, sponsors or
contributes to any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan" or a "multiemployer plan"
(collectively, "ERISA PLANS") as such terms are defined in Sections 3(2), 3(1)
and 3(37), respectively, of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Neither the Company nor any of its Subsidiaries has
maintained or contributed to a defined benefit plan as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has
11
<PAGE> 12
engaged in a "prohibited transaction" within the meaning of Section 406 of
ERISA or Section 4975 of the Code, which could subject the Company or any of
its Subsidiaries to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to such ERISA Plan. Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which are intended
to comply with Code Section 401(a) stating that such ERISA Plan and the
attendant trust are qualified thereunder. Neither the Company nor any of its
Subsidiaries has ever completely or partially withdrawn from such a
"multiemployer plan." Neither the Company nor any of its Subsidiaries will be
subject to any material liability under ERISA or any ERISA Plans.
(z) Each of the Company and its Subsidiaries
owns and has the unrestricted right to use all trade secrets, know-how,
technology (including all other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), inventions, designs,
processes, works of authorship, computer programs and technical data and
information (collectively, the "INTELLECTUAL PROPERTY") that are or could
reasonably be expected to be material to its business as currently conducted or
proposed to be conducted or to the development, manufacture, operation and sale
of any products and services sold or proposed to be sold by any of the Company
or any of its Subsidiaries, each free and clear of and without violating any
right, claimed right, charge, encumbrance, pledge, security interest, defect,
restriction, equity or lien of any kind whatsoever of others, including without
limitation, former employers of its employees. Neither the Company nor any of
its Subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any patent, patent application,
copyright or Intellectual Property which singly or in the aggregate, if the
subject of any unfavorable decision, ruling or finding, might have an adverse
effect on the general affairs, business, business prospects, earnings,
position, value, properties, management, condition (financial or otherwise),
operations or results of operations of the Company and its Subsidiaries taken
as a whole. Except as set forth in the Prospectus, the Company and its
Subsidiaries are not obligated or under any liability whatsoever to make any
payment by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, patent application, copyright or Intellectual
Property, with respect to the use thereof or in connection with the conduct of
their respective businesses or otherwise.
(aa) Each of the Company and its Subsidiaries
has taken reasonable security measures to protect the secrecy, confidentiality
and value of all their Intellectual Property in all material aspects.
4. Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder acting severally and not jointly, and
Spier, individually and on behalf of the other Selling Stockholders, represents
and warrants to, and covenants with, each Underwriter [and with respect to
paragraphs (g) and (h) of, the Company that:
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<PAGE> 13
(a) Such Selling Stockholder has full power and
authority to enter into this Agreement and the Custody Agreement. All
authorizations and consents necessary for the execution and delivery by such
Selling Stockholder of the Custody Agreement, and for the execution of this
Agreement on behalf of such Selling Stockholder, have been given. Each of the
Custody Agreement and this Agreement has been duly authorized (to the extent
such Selling Stockholder is not a natural person), executed and delivered by or
on behalf of such Selling Stockholder and constitutes a valid and binding
agreement of such Selling Stockholder and is enforceable against such Selling
Stockholder in accordance with the terms thereof and hereof, except as rights
to indemnification and contribution hereunder may be limited by applicable law
and public policy and except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors rights generally or by general
equitable principles.
(b) Such Selling Stockholder now has, and at
the time of delivery thereof hereunder will have, (i) good and valid title to
the Firm Shares to be sold by such Selling Stockholder hereunder, free and
clear of all liens, encumbrances and claims whatsoever (other than pursuant to
the Agreement and the Custody Agreement), and (ii) full legal right and power,
and all authorizations and approvals required by law, to sell, transfer and
deliver such Firm Shares to the Underwriters hereunder and to make the
representations, warranties and agreements made by such Selling Stockholder
herein. Upon the delivery of and payment for such Firm Shares hereunder,
assuming each Underwriter has no notice of any adverse claim as such term is
used in the Uniform Commercial Code such Selling Stockholder will deliver good
and valid title thereto, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or restrictions of any kind
whatsoever.
(c) On the Closing Date all stock transfer or
other taxes (other than income taxes) which are required to be paid in
connection with the sale and transfer of the Firm Shares to be sold by such
Selling Stockholder to the several Underwriters hereunder will have been fully
paid or provided for by the Selling Stockholder, and all laws imposing such
taxes will have been fully complied with.
(d) The performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the
assets of such Selling Stockholder pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the acceleration of any obligation
under, as to such Selling Stockholder, any contract or other agreement to which
such Selling Stockholder is a party or by which such Selling Stockholder or any
of his property is bound or affected, or any ruling, decree, judgment, order,
statute, rule or regulation of any court or other governmental agency or body
having jurisdiction over such Selling
13
<PAGE> 14
Stockholder or the property of such Selling Stockholder, except for violations,
defaults, breaches or accelerations which would not result in a material
adverse effect in the financial condition of the Selling Stockholder.
(e) No consent, approval, authorization or
order of, or any filing or declaration with, any court or governmental agency
or body is required for the consummation by such Selling Stockholder of the
transactions on his part contemplated herein and in the Custody Agreement,
except such as have been obtained under the Act or the Rules and Regulations
and such as may be required under state securities or Blue Sky laws or the
by-laws and rules of the NASD in connection with the purchase and distribution
by the Underwriters of the Firm Shares to be sold by such Selling Stockholder.
(f) Such Selling Stockholder has no knowledge
of any fact or condition not set forth in the Registration Statement or the
Prospectus which has materially adversely affected, or may materially adversely
affect, the general affairs, business, business prospects, earnings, position,
value, properties, management, condition (financial or otherwise), operations
or results of operations of the Company, and the sale of the Firm Shares
proposed to be sold by such Selling Stockholder is not prompted by any such
knowledge.
(g) The information under the caption "Selling
Stockholder" in the Prospectus is complete and accurate in all material
respects.
(h) Other than as permitted by the Act and the
Rules and Regulations, such Selling Stockholder has not distributed and will
not distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the Shares. Such Selling
Stockholder has not taken, directly or indirectly, any action intended to cause
or result in, or which might reasonably be expected to cause or result in, or
which has caused or resulted in, stabilization or manipulation, under the Act
or otherwise, of the price of any security of the Company to facilitate the
sale or resale of the Shares.
(i) Certificates in negotiable form for the
Firm Shares to be sold hereunder by such Selling Stockholder have been placed
in custody, for the purpose of making delivery of such Firm Shares under this
Agreement, under the Custody Agreement which appoints [the Company's Registrar
and Transfer Agent] as custodian (the "CUSTODIAN") for such Selling
Stockholder. Such Selling Stockholder agrees that the Firm Shares represented
by the certificates held in custody for him under the Custody Agreement are for
the benefit of and coupled with and subject to the interest hereunder of the
Custodian, the Underwriters and the Company, that the arrangements made by such
Selling Stockholder for such custody and the appointment of the Custodian by
such Selling Stockholder are irrevocable, and that the obligations of such
Selling Stockholder hereunder shall not be terminated by operation of law,
whether by the death, disability
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<PAGE> 15
or incapacity of such Selling Stockholder or the occurrence of any other event.
If the Selling Stockholder should die, become disabled or incapacitated or if
any other such event should occur before the delivery of the Firm Shares
hereunder, certificates for the Firm Shares shall be delivered by the Custodian
in accordance with the terms and conditions of this Agreement, and actions
taken by the Custodian pursuant to the Agreement and the Custody Agreement
shall be as valid, as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have received notice
thereof.
4A. Representations and Warranties of Spier. Spier,
acting individually, represents and warrants to the Underwriter and the Company
that:
(a) The information under the caption "Selling
Stockholders" in the Prospectus is complete and accurate in all material
respects.
(b) To the best of his knowledge, on the Effective Date,
and at the Closing Date no part of the Registration Statement or any amendment
thereto did or will contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, in light of the circumstances under
which they were made; at the Effective Date, the date the Prospectus or any
amendment or supplement to the Prospectus is filed with the Commission, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, in light of the
circumstances under which they were made.
5. Agreements of the Company and the Selling
Stockholder. The Company and the Selling Stockholders ,severally and not
jointly, and William Spier as authorized representative of the Selling
Stockholders, individually and on behalf of the Selling Stockholders (in the
case of the Selling Stockholders and Spier, as to Sections 5(j), (k), (n) and
(o) only ) agree with the several Underwriters as follows:
(a) The Company shall not, either prior to the
Effective Date or thereafter during such period as the Prospectus is required
by law to be delivered in connection with sales of the Shares by an Underwriter
or dealer, file any amendment or supplement to the Registration State ment or
the Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company shall use its best efforts to
cause the Registration Statement to become effective, and shall notify the
Representatives and the Selling Stockholders promptly, and shall confirm such
advice in writing, (i) when the Registration Statement has become
15
<PAGE> 16
effective and when any post-effective amendment thereto becomes effective, (ii)
of any request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional information, (iii)
of the commencement by the Commission or by any state securities commission of
any proceedings for the suspension of the qualification of any of the Shares
for offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, including, without limitation,
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose or the threat thereof, (iv) of the happening of any event during the
period mentioned in the second sentence of Section 5(e) hereof that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading
and (v) of receipt by the Company or any representative of the Company of any
other communication from the Commission relating to the Company, the
Registration Statement, any preliminary prospectus or the Prospectus. If at any
time the Commission shall issue any order suspending the effectiveness of the
Registration Statement, the Company shall make every reasonable effort to
obtain the withdrawal of such order at the earliest possible moment. The
Company shall use its best efforts to comply with the provisions of and make
all requisite filings with the Commission pursuant to Rule 430A and to notify
the Representatives promptly of all such filings.
(c) The Company shall furnish to the
Representatives, without charge, two signed copies of the Registration
Statement and of any post-effective amendment thereto, including financial
statements and schedules, and all exhibits thereto (including any ument filed
under the Exchange Act and deemed to be incorporated by reference into the
Prospectus) and shall furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company shall comply with all the
provisions of any undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from
time to time, the Company shall deliver to each of the Underwriters and the
Selling Stockholders, without charge, as many copies of the Prospectus or any
amendment or supplement thereto as the Representatives or the Selling
Stockholders may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters [or the Selling
Stockholders] should be set forth in the
16
<PAGE> 17
Prospectus in order to make any statement therein, in the light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company shall
forthwith prepare and duly file with the Commission an appropriate supplement
or amendment thereto, and shall deliver to each of the Underwriters and the
Selling Stockholders, without charge, such number of copies thereof as the
Representatives may reasonably request. The Company shall not file any ument
under the Exchange Act before the termination of the offering of the Shares by
the Underwriters if such ument would be deemed to be incorporated by
reference into the Prospectus which is not approved by the Representatives [and
the Selling Stockholders] after reasonable notice thereof.
(f) Prior to any public offering of the Shares
by the Underwriters, the Company shall cooperate with the Representatives and
counsel to the Underwriters in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as the Representatives may request; provided,
however, that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) During the period of five years commencing
on the Effective Date, the Company shall furnish to the Representatives and
each other Underwriter who may so request copies of such financial statements
and other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock, and will
furnish to the Representatives and each other Underwriter who may so request a
copy of each annual or other report it shall be required to file with the
Commission.
(h) The Company shall make generally available
to holders of its securities as soon as may be practicable but in no event
later than the last day of the fifteenth full calendar month following the
calendar quarter in which the Effective Date falls, an earnings statement
(which need not be audited but shall be in reasonable detail) for a period of
12 months ended commencing after the Effective Date, and satisfying the
provisions of Section 11(a) of the Act (including Rule 158 of the Rules and
Regulations).
(i) Whether or not any of the transactions '
contemplated by this Agreement are consummated or this Agreement is terminated,
the Company shall pay, or reimburse if paid by the Representatives, all costs
and expenses incident to the performance of the obligations of the Company and,
except as specified in paragraph (j) below, the Selling Stockholder under this
Agreement (other than underwriting discounts and fees and fees and expenses of
counsel and accountants of the Selling Stockholders), including but not limited
to costs and expenses of or relat ing to (i) the preparation, printing and
filing of the Registration Statement and exhibits thereto, each preliminary
prospectus, the Prospectus and any amendment or supplement to the Registration
Statement or the Prospectus, (ii) the preparation and delivery of certificates
representing the
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<PAGE> 18
Securities, (iii) the printing of this Agreement, the Agreement Among
Underwriters, any Dealer Agreements, any Underwriters' Questionnaire and the
Power of Attorney and the Custody Agreement, (iv) furnishing (including costs
of shipping, mailing and courier) such copies of the Registration Statement,
the Prospectus and any preliminary prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold, (v) the listing of the Shares on the Nasdaq National Market
System, (vi) any filings required to be made by the Underwriters with the NASD,
and the fees, disbursements and other charges of counsel for the Underwriters
in connection therewith, (vii) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 5(f) hereof, including the fees, disbursements
and other charges of counsel to the Underwriters in connection therewith, and
the preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) counsel to the Company, (ix) the transfer agent for the
Shares and (x) the Accoun tants. The cost of original issue tax stamps, if any,
in connection with the issuance and delivery of the Option Shares to the
respective Underwriters shall be borne by the Company. The cost of tax stamps,
if any, in connection with the sale of the Firm Shares by the Selling
Stockholders shall be borne by the Selling Stockholders. The Company with
respect to the Option Shares and the Selling Stockholders with respect to the
Firm Shares shall pay and hold each Underwriter and any subse quent holder of
the Shares harmless from, any and all liabilities with respect to or resulting
from any failure or delay in paying Federal and state stamp and other transfer
taxes, if any, which may be payable or determined to be payable in connection
with the original issuance or sale to such Under writer of the Shares.
(j)(I) If this Agreement shall be terminated by the
Company pursuant to any of the provisions hereof (other than pursuant to
Section 9) or if for any reason the Company shall be unable to perform its
obligations hereunder, the Company shall reimburse the several Underwriters for
all out-of-pocket expenses (including the fees, disbursements and other charges
of counsel to the Underwriters) reasonably incurred by them in connection
herewith; provided, however, that any payments received by the Underwriters
pursuant to clause (j) (III) below shall be deducted from any amounts due
pursuant to this clause (j) (I); (II) if this Agreement shall be terminated by
the Selling Stockholders pursuant to any of the provisions hereof (other than
pursuant to Section 9) or if for any reason the Selling Stockholders shall be
unable to perform their obligations hereunder, the Selling Stockholders shall
reimburse the several Underwriters for all out-of-pocket expenses (including
the fees, disbursements and other charges of counsel to the Underwriters)
reasonably incurred in connection herewith; provided, however, that any
payments received by the Underwriters pursuant to clause (j) (III) below shall
be deducted from any amount due pursuant to this clause (j) (II); (III) whether
or not any of the transactions contemplated by this Agreement are consummated
or whether or not this Agreement is terminated, Selling Stockholders shall
reimburse the Representatives for all out-of-pocket expenses (including the
fees, disbursements and other charges of counsel to the Underwriters)
reasonably incurred by them in connection
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<PAGE> 19
herewith (other than fees and expenses paid by the Company pursuant to
paragraphs 5(i)(vii) above); provided, however, that Selling Stockholders'
obligations pursuant to this clause (j) (III) shall not exceed $150,000. The
obligations of the Selling Stockholders under this paragraph (j) shall be joint
and several.
(k) Neither the Company nor the Selling
Stockholders shall, at any time, directly or indirectly, take any action
intended to cause or result in, or which might reasonably be expected to cause
or result in, or which will constitute, stabilization or manipulation, under
the Act or otherwise, of the price of the shares of Common Stock to facilitate
the sale or resale of any of the Shares.
(l) The Company shall apply the net proceeds
from the offering and sale of the Shares to be sold by the Company in the
manner set forth in the Prospectus under "Use of Proceeds".
(m) The Company shall not, and shall cause each
of its executive officers, directors and each beneficial owner of more than 5%
of the outstanding shares of Common Stock to enter into agreements with the
Representatives in the form set forth in Exhibit D to the effect that they
shall not, for a period of 120 days after the commencement of the public
offering of the Shares, without the prior written consent of the
Representatives, offer to sell, sell, contract to sell, grant any option to
sell, pledge, grant any rights with respect to, or otherwise dispose of, or
require the Company to file with the Commission a registration statement under
the Act to register, any shares of Common Stock or securities convertible into
or exchangeable for Common Stock or warrants or other rights to acquire shares
of Common Stock of which the undersigned is now, or may in the future become,
the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act).
Furthermore, such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Company Stock held by such person except in compliance with this
restriction. The Company has provided to counsel for the Representatives a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Representatives true, accurate and complete copies of all of
the agreements pursuant to which its officers, directors and stockholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of the Representatives.
(n) As soon as any Selling Stockholder is
advised thereof, such Selling Stockholder shall advise the Representatives and
the Company and confirm such advice in writing, (i) of receipt by such Selling
Stockholder, or by any representative of such Selling Stockholder, of any
communication from the Commission relating to the Registration Statement, the
Prospectus or
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<PAGE> 20
any preliminary prospectus, or any notice or order of the Commission relating
to the Company or such Selling Stockholder in connection with the transactions
contemplated by this Agreement, and (ii) of the happening of any event during
the period from and after the Effective Date that in the reasonable judgment of
such Selling Stockholder makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
(o) Each Selling Stockholder shall deliver to
Representatives prior to or on the Effective Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
6. Conditions of the Obligations of the Underwriters.
In addition to the execution and delivery of the Price Determination Agreement,
the obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration
Statement has become effective shall be received by the Representatives not
later than 5:00 p.m., New York City time, on the date of this Agreement or at
such later date and time as shall be consented to in writing by the
Representatives and all filings required by Rule 424 of the Rules and
Regulations and Rule 430A shall have been made.
(b)(i) No stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for
that purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer or the Chairman of the Board of
Directors of the Company and the Chief Financial Officer of the Company (who
may, as to proceedings threatened, rely upon the best of their information and
belief), to the effect of clauses (i), (ii) and (iii).
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<PAGE> 21
(c) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
there shall not have been a material adverse change or development involving a
prospective material adverse change, in the general affairs, business, business
prospects, earnings, position, value, properties, management, condition
(financial or otherwise), operations or results of operations of the Company
and its Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the Prospectus, (ii)
neither the Company nor any of its Subsidiaries shall have sustained any
material loss or interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or
from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration Statement
and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the initial public offering
price, (iii) there shall have been no transactions, not in the ordinary course
of business, entered into by the Company or any of its Subsidiaries and no
liabilities or obligations incurred by the Company or any of its Subsidiaries,
in each case from the latest date as of which the financial condition of the
Company and its Subsidiaries is set forth in the Registration Statement and the
Prospectus, which are materially adverse to the Company and its Subsidiaries,
taken as a whole, (iv) neither the Company nor any of its Subsidiaries shall
have issued any securities (other than the Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class,
debt (long term or short term) or, except in the ordinary course of business,
liabilities or obligations of the Company or any of its Subsidiaries
(contingent or otherwise), except as set forth in the Registration Statement
and Prospectus and (v) no material amount of the assets of the Company or any
of its Subsidiaries shall have been pledged, mortgaged or otherwise encumbered,
except as set forth in the Registration Statement and Prospectus.
(d) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have been no litigation or other proceeding instituted against the
Company or any of its Subsidiaries or any of their respective officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the general
affairs, business, business prospects, earnings, position, value, properties,
management, condition (financial or otherwise), operations or results of
operations, of the Company and its Subsidiaries taken as a whole.
(e) Each of the representations and warranties
of the Company, the Selling Stockholders and Spier contained herein shall be
true and correct in all material respects at the Closing Date and, with respect
to the Option Shares, the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Option Closing
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<PAGE> 22
Date, as if made at the Closing Date and, with respect to the Company and the
Option Shares, at the Option Closing Date, and all covenants and agreements
contained herein to be performed by the Company and all conditions contained
herein to be fulfilled or complied with by the Company at or prior to the
Closing Date and, with respect to the covenants, agreements and conditions
relating to the Company in connection with the Option Shares, at or prior to
the Option Closing Date, shall have been duly performed, fulfilled or complied
with.
(f) The Representatives and, with respect to
the Firm Shares, the Selling Stockholders, shall have received opinions, each
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, satisfactory in form and substance to counsel for the
Underwriters and the Selling Stockholders, as the case may be, from Rogers &
Harden, counsel to the Company, to the effect set forth in Exhibit E and from
Fried, Frank, Harris, Shriver & Jacobson, counsel to the Selling Stockholders,
to the effect set forth in Exhibit F.
(g) The Representatives shall have received an
opinion, dated the Closing Date and the Option Closing Date, from Kaye,
Scholer, Fierman, Hays & Handler, LLP, counsel to the Underwriters, with
respect to the Registration Statement, the Prospectus and this Agreement, which
opinion shall be satisfactory in all respects to the Representatives.
(h) On the date of the Prospectus, the
Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, addressed to the Representatives and in form and
substance satisfactory to the Representatives, confirming that they are
independent accountants with respect to the Company as required by the Act and
the Rules and Regulations and with respect to the financial and other
statistical and numerical information contained in the Registration Statement
or incorporated by reference therein. At the Closing Date and, as to the Option
Shares, the Option Closing Date, the Accountants shall have furnished to the
Representatives a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
letter from the Accountants, that nothing has come to their attention during
the period from the date of the letter referred to in the prior sentence to a
date (specified in the letter) not more than five days prior to the Closing
Date and the Option Closing Date which would require any change in their letter
dated the date of the Prospectus, if it were required to be dated and delivered
at the Closing Date and the Option Closing Date. The Selling Stockholders shall
have received an "agreed upon procedures" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by such letters in connection with public offerings of
securities as the Selling Stockholders shall reasonably request, dated within
five days of the date of effectiveness or supplements, as the case may be,
addressed to the Selling Stockholders and with an appropriate bring down as of
the Closing Date.
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<PAGE> 23
(i) At the Closing Date and, as to the Option
Shares, the Option Closing Date, there shall be furnished to the
Representatives an accurate certificate, dated the date of its delivery, signed
by each of the Chief Executive Officer and the Chief Financial Officer of the
Company, in form and substance satisfactory to the Representatives, to the
effect that:
(i) Each signer of such certificate
has carefully examined the Registration Statement and the Prospectus
(including any uments filed under the Exchange Act and deemed to be
incorporated by reference into the Prospectus), and (A) as of the date
of such certificate, such uments are true and correct in all material
respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein
not misleading in light of the circumstances under which they were
made, and (B) since the Effective Date, no event has occurred as a
result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein not untrue or misleading in
any material respect, and there has been no ument required to be filed
under the Exchange Act and the Exchange Act Rules and Regulations that
upon such filing would be deemed to be incorporated by reference into
the Prospectus that has not been so filed.
(ii) Each of the representations and
warranties of the Company contained in this Agreement were, when
originally made, and are, at the time such certificate is delivered,
true and correct in all material respects.
(iii) Each of the covenants required
herein to be performed by the Company on or prior to the date of such
certificate has been duly, timely and fully performed and each
condition herein required to be complied with by the Company on or
prior to the delivery of such certificate has been duly, timely and
fully complied with.
(j) At the Closing Date, there shall have been
furnished to the Representatives and the Company, as applicable, an accurate
certificate, dated the date of its delivery, signed by Spier on behalf of the
Selling Stockholders, in form and substance satisfactory to the
Representatives, to the effect that the representations and warranties of the
Selling Stockholders and Spier contained herein are true and correct in all
material respects on and as of the date of such certificate as if made on and
as of the date of such certificate, and each of the covenants and conditions
required herein to be performed or complied with by the Selling Stockholders
and Spier on or prior to the date of such certificate has been duly, timely and
fully performed or complied with.
(k) On or prior to the Closing Date, the
Representatives shall have received the executed agreements referred to in
Section 5(m).
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<PAGE> 24
(l) The Shares shall be qualified for sale in
such states as the Representatives may reasonably request, each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date and the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall
have been duly authorized for listing by the Nasdaq National Market System upon
official notice of issuance.
(n) The Company, the Selling Stockholders and
Spier shall have furnished to the Representatives such certificates, in
addition to those specifically mentioned herein, as the Representatives may
have reasonably requested as to the accuracy and completeness at the Closing
Date and, with respect to the Company and the Option Shares, the Option Closing
Date of any statement in the Registration Statement or the Prospectus or any
uments filed under the Exchange Act and deemed to be incorporated by reference
into the Prospectus, as to the accuracy at the Closing Date and, with respect
to the Company, the Option Closing Date of the representations and warranties
of the Company, the Selling Stockholders and Spier herein, as to the
performance by the Company, the Selling Stockholders and Spier of their
respective obligations hereunder or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. Indemnification.
(a) The Company severally and each of the
Selling Stockholders, jointly and severally, shall indemnify and hold harmless
each Underwriter, the directors, officers, employees, counsel and agents of
each Underwriter and each person, if any, who controls each Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and
against any and all losses, claims, liabilities, expenses and damages
(including any and all investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding between any of the indemnified parties and any indemnifying
parties or between any indemnified party and any third party, or otherwise, or
any claim asserted), to which they, or any of them, may become subject under
the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on any untrue
statement or alleged untrue statement of a material fact contained in (i) any
preliminary prospectus, the Registra tion Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or in
any uments filed under the Exchange Act and deemed to be incorporated by
reference into the Prospectus, (ii) any application, other ument or written
communication, executed by the Company or based upon written information
supplied by the Company, filed with or sent to the Commission, (iii) any
application, other ument or written communication, executed by the Company or
based upon written information supplied by the Company, filed in any
jurisdiction in order to qualify the Shares under the securities laws of such
jurisdiction or (iv) any
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<PAGE> 25
document, executed by the Company or based on written information supplied by
the Company, filed with any securities exchange, or the omission or alleged
omission to state in such uments enumerated in (i-iv) of a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, pro vided
that the Company and the Selling Stockholders shall not be liable to the extent
that such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on
an untrue statement or omission or alleged untrue state ment or omission made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of any
Under writer expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus; provided, further, that the Selling
Stockholders (other than Spier) shall not be liable unless such loss, claim,
liability, expense or damages arises from the sale of the Firm Shares in the
public offering to any person by an Underwriter and arises out of or is based
on an untrue statement or omission or alleged untrue statement or omission made
in reliance on and in conformity with information furnished in writing to the
Company by the Selling Stockholders or Spier expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus. In no
event shall the aggregate liability of any Selling Stockholder for
indemnification hereunder exceed the net proceeds received by such Selling
Stockholder in the offering of the Firm Shares hereunder and no Selling
Stockholder (other than Spier) shall be liable for any untrue statement,
alleged untrue statement, omission or alleged omission of any other Selling
Stockholder. Spier shall be jointly and severally liable for any statement,
alleged untrue statement, omission or alleged omission of all the Selling
Stockholders. In no event shall Spier's liability under this Agreement, as
representative of himself and the other Selling Stockholders exceed the
aggregate net proceeds received by all Selling Stockholders. If multiple claims
are brought against any Underwriter, the directors, officers, employees,
counsel and agents of such Underwriter and any person, if any, who controls
such Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, in an arbitration proceeding, and indemnification is
permitted under applicable law and is provided for under this Agreement with
respect to at least one such claim, the Company agrees that any arbitration
award shall be conclusively deemed to be based on claims as to which
indemnification is permitted and provided for, except to the extent the
arbitration award expressly states that the award, or any portion thereof, is
based solely on a claim as to which indemnification is not available. [The
Company agrees to indemnify and hold harmless each of the Selling Stockholders
(other than Spier) to the same extent that the Company has agreed to indemnify
and hold harmless each Underwriter pursuant to the preceding paragraph;
provided, however, the Company shall not be liable under this paragraph to the
extent any loss, claim, liability, expense or damages described in the
preceding paragraph arises out of or is based upon an untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information furnished in writing to the Company by the Selling
Stockholders or Spier expressly for inclusion in the Registration Statement,
any preliminary prospectus or the Prospectus.] This indemnity agreement
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<PAGE> 26
will be in addition to any liability that the Company, the Selling Stockholders
and Spier might other wise have, including any other agreements between the
Company and the Selling Stockholders.
(b) Each Underwriter shall indemnify and hold
harmless the Company, the Selling Stockholders, each person, if any, who
controls the Company within the meaning of Sec tion 15 of the Act or Section 20
of the Exchange Act, each director of the Company and each officer of the
Company who signs the Registration Statement to the same extent as the
foregoing indemnity from the Company and the Selling Stockholders to each
Underwriter, but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of such Underwriter expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
(c) Any party that proposes to assert the right
to be indemnified under this Section 7 shall, promptly after receipt of notice
of commencement of any action against such party in respect of which a claim is
to be made against an indemnifying party or parties under this Sec tion 7,
notify each such indemnifying party of the commencement of such action,
enclosing a copy of all papers served, but the omission so to notify such
indemnifying party shall not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 7 unless,
and only to the extent that, such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. If any such action is
brought against any indemnified party and it notifies the indemnifying party of
its commencement, the indemnifying party will be entitled to participate in
and, to the extent that it elects by delivering written notice to the
indemnified party promptly after receiving notice of the commencement of the
action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own
counsel in any such action, but the fees, expenses and other charges of such
counsel will be at the expense of such indemnified party unless (1) the
employment of counsel by the indemnified party has been authorized in writing
by the indemnifying party, (2) the indemnified party has reasonably concluded
(based on advice of counsel) that there may be legal defenses available to it
or other indemnified parties that are different from or in addition to those
available to the indemnifying party, (3) a conflict or potential conflict
exists (based on advice of counsel to the indemnified party) between the
indemnified party and the indemnifying party (in which case the indemnifying
party shall not have the right to direct the defense of such action on behalf
of the indemnified party) or (4) the indemnifying party has not in
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<PAGE> 27
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel shall be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm admitted
to practice in such jurisdiction at any one time for all such indemnified party
or parties except (i) where authorized by the indemnifying party, (ii)
indemnified parties have reasonably concluded (based on advice of counsel) that
there may be legal defenses available to each of them that are different from
or in addition to those available to the other indemnified parties or (iii) a
conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified parties. All such fees,
disbursements and other charges shall be reimbursed by the indemnifying party
promptly as they are incurred. An indemnifying party shall not be liable for
any settlement of any action or claim effected without its written consent
(which consent will not be unreasonably withheld or delayed). No indemnifying
party shall, without the prior written consent of each indemnified party,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding relating to the matters contemplated by
this Section 7 (whether or not any indemnified party is a party thereto),
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising or that may arise out of
such claim, action or proceeding and does not include any statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 7 is applicable in accordance with its
terms but for any reason is held to be unavailable from the Company, the
Selling Stockholders or the Underwriters, the Company, the Selling Stockholders
and the Underwriters shall contribute to the total losses, claims, liabilities,
expenses and damages (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted, but after deducting any
contribution received by the Company or the Selling Stockholders from persons
other than the Underwriters, such as persons who control the Company within the
meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for
contribution) to which the Company or the Selling Stockholders and any one or
more of the Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company and
Selling Stockholders on the one hand and the Underwriters on the other. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus. If,
but only if, the
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<PAGE> 28
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other, with respect
to the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Representatives on behalf of the Underwriters, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, however, that no Selling
Stockholder (other than Spier) shall be liable for any untrue statement,
alleged untrue statement, omission or alleged omission of any other Selling
Stockholder. Spier shall be jointly and severally liable for any untrue
statement, alleged untrue statement, omission or alleged omission of all the
Selling Stockholders. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 7(d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action
in respect thereof, referred to above in this Section 7(d) shall be deemed to
include, for purpose of this Sec tion 7(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts received by it, and no person found guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
as provided in this Section 7(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 7(d), any
person who controls a party to this Agreement within the meaning of the Act
will have the same rights to contribution as that party, and each officer of
the Company who signed the Registration Statement will have the same rights to
con tribution as the Company, subject in each case to the provisions hereof.
Any party entitled to contri bution, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim for
contribution may be made under this Section 7(d), will notify any such party or
parties from whom contribution may be sought, but the omission so to notify
will not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have under this Section 7(d). No party will
be liable for contribution with respect to any action or claim settled without
its written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements
contained in this Section 7 and the representations and warranties of the
Company, the Selling Stockholders and Spier contained
28
<PAGE> 29
in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by or on behalf of the Underwriters,
(ii) acceptance of any of the Shares and payment therefor or (iii) any
termination of this Agreement.
8. Termination. The obligations of the several Underwriters
under this Agreement may be terminated at any time prior to the Closing Date
(or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company from the Representatives, without liability on
the part of any Underwriter to the Company or the Selling Stockholders, if,
prior to delivery and payment for the Shares (or the Option Shares, as the case
may be), in the sole judgment of the Representatives, (i) trading in any of the
equity securities of the Company shall have been suspended by the Commission,
by an exchange that lists the Shares or by the Nasdaq National Market System,
(ii) trading in securities generally on the New York Stock Exchange shall have
been suspended or limited or minimum or maximum prices shall have been
generally established on such exchange, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by such exchange or by order of
the Commission or any court or other governmental authority, (iii) a general
banking moratorium shall have been declared by either Federal or New York State
authorities, (iv) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
declaration by the United States of a national emergency or war or other
calamity or crisis shall have occurred, the effect of any of which is such as
to make it impracticable or inadvisable to market the Shares or Option Shares
on the terms and in the manner contemplated by the Prospectus, (v) if the
Company or any of its Subsidiaries shall have sustained a loss material or
substantial to the Company or any of its Subsidiaries by reason of flood, fire,
accident, hurricane, earthquake, theft, sabotage, or other calamity or
malicious act which, whether or not such loss shall have been insured, will
make it inadvisable to proceed with the offering and sale of the Shares or
Option Shares or (vi) if there shall have been a material adverse change in the
condition (financial or otherwise), earnings, business, prospects,
stockholders' equity, operations, properties, business, or results of
operations, of the Company or the Company and its Subsidiaries taken as a
whole, as would make it inadvisable to proceed with the offering and sale of
the Shares or Option Shares.
9. Substitution of Underwriters. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it
or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of Firm
Shares, the other Underwriters shall be obligated, severally, to purchase the
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase, in the proportions which the number of Firm Shares
which they have respectively agreed to purchase pursuant to Section 1 bears to
the aggregate number of Firm Shares which all such non-defaulting Underwriters
have so agreed to purchase, or in such other proportions as the Representatives
may specify;
29
<PAGE> 30
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 9 by more than one-ninth of the number of Firm Shares
agreed to be purchased by such Underwriter without the prior written consent of
such Underwriter. If any Underwriter or Underwriters shall fail or refuse to
purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Company, the Attorneys and the Representatives for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Under writer, or the Company or the Selling Stockholders for the
purchase or sale of any Shares under this Agreement. In any such case either
the Representatives or the Company and the Attorneys shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other uments or arrangements may be effected. Any
action taken pursuant to this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. Miscellaneous. Notice given pursuant to any of the provisions
of this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company, 2311
South 7th Avenue, Bozeman, Montana 59715 Attention: Richard M. Haddrill, (b) if
to the Selling Stockholders, to ____________________, or (c) if to the
Underwriters, to GKM at the offices of GKM, 529 Park Avenue, New York, New York
10017 and to Ladenburg Thalmann & Co. Inc. at its offices at ________________.
Any such notice shall be effective only upon receipt. Any notice under Section
8 or 9 may be made by telex or telephone, but if so made shall be subsequently
confirmed in writing.
This Agreement has been and is made solely for the benefit of
the several Underwriters, the Company and the Selling Stockholders, and of the
controlling persons, directors and officers referred to in Section 7, and their
respective successors and assigns, and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
With respect to any obligation of the Company and the Selling
Stockholders hereunder to make any payment, to indemnify for any liability or
to reimburse for any expense, the Underwriters (or any other person to whom
such payment, indemnification or reimbursement is owed) may pursue the Company
with respect thereto prior to pursuing any Selling Stockholder.
All representations, warranties and agreements of the Company
and the Selling Stockholders contained herein or in certificates or other
instruments delivered pursuant hereto, shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf
30
<PAGE> 31
of any Underwriter (ii) acceptance of and Shares and payment therefor or (iii)
any termination of this Agreement.
Any action required or permitted to be taken by the
Representatives under this Agreement may be taken by them jointly or by GKM.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. Each party hereto hereby
irrevocably submits for purposes of any action arising from this Agreement
brought by the other party hereto to the jurisdiction of the courts of New York
State located in the Borough of Manhattan and the U.S. District Court for the
Southern District of New York. This Agreement may be signed in two or more
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
The Company, the Selling Stockholders and the Underwriters
each hereby irrevocably waive any right they may have to a trial by jury in
respect of any claim based upon or arising out of this Agreement or the
transactions contemplated hereby.
This Agreement embodies the entire agreement and
understanding between the Company and Underwriters, on the one hand and the
Selling Stockholders and the Underwriters on the other, and supersedes all
prior agreements and understandings relating to the subject matter hereof
between those respective parties, including the letter agreement dated December
1, 1997 between the Representatives and Spier, individually and on behalf of
the Selling Stockholders. This Agreement does not supersede the Stockholders
Agreement dated February 23, 1993 and the Letter Agreement dated December 3,
1997 between the Company and William Spier. This Agreement may not be amended
or otherwise modified or any provision hereof waived except by an instrument in
writing signed by the Representatives, the Selling Stockholders and the
Company.
31
<PAGE> 32
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
POWERHOUSE TECHNOLOGIES, INC.
By:
-----------------------------
Name:
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE I ATTACHED HERETO
By:
-----------------------------
Name:
Attorney-in-Fact
32
<PAGE> 33
Confirmed as of the date first above mentioned:
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
Acting on behalf of
themselves and as the
Representatives of the
other several Underwriters
named in Schedule II hereof.
By: GERARD KLAUER MATTISON & CO., INC.
By:
-------------------------------
Name:
Title:
By: LADENBURG THALMANN & CO. INC.
By:
-------------------------------
Name:
Title:
33
<PAGE> 34
SCHEDULE I
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Name of Selling Stockholder Total Number of Firm Shares to be Sold
- --------------------------- --------------------------------------
<S> <C>
William Spier
Video Investment Partners, L.P.
Gabriel Capital, L.P.
Asgard Ltd.
LBN Investment Associates, L.P.
Parkway M&A Capital Corporation
Homer Noble
</TABLE>
<PAGE> 35
SCHEDULE II
UNDERWRITERS
Names of Underwriters Number of Firm Shares to be Purchased
- --------------------- -------------------------------------
Gerard Klauer Mattison & Co., Inc.
Ladenburg Thalmann & Co. Inc.
Total -------------------------------------
=====================================
<PAGE> 36
EXHIBIT A
POWERHOUSE TECHNOLOGIES, INC.
---------------------
PRICE DETERMINATION AGREEMENT
February __, 1998
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
As Representatives of the several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated February
__, 1998 (the "UNDERWRITING AGREEMENT"), among Powerhouse Technologies, Inc., a
Delaware corporation (the "COMPANY"), the Selling Stockholders named in Schedule
I thereto or hereto (the "SELLING STOCKHOLDERS") and the several Underwriters
named in Schedule II thereto or hereto (the "UNDERWRITERS"), for whom Gerard
Klauer Mattison & Co., Inc. ("GKM") and Ladenburg Thalmann & Co. Inc. are acting
as Representatives (the "REPRESENTATIVES"). The Underwriting Agreement provides
for the purchase by the Underwriters from the Selling Stockholder, subject to
the terms and conditions set forth therein, of an aggregate of ________ shares
(the "FIRM SHARES") of the Company's common stock, par value $0.01 per share.
This Agreement is the Price Determination Agreement referred to in the
Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the
undersigned agree with the Representatives as follows:
1. The public offering price per share for the Firm Shares shall be
$_______.
<PAGE> 37
2. The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $_______, representing an amount equal to the
initial public offering price set forth above, less $______ per share. In
addition, the Underwriters shall retain $150,000, representing approximately
$___ per share from the proceeds payable to the Selling Stockholders for
reimbursement of Underwriters expenses in accordance with Section 5(j)(III) of
the Underwriting Agreement.
The Company represents and warrants to each of the Underwriters
that the representations and warranties of the Company set forth in Section 3 of
the Underwriting Agreement are accurate as though expressly made at and as of
the date hereof.
Each Selling Stockholder represents and warrants to each of the
Underwriters that the representations and warranties of such Selling Stockholder
and, as applicable, to the Company set forth in Section 4 of the Underwriting
Agreement are accurate as though expressly made at and as of the date hereof.
Spier represents and warrants to each Underwriter and the Company
that the representations and warranties set forth in Section 4A of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as
Schedule II is a completed list of the several Underwriters, which shall be a
part of this Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE. Each party hereto hereby irrevocably
submits for purposes of any action arising from this Agreement brought by the
other party hereto to the jurisdiction of the courts of New York State located
in the Borough of Manhattan and the U.S. District Court for the Southern
District of New York.
If the foregoing is in accordance with your understanding of the
agreement among the Company, the Selling Stockholders and the Underwriters,
please sign and return to the Company a counterpart hereof, whereupon this
instrument along with all counterparts and together with the Underwriting
Agreement shall be a binding agreement among the Company, the Selling
<PAGE> 38
Stockholders and the Underwriters in accordance with its terms and the terms of
the Underwriting Agreement. Very truly yours,
POWERHOUSE TECHNOLOGIES, INC.
By:
------------------------------
Name:
Title:
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE I TO THE
UNDERWRITING AGREEMENT
By:
-----------------------------
Name: William Spier
Attorney-in-Fact
Confirmed as of the date
first above mentioned:
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
Acting on behalf of themselves
and as the Representatives
of the other several Underwriters
named in Schedule II hereof.
By: GERARD KLAUER MATTISON & CO., INC.
By:
--------------------------------
Name:
Title:
By: LADENBURG THALMANN & CO. INC.
By:
--------------------------------
Name:
Title:
<PAGE> 39
EXHIBIT B
POWER OF ATTORNEY
POWERHOUSE TECHNOLOGIES, INC.
Common Stock
William Spier
Ladies and Gentlemen:
The undersigned understands that Powerhouse Technologies, Inc., a
Delaware corporation (the "COMPANY"), intends to file a registration statement
(the "REGISTRATION STATEMENT") under the Securities Act of 1933, as amended (the
"ACT"), in connection with the proposed public offering and sale by the
undersigned (the "SELLING STOCKHOLDER") of the Company's Common Stock, par value
$0.01 per share (the "COMMON STOCK").
The Selling Stockholder desires to sell certain shares of Common
Stock and to include such shares among the shares covered by the Registration
Statement. The number of shares of Common Stock which the undersigned desires to
sell (the "SHARES") are set forth beneath the signature of the Selling
Stockholder below.
Concurrently with the execution and delivery of this Power of
Attorney, the undersigned is delivering to you, or requesting the Company to
deliver to you, certificates for the Shares, which you are authorized to deposit
with a custodian of your selection (the "CUSTODIAN"), pursuant to a custody
agreement in the form attached as Attachment A hereto (the "CUSTODY AGREEMENT").
1. In connection with the foregoing, the Selling Stockholder hereby
makes, constitutes and appoints you (the "MEMBER") and your substitute under
Section 3, the true and lawful attorney-in-fact of the undersigned (the Member
or substitute, being herein referred to as the "ATTORNEY"), with full power and
authority, in the name and on behalf of the Selling Stockholder:
<PAGE> 40
(a) To enter into the Custody Agreement and deposit with the
Custodian pursuant thereto the certificates for the Shares delivered to the
Attorney concurrently herewith;
(b) For the purpose of effecting the sale of the Shares, to
execute and deliver (i) an Underwriting Agreement in the form filed as an
exhibit to the Registration Statement with such changes as the Attorney deems
necessary or advisable (the "UNDERWRITING AGREEMENT"), by and among the Company,
the Selling Stockholders and the Representatives (the "REPRESENTATIVES"),
selected by the Company, of the several Underwriters identified on Schedule II
to the Underwriting Agreement (the "UNDERWRITERS") and (ii) a Price
Determination Agreement (as defined in the Underwriting Agreement), by and among
the Company, the Selling Stockholders and the Representatives of the several
Underwriters;
(c) To endorse, transfer and deliver certificates for the
Shares to or on the order of the Representatives or to their nominee or
nominees, and to give such orders and instructions to the Custodian as the
Attorney may in its sole discretion determine with respect to (i) the transfer
on the books of the Company of the Shares in order to effect such sale
(including the names in which new certificates for such Shares are to be issued
and the denominations thereof); (ii) the delivery to or for the account of the
Representatives of the certificates for the Shares against receipt by the
Custodian of the full purchase price to be paid therefor; (iii) the remittance
to the Selling Stockholder of the Selling Stockholder's share of the proceeds,
after payment of expenses described in the Underwriting Agreement, from any sale
of Shares; and (iv) the return to the Selling Stockholder of certificates
representing the number of Shares (if any) deposited with the Custodian but not
sold by the Selling Stockholder under the Registration Statement for any reason;
(d) To retain Fried, Frank, Harris, Shriver & Jacobson as legal
counsel for the Selling Stockholder in connection with any and all matters
referred to herein;
(e) To take for the Selling Stockholder all steps deemed
necessary or advisable by the Attorney in connection with the registration of
the Shares under the Act, including without limitation filing amendments to the
Registration Statement, requesting acceleration of effectiveness of the
Registration Statement, advising the Securities and Exchange Commission that the
reason the Selling Stockholder is offering the Shares for sale is to diversify
the Selling Stockholder's investments and to assist the Company in enlarging the
public market for the Common Stock, informing said Commission that the Selling
Stockholder has no knowledge of any material adverse information with regard to
the current and prospective operations of the Company which is not stated in the
Registration Statement, and such other steps as the Attorney may in its absolute
discretion deem necessary or advisable;
(f) To make, acknowledge, verify and file on behalf of the
Selling Stockholder applications, consents to service of process and such other
undertakings or reports as
<PAGE> 41
may be required by law with state commissioners or officers administering state
securities or Blue Sky laws and to take any other action required to facilitate
the qualification of the Shares under the securities or Blue Sky laws of the
jurisdictions in which the Shares are to be offered;
(g) If necessary, to endorse (in blank or otherwise) on behalf
of the Selling Stockholder the certificate or certificates representing the
Shares, or a stock power or powers attached to such certificate or certificates;
and
(h) To make, execute, acknowledge and deliver all such other
contracts, orders, receipts, notices, requests, instructions, certificates,
letters and other writings and, in general, to do all things and to take all
actions which the Attorney in its sole discretion may consider necessary or
proper in connection with or to carry out the aforesaid sale of Shares, as fully
as could the Selling Stockholder if personally present and acting.
2. This Power of Attorney and all authority conferred hereby is
granted and conferred subject to and in consideration of the interests of the
Company, the Representatives and the Underwriters and, for the purpose of
completing the transactions contemplated by this Power of Attorney, this Power
of Attorney and all authority conferred hereby shall be irrevocable and shall
not be terminated by any act of the Selling Stockholder or by operation of law,
whether by the death, disability, incapacity or liquidation of the Selling
Stockholder or by the occurrence of any other event or events (including,
without limitation, the termination of any trust or estate for which the Selling
Stockholder is acting as a fiduciary or fiduciaries), and if, after the
execution hereof, the Selling Stockholder shall die or become disabled or
incapacitated, or if any other such event or events shall occur before the
completion of the transactions contemplated by this Power of Attorney, the
Attorney shall nevertheless be authorized and directed to complete all such
transactions as if such death, disability, incapacity or other event or events
had not occurred and regardless of notice thereof.
3. The Member shall have full power to make and substitute any person
in the place and stead of such Member, and the Selling Stockholder hereby
ratifies and confirms all that the Member or substitute shall do by virtue of
these presents. All actions hereunder may be taken by any the Member or his
substitute.
4. The Selling Stockholder hereby represents, warrants and covenants
that:
(a) Such Selling Stockholder has full power and authority to
enter into this Agreement, the Underwriting Agreement and the Custody Agreement.
All authorizations and consents necessary for the execution and delivery by such
Selling Stockholder of this Agreement, the Underwriting Agreement and the
Custody Agreement have been given. Each of this Agreement, the Underwriting
Agreement. Each of this Agreement, the Underwriting Agreement and the Custody
<PAGE> 42
Agreement has been duly author ized (to the extent such Selling Stockholder is
not a natural person), executed and delivered by or on behalf of such Selling
Stockholder. This Agreement constitutes a valid and binding agreement of such
Selling Stockholder and is enforceable against such Selling Stockholder in
accordance with the terms hereof, and the Underwriting Agreement and the Custody
Agreement, when executed and delivered by the Attorney in accordance herewith,
will constitute the valid and binding agreement of such Selling Stockholder and
will be enforceable against Selling Stockholder in accordance with the terms
thereof; except with respect to each agreement as rights to indemnification and
contribution thereunder may be limited by applicable law and public policy and
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors rights generally or by general equitable principles.
(b) Such Selling Stockholder now has, and at the time of
delivery thereof pursuant to the Underwriting Agreement will have, (i) good and
valid title to the Firm Shares to be sold by such Selling Stockholder hereunder,
free and clear of all liens, encumbrances and claims whatsoever (other than
pursuant to the Underwriting Agreement and the Custody Agreement), and (ii) full
legal right and power, and all authorizations and approvals required by law, to
sell, transfer and deliver such Firm Shares to the Underwriters pursuant to the
Underwriting Agreement and to make the representations, warranties and
agreements made by such Selling Stockholder therein. Upon the delivery of and
payment for such Firm Shares pursuant to the Underwriting Agreement, assuming
each Underwriter has no notice of any adverse claim as such term is used in the
Uniform Commercial Code such Selling Stockholder will deliver good and valid
title thereto, free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or restrictions of any kind whatsoever.
(c) On the Closing Date all stock transfer or other taxes
(other than income taxes) which are required to be paid in connection with the
sale and transfer of the Firm Shares to be sold by such Selling Stockholder to
the several Underwriters pursuant to the Underwriting Agreement will have been
fully paid or provided for by the Selling Stockholder, and all laws imposing
such taxes will have been fully complied with.
(d) The performance of this Agreement, the Underwriting
Agreement and the Custody Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of such Selling Stockholder
pursuant to the terms or provisions of, or result in a breach or violation of
any of the terms or provisions of, or consti tute a default under, or result in
the acceleration of any obligation under, as to such Selling Stockholder, any
contract or other agreement to which such Selling Stockholder is a party or by
which such Selling Stockholder or any of his property is bound or affected, or
any ruling, decree, judgment, order, statute, rule or regulation of any court or
other governmental agency or body having jurisdiction over such Selling
Stockholder or the property of
<PAGE> 43
such Selling Stockholder, except for violations, defaults, breaches or
accelerations which would not result in a material adverse effect in the
financial condition of the Selling Stockholder.
(e) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
for the consummation by such Selling Stockholder of the transactions on his part
contemplated in this Agreement, the Underwriting Agreement and the Custody
Agreement, except such as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Firm Shares to be sold by such Selling
Stockholder.
(f) The information under the caption "Selling Stockholder" in
the Prospectus is complete and accurate in all material respects.
(g) Other than as permitted by the Act and the Rules and Regula
tions, such Selling Stockholder has not distributed and will not distribute any
preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. Such Selling Stockholder
has not taken, directly or indirectly, any action intended to cause or result
in, or which might reasonably be expected to cause or result in, or which has
caused or resulted in, stabilization or manipulation, under the Act or
otherwise, of the price of any security of the Company to facilitate the sale or
resale of the Shares.
(h) Certificates in negotiable form for the Firm Shares to be
sold pursuant to the Underwriting Agreement by such Selling Stockholder have
been placed in custody, for the purpose of making delivery of such Firm Shares
pursuant to the Underwriting Agreement, under the Custody Agreement which
appoints a custodian (the "CUSTODIAN") for such Selling Stockholder. Such
Selling Stockholder agrees that the Firm Shares represented by the certificates
held in custody for him under the Custody Agreement are for the benefit of and
coupled with and subject to the interest hereunder of the Custodian, the
Underwriters and the Company, that the arrangements made by such Selling
Stockholder for such custody and the appointment of the Custodian by such
Selling Stockholder are irrevocable, and that the obligations of such Selling
Stockholder pursuant to the Underwriting Agreement shall not be terminated by
operation of law, whether by the death, disability or incapacity of such Selling
Stockholder or the occurrence of any other event. If the Selling Stockholder
should die, become disabled or incapacitated or if any other such event should
occur before the delivery of the Firm Shares hereunder, certificates for the
Firm Shares shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement, and actions taken by the Custodian pursuant to the
Agreement and the Custody Agreement shall be as valid, as if such death,
incapacity or other event had not occurred, regardless of whether or not the
Custodian shall have received notice thereof.
<PAGE> 44
5. The representations, warranties and covenants of the
Selling Stockholder in this Power of Attorney are made for the benefit of, and
may be relied upon by, the Attorney, the Custodian, the Underwriters and the
Representatives.
6. The Attorney shall be entitled to act and rely upon any
statement, request, notice or instructions respecting this Power of Attorney
given to it by the Selling Stockholder, not only as to the authorization,
validity and effectiveness thereof, but also as to the truth and acceptability
of any information therein contained.
It is understood that the Attorney assumes no responsibility or
liability to any person other than to deal with the Shares deposited with it and
the proceeds from the sale of the Shares in accordance with the provisions
hereof. The Attorney makes no representations with respect to and shall have no
responsibility for the Registration Statement, the Prospectus or any Preliminary
Prospectus nor, except as herein expressly provided, for any aspect of the
offering of Common Stock, and shall not be liable for any error of judgment or
for any act done or omitted or for any mistake of fact or law except for their
own negligence, willful misconduct or bad faith. The Selling Stockholder agrees
to indemnify the Attorney for and to hold the Attorney harmless against any
loss, claim, damage or liability incurred on their part arising out of or in
connection with their acting as the Attorney under this Power of Attorney, as
well as the cost and expense of investigating and defending against any such
loss, claim, damage or liability, except to the extent such loss, claim, damage
or liability is due to the negligence, willful misconduct or bad faith of the
Member seeking indemnifi cation. The Selling Stockholder agrees that the
Attorney may consult with counsel of their own choice (who may be counsel for
the Company) and they shall have full and complete authorization and protection
for any action taken or suffered by them hereunder in good faith and in
accordance with the opinion of such counsel.
It is understood that the Attorney may, without breaching any express or
implied obligation to the Selling Stockholder hereunder, release, amend or
modify any other Power of Attorney granted by any other Selling Stockholder.
7. It is understood that the Attorney shall serve entirely without
compensation.
8. This Power of Attorney shall be governed by the laws of the State
of New York applicable to agreements made and to be performed entirely within
such State. Each party hereto hereby irrevocably submits for purposes of any
action arising from this Agreement brought by the other party hereto to the
jurisdiction of the courts of New York State located in the Borough of Manhattan
and the U.S. District Court for the Southern District of New York.
This Power of Attorney may be signed in two or more counterparts with the
same effect as if the signature thereto and hereto were upon the same
instrument.
<PAGE> 45
In case any provision in this Power of Attorney shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
This Power of Attorney shall be binding upon the Attorneys and the
Selling Stockholder and the heirs, legal representatives, distributees,
successors and assigns of the Selling Stockholder.
Dated: February __, 1998
Very truly yours,
SELLING STOCKHOLDER
By: (1)
----------------------------
Name:
Title:
----------------------------
(Address)
SHARES TO BE SOLD:
shares of Common Stock
---------
ACKNOWLEDGED AND ACCEPTED:
ATTORNEY-IN-FACT:
- --------------------------------
William Spier
- --------------------------------
(1) To be signed in exactly the same manner as the shares are registered.
NOTE: SIGNATURES MUST BE NOTARIZED
<PAGE> 46
Attachment A
CUSTODY AGREEMENT
CUSTODY AGREEMENT, dated _____________________, 1998, between
___________________________, as Custodian (the "CUSTODIAN"), and ______________
(the "SELLING STOCKHOLDER").
Powerhouse Technologies, Inc., a Delaware corporation (the
"COMPANY"), intends to file a Registration Statement (the "REGISTRATION
STATEMENT") with the Securities and Exchange Commission to register for sale to
the public under the Securities Act of 1933, as amended (the "ACT"), shares of
the Company's common stock, $0.01 par value per share (the "COMMON STOCK").
The shares to be covered by the Registration Statement shall
consist of up to ________ shares of Common Stock (the "SHARES") to be sold by
the Selling Stockholder.
The Selling Stockholder has executed and delivered a Power of
Attorney (the "POWER OF ATTORNEY") naming William Spier as his attorney-in-fact
(the "ATTORNEY"), for certain purposes, including the execution, delivery and
performance of this Agreement in its name, place and stead, in connection with
the proposed sale by the Selling Stockholder of ___________ Shares.
1. A custody arrangement is hereby established by the Selling
Stockholder with the Custodian with respect to the Shares, and the Custodian is
hereby instructed to act in accordance with this Agreement and any amendments or
supplements hereto authorized by the Attorney.
2. There are herewith delivered to the Custodian, and the Custodian
hereby acknowledges receipt of, certificates representing the Shares, which
certificates have been endorsed in blank or are accompanied by duly executed
stock powers, in each case with all signatures guaranteed by a commercial bank
or trust company or by a member firm of the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. or a member of the National Association of
Securities Dealers, Inc. Such certificates are to be held by the Custodian for
the account of the Selling Stockholder and are to be disposed of by the Custo
dian in accordance with this Agreement.
3. The Custodian is authorized and directed by the Selling
Stockholder:
(a) To hold the certificates representing the Shares delivered
by the Selling Stockholder in its custody;
<PAGE> 47
(b) On or immediately prior to the settlement date for any
Shares sold pursuant to the Registration Statement (the "CLOSING DATE"), to
cause such Shares to be transferred on the books of the Company into such names
as the Custodian shall have been instructed by the Representatives (the
"REPRESENTATIVES") of the several Underwriters (the "UNDERWRITERS") pursuant to
the Underwriting Agreement, dated February __, 1998 (the "UNDERWRITING
AGREEMENT"), among the Company, the Selling Stockholder and the Underwriters; to
cause to be issued, against surrender of the certificates for the Shares, a new
certificate or certificates for such Shares, free of any restrictive legend,
registered in such name or names; to deliver such new certificates representing
such Shares to the Representatives, as instructed by the Representatives on the
Closing Date for their account or accounts against full payment therefor; and to
give receipt for such payment;
(c) To disburse such payments in the following manner: (i) to
itself, as agent for the Selling Stockholder, a reserve amount to be designated
in writing by the Attorney from which amount the Custodian shall pay by the end
of the fifth business day following the Closing Date, (A) the Selling
Stockholder's proportionate share of all expenses of the offering and sale of
the Shares as provided in the Underwriting Agreement, and (B) any applicable
stock transfer taxes; and (ii) to the Selling Stockholder, pursuant to the
written instructions of the Attorney, (A) on the Closing Date, a sum equal to
the share of the proceeds to which such Selling Stockholder is entitled, as
determined by the Attorney, less the reserve amount designated by such Attorney,
and (B) promptly after all proper charges, disbursements, costs and expenses
shall have been paid, any remaining balance of the amount reserved under clause
(i) above. Before making any payment from the amount reserved under clause (i)
above, except payments made pursuant to subclause (B) of clause (ii) above, the
Custodian shall request and receive the written approval of the Attorneys. To
the extent the expenses referred to in subclause (A) of clause (i) above exceed
the amount reserved, the Selling Stockholder shall remain liable for their
proportionate share of such expenses. The Company shall be responsible for any
fees of the Custodian.
4. Subject in each case to the indemnification obligations set forth
in Section 7, in the event Shares of the Selling Stockholder are not sold, the
Custodian shall deliver to such Selling Stockholder as soon as practicable after
termination of the offering of the Shares, certificates representing such Shares
deposited by such Selling Stockholder. Certificates returned to the Selling
Stockholder shall be returned with any related stock powers, and any new
certificates issued to the Selling Stockholder with respect to such Shares shall
bear any appropriate legend reflecting the unregistered status thereof under the
Act.
5. This Agreement is for the express benefit of the Company and the
Selling Stockholder, the Underwriters and the Representatives. Prior to the
termination of the offering of the Shares, the obligations and authorizations of
the Selling Stockholder hereunder are irrevocable and shall not be terminated by
any act of the Selling Stockholder or by operation of law, whether by the death,
disability or incapacity of the Selling Stockholder or by the occurrence of any
other event
<PAGE> 48
or events (including, without limitation, the termination of any trust or estate
for which the Selling Stockholder is acting as a fiduciary), and if after the
execution hereof the Selling Stockholder shall die or become disabled or
incapacitated, or if any other event or events shall occur before the delivery
of such Selling Stockholder's Shares hereunder to the Representatives, such
Shares shall be delivered to the Representatives in accordance with the terms
and conditions of this Agreement, as if such event had not occurred, regardless
of whether or not the Custodian shall have received notice of such event.
6. Until payment of the purchase price for the Shares has been made
to the Selling Stockholder or to the Custodian, the Selling Stockholder shall
remain the owner of (and shall retain the right to receive dividends and
distributions on, and to vote) the number of Shares delivered by him to the
Custodian hereunder. Until such payment in full has been made or until the
offering of Shares has been terminated, the Selling Stockholder agrees that he
will not give, sell, pledge, hypothecate, grant any lien on, transfer, deal with
or contract with respect to the Shares and any interests therein.
7. The Custodian shall assume no responsibility to any person other
than to deal with the certificates for the Shares and the proceeds from the sale
of the Shares represented thereby in accordance with the provisions hereof, and
the Selling Stockholder hereby agrees to indemnify the Custodian for and to hold
the Custodian harmless against any and all losses, claims, damages or
liabilities incurred on its part arising out of or in connection with it acting
as the Custodian pursuant hereto, as well as the costs and expenses of
investigating and defending any such losses, claims, damages or liabilities,
except to the extent such losses, claims, damages or liabilities are due to the
negligence, willful misconduct or bad faith of the Custodian. The Selling
Stockholder agrees that the Custodian may consult with counsel of its own choice
(who may be counsel for the Company), and the Custodian shall have full and
complete authorization and protection for any action taken or suffered by the
Custodian hereunder in good faith and in accordance with the opinion of such
counsel.
8. The Selling Stockholder hereby represents and warrants that: (a)
he has, and at the time of delivery of its Shares to the Representatives he will
have, full power and authority to enter into this Agreement and the Power of
Attorney, to carry out the terms and provisions hereof and thereof and to make
all of the representations, warranties and agreements contained herein and
therein; and (b) this Agreement and the Power of Attorney are valid and binding
agreements of such Selling Stockholder and are enforceable against such Selling
Stockholder in accordance with their respective terms.
9. The Custodian's acceptance of this Agreement by the execution
hereof shall constitute an acknowledgment by the Custodian of the authorization
herein conferred and shall
<PAGE> 49
evidence the Custodian's agreement to carry out and perform this Agreement in
accordance with its terms.
10. The Custodian shall be entitled to act and rely upon any
statement, request, notice or instruction with respect to this Agreement given
to it on behalf of the Selling Stockholder if the same shall be made or given to
the Custodian by the Attorneys, not only as to the authorization, validity and
effectiveness thereof, but also as to the truth and acceptability of any
information therein contained.
11. This Agreement may be executed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument. Execution by the Custodian of one counterpart hereof and its
delivery thereof to the Attorneys shall constitute the valid execution of this
Agreement by the Custodian.
12. This Agreement shall be binding upon the Custodian, the Selling
Stockholder and the heirs, legal representatives, distributees, successors and
assigns of the Selling Stockholder.
13. This Agreement shall be governed by the laws of the State of New
York applicable to agreements made and to be performed entirely within such
State. Each party hereto hereby irrevocably submits for purposes of any action
arising from this Agreement brought by the other party hereto to the
jurisdiction of the courts of New York State located in the Borough of Manhattan
and the U.S. District Court for the Southern District of New York.
14. Any notice given pursuant to this Agreement shall be deemed given
if in writing and delivered in person, or if given by telephone or telegraph if
subsequently confirmed by letter: (i) if to the Selling Stockholder, to his
attorney, William Spier at _____________________; and (ii) if to the Custodian,
to it at ___________________.
<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
------------------------
-----------------------,
as Custodian
THE SELLING STOCKHOLDER
By: THE ATTORNEY
By:
---------------------
William Spier
Attorney-in-Fact
<PAGE> 51
EXHIBIT C
SUBSIDIARIES
<PAGE> 52
EXHIBIT D
February __, 1998
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
As Representatives of the
several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
In consideration of the agreement of the several Underwriters, for
which Gerard Klauer Mattison & Co., Inc. ("GKM") and Ladenburg Thalmann & Co.
Inc. (the "REPRESENTATIVES") intend to act as Representatives, to underwrite a
proposed public offering (the "OFFERING") of ____________ shares of Common
Stock, par value $0.01 per share (the "COMMON STOCK") of Powerhouse
Technologies, Inc., a Delaware corporation, the undersigned hereby agrees that
the undersigned shall not, for a period of 120 days after the commencement of
the public offering of such shares, without the prior written consent of the
Representatives, offer to sell, sell, contract to sell, grant any option to
sell, or otherwise dispose of, or require the Company to file with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933, as amended, to register, any shares of Common Stock or securities
convertible into or exchangeable for Common Stock or warrants or other rights to
acquire shares of Common Stock of which the undersigned is now, or may in the
future become, the beneficial owner (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended).
Very truly yours,
-------------------------------
By:
------------------------
Name:
Title:
<PAGE> 53
EXHIBIT E
Form of Opinion of
Counsel to the Company
1. Each of the Company and its Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
conduct all the activities conducted by it, to own or lease all the assets owned
or leased by it and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is the sole record owner and, to our
knowledge, the sole beneficial owner of all of the capital stock of each of its
Subsidiaries.
2. The Firm Shares have been, and the Option Shares, when paid
for by the Underwriters in accordance with the terms of the Agreement will be,
duly authorized, validly issued, fully paid and nonassessable and will not be
subject to any preemptive or similar right under (i) the statutes, judicial and
administrative decisions and the rules and regulations of the governmental
agencies of the State of Delaware, (ii) the Company's certificate of
incorporation or by-laws or (iii) any instrument, document, contract or other
agreement referred to in the Registration Statement or any instrument, document,
contract or agreement filed as an exhibit to, or incorporated as an exhibit by
reference in, the Registration Statement. Except as described in the
Registration Statement or the Prospectus, to the best of our knowledge, there is
no commitment or arrangement to issue, and there are no outstanding options,
warrants or other rights calling for the issuance of, any share of capital stock
of the Company or any Subsidiary to any person or any security or other
instrument that by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company.
3. No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the authorization, issuance, transfer, sale or delivery of
the Shares by the Company, in connection with the execution, delivery and
performance of the Agreement or the Price Determination Agreement (collectively
the "TRANSACTION AGREEMENTS") by the Company or in connection with the taking by
the Company of any action contemplated thereby [or, if so required, all such
consents, approvals, authorizations and orders, [specifying the same] have been
obtained and are in full force and effect], except such as have been obtained
under the Act and the Rules and Regulations and such as may be required under
state securities or "Blue Sky" laws or by the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the Shares
to be sold by the Company.
<PAGE> 54
4. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Registration Statement and the Prospectus under
the caption "Capitalization." To our knowledge, the description of the Common
Stock contained in the Prospectus is complete and accurate in all material
respects. The form of certificate used to evidence the Common Stock is in due
and proper form and complies with all applicable statutory requirements.
5. The Registration Statement and the Prospectus (including
any documents incorporated by reference into the Prospectus, at the time they
were filed) comply or complied in all material respects as to form with the
requirements of the Act, the Exchange Act, the Exchange Act Rules and
Regulations and the Rules and Regulations (except that we express no opinion as
to financial statements, schedules and other financial data contained in the
Registration Statement or the Prospectus or incorporated by reference therein).
6. To the best of our knowledge, any instrument, document,
lease, license, contract or other agreement (collectively, "DOCUMENTS") required
to be described or referred to in the Registration Statement or the Prospectus
has been properly described or referred to therein and any Document required to
be filed as an exhibit to the Registration Statement has been filed as an
exhibit thereto or has been incorporated as an exhibit by reference in the
Registration Statement; and to our knowledge no default exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any Document filed or required to be filed as an exhibit
to the Registration Statement.
7. To the best of our knowledge, the Company and its
Subsidiaries have obtained all authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those with jurisdiction
over environmental or similar matters) necessary to own or lease their
respective properties and to conduct their respective businesses as described in
the Prospectus. To the best of our knowledge, the Company and its Subsidiaries
have been, and are currently, conducting their respective businesses in
compliance with all such approvals, orders, licenses, certificates, franchises
and permits. To the best of our knowledge, neither the Company nor any of its
Subsidiaries has received any notice of any proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would adversely affect
the business, condition (financial or otherwise), earnings, prospects,
operations, properties, or results of operations of the Company and its
Subsidiaries taken as a whole.
8. To the best of our knowledge, except as disclosed in the
Registration Statement or the Prospectus, no person or entity has the right to
require the registration under the Act of shares of Common Stock or other
securities of the Company by reason of the filing or effectiveness of the
Registration Statement.
<PAGE> 55
9. To the best of our knowledge, the Company is not in
violation of, or in default with respect to, any law, rule, regulation, order,
judgment or decree, except as may be described in the Prospectus or such as in
the aggregate do not now have and will not in the future have a material adverse
effect upon the operations, business or assets of the Company and the
Subsidiaries, taken as a whole.
10. To our knowledge, all descriptions in the Prospectus of
statutes, regulations or legal or governmental proceedings are accurate and
fairly present the information required to be shown.
11. The Company has full corporate power and authority to enter
into the Transaction Agreements, and the Transaction Agreements have been duly
authorized, executed and delivered by the Company, are valid and binding
agreements of the Company and, except for the indemnification and contribution
provisions thereof, as to which we express no opinion, are enforceable against
the Company in accordance with the terms thereof.
12. The execution and delivery by the Company of, and the
performance by the Company of its agreements in, the Transaction Agreements do
not and will not (i) violate the certificate of incorporation or by-laws of the
Company, (ii) to our knowledge, breach or result in a default under, cause the
time for performance of any obligation to be accelerated under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of the Company or any of its Subsidiaries pursuant to the terms of, (x) any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement, capital lease or other evidence of indebtedness, (y) to our
knowledge, any voting trust arrangement or any contract or other agreement to
which the Company is a party that restricts the ability of the Company to issue
securities or (z) to our knowledge, any Document filed as an exhibit to, or
incorporated as an exhibit by reference in, the Registration Statement, (iii) to
our knowledge, breach or otherwise violate any existing obligation of the
Company under any court or administrative order, judgment or decree of which we
have knowledge or (iv) to our knowledge, violate applicable provisions of any
statute or regulation in the States of Delaware, or any other state where the
Company has material operations or of the United States.
13. Delivery of certificates for the Option Shares will
transfer valid and marketable title thereto to each Underwriter that has
purchased such Shares in good faith and without any notice of any adverse claim
with respect thereto.
15. The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
<PAGE> 56
16. The Shares have been duly authorized for listing by the
Nasdaq National Market System upon official notice of issuance.
We hereby confirm to you that we have been advised by the
Commission that the Registration Statement has become effective under the Act
and that no order suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose has been instituted or is
threatened, pending or contemplated.
We hereby further confirm to you that to our knowledge, there are
no actions, suits, proceedings or investigations pending or overtly threatened
in writing against the Company or any of its respective officers or directors in
their capacities as such, before or by any court, governmental agency or
arbitrator which (i) seek to challenge the legality or enforceability of the
Transaction Agreements, (ii) seek to challenge the legality or enforceability of
any of the Documents filed, or required to be filed, as exhibits to the
Registration Statement, (iii) seek damages or other remedies with respect to any
of the Documents filed, or required to be filed, as exhibits to the Registration
Statement, (iv) except as set forth in or contemplated by the Registration
Statement and the Prospectus, seek money damages in excess of $100,000 or seek
to impose criminal penalties upon the Company, any of its Subsidiaries or any of
their respective officers or directors in their capacities as such and of which
we have knowledge, (v) seek to enjoin any of the business activities of the
Company or any of its Subsidiaries or the transactions described in the
Prospectus and of which we have knowledge, (vi) question the validity of the
capital stock, (vii) in any of which there is a reasonable possibility of an
adverse decision which may result in a material change in the condition
(financial or otherwise), earnings, business, prospects, stockholders' equity,
operations, properties, business, or results of operations, of the Company and
its Subsidiaries or (viii) are required to be disclosed in the Registration
Statement and Prospectus but are either not disclosed, or not disclosed
accurately in all material respects.
We have participated in the preparation of the Registration
Statement and the Prospectus and, without assuming any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or in any document incorporated by reference into the Prospectus,
nothing has come to our attention that causes us to believe that, both as of the
Effective Date and as of the Closing Date and the Option Closing Date, the
Registration Statement, or any amendment thereto, contained or contains any
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that any Prospectus or any amendment or supplement thereto
including any documents incorporated by reference into the Prospectus, at the
time such Prospectus was issued, at the time any such amended or supplemented
Prospectus was issued, at the Closing Date and the Option Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact
<PAGE> 57
necessary in order to make the statements therein, in the light of the circum
stances in which they were made, not misleading (except that we express no
opinion as to financial statements, schedules and other financial data contained
in the Registration Statement or the Prospectus or incorporated by reference
therein).
The foregoing opinion is subject to the qualification that the
enforceability of the Transaction Agreements may be: (i) subject to bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally; and (ii) subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding at law or in
equity), including principles of commercial reasonableness or conscionability
and an implied covenant of good faith and fair dealing.
This letter is furnished by us solely for your benefit in
connection with the transactions referred to in the Transaction Agreements and
may not be circulated to, or relied upon by, any other person, except that this
letter may be relied upon by your counsel in connection with the opinion letter
to be delivered to you pursuant to Section 6(g) of the Agreement.
<PAGE> 58
EXHIBIT F
Form of Selling Stockholder Opinion
February __, 1998
GERARD KLAUER MATTISON & CO., INC.
LADENBURG THALMANN & CO. INC.
As Representatives of
the several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Dear Sirs:
We are acting a special counsel to the holders of Common Stock (the
"Common Stock") of Powerhouse Technologies, Inc., a Delaware corporation (the
"Company") who are listed as selling stockholders in the Registration Statement
(No. 333-41417) and Prospectus, dated January __, 1998, of the Company under the
heading "Selling Stockholders" (the "Selling Stockholders") in connection with
the secondary offering by the Selling Stockholders of up to 1,468,026 shares
(the "Shares") of Common Stock of the Company. This opinion is being delivered
to you pursuant to Section 6(f) of the underwriting agreement, dated February
__, 1998 (the "Underwriting Agreement"), among the Company, the Selling
Stockholders and Gerard Klauer Mattison & Co., Inc. and Ladenburg Thalmann & Co.
Inc., as representatives (the "Representatives") of the several Underwriters
named in Schedule I thereto (the "Underwriters"). All terms used herein that are
defined in the Underwriting Agreement have the respective meanings set forth
therein, unless otherwise defined herein.
We have examined the originals, or certified, conformed or reproduction
copies, of all records, agreements, instruments and documents as we have deemed
relevant or necessary as the basis for the opinions hereinafter expressed,
including, without limitation, (i) an Agreement of Limited Partnership of Video
Investment Partners, L.P. and the Investment Agreement among certain of the
Selling Stockholders (collectively, the "Investment Agreements"), executed and
delivered by or on behalf of each of the Selling Stockholders, pursuant to which
Mr. William Spier (the "Authorized Representative") is appointed
attorney-in-fact for the Selling Stockholders, (ii) a custody agreement (the
"Custody Agreement") between the Authorized Representative, individually and on
behalf of each of the Selling Stockholders and ___________, as custodian (the
"Custodian"),
<PAGE> 59
(iii) the Underwriting Agreement, and (iv) the Powers of Attorney executed by
each of the Selling Stockholders other than Mr. Spier (the "Powers of
Attorney"). In all such examinations, we have assumed that all natural persons
executing documents have the legal capacity to execute and deliver those
documents. In addition, in all such examinations, we have assumed the
genuineness of all signatures, the authenticity of all original or certified
copies and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduction copies. We have also assumed for
purposes of the opinions expressed herein that the Custodian has the power to
enter into and perform the Custody Agreement and that such agreement has been
duly authorized, executed and delivered by, and constitutes a valid and binding
obligation of, the Custodian. As to various questions of fact relevant to the
opinions expressed herein, we have relied upon and assume the accuracy of the
representations and warranties of each Selling Stockholder contained in the
Underwriting Agreement, the Investment Agreements or the Custody Agreement, and
of certificates and oral or written statements and other information of or from
public officials, representatives of the Company, the Selling Stockholders, and
others, and assume compliance on the part of all parties to the Underwriting
Agreement and the Custody Agreement with the covenants and agreements contained
therein.
For purposes of the opinions expressed below, we have, with your
permission, further assumed that the opinion expressed in paragraph (v) below is
governed solely by the provisions of Article 8 of the Uniform Commercial Code as
currently in effect in the State of New York.
Based upon the foregoing, and subject to the limitations, qualifications
and assumptions set forth herein, we are of the opinion that:
(i) The Powers of Attorney, the Investment Agreements and the
Custody Agreement have been duly executed and delivered by or on behalf of each
Selling Stockholder and constitute valid and binding agreements of such Selling
Stockholder, enforceable against such Selling Stockholder in accordance with
their respective terms, subject to (i) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws affecting
creditors' rights generally and (ii) general principles of equity (whether
considered in a proceeding at law or in equity).
(ii) The Underwriting Agreement has been duly executed and
delivered by or on behalf of each Selling Stockholder.
(iii) The execution and delivery of the Underwriting Agreement,
the Investment Agreements, the Powers of Attorney and the Custody Agreement by
or on behalf of each Selling Stockholder and the sale of the Shares to be sold
by each Selling Stockholder pursuant to the Underwriting Agreement and the
compliance by each Selling Stockholder with all of the provisions of the
Underwriting Agreement, the Power of Attorney and the Custody Agreement
applicable to him, her, or it and with the powers of attorney set forth in the
Investment Agreements will not result in a breach or violation of any terms or
provisions of, or constitute a default under, any law or
<PAGE> 60
present regulation of any governmental agency or authority of the State of New
York or the United States of America known to us to be applicable to such
Selling Stockholder (except that we express no opinion as to (A) the Act and the
Rules and Regulations thereunder, (B) the anti-fraud provisions of any federal
securities law of the United States and (C) the securities or Blue Sky laws of
the various states in connection with the offer and sale of the Shares),
provided that the foregoing opinion is limited to such laws which, in our
experience, are normally applicable to public offerings of securities of the
type contemplated by this Agreement.
(iv) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental agency or body of
the United States of America or the State of New York is required for the
consummation by each Selling Stockholder of the sale of the Shares to be sold by
such Selling Stockholder pursuant to the Underwriting Agreement (except that we
express no opinion as to any consent, approval, authorization, order, filing,
registration or qualification which may be required under the Act and the Rules
and Regulation or state securities or Blue Sky laws in connection with the
purchase and distribution of such Shares by the Underwriters), provided that the
foregoing opinion is limited to such consents, approvals, authorizations,
orders, filings, registrations or qualifications which, in our experience, are
normally applicable to public offerings of securities of the type contemplated
by this Agreement.
(v) Assuming that the Underwriters purchase the Shares to be
delivered at the Time of Delivery for value and without notice of any adverse
claim as such term is used in Section 8-102 of the Uniform Commercial Code as
currently in effect in the State of New York, the delivery of certificates
representing such Shares either registered in the name of the Underwriters or
effectively endorsed to the Underwriters or in blank will pass to the
Underwriters all rights that the transferor has in such Shares, free and clear
of all adverse claims.
The opinions expressed herein are limited to the federal law of the
United States of America and the internal laws of the State of New York and, to
the extent relevant hereto, the General Corporation Law of the State of
Delaware, as currently in effect.
The opinions expressed herein are solely for your benefit and may not be
relied upon in any manner or for any purpose by any other person and may not be
quoted in whole or in part without our prior written consent.
Very truly yours,
By:
---------------------------------------
3
<PAGE> 1
EXHIBIT 4.4
AGREEMENT dated December 3, 1997 between Video Lottery Technologies, Inc.,
a Delaware corporation (the "Company"), and William Spier ("Spier").
1. In connection with an exercise of the demand registration rights
pursuant to Section 4.1.1 of the Stockholders Agreement dated as of February
23, 1993 by the Purchasers (as such term is defined therein), the Company
agrees to cooperate with the Purchasers and their underwriters with respect to
the offer to sell their shares of Company common stock and to comply with its
obligations under Section 4 of the Stockholders Agreement. Spier agrees to
include in the offering of shares all shares of Company common stock he owns,
whether or not acquired or held as part of the group which is a party to the
Stockholders Agreement.
2. Spier agrees to resign as a director of the Company effective
immediately upon the disposition of shares of Company common stock by the
purchasers resulting in the aggregate beneficial ownership of the Purchasers
being less than 5% of all outstanding shares of Company common stock.
3. Spier agrees that, if the aggregate beneficial ownership of shares of
Company common stock of the Purchasers falls below 5% of all outstanding shares
as a result of dispositions of shares by the Purchasers, for a period of seven
years after the date hereof, he will not (a) acquire beneficial ownership of or
any rights with respect to any additional shares of Company common stock or any
other security issued by the Company (other than indirect ownership through
investment or mutual funds as to which he has not investment or voting
authority) or (b) "solicit" or become a "participant" in any solicitation or
"proxies" involving any voting stock of the Company (as such terms are defined
in the proxy rules promulgated pursuant to the provisions of the Securities
Exchange Act of 1934, as amended).
4. (a) Effective upon the aggregate beneficial ownership of shares of
Company common stock by the Purchasers falling below 2% of all outstanding
shares of Company common stock, the Company, its affiliates, successors and
assigns release and discharge Spier and each of the Purchasers, their
respective affiliates, associates, heirs and assigns and advisors and counsel
(the "Investor Group") from all suits, claims, charges and causes of action, in
law or equity or otherwise, whether known or unknown, which any of them have or
may have against any member of the Investor Group arising out of, relating to,
or in connection with (i) Spier's service as an officer and director of the
Company and its subsidiaries, (ii) the Investor Group's investment in the
Company, and (iii) any events relating to the Company or its stock or any
actions or omissions by Spier or any other member of the Investor Group on or
before the date of this Agreement; but, excluding matters relating to breaches
of this Agreement.
<PAGE> 2
(b) Effective upon the aggregate beneficial ownership of shares of
Company common stock by the Purchasers falling below 2% of all outstanding
shares of Company common stock, Spier, each member of the Investor Group, their
respective affiliates, associates, heirs and assigns release and discharge the
Company and its subsidiaries, their respective successors, assigns, directors,
officers and affiliates and their advisors and counsel (the "Company Group")
from all suits, claims, charges and causes of action, in law or equity or
otherwise, whether known or unknown, which any of them may have against the
Company, its subsidiaries or any of their respective successors, assigns,
directors, officers, affiliates, advisors and counsel arising out of, relating
to, or in connection with (i) Spier's service as an officer and director of the
Company and its subsidiaries, (ii) the Investor Group's investment in the
Company, and (iii) any events relating to the Company or its stock or any
actions or omissions by any member of the Company Group on or before the date
of this Agreement; but, excluding matters relating to breaches of this
Agreement.
5. Pursuant to the Company's policies and procedures, the Company will
reimburse Spier for his accounting, financial and other actual expenses up to
$22,000 incurred in connection with Company licensing matters and other
regulatory disclosure requirements.
6. If all of the shares of Company common stock owned by the Purchasers
can be sold pursuant to the proposed underwritten public offering at a price
of at lease $11.75 per share before March 1, 1998 and the Purchasers decide not
to sell their shares, then Spier (on behalf of the Purchasers) agrees to pay up
to $150,000 of the Company's actual out-of-pocket expenses in connection with
the preparation and filing of a registration statement or otherwise directly
relating to the offering of the Purchasers' shares ("Company Expenses"). If
all of the shares of Company common stock owned by the Purchasers are sold
pursuant to the proposed underwritten public offering at a price in excess of
$12.50 per share before March 1, 1998, then Spier (on behalf of the Purchasers)
agrees to pay up to $100,000 of the Company Expenses.
7. The provisions of Sections 6(a) - (h) of the Stockholders Agreement
are incorporated herein with the same effect as if such Sections were expressly
set forth herein.
8. This Agreement will terminate and be of no further force and effect
(except that paragraphs 5, 6 and this paragraph shall survive termination and
continue in full force and effect) if the Purchasers do not sell sufficient
shares of Company common stock to reduce their beneficial ownership to below 5%
of all outstanding shares of Company common stock pursuant to the proposed
public offering.
-2-
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be signed as of the date first above written.
VIDEO LOTTERY TECHNOLOGIES, INC.
By:/s/ William Spier
----------------------------
William Spier
-3-
<PAGE> 1
EXHIBIT 5.1
[The following text appears as letterhead:
Rogers & Hardin
Attorneys At Law
A Limited Liability Partnership
2700 International Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
(404) 522-4700
FACSIMILE: (404) 525-2224]
February 5, 1998
Powerhouse Technologies, Inc.
2311 South Seventh Avenue
Bozeman, Montana 59715
Gentlemen:
We have acted as counsel to Powerhouse Technologies, Inc. (the "Company")
in connection with the registration by the Company on Form S-3 (hereinafter
referred to, together with any amendments thereto, as the "Registration
Statement") under the Securities Act of 1933, as amended, of an aggregate of
1,688,230 shares of common stock, $.01 par value per share, of the Company, of
which (a) 1,468,026 shares will be purchased by certain underwriters (the
"Underwriters") from certain selling stockholders of the Company (the "Selling
Stockholders") and (b) up to 220,204 additional shares (the "Shares") will be
purchased by the Underwriters from the Company if the Underwriters exercise the
option granted to them by the Company solely to cover over-allotments, if any.
In connection with this opinion, we have examined such corporate records
and documents and have made such examinations of law as we have deemed
necessary. In rendering this opinion, we have relied, without investigation,
upon various certificates of public officials and of officers and
representatives of the Company. In our examination of documents, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals and the conformity with the originals of all documents
submitted to us as copies.
Based upon the foregoing and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the opinion that the
Shares have been duly authorized and, if and when sold as contemplated in the
Registration Statement and in the Underwriting Agreement to be entered into
among the Company, the Selling Stockholders and Gerard Klauer Mattison &
<PAGE> 2
Powerhouse Technologies, Inc.
February 5, 1998
Page 2
Co., Inc. and Ladenburg Thalmann & Co. Inc., as representatives of the several
Underwriters, will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to applications to the securities
commissioners of the various states and other jurisdictions of the United States
for registration or qualification of the Shares in such states and other
jurisdictions. We further consent to the reference to our firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Rogers & Hardin
ROGERS & HARDIN
<PAGE> 1
EXHIBIT 23.1
KPMG Peat Marwick LLP
1000 First Interstate Center
401 N. 31st Street
P.O. Box 7108
Billings, MT 59103
Independent Accountants' Consent
The Board of Directors
Powerhouse Technologies, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Billings, Montana
February 4, 1998
