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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
--------------------------
COMMISSION FILE NUMBER 000-22298
SCIENTIFIC GAMES HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3615274
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1500 BLUEGRASS LAKES PARKWAY, ALPHARETTA, GEORGIA 30004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 664-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the Registrant held
by non affiliates of the Registrant on March 23, 1998 was $233,038,061. For the
purposes of this response, executive officers and directors are deemed to be
affiliates of the Registrant and the holding by non affiliates was computed as
11,472,643 shares.
The number of shares outstanding of the Registrant's Common Stock as of
March 23, 1998 was 12,105,814 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's proxy statement for its Annual Meeting of
Stockholders, to be held May 22, 1998, which will be filed pursuant to
Regulation 14A within 120 days of the close of Registrant's fiscal year, is
incorporated by reference in answer to Part III of this report but only to the
extent indicated in Part III herein. In addition, pages 14 through 35 of
Scientific Games Holdings Corp.'s 1997 Annual Report to Stockholders are
incorporated by reference in answer to Items 6, 7 and 8 of Part II and Item
14(a) of Part IV of this report.
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PART 1
ITEM 1. BUSINESS
GENERAL
Scientific Games Holdings Corp. (the "Company" or "Scientific Games")
through its wholly owned subsidiaries, principally, Scientific Games Inc.
("SGI"), Scientific Games International, Limited ("SGIL") and Scientific Games
Kommunikations - und Computersysteme A.G. ("SG Austria"), is the leading
worldwide manufacturer of instant lottery tickets based upon the number of
instant lottery tickets sold. Except as the context otherwise requires,
references to "Scientific Games" or the "Company" refer to the consolidated
business and operations. The Company's corporate headquarters and its primary
manufacturing facility are located in Alpharetta, Georgia (suburban Atlanta) and
the Company employs approximately 1,177 people. The Company also has production
and operating facilities in California, the United Kingdom, South Africa and
software development facilities in Georgia and Austria. Scientific Games'
business consists primarily of manufacturing and selling instant lottery tickets
to domestic and foreign governmental lottery authorities and licensees and
providing lottery services to such customers. The Company also offers its
customers a full range of instant lottery services under cooperative services
contracts, including some or all of the following services: designing and
installing game management software, ticket production, telemarketing, field
sales, accounting, ticket distribution, training sales staff, estimating ticket
needs, managing staff, advising with respect to security, ticket validation and
fulfillment, provision of computer hardware, validation terminals, SciScan
Technology(R) validators, maintenance, prize structure, communication network
and sales agent hot-line service. Scientific Games' acquisition in April 1997 of
Vienna, Austria based TeleControl Kommunications - und Computersysteme
Gesellschaft m.b.h. ("TeleControl"), an on-line lottery and transaction
processing company, enables the Company to expand the Company's systems
offerings and make available on-line lottery technology. The Company announced
in February 1998 that it had entered into a joint venture agreement with La
Francaise des Jeux, the operator of the French National Lottery, to develop a
new generation of on-line terminals incorporating the Company's SciScan
Technology. The agreement also provides for the assumption by the joint venture
of La Francaise des Jeux's terminal and software maintenance contracts with six
German State Lottery customers. The joint venture is subject to the approval of
the French Minister of Finance and the execution of definitive agreements for
products and services.
INDUSTRY OVERVIEW
Lotteries are operated by domestic and foreign governmental authorities
and their licensees in approximately 200 jurisdictions throughout the world.
Currently, 39 jurisdictions in the United States sell instant lottery tickets.
Of the approximately 8.8 billion tickets sold by the Company in 1997,
approximately 30% were sold outside the United States. Governments typically
authorize lotteries as a means of generating revenues without the imposition of
additional taxes. Lottery revenues are frequently set aside for particular
public purposes, such as education, aid to the elderly, conservation,
transportation and economic development. As lottery ticket sales have become a
significant source of funding for such programs, many jurisdictions have come to
rely on the revenues generated by such sales.
Although there are many types of lotteries worldwide, government
authorized lotteries may generally be categorized into three principal groups:
instant lotteries, on-line lotteries and the traditional draw-type lotteries. An
instant lottery is one which is typically played by removing a coating from a
preprinted ticket to determine whether it is a winner. On-line lotteries are
generally pari-mutuel in nature (although fixed prizes are also offered) and are
conducted through a computerized lottery system in which lottery terminals are
connected to a central computer, usually by dedicated telephone lines.
Internationally, the older form of traditional draw-type lottery games, in which
players purchase tickets which are manually processed for a future drawing for
prizes of a fixed amount, is the prevalent form of play. In addition to the
foregoing types of lotteries, there are video lotteries played on electronic
machines featuring keno, "line-up" (cherries, bars, plums, etc.) and similar
video games. Video lotteries are typically targeted to locations such as horse
and dog racing tracks, athletic arenas, certain bars, clubs and similar
establishments.
There are many promotional (i.e., commercial) game suppliers (including
the Company) which produce instant tickets for both sales promotion companies
and their end users. Management believes Scientific Games is the
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only company which also offers the promotional market a full line of support and
services similar to those which the Company offers to the government lottery
market. While potential lottery customers in the United States currently are
limited to the 39 jurisdictions where such games are legally permitted,
promotional games are believed permitted in substantially all states. A
significant difference between lottery games and promotional games is the lower
level of security requirements associated with promotional games which typically
offer less valuable prizes. The Company's promotional game business expanded
significantly with the 1996 acquisition of its SGIL subsidiary see - "Products
and Services" below.
BUSINESS STRATEGY
The Company is a leading provider of instant lottery tickets,
integrated systems and support services worldwide. Scientific Games intends to
expand this leadership position by (i) pursuing new instant ticket printing
opportunities in both the domestic and foreign marketplaces, (ii) emphasizing
and marketing Scientific Games' expertise in cooperative services capabilities,
(iii) growing its on-line lottery business by utilizing its SGI-NET(TM)
technology, the core of which was acquired through its 1997 acquisition of SG
Austria, (iv) continuing the Company's emphasis on customer service and
responsiveness to customer needs both before and after delivery of products and
services, (v) investing in its facilities while aggressively pursuing practices
and methods which reduce operating costs, (vi) funding research and development
costs that continue to provide innovations for the Company's customers such as
SGI-NET, a high performance, configurable hardware and software-redundant
transaction processing system that can accommodate both instant an on-line
lottery operations, (vii) partnering with respected local corporations to
establish new lotteries in foreign countries and (viii) utilizing the joint
venture with La Francaise des Jeux to develop a new generation of lottery
terminals.
As state governments face budgetary pressures, they increasingly seek
methods of reducing state spending. One method of reducing spending which is
often considered by states is privatization or outsourcing of various operating
tasks associated with lottery operations. The Company has cooperative services
contracts with eight domestic lotteries which have elected to privatize certain
operating functions related to the management of instant ticket games. It is
expected that more state or foreign governments will decide to privatize or
outsource various lottery operations. The Company has significant experience in
this field and is well positioned to offer this privatization or outsourcing
option to the industry. The Company intends to continue to emphasize and invest
in the growing cooperative services segment of its business.
The increased application of computer-based and communications
technologies (including proprietary technologies) to the manufacturing and
servicing of instant tickets (See - "New Product Development") continues to
separate the instant ticket from conventional forms of printing. The Company is
generally recognized within the lottery industry as the leader in applying these
technologies to the manufacturing and sale of instant tickets. In order to
maintain its position as a leading innovator within the lottery industry, the
Company intends to continue to explore and develop new technologies and their
application to instant lottery tickets and systems.
In addition to the internal development of new products, the Company
intends to leverage its management expertise, reputation, and contacts in the
lottery industry by pursuing joint ventures and marketing agreements which will
provide access to lottery customers to whom the Company does not currently
provide products or services.
PRODUCTS AND SERVICES
In 1974, the Company introduced the first "secure" instant game ticket.
Today, instant tickets manufactured by the Company are typically printed on
recyclable ticket stock by a series of computer controlled presses and ink-jet
imagers and are believed by management to incorporate the most advanced
technology and security currently available in the industry. Instant tickets
range in size from 2 inches by 3 inches to ticket sizes as large as some
greeting cards; instant tickets are normally played by removing a coating to
determine if they are winning tickets. The Company markets instant tickets to
domestic lottery jurisdictions, foreign lottery jurisdictions and commercial
customers. The Company currently has contracts with 25 of the 39
states/jurisdictions in the U.S. which currently sell instant lottery tickets.
These domestic contracts are typically at a fixed price per thousand tickets and
typically range from one to five years in duration, although they usually have
one or more extension options. Customers of Scientific Games have exercised
extension options in domestic lottery contracts with the Company a majority of
the
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time. See - "Markets" for additional information. In 1997, the Company sold
approximately 8.8 billion tickets. Such instant ticket sales represented
approximately 60% of all instant lottery tickets sold by all companies to
domestic lotteries and approximately twice as many instant tickets as were sold
by the Company's next largest domestic competitor.
The Company currently manufactures instant tickets for the promotional
game market. Examples of promotional games produced by the Company include games
for European newspapers, major food and beverage companies, telephone companies
and games for various other commercial customers. The majority of the Company's
promotional games are produced at its United Kingdom subsidiary SGIL.
Approximately 50% of SGIL's sales are to promotional game customers. Sales of
promotional game products and services accounted for less than 10% of the
Company's consolidated revenues in 1997.
Scientific Games pioneered the idea of cooperative services as a means
of reducing the operating costs of lotteries while increasing lottery revenues
and is the only instant ticket manufacturer which has a separate lottery ticket
cooperative support services business to supplement its manufacturing
operations. Cooperative services consist of lottery ticket distribution and
support services involving the performing of selected key sales, distribution,
marketing and/or data processing services for lottery jurisdictions. While most
lottery jurisdictions to date have chosen to control the distribution and sales
of tickets, Scientific Games has been successful in demonstrating to a number of
jurisdictions that the Company can perform these functions effectively and at a
lower cost.
Domestically, the Company had cooperative services agreements with the
states of Florida, Georgia, Maine, Nebraska, Pennsylvania and West Virginia
during 1997, which accounted for approximately 22.8% of the Company's total
revenues. Cooperative service agreements with the states of Delaware and
Kentucky will commence in 1998, increasing the number of the Company's
cooperative service customers to eight. Under cooperative services contracts,
the Company typically provides selected management, distribution services and/or
data processing for the jurisdiction's instant ticket lottery game business and
is paid a percentage of the lottery's total instant ticket revenues. Customers
select those services which they desire to privatize from a menu of services
offered, including: designing and installing game management software, instant
ticket production, telemarketing, field sales, accounting, instant ticket
distribution, sales staff training, estimating ticket needs, managing staff,
advising with respect to security, instant ticket validation, and provision of
computer hardware, validation terminals, SciScan Technology validation units,
maintenance, communication network and sales agent hot-line service. Replacement
of cooperative services agreements can be associated with large conversion costs
for the lottery, as the lottery would have to hire and/or retrain its staff and
redesign and install a software system to control the instant ticket lottery
business.
In addition to laminated scratch off instant tickets, the Company's
business also includes the sale of pull-tab tickets to its lottery customers. In
October 1997, Scientific Games sold substantially all of the assets of its
pull-tab manufacturer subsidiary, GameTec Inc. to International Gamco, Inc.
("Gamco"). However, the Company will continue to sell pull-tab tickets to
lotteries in the U.S. through a marketing agreement with Gamco.
Scientific Games and its partner TeleCom Productions, Inc. introduced
The Daily Race Game(TM) in January 1997. The Daily Race Game is a
player-selection game that combines on-line, virtual reality horse racing with a
popular "pick your numbers" format. Players chose three horses from a field of
12 in a 55-second animated horse race that can be shown on either commercial or
closed-circuit television.
Another innovation announced by Scientific Games during 1997 was its
new probability-game ticket, Winner's Choice(TM). Winner's Choice is a
scratch-off instant ticket lottery game in which every ticket is a potential
winner (unlike existing tickets, where winning tickets are pre-determined before
a player scratches). Winner's Choice combines some of the best features of
instant and on-line games, and possesses three important player benefits -
choice, instant-win opportunities and appealing play styles. Probability games
have been discussed within the lottery industry for years, but have never been
viable because secure validation could not be assured. The Company's new SciScan
Technology provides secure validation to enable probability tickets to be sold.
Winner's Choice games are currently undergoing field testing in Maine conducted
by Scientific Games in cooperation with the Maine State Lottery.
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As mentioned above, in April 1997, Scientific Games acquired
TeleControl, now known as SG Austria, whose systems enable the Company to
reenter the on-line lottery systems business. Scientific Games' predecessor
company had previously developed and operated on-line lottery systems from 1985
until 1991. During that period, Scientific Games supplied and operated on-line
lottery systems in Iowa, Maine, New Hampshire, Vermont, West Virginia and sold
on-line systems to the Virginia Lottery.
NEW PRODUCT DEVELOPMENT
Since its inception, Scientific Games has provided many of the
innovations in instant ticket technology in both manufacturing and game
development which subsequently became the industry standard. Past examples of
new products developed by Scientific Games include the ink-jet printed instant
ticket, cooperative services (lottery privatization), bar coding on the front
and back of tickets (which facilitates validation), the IL/MVS instant ticket
accounting management, ticket validation software technology, Terra 2000(R)
tickets, and SciScan Technology(R). The Terra 2000 ticket is a recyclable and
biodegradable paper ticket which meets the rigorous security standards demanded
by the lottery industry. SciScan Technology is a keyless validation system for
retailers which significantly reduces the time requirements of ticket validation
while at the same time improving security of the game. The Company's latest
innovation, SGI-NET, is a high-performance, configurable hardware and
software-redundant transaction processing system that can accommodate both
instant and on-line lottery operations. SGI-NET's configurability and
software-driven architecture enables it to operate with virtually any type or
number of terminals and provides flexibility to adapt to unique characteristics
of almost any lottery.
Certain technology associated with these innovations is the subject of
issued patents and patent applications currently pending with the United States
Patent Office and selected other countries outside the United States. The
Company also holds a number of other patents and licenses with respect to
certain technology used in its business. The loss of any such patent or license,
however, would not in the opinion of management have a material adverse effect
on the Company's overall business. Scientific Games is continually looking for
ways to apply its expertise in specialty printing technologies and
security/randomization techniques to develop commercially viable products for
both the lottery industry as well as for other commercial applications.
CUSTOMER SERVICE
The Company has an active professional Customer Service Department
which works closely with its account managers, the lotteries, and Scientific
Games' Graphics and Game Programming Departments in the area of initial game
design. Artwork concepts, game play style and prize structure are assembled,
proposed, and refined. Important manufacturing information is also assembled and
documented in the "working papers" by the Company's customer service
representatives. This information, when approved by the lottery, becomes the
technical manufacturing specifications for specific instant ticket orders.
MARKETING
Scientific Games has been instrumental in the development of marketing
strategies for instant games for domestic and foreign lotteries, including some
of the most successful lotteries in North America. The Company's involvement
includes all phases of instant game marketing support, including marketing
strategies, prize structures, game rules, delivery schedules, play styles,
telemarketing, instant ticket ordering and billing, field sales support,
research, game design, working papers, retailer manuals, instant game concepts,
ticket quantities, delivery and promotions. Scientific Games or its predecessor
has prepared market research analysis of gaming tendencies in most new state
lotteries since 1982, and the Company can provide customers with a bank of
lottery-specific consumer and market research data derived from these years of
analyses.
Instant tickets are believed to have the broadest consumer appeal of
any lottery product. Consumers are generally split equally between men and
women, are distributed evenly between ages 25 and 65, and cover a broad range of
socioeconomic groupings. This broad-based market is significantly affected by
appropriate advertising and promotion. The most successful lotteries have found
that instant lottery products are largely an impulse item which must be marketed
like other consumer products.
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Sales of instant lottery tickets are based on, among other factors, the
quality of the lottery product, prize structure design and the existence of
efficient retail distribution systems which allow maximum convenience to
consumers. Scientific Games, with its large game library and extensive research
into product design and consumer purchasing habits, has been an industry leader
in producing new products, distribution methodologies and consumer promotions to
enhance sales.
SECURITY
Scientific Games recognizes that security and integrity are the
foundation of successful lottery organizations. As the incidence and severity of
publicly reported cases of physical and computer crime continue, major lotteries
periodically reassess key security questions concerning the vulnerability of
lottery games. Attempts to penetrate security measures may come from various
combinations of customers, retailers, vendors, lottery officials and others.
Because the integrity of a lottery is believed essential to its successful
operation, both the vendor and lottery must guard their systems against
unauthorized actions. The Company is unaware of any practical, economically
feasible way to breach the security of its instant lottery tickets which could
result in a material loss to any of its customers, nor is it aware of any breach
thereof which has resulted in any material loss to any of its lottery customers.
Scientific Games constantly assesses the adequacy of its security
systems, incorporating various improvements, bar coding and additional layers of
protection. There must be well-planned security measures in place at every stage
of the lottery operation. Scientific Games has pioneered and effected security
safeguards in areas of ticket specifications, production, packaging, delivery,
distribution and accounting. Also, computer function safeguards, including
secure ticket data, control number encryption, winner file data, and ticket
stock control have been incorporated in the Company's data processing and the
computer operations phase. The Company retains a major public accounting firm to
perform agreed upon procedures for each game produced before it is sent to the
customer.
MANUFACTURING PROCESS
Using a series of computer-controlled presses and ink-jet imagers,
management believes Scientific Games' tickets incorporate the most advanced
technology and security methodology available in the industry. Its facilities
are designed for efficient, secure production of instant game tickets and
support ink-jet image tape generation, printing, packaging and storage of
instant game tickets.
The Company's dedicated computer-controlled printing process is
specifically designed for producing instant lottery game tickets for
governmentally sanctioned lotteries and promotional games. The process is not a
business forms press or a direct mail press temporarily diverted to lottery
work. The Company's specialized equipment contributes to the underlying superior
manufacturing and product quality. Instant ticket games are delivered finished
and ready for distribution by the lottery, or by Scientific Games in the
jurisdictions which are part of a cooperative services contract with Scientific
Games.
Paper and ink are the principal raw materials consumed in the Company's
manufacturing operations. The Company has a variety of sources for both paper
and ink and should, therefore, not be dependent on any particular supplier.
PERSONNEL
As of December 31, 1997, the Company had approximately 1,177 full-time
employees. Four of Scientific Games' employee groups are represented by a labor
union. At the California Facility (See "Properties"), ticket packaging is
performed by approximately 60 employees who are members of the Service Employees
International Union Local 1877. SG Austria's employees are represented by a
Worker's Council as is typical in many European companies. At the Leed's
Facility in the United Kingdom, approximately 150 employees are members of the
GPMU union. Approximately 14 employees who work at the Company's cooperative
service facility in Harrisburg, Pennsylvania are members of the Chauffeurs,
Teamsters and Helpers Local Union 776. The Company believes that its employee
relations are good.
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EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers of the Company who are considered executive officers by the
Company for the purposes of Rule 36-7, as of March 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
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<S> <C> <C>
William G. Malloy............. 51 Director, Chairman, President and Chief
Executive Officer
William F. Behm............... 52 Director and Executive Vice President
Thomas F. Little.............. 53 Senior Vice President
Cliff O. Bickell.............. 55 Vice President, Treasurer and Chief Financial Officer
C. Gray Bethea, Jr. .......... 53 Vice President, Secretary and General Counsel
Bruce H. Longhurst............ 57 Vice President, International Sales and Marketing
Howard H. Roath............... 45 Vice President-U.S. Sales and Marketing
Terry D. Mangold.............. 57 Vice President-Instant Game Services
William C. Christie........... 49 Managing Director-Scientific Games International Limited
James H. Edwards, Jr. ........ 52 Director of Manufacturing
DI Gerhard Harwalik........... 43 Executive Vice President-Scientific Games Austria
Mark L. Hutchinson............ 39 Director-Scientific Games Africa
Donald N. MacLean............. 53 Director- Human Resources
Kenneth W. Taylor............. 37 Corporate Controller
John J. Walsh................. 38 Director-Cooperative Services
</TABLE>
WILLIAM G. MALLOY has been President and Chief Executive Officer since
1990. Mr. Malloy was elected a Director and Chairman of the Board in October
1991 when Centre Partners L.P. and certain executive officers of the Company
purchased substantially all of the assets of the instant lottery ticket sales
business, the instant ticket cooperative sales business and the video lottery
business of the predecessor to the Company in a leveraged buy-out transaction
("Acquisition"). Prior to becoming the Company's President and Chief Executive
Officer, Mr. Malloy served as Vice President, Treasurer and Chief Financial
Officer. Mr. Malloy joined the Company in 1987 when he transferred from the
corporate staff of Bally Manufacturing Company. Mr. Malloy has over twenty years
of experience in the coin-operated amusement and gaming industry.
WILLIAM F. BEHM joined the Company in 1978 and was promoted to
Executive Vice President in 1988 and was elected a Director in 1992. Mr. Behm
has overall management responsibility for Scientific Games' research and
business development projects. In addition, he is also responsible for the
Company's product security. Prior to joining Scientific Games, Mr. Behm was an
aerospace engineer with McDonnell Douglas Corporation. Mr. Behm was instrumental
in the development of the Company's former on-line lottery system, the invention
of instant lottery bar codes, the development of the Company's environmental
instant ticket and the development of the Company's recent SciScan and Winner's
Choice product lines. He is co-named as the inventor of various issued patents
and pending applications and is a regular speaker at trade shows and conferences
on the subject of technology in the lottery industry.
THOMAS F. LITTLE joined the Company in 1975 and was promoted to Senior
Vice President in 1991. Mr. Little has overall management responsibility for
Scientific Games' Systems Division, which includes the Company's on-line lottery
systems business. Prior to joining the Company, Mr. Little was Manager of Data
Processing for First National Bank of Atlanta. Mr. Little's experience includes
the introduction of the first video lottery test in Illinois, the development of
the Company's former on-line lottery system and extensive contacts with the
international lottery industry.
CLIFF O. BICKELL joined the Company as Vice President, Treasurer and
Chief Financial Officer in January of 1995. Mr. Bickell has overall management
responsibility for Scientific Games' corporate financial, accounting, and
administrative affairs, including the Company's human resource function. Prior
to joining Scientific Games, Mr. Bickell was Vice President, Chief Financial
Officer and Treasurer of Paragon Trade Brands, a multi-national consumer
products manufacturer where he had similar financial responsibilities. In
addition, Mr. Bickell has held
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the positions as Senior Vice President, Corporate Administration - Chief
Financial Officer of the W. A. Krueger Co., a commercial printing company, and
Treasurer of Dataproducts Corporation, a multinational electronics manufacturer.
C. GRAY BETHEA, JR. joined the Company in 1985 as Vice President,
Secretary and General Counsel. Mr. Bethea has overall management responsibility
for Scientific Games' legal compliance, statutory interpretation, corporate
matters, and contract documents. Throughout his corporate and private practice
of law, Mr. Bethea has had extensive experience in corporate and contract law.
Prior to joining Scientific Games, Mr. Bethea was a partner with the law firm of
Smith, Gambrell & Russell in Atlanta, Georgia.
BRUCE H. LONGHURST joined the Company in 1997 as Vice President,
International Sales and Marketing. Mr. Longhurst has overall management
responsibility for Scientific Games international marketing and sales efforts.
Prior to joining Scientific Games, Mr. Longhurst was Vice President,
International and Strategic Planning for Autotote Corporation and Managing
Director of its subsidiary TeleControl, which was acquired in 1997 by Scientific
Games. Mr. Longhurst held these and other positions with Autotote from
1993-1997. From 1988 - 1992, Mr. Longhurst held the position of Executive Vice
President of the Worldwide Wagering Division of General Instrument Corporation.
In addition, Mr. Longhurst was one of the founders and served as Executive Vice
President and General Manager of Ticketron, including its AWI subsidiary.
HOWARD H. ROATH joined the Company in 1987 and was promoted to Vice
President, U.S. Sales and Marketing in 1997. Mr. Roath has overall management
responsibility for Scientific Games' U.S. marketing and sales efforts. Prior to
joining Scientific Games, Mr. Roath served as Director of Marketing of the
Pennsylvania Lottery, Director of Pharmaceutical Assistance Program for the
Elderly for the Pennsylvania Department of Aging and the Director of the
Division of State Employment for the Pennsylvania's Governor's Office of
Administration.
TERRY D. MANGOLD joined the Company in 1975 and was promoted to Vice
President-Instant Games Services in 1987. Mr. Mangold has overall management
responsibility for Scientific Games' instant ticket game programming operations,
i.e., the generation of games with the proper distribution of winning and
non-winning tickets. Prior to joining Scientific Games, Mr. Mangold was
responsible for computerized systems at First National Bank of Atlanta.
WILLIAM C. CHRISTIE joined the Company in 1996 as Managing Director for
the Company's subsidiary SGIL in the United Kingdom. Mr. Christie has overall
management responsibility for ticket production and printing for SGIL's
production facilities. Prior to joining the Company, Mr. Christie was the
Managing Director of Lottery Products for De La Rue in the United Kingdom.
During his 26 years with De La Rue, Mr. Christie held various other management
positions.
JAMES H. EDWARDS, JR. joined the Company in 1991 as Plant Manager and
was promoted to Director of Manufacturing in 1998. Mr. Edwards has overall
management responsibility for ticket production and printing for the Company's
United States production facilities. Prior to joining the Company, Mr. Edwards
held various management positions with Quebecor Printing, Inc. for over 20
years.
DI GERHARD HARWALIK joined the Company in 1997 as Executive Vice
President. Mr. Harwalik has overall management responsibility for the Company's
subsidiary SG Austria. Prior to joining the Company, Mr. Harwalik, as one of the
original founders of TeleControl, (now known as SG Austria), served as their
Managing Director from 1983 to 1995 and maintained a management role in the SG
Austria until 1997. Mr. Harwalik also was the manager the computer center of the
Technical University of Vienna and held positions with ETAG Group, Switzerland,
which developed on-line systems for gaming wagering.
MARK L. HUTCHINSON joined the Company in 1997 as Managing Director. Mr.
Hutchinson has overall management responsibility for the Company's branch office
in Africa including operations in South Africa and Zimbabwe. Prior to joining
Scientific Games, Mr. Hutchinson served as President from 1992 to 1997 of Gaming
Solutions International. Mr. Hutchinson also held the position of Senior Vice
President of an instant ticket printing company.
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DONALD N. MACLEAN joined the Company in 1997 as Director of Human
Resources. Mr. MacLean manages the personnel function for all of the Company's
locations. Prior to joining the Company, Mr. MacLean held the position of Vice
President of Human Resources for Burnham Service Corporation from 1989 to 1997.
In addition, Mr. MacLean was the Corporate Director of Human Resources for
Interlake Corporation and Division Director of Human Resources for Mueller
Corporation.
KENNETH W. TAYLOR joined the Company in 1987 and was promoted to
Corporate Controller in 1990. Mr. Taylor has management responsibility for
accounting and financial information as well as responsibility for customer
pricing compliance. Prior to joining the Company, Mr. Taylor held auditor
positions with Bally Manufacturing Corporation, Duchossois Industries and Amsted
Industries, Inc.
JOHN J. WALSH joined the Company in 1986 and was promoted to Director
of Cooperative Services in 1994. Mr. Walsh has overall management responsibility
for coordinating lottery operations support through the Cooperative Services
Program. Prior to joining the Company, Mr. Walsh held positions with Control
Data Corporation and Ticketron's sports and entertainment division.
THE FOLLOWING DISCUSSION OF ASPECTS OF THE COMPANY'S BUSINESS ALSO
CONSTITUTES A CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
quarterly and annual consolidated results for 1998, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company:
GOVERNMENTAL REGULATION
Lotteries are not permitted in the various states/jurisdictions of the
United States unless expressly authorized by law. The ongoing operations of
authorized lotteries in the United States typically are extensively regulated.
Applicable legislation varies from jurisdiction to jurisdiction but, in addition
to authorizing the lottery and creating the applicable regulatory authority, the
lottery statues generally dictate certain broad parameters of lottery operation,
including the percentage of lottery revenues which must be paid out in prizes.
Lottery authorities typically exercise significant control as to the selection
of vendors (such as the Company) and award of lottery contracts, ticket prices,
types of games played and marketing strategy, all of which can affect the
Company's operating results.
Prior to and after granting a lottery contract, governmental
authorities generally conduct an investigation of the Company and its employees
and such authorities may require removal of an employee deemed to be unsuitable.
The Company has not been disqualified from a lottery contract as a result of any
such investigation. Certain states also require extensive personal and financial
disclosure (including, among other things, submission of fingerprints, personal
financial statements and federal and state income tax returns) and background
checks of control persons and entities beneficially owning a specified
percentage (typically 5% or more) of the Company's securities. The failure of
such beneficial owners to submit to such background checks and provide such
disclosure could jeopardize the award of a lottery contract to the Company or
provide the basis for cancellation of existing lottery contracts.
Scientific Games generally retains governmental affair representatives
in various states of the United States to advise legislators and the public
concerning its views on lottery legislation, to monitor any such legislation and
to advise the Company on contract proposals to lottery authorities. Scientific
Games also makes campaign contributions to various state political parties and
political candidates. The Company believes it has complied with applicable laws
and regulations concerning campaign contributions and lobbying disclosures.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions also are extensively regulated, although this
regulation usually varies from that prevailing in the United States.
Restrictions are frequently imposed on foreign corporations seeking to do
business in such jurisdictions and, as a consequence, the Company has, in a
number of instances, allied itself with a local company when seeking foreign
lottery contracts. Laws and regulations applicable to lotteries in the United
States and foreign jurisdictions are subject to
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change and the effect of such changes on the Company's ongoing and potential
operations cannot be predicted with certainty.
MARKETS
The Company's operations are international in scope. With 39 states and
the District of Columbia currently operating lotteries in the United States, the
Company's growth in the domestic market depends primarily on expanded activities
of existing lotteries as well as winning new contract awards, re-bids and
contract extensions. Contrasted with the domestic market, the international
market is far from mature, with various countries viewing lotteries as a source
of revenue for a variety of governmental programs. For a discussion of the
Company net revenues, operating income and identifiable assets attributable to
U.S. production operations, see Note 11 of the Notes to the Financial Statements
set forth elsewhere in this report, which is incorporated herein by reference
thereto. For a discussion of revenues from lottery agencies and other customers
domiciled in foreign countries, also see Note 11 which is incorporated herein by
reference thereto.
In 1997, no state accounted for more than 10% of the revenues of the
Company. The Company had twelve domestic contracts that were scheduled to expire
in 1997. Six of these contracts were extended, and the Company was awarded new
contracts for five states through a competitive procurement process. The Company
was the unsuccessful bidder on the New Hampshire Lottery contract. With regard
to contracts previously held by its competitors, the Company was the successful
bidder in 1997 for the Pennsylvania Lottery, which now has a cooperative
services contract with the Company.
The Company has seven domestic contracts which are subject to
extensions or scheduled to expire in 1998. Of these seven contracts, five have
extensions available. Management believes new contracts for those states without
extensions will be awarded through a competitive procurement process in which
the Company will participate. The Company estimates, based in part upon industry
and lottery furnished information, that 1997 domestic instant ticket retail
sales by lotteries ("1997 Lottery Sales") were in excess of $14.1 billion. In
comparison, 1997 international instant ticket retail sales are estimated to be
$13.0 billion. Based in part on such information, management estimates the
Company's domestic customers with contracts subject to extensions or scheduled
to expire in 1998 represent, in the aggregate, retail sales of approximately
22.1% of 1997 Lottery Sales. In contrast, management believes that lottery
contracts with seven states currently serviced by its competitors are subject to
extensions or are scheduled to expire in 1998. The Company expects that new
contracts for such states not exercising extensions will be awarded through the
competitive procurement process in which the Company expects to participate. The
Company estimates, based in part upon industry and lottery furnished
information, that instant ticket contracts for the Company's competitors
scheduled to expire in 1998 represent, in the aggregate, retail sales of
approximately 24.2% of 1997 Lottery Sales.
The Company's domestic lottery contracts typically have an initial term
of from one to five years and usually provide the customer with options to
extend the contract one or more times under the same or mutually agreeable terms
and conditions for additional periods generally ranging from one to five years.
The Company's customers have exercised extension options in the Company's
domestic instant lottery contracts a majority of the time.
The table included herein lists the domestic instant lottery contracts with
which the Company had executed agreements as of March 23, 1998 and certain
information with respect thereto. The Company is the primary instant ticket
supplier unless otherwise noted. The table also includes 1997 instant ticket
retail sales for each state or district. Information obtained from industry
sources lists 1997 domestic instant ticket retail sales of $14.1 billion and
international instant ticket retail sales of $19.6 billion.
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DOMESTIC LOTTERY CONTRACTS
<TABLE>
<CAPTION>
1997
INSTANT TICKET COMMENCEMENT EXPIRATION CURRENT RENEWAL
RETAIL SALES DATE OF CURRENT DATE OF CURRENT OPTIONS
STATE/DISTRICT (IN MILLIONS) CONTRACT CONTRACT REMAINING TYPE OF CONTRACT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona 113.0 January 1998 January 2001 2 one-year Instant Tickets
California 556.1 January 1996 January 1998 2 one-year Instant Tickets
Colorado 218.2 March 1995 June 1999 2 one-year Instant Tickets
District of Columbia 23.0 May 1996 May 1998 3 one-year Instant Tickets
Delaware 19.5 July 1995 July 2000 none Cooperative Services
Florida 664.8 April 1997 September 2002 none Cooperative Services
Georgia 557.0 April 1993 April 2003 none Cooperative Services
Illinois 611.0 July 1996 July 1999 3 one-year Instant Tickets
Indiana 328.9 December 1997 December 1999 2 one-year Instant Tickets
Iowa 91.3 January 1995 December 1998 1 one-year Instant Tickets
Kentucky 272.4 October 1997 October 1999 3 one-year Cooperative Services
Maine 102.9 July 1990 June 2000 none Cooperative Services
and SciScan Terminals
Massachusetts 1,963.6 October 1993 October 1998 none Instant Tickets
Minnesota 266.6 January 1995 January 1999 1 one-year Instant Tickets
Missouri 235.1 June 1997 June 1999 none Instant Tickets
Nebraska 41.7 July 1993 June 2001 none Cooperative Services
and SciScan Terminals
New Jersey 446.7 November 1996 October 1999 2 one-year Instant Tickets
New Mexico 50.4 March 1997 March 1999 4 one-year Instant Tickets
New York 1,030.6 April 1996 April 1999 2 one-year Instant Tickets
Pennsylvania 432.8 April 1997 April 2002 5 one-year Cooperative Services
South Dakota 14.6 June 1995 June 1998 2 one-year Instant Tickets
Virginia 285.9 January 1997 July 2002 1 three or five year SciScan Terminals
Washington 217.5 May 1995 May 1998 2 one-year Instant Tickets
W. Virginia 78.1 December 1996 June 2000 1 one-year Cooperative Services
and SciScan Terminals
Wisconsin 256.2 October 1996 October 1998 1 one-year Instant Tickets*
- -----------------------------------------------------------------------------------------------------------------------------
* secondary printer
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Based on industry information, it is estimated that 1997 domestic
on-line lottery retail sales were $19.6 billion compared with 1997 international
on-line lottery retail sales of $48.7 billion. The Company's re-entry into the
on-line lottery business in 1997 will allow the Company to compete for a share
of both the domestic and international sales in the future. The Company believes
on-line lottery contracts with four states currently serviced by its competitors
are subject to extensions or will expire during 1998. It is estimated that
domestic on-line lottery contracts for the Company's competitors scheduled to
expire or subject to extensions during 1998 represent, in aggregate, on-line
lottery retail sales of approximately 8.8% of 1997 on-line lottery retail sales.
The Company expects to bid on these domestic contracts, while pursuing
international on-line opportunities during 1998.
Sales outside the United States may consist of sales of goods and
services exported to customers located overseas, sales of goods and services to
customers in countries in which the Company's foreign subsidiaries have
manufacturing facilities or sales of goods and services by the Company's foreign
subsidiaries located outside the
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<PAGE> 12
country of production. Although the Company does business worldwide, a majority
of the Company's current foreign operations are conducted in, and U.S. export
sales are made to customers located in Europe.
The Company's international lottery contracts are less likely to have
firm contract periods and, historically, international lottery ticket customers
have sought competitive bids for such contracts more frequently than domestic
U.S. customers. The volume and timing of the international contracts fluctuate
from country to country and it is difficult to predict the volume or timing of
sales to these customers from period to period.
LOTTERY CONTRACTS: PROCUREMENT PROCESS AND REQUIREMENTS
Lotteries in the United States typically select an instant ticket
supplier by issuing a Request for Proposals ("RFP") which outlines contractual
obligations as well as products and services to be delivered. An evaluation
committee frequently comprised of key lottery staff evaluates responses based on
various criteria. These criteria usually include quality of product, security
plan and features, experience in the industry, quality of personnel and services
to be delivered and price. The Company believes that the quality of its
personnel, technical expertise and manufacturing efficiency give it many
advantages relative to the competition when responding to state lottery RFPs.
However, many lotteries still award the contract to the qualified vendor with
the lowest price, regardless of factors other than price. Contract awards by
lottery authorities in the United States are sometimes challenged by
unsuccessful competitors which can result in protracted legal proceedings.
The Company's domestic lottery contracts typically contain provisions
for payment of liquidated damages for late delivery of tickets or delivery of
defective tickets, which in the aggregate could result in several million
dollars or more per day in penalties to the Company. Although the incurrence of
liquidated damages with respect to on-line lotteries may not be uncommon, the
Company believes it is uncommon for instant lotteries. Scientific Games has not
typically paid any material liquidated damages under an instant lottery
contract, although it has on occasion negotiated customer allowances which
management does not consider material.
Lottery contracts to which the Company is party frequently contain
exacting implementation schedules and performance requirements. Failure to meet
these schedules and requirements can result in substantial monetary liquidated
damages, as well as possible contract termination. The Company maintains a
bonding program for its bid bonds, litigation bonds and performance bonds
through various insurance companies. As of December 31, 1997, $64.7 million was
outstanding in aggregate face amount of surety bonds issued. One or more of
these bonds is generally required by a lottery customer in order to participate
in a lottery procurement or to enter into a contract with the lottery following
successful bid. Failure to provide such bonds would materially and adversely
affect the Company's ability to do business. The Company's bonding program is
backed by a blanket indemnity of the surety.
Lottery contracts of the Company periodically expire and/or reach
optional extension dates. Upon the expiration of a contract (including any
extensions thereof), lottery authorities may award new contracts through a
competitive procurement process. There can be no assurance that the Company's
contracts will be extended or that the Company will be awarded new contracts as
a result of competitive procurement processes in the future. The Company's
lottery contracts typically permit a lottery authority to terminate the contract
at any time for failure to perform and other specified reasons, and many of such
contracts permit the lottery authority to terminate the contract at will without
penalty. Depending upon, among other factors, the amount of new revenue derived
by the Company thereunder, the termination, expiration or failure to renew one
or more instant lottery contracts could have a material adverse effect on the
Company's business or prospects.
COMPETITION
The instant lottery business is highly competitive, and the Company
business faces competition from a number of domestic and foreign instant ticket
manufacturers, on-line lottery system providers and other competitors.
In particular, Scientific Games currently has two primary instant
lottery ticket competitors in the U.S.: Pollard Banknote Limited ("Pollard") and
BABN Technologies ("BABN",a subsidiary of Group Francois-Charles Oberthur of
France), which purchased the lottery ticket business of a former competitor,
Dittler Brothers, Inc. ("Dittler") in 1997. The Company estimates that the
retail sales value of its domestic customer base was in excess of 60% of total
domestic instant ticket retail sales in 1997 - approximately twice as many as
its next largest competitor.
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<PAGE> 13
Except as permitted by the applicable provisions of the North American Free
Trade Act with respect to Canada and Mexico, it is currently illegal to import
lottery tickets into the United States from a foreign country. The Company's
business could be adversely affected should additional foreign competitors in
Canada or Mexico export their lottery products to the U.S. or should other
foreign competitors establish printing facilities in the U.S., Canada or Mexico
to supply the U.S. market.
Internationally, there are many lottery instant ticket vendors which
provide competition to the Company, including, among others, BABN, Pollard,
Creative Games International, Inc. in the United States, government owned
printers in Scandinavia, GPS Honsel in Germany and various other vendors.
Both in the domestic market and internationally, factors which
influence the award of lottery contracts in addition to price, are believed to
include, among others, the ability to optimize lottery revenues through game
design and technical capability, quality of the product, dependability,
production capacity, marketing experience, financial condition and reputation of
the bidder, the security and integrity of the bidder's production operations,
products and services and the satisfaction of various other requirements and
qualifications imposed by specific jurisdictions.
Scientific Games' position as a leading worldwide producer of instant
lottery tickets and its reputation as a developer of state-of-the-art technology
and marketing concepts, as well as its experience in the industry, are believed
to enhance significantly the Company's competitive position. The large capital
investment necessary to purchase, customize and install an instant ticket
printing operation, the high level of security required in the lottery industry
and the fact that all states in the U.S. which have lotteries have typically
required potential suppliers to have prior lottery experience are all factors
which tend to limit the number of firms which are willing to, or are in the
position to, enter the instant lottery ticket production business. The Company's
business could be adversely affected should its competitor's research and
development activities result in reduced technological differentiation between
the products of the Company and its competitors. Similarly, in the event
technological developments materially reduce the capital investment required to
finance secure lottery ticket printing operations, the Company's business could
be adversely affected by increased competition. Management does not anticipate
any material reduction in the level of capital financing required for entry into
the lottery ticket product business in the foreseeable future.
In the cooperative services business, the Company believes it has no
current competitor in the U.S. market which produces instant lottery tickets,
provides on-line systems and offers a full range of cooperative services to
state lotteries. Competitors have typically either manufactured only instant
tickets or provided only certain services which comprise cooperative services,
such as software for the management systems, marketing assistance or other
specific duties. However, an on-line vendor in cooperation with an instant
ticket supplier may be considered a competitor or potential competitor in
cooperative services. In addition, an on-line vendor not in cooperation with an
instant ticket supplier may nonetheless provide various cooperative services,
including data processing services. Scientific Games has two primary domestic
and international competitors in this regard: Powerhouse Technologies, Inc.,
which changed its name from Video Lottery Technologies, Inc in 1997 and GTech
Corporation.
In 1997, the Company discontinued its charity pull-tab ticket business,
which was produced and distributed by its subsidiary GameTec Inc. ("GameTec").
In connection with the disposition, the Company sold substantially all of the
assets of GameTec to International Gamco, Inc. ("Gamco"). The Company entered
into a three-year extendible marketing agreement with Gamco to provide marketing
and related services to state lotteries for pull-tab tickets. Currently, the
Company has 3 contracts with state lotteries for pull-tab tickets. The Company
believes it is desirable to offer pull-tab tickets to its lottery customers to
maintain a full range of products and services and the Company will continue to
provide pull-tab tickets to its lottery customers through the marketing
agreement. The Company does not consider the provision of pull-tab tickets to
its lottery customers to be a separate operating segment, and sales of pull-tab
tickets to lottery customers accounted for less than 10% of the Company's
consolidated gross revenues in 1997.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from period to
period. Revenues and capital expenditures may be difficult to forecast because
the Company's sales cycle may vary and depend upon facts such
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<PAGE> 14
as the size and timing of awarded contracts, changes in customer budgets, delays
in customer orders, changes in lottery marketing strategies and ticket ordering
patterns and general economic conditions. Contracts with governmental entities
operating newly authorized instant lotteries tend to generate higher levels of
ticket sales in the initial months.
Operating results also may be affected by the working capital
requirements associated with preparing facilities and equipment, establishing
the distribution system and printing tickets for a recently awarded contract,
and by the amount of time elapsing before the receipt and/or recognition of
revenues from the sale of instant lottery tickets and the provision of
cooperative services. New cooperative service customers may require additional
resources and infrastructures that may be required to be put in place before
revenues are realized. In addition, operating results may be affected by
utilization of overtime labor and the Company's ability to smoothly integrate
new and/or upgraded production equipment with its existing production
operations. Revenues from the sale of instant tickets, cooperative services,
software and hardware development may be recognized based upon ticket shipments,
a percentage of the lottery's instant ticket sales to the public, a contracted
price, a license agreement, an equipment lease agreement or any combination of
the foregoing. Current on-line revenues are generated from the sale of hardware
and software to lotteries, as well as support and maintenance contracts on the
on-line systems.
Additionally, circumstances encountered in international markets,
including the substantial amount of time involved in bidding on any
international contract, the evaluation of such bid and the resultant contract
award or rejection can vary significantly from that originally anticipated when
the bid is prepared. All of these factors may make it difficult to forecast
revenues and expenditures related to the Company's operations over extended
periods and may result in fluctuations in the Company's quarterly financial
results. Accordingly, quarter to quarter fluctuations in revenues may be
expected.
RELIANCE ON SENIOR MANAGEMENT
The Company believes it has benefited and continues to benefit
substantially from the skills, experience and efforts of its senior management
(See "Executive Officers"). The loss of the services of members of the Company's
senior management could have a material adverse effect on the Company's business
and prospects.
ADDITIONAL RISK FACTORS AND INVESTMENT CONSIDERATIONS
Additional or related factors which could affect the Company's actual
results and could cause the Company's actual consolidated results for the first
quarter of 1998, and beyond, to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company include:
Continued or increased pressure to change the selling prices for the
Company's products, and the resulting effects on margins, the Company's actions
in connection with continued competition in many product areas, including, but
not limited to, price competition and fluctuating demand for certain lottery
ticket products by one or more lottery customers;
Difficulties or delays in the development, production, testing and
marketing of products, including, but not limited to, a failure to ship new
products utilizing SGI-NET, SciScan Technology and/or other technologies when
anticipated, the failure of customers to accept these products or technologies
when planned, any defects in products and a failure of manufacturing economies
to develop when planned;
Occurrences affecting the Company's ability to reduce product and other
costs, and to increase productivity;
Inability to offset pricing competition with production efficiencies
and economies of sales; underutilization of the Company's plants and factories
resulting in production inefficiencies and higher costs; start-up expenses and
inefficiencies and delays and increased depreciation costs in connection with
the start of production in new plants and expansions;
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<PAGE> 15
The amount, and rate of growth in, the Company's selling, general and
administrative expenses, and the impact of unusual items resulting from the
Company's ongoing evaluation of its business strategies, asset valuations and
organizational structures;
The compromise or breach or perceived compromise or breach of the
Company's production security and integrity or the security and integrity of its
products or services;
Difficulties in obtaining raw materials, supplies, power and natural
resources and any other items needed for production of lottery tickets and other
products;
The acquisition of fixed assets and other assets, including inventories
and receivables, and the making or incurring of any expenditures and expenses,
including, but not limited to, depreciation and research and development
expenses, any revaluation of assets or related expenses and the amount of, and
any changes to, tax rates;
The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions or
prohibitions, inflation and monetary fluctuations, import and other changes or
taxes, the ability or inability of the Company to obtain, or hedge against,
foreign currency, foreign exchange rates and fluctuations in those rates, loss
of international contracts or lower international revenue resulting from
increased expenses associated with overseas operations, the impact of foreign
labor laws and disputes, adverse effects arising out of political unrest,
terrorist activity, nationalizations and unstable governments and legal systems,
and intergovernmental disputes, as well as actions affecting frequency, use and
availability of lottery products and licensing of lotteries for business;
The costs and other effects of legal or administrative cases and
proceedings (whether civil, such as environmental and product-related, or
criminal), settlements and investigations, claims, and changes in those items;
developments or assertions by or against the Company relating to intellectual
property rights and intellectual property licenses; adoptions of new, or changes
in, accounting policies and practices and the application of such policies and
practices;
The rejection or a delay in implementing terms of the joint venture
agreement with La Francaise des Jeux by the French Minister of Finance or the
inability to execute definitive agreements for products and services related to
the joint venture agreement;
The effects of changes within the Company's organization or in
compensation and benefit plans; any activities of parties with which the Company
has an agreement or understanding, including any issues affecting any investment
or joint venture in which the Company has an interest; the amount, type and cost
of the financing which the Company has, and any changes to that financing; and
The ability to integrate acquisitions into the Company's existing
operations and unexpected difficulties or problems with such acquired entities
including inadequate production equipment, inadequate production capacity or
quality, outdated or incompatible technologies or an inability to realize
anticipated synergies and efficiencies, whether within anticipated time frames
or at all.
For a more detailed discussion of certain of these risks see Item 3
"Legal Proceedings" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
ITEM 2. PROPERTIES
The Company currently has four instant ticket manufacturing sites: a
71,000 square foot leased facility in Gilroy, California (the "California
Facility"), a 185,000 square foot owned headquarters and manufacturing facility
in Alpharetta, Georgia (the "Georgia Facility"), a 112,000 square foot leased
facility in Leeds, United Kingdom (the "Leeds Facility"), and a 30,000 square
foot leased facility in Bradford, United Kingdom (the "Bradford Facility").
Scientific Games has a 8,000 square foot leased facility in Vienna, Austria (the
"Austria Facility"), where the main
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<PAGE> 16
software development activities for its on-line business are located. Sales
support, research, product development, U.S. software development and graphics
are located in the Company's corporate headquarters at the Georgia Facility. The
four manufacturing facilities have a combined maximum production capacity of
approximately 14 billion "standard sized" (2 by 4 inch) tickets per year.
However, at maximum production capacity, the Company incurs substantial overtime
expense and can encounter reduced efficiencies. The California Facility consists
of office and production space equipped with a modern gravure press with
multiple ink-jet imagers. The California Facility lease expires April 30, 2005.
Currently, annual rents for the California Facility are approximately $680,000.
In addition, the Company separately leases in California an approximately 14,000
square foot ink production facility under a lease expiring April 30, 1999 with
annual rents of approximately $90,000. The Leeds Facility consists of office and
production space equipped with five sheet-fed offset presses. The administrative
and game development departments for both the Leeds and Bradford Facilities are
in this location. The Leeds Facility lease expires October 31, 2001 with annual
rents of approximately $368,000. The Bradford Facility includes office and
production space and is equipped with three separate printing processes: offset,
inkjet and rotary screen. The Bradford Facility lease expires June 30, 2016 with
annual rents of approximately $212,000. The Austria Facility consists of office
and software development space equipped with state of the art software
development tools. The Austria Facility lease expires on December 31, 2007 with
annual rents of approximately $465,000.
Scientific Games' headquarters and printing facility in Georgia began
operation in February 1992. The Georgia Facility operates two presses, including
a modern 15 station gravure press. The Georgia Facility's gravure press is
equipped with a state-of-the-art register control system, designed to reduce
overall waste while achieving high quality. The press has four reversible
stations providing color flexibility including potential four-color back
printing in selected situations and is designed to accommodate alternative
printing technology on a station-by-station basis. The press is designed to dry
both water-based and solvent-based inks at full press speed. Currently, the use
of water-based inks is increasing as the printing industry moves to reduce its
output of volatile organic compounds (VOC's) created as the result of drying
solvent based inks.
In 1994-95, after an analysis of projected future manufacturing
requirements, the Company installed new imagers, data stations and related
equipment incorporating significantly advanced technology for its existing
presses in its California and Georgia facilities at a total cost of
approximately $5 million. Such imagers materially increased the efficiency and
flexibility (and thus capacity) of the Company's existing presses.
In 1995, the Company also installed an additional custom-designed
printing press, including new imagers, data stations and related equipment, in
its Georgia Facility. The total cost of the equipment and building expansion was
approximately $15.5 million. The new press is designed to employ both offset and
flexographic printing technologies and allows Scientific Games to more
economically produce smaller print runs than the existing two gravure presses,
by, among other things, reducing press set-up costs versus the existing two
gravure presses. The savings in operation of the third press are attributable
to, among other factors, the flexographic and offset technologies which use
photopolymer and aluminum plates rather than the engraved chrome plated
cylinders used in the gravure process.
The Company has presses at the Leeds and Bradford Facilities located in
the United Kingdom. The Leeds Facility has five sheet-fed offset presses as well
as imaging and silk screen equipment. The Bradford Facility utilizes three
separate printing processes, which are an offset, inkjet and rotary screen. In
1997, the Company, after an analysis of projected future manufacturing
requirements, began installation of new imagers, data stations and related
equipment incorporating significantly advanced technology for its existing
presses at the Bradford Facility at a total retail cost of approximately $3.0
million. Such imagers were fully operational in March 1998 and are expected to
materially increase the efficiency and flexibility (and thus capacity) of the
Company's existing presses at the Bradford Facility.
ITEM 3. LEGAL PROCEEDINGS
The Company's SGI subsidiary owns a minority interest in Wintech de
Colombia S.A. ("Wintech"), which has operated the Colombian national lottery
under contract with Empresa Colombian de Recuros para la Salud, S.A.
("Ecosalud"), an agency of the Colombian government. The contract projected that
certain levels of lottery ticket sales would be attained, and provided a penalty
against Wintech, SGI and the other shareholders of up to
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<PAGE> 17
$5,000,000 if such levels were not achieved. In addition, with respect to the
further guarantee of performance under the contract with Ecosalud, SGI delivered
to Ecosalud a $4,000,000 bond issued by a Colombian surety. Wintech started the
instant lottery in Colombia but, due to difficulties beyond its control, the
projected sales level was not met for the year ending 1993. On July 1, 1993,
Ecosalud adopted resolutions declaring, among other things, that the contract
was in default and asserted various claims for compensation and penalties
against Wintech, SGI and shareholders of Wintech. As the Company has previously
disclosed in its filings with the Commission, litigation is pending in Colombia
concerning various claims among Ecosalud, Wintech and the Company relating to
the termination of the contracts with Ecosalud (the "Colombian Litigation").
Ecosalud's claims in the Colombian Litigation are for, among other things,
realization on the full amount of the penalty plus interest and costs of the
bond.
SGI has consulted with Colombian counsel and been advised that SGI has
various legal defenses to Ecosalud's claims. SGI also has certain cross
indemnities and undertakings from the two other private shareholders of Wintech
for their respective shares of any liability to Ecosalud. That obligation is
secured in part by a $1,500,000 confirmed letter of credit in favor of SGI. The
Colombian surety which issued a $4,000,000 bond to Ecosalud under the contract
has reportedly paid $2,400,000 to Ecosalud under the bond, and made demand upon
SGI for that amount under the indemnity agreement entered into by the surety and
SGI. SGI declined to make or authorize any such payment and notified the surety
that any payment in response to Ecosalud's demand on the bond is at the surety's
risk. No suit by the Colombian surety has been filed to date. No assurance can
be given that the other shareholders of Wintech will, or have sufficient assets
to, honor their indemnity undertakings to SGI when the claims by Ecosalud
against SGI and Wintech are resolved in the even such claims result in any
liability.
In June 1996, Ecosalud filed a complaint against the Company in the
Unites States District Court for the Northern District of Georgia, Atlanta
Division (the "Georgia Litigation"). Total damages claimed in the original
Complaint were "not less than $84,423,267." The Complaint also sought reasonable
attorneys' fees and costs allegedly pursuant to the contract. In response to the
complaint, SGI filed a motion to dismiss the action on multiple grounds,
including the mandatory arbitration clause contained within the contract.
Ecosalud then filed an "Amended Complaint" in which it withdrew its claim for in
excess of $84,000,000 and, instead, sought $5,000,000 under an "Executive
Title," a purported joint and several guarantee by the Company, Wintech and
other shareholders in Wintech that projected levels of lottery sales would be
attained. In addition, Ecosalud also sought attorneys' fees and interest on the
claim. SGI filed a motion to dismiss the Amended Complaint on the ground, inter
alia, that litigation involving the same subject matter is pending in Colombia,
the dispute is subject to an arbitration clause and forum non conveniens. On
March 19, 1997 judgment was entered on behalf of the Company. The Court
dismissed the action on the grounds that it was governed by the arbitration and
forum selecting clauses in the contract which require that all disputes be
settled either by arbitration in Colombia or in the administrative courts of
Colombia. The Court also dismissed the action on the grounds of lis alibi
pendens. On April 16, 1997, the Plaintiff filed a Notice of Appeal. The United
States Court of Appeals for the Eleventh Circuit heard oral argument on the
appeal of the dismissal of the complaint of Ecosalud on January 16, 1998 and
thereafter affirmed the holding of the trial Court. Ecosalud did not seek
reconsideration by the Eleventh Circuit; accordingly, the Georgia Litigation has
been concluded.
SGI intends to vigorously defend the Colombian Litigation and has been
advised by counsel that the Company has numerous defenses on the merits, as well
as procedural defenses to the litigation. Although it is not possible to
determine the outcome of the litigation in Colombia, or the other related surety
and indemnity claims, management believes, based upon, among other things, the
advice of counsel, the advice of counsel that SGI has various defenses (which it
has asserted in response to such proceedings and claims), that adequate
provision has been made for such claims and the disposition thereof should not
have a material adverse effect on the Company's consolidated financial condition
or consolidated results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders at any time
during the fourth quarter of the year ended December 31, 1997.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In July 1997, the Company adopted a shareholders rights plan which
provided for the issuance to each holder of the Company's Common Stock, certain
rights (the "Rights") to purchase shares of the Company's redeemable Series A
Participating Cumulative Preferred Stock pursuant to the terms of a Rights
Agreement. Such rights are exercisable after distribution by holders other than
"Acquiring Persons" as defined in the Rights Agreement in the event of certain
ownership changes and in connection with certain business combinations. The
Rights may have certain anti-takeover effects. The Rights may cause substantial
dilution to a person that attempts to acquire the Company without a condition to
such an offer being that a substantial number of the Rights be acquired or that
the Rights be redeemed or declared invalid. The Rights should not interfere with
any merger or other business combination approved by the Board of Directors
(under some circumstances, with the concurrence of the Continuing Directors)
since the Rights may be redeemed by the Company. A copy of the Rights Agreement
and a more expansive summary of the provisions thereof is set forth in the
Company's Form 8-A/A with respect thereto, filed with the Commission on August
6, 1997.
The information presented under the caption "Corporate Information" on
page 37 of the Company's 1997 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 6 SELECTED FINANCIAL DATA
The information presented under the caption "Five-Year Selected
Financial Data" on page 14 of the Company's 1997 Annual Report to Shareholders
is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information presented under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 15
through 22 of the Company's 1997 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information presented under the caption's "Consolidated Statements
of Income", "Consolidated Balance Sheets", "Consolidated Statements of Cash
Flows", "Consolidated Statements of Shareholders' Equity", and "Notes to
Consolidated Financial Statements", on pages 23 - 35 of the Company's 1997
Annual Report to Shareholders is incorporated herein by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
18
<PAGE> 19
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information required by Item 10 is incorporated by reference from
the information in Registrant's proxy statement (filed or to be filed pursuant
to Regulation 14A) for its Annual Meeting of Stockholders to be held May 22,
1998, except as to biographical information on Executive Officers which is
contained in Item 1 of this Annual Report on Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the information in Registrant's proxy statement (filed or to be filed pursuant
to Regulation 14A) for its Annual Meeting of Stockholders to be held May 22,
1998.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the information in Registrant's proxy statement (filed or to be filed pursuant
to Regulation 14A) for its Annual Meeting of Stockholders to be held May 22,
1998.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the information in Registrant's proxy statement (filed or to be filed pursuant
to Regulation 14A) for its Annual Meeting of Stockholders to be held May 22,
1998.
19
<PAGE> 20
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Consolidated Financial Statements
The following financial statements and notes thereto of Scientific
Games Holdings Corp. are incorporated in Item 8 by reference from the Company's
1997 Annual Report to Shareholders:
<TABLE>
<CAPTION>
Page in Annual
Report to Shareholders
----------------------
<S> <C>
Consolidated Statements of Income, Years ended December 31, 1997, 1996 and 1995 23
Consolidated Balance Sheets -- December 31, 1997 and 1996 24
Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995 25
Consolidated Statements of Shareholders' Equity, Years ended December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements -- December 31, 1997 27-35
Report of Independent Auditors 35
</TABLE>
(a)(2) Financial Statement Schedules
Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(a)(3) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
(a)(4) Listing of Exhibits
The exhibits listed below are filed with or incorporated by reference
into this annual report on Form 10-K.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 -- Second Amended and Restated Certificate of
Incorporation of Scientific Games Holdings Corp. with
Certificate of Designation
3.2 -- Second Amended and Restated By-Laws of Scientific
Games Holdings Corp.(4)
10.2 -- Agreement by and between the Massachusetts State
Lottery Commission and Scientific Games, Inc. dated
December 18, 1987 and extensions thereto(1)
10.6 -- Employment Agreement ("Malloy Employment Agreement")
dated as of October 1, 1991 between Scientific Games
Operating Corp.(now known as Scientific Games Inc.)
and William G. Malloy(1)
10.7 -- Employment Agreement ("Behm Employment Agreement")
dated as of October 1, 1991 between Scientific Games
Operating Corp.(now known as Scientific Games Inc.)
and William F. Behm(1)
10.8 -- Employment Agreement ("Little Employment Agreement")
dated as of October 1, 1991 between Scientific Games
Operating Corp.(now known as Scientific Games Inc.)
and Thomas F. Little(1)
10.10 -- Form of Promissory Note evidencing loans to
Management Stockholders(1)
20
<PAGE> 21
10.16 -- Second Amendment to Asset Purchase Agreement dated as
of October 1, 1991 between Bally Manufacturing
Corporation and Scientific Games Operating Corp. (now
known as Scientific Games Inc.)(re: Earnout)(1)
10.17 -- Stockholders' Agreement dated as of July 1, 1993, as
amended(1)
10.18 -- Amended First 1991 Management Stock Option Plan(1)
10.19 -- Amended Second 1991 Management Stock Option Plan(1)
10.20 -- 1993 Management Stock Option Plan(1)
10.21 -- Industrial Real Estate Lease dated December 4, 1984
between Arroyo One as Landlord and Scientific Games
Inc. as Tenant (Gilroy Lease), as amended(1)
10.22 -- Lease dated April 27, 1987 between Kishimura Bros.
and Scientific Games of California, Inc. (Scientific
Games of California, Inc. assigned its leasehold
interest to Scientific Games Operating Corp., now
known as Scientific Games, Inc.), as amended(1)
10.23 -- Form of Amendment to Malloy Employment Agreement(1)
10.24 -- Form of Amendment to Behm Employment Agreement(1)
10.25 -- Form of Amendment to Little Employment Agreement(1)
10.26 -- Instant Ticket and Associated Products and Services
Agreement dated May 4, 1993 by and between Georgia
Lottery Corporation and Scientific Games, Inc.(4)
10.31 -- Form of revised Severance Benefits Agreement(4)
10.32 -- Amendment to Amended First 1991 Management Stock
Option Plan(4)
10.33 -- Amendment to Amended Second 1991 Management Stock
Option Plan(4)
10.34 -- Amendment to 1993 Management Stock Option Plan(4)
10.35 -- First Amended and Restated 1993 Directors' Stock
Option Plan(4)
10.37 -- 1994 Management Stock Option Plan(6)
10.38 -- 1995/1996 Management Stock Option Plan(6)
10.39 -- Key Employee Restricted Stock Option Plan(6)
10.40 -- Severance Benefits Agreement dated as of May 5, 1995,
between Scientific Games Holdings Corp. and Cliff O.
Bickell(7)
10.42 -- Key Employee Restricted Stock Plan(6)
10.43 -- Form of Key Employee Restricted Stock Plan Restricted
Stock Award Agreement(7)
10.45 -- Instant Lottery Tickets Supply Agreement between
Thomas De La Rue Limited, Scientific Games Inc. and
Camelot Group plc, dated June 15, 1995.(3)(8)
10.46 -- Credit Agreement for Line of Credit From First Union
National Bank of Georgia to Scientific Games Holdings
Corp. and Scientific Games Inc. Dated: December 20,
1996(9)
10.47 -- Rights Agreement dated as of July 10, 1997 between
Scientific Games Holdings Corp. and First Union
National Bank as Rights Agent(11)
10.48 -- Amended Bank Credit Agreement
10.49 -- 1998 Employee Stock Purchase Plan, as amended and
restated
10.50 -- Stock Purchase Agreement dated as of April 15, 1997,
by and between Scientific Games Holdings Corp. and
Autotote Corporation with Respect to All Outstanding
Capital Stock of Tele Control Kommunications - und
Computersysteme Gesellschaft m.b.h.
10.51 -- Form of Amendment to Behm Employment Agreement
10.52 -- Form of Amendment to Little Employment Agreement
11.0 -- Statement re: computation of per share earnings(loss)
13.1 -- 1997 Annual Report to Shareholders pages 14, 15-35
and 37 only
21.0 -- List of Subsidiaries of Registrant
23.0 -- Consent of Independent Auditors
27.0 -- Financial Data Schedule (for SEC use only)
- --------------------
(1) Previously filed with Registration Statement No. 33-65582,
filed on July 2, 1993 or as subsequently amended on July 28,
1993, August 9, 1993 or August 20, 1993.
21
<PAGE> 22
(2) Previously filed with the Company's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1993.
(3) Portions of Exhibits 10.28 and 10.43 deemed confidential by
the Company have been omitted, were filed separately with the
Commission and confidential treatment has been granted for
portions of these exhibits.
(4) Previously filed with the Company's Registration Statement No.
33-75168, filed on February 11, 1994 or as subsequently
amended on March 4, 1994.
(5) Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(6) Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(7) Previously filed with the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
(8) Previously filed with the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
(9) Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(10) Previously filed with the Company's Current Report on Form 8-K
dated April 15, 1997 and filed with the Commission on June 30,
1997.
(11) Previously filed with the Company's Current Report of Form 8-K
8A/A dated August 6, 1997 and filed with the Commission on
such date.
(b) Reports on Form 8-K: none.
(c) Executive Compensation Plans and Arrangements.
(i) Employment Agreement ("Malloy Employment
Agreement") dated as of October 1, 1991 between
Scientific Games Operating Corp. (now known as
Scientific Games Inc.) and William G. Malloy,
Exhibit 10.6(1)
(ii) Employment Agreement ("Behm Employment Agreement")
dated as of October 1, 1991 between Scientific
Games Operating Corp. (now known as Scientific
Games Inc.) and William F. Behm, Exhibit 10.7(1)
(iii) Employment Agreement ("Little Employment
Agreement") dated as of October 1, 1991 between
Scientific Games Operating Corp. (now known as
Scientific Games Inc.) and Thomas F. Little,
Exhibit 10.8(1)
(iv) Amended First 1991 Management Stock Option Plan,
Exhibit 10.18(1)
(v) Amended Second 1991 Management Stock Option Plan,
Exhibit 10.19(1)
(vi) 1993 Management Stock Option Plan, Exhibit
10.20(1)
(vii) Form of Amendment to Malloy Employment Agreement,
Exhibit 10.23(1)
(viii) Form of Amendment to Behm Employment Agreement,
Exhibit 10.24(1)
(ix) Form of Amendment to Little Employment Agreement,
Exhibit 10.25(1)
(x) Form of revised Severance Benefits Agreement,
Exhibit 10.31(2)
(xi) Amendment to Amended First 1991 Management Stock
Option Plan, Exhibit 10.32(2)
(xii) Amendment to Amended Second 1991 Management Stock
Option Plan, Exhibit 10.33(2)
(xiii) Amendment to 1993 Management Stock Option Plan,
Exhibit 10.34(2)
(xiv) 1994 Management Stock Option Plan, Exhibit
10.37(3)
(xv) 1995/1996 Management Stock Option Plan, Exhibit
10.38(3)
(xvi) Severance Benefits Agreement dated as of May 5,
1995, between Scientific Games Holdings Corp and
Cliff O. Bickell, Exhibit 10.40(4)
(xvii) Key Employee Restricted Stock Plan, Exhibit
10.42(3)
(xviii) Form of Key Employee Restricted Stock Plan
Restricted Stock Award Agreement, Exhibit 10.43(4)
(xix) Form of Amendment to Behm Employment Agreement,
Exhibit 10.51
(xx) Form of Amendment to Little Employment Agreement,
Exhibit 10.52
22
<PAGE> 23
- ------------------------------------
(1) Previously filed with Registration Statement No.
33-65582, filed on July 2, 1993 or as subsequently
amended on July 28, 1993, August 9, 1993 or August
20, 1993.
(2) Previously filed with Registration Statement No.
33-75168, filed on February 11, 1994 or as
subsequently amended on March 4, 1994.
(3) Previously filed with the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
(4) Previously filed with the Company's Annual Report
on Form 10-Q for the quarter ended June 30, 1995.
23
<PAGE> 24
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Scientific Games Holdings Corp. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Alpharetta, and State of Georgia on this 31st day of
March, 1998.
Scientific Games Holdings Corp.
By: /s/ William G. Malloy
-------------------------------
William G. Malloy, Chairman
of the Board, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Registrant, Scientific
Games Holdings Corp. in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William G. Malloy Chairman of the Board, President, March 31, 1998
- ------------------------------ and Chief Executive Officer
William G. Malloy (Principal Executive Officer)
/s/ Cliff O. Bickell Chief Financial Officer, March 31, 1998
- ------------------------------ Vice President and Treasurer
Cliff O. Bickell (Principal Financial and Accounting
Officer)
/s/ Paul F. Balser Director March 31, 1998
- ------------------------------
Paul F. Balser
/s/ William F. Behm Director March 31, 1998
- ------------------------------
William F. Behm
/s/ Mark E. Jennings Director March 31, 1998
- ------------------------------
Mark E. Jennings
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C> <C>
/s/ Frank S. Jones Director March 31, 1998
- ------------------------------
Frank S. Jones
/s/ Edith K. Manns Director March 31, 1998
- ------------------------------
Edith K. Manns
/s/ Dennis L. Whipple Director March 31, 1998
- ------------------------------
Dennis L. Whipple
</TABLE>
25
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SCIENTIFIC GAMES HOLDINGS CORP.
(ORIGINALLY INCORPORATED ON MARCH 28, 1991
UNDER THE NAME OF
SCIENTIFIC GAMES ACQUISITION CORP.)
Scientific Games Holdings Corp. (the "Corporation") a corporation
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware, does hereby certify as follows:
FIRST: That the Board of Directors of said Corporation, at a meeting
duly held, adopted a resolution proposing and declaring advisable the
amendments to the Certificate of Incorporation of the Corporation, and the
restatement of the Corporation's Certificate of Incorporation, in each case, as
set forth below.
SECOND: That thereafter, pursuant to a resolution of its Board of
Directors, the holders of a majority of the issued and outstanding shares of
the capital stock of said Corporation approved the amendments and this
restatement.
THIRD: That the amendments were duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
RESOLVED, that the Corporation's Certificate of Incorporation be
amended and restated by deleting the text therein in its entirety and adding
the following in lieu thereof.
ARTICLE I
The name of the corporation is "Scientific Games Holdings Corp." (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is c/o The Corporation Trust Company, 1209 Orange Street, in the City
of Wilmington, County of New Castle, Delaware 19801. The name of the
Corporation's registered agent at such address is The Corporation Trust
Company.
<PAGE> 2
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
A. Authorization. The total number of shares of capital stock
(the "Stock") which the Corporation shall have the authority to issue is
28,750,000 shares. Such authorized shares shall be divided into two classes, as
follows:
1. Common stock, consisting of 25,750,000 shares, par
value $0.001 per share (the "Common Stock"), which shall have full
voting powers and all rights and privileges of common stock; and
2. Preferred stock, consisting of 3,000,000 shares, par
value $0.001 per share (the "Preferred Stock"), in one or more series,
each such series to have such distinctive designation or title as may
be fixed by the Board of Directors prior to the issuance of any shares
thereof.
The preferences and relative, participating, optional and other special rights,
qualifications and restrictions of the shares of each class of Stock shall be
as hereinafter provided in this Article IV.
B. Common Stock.
1. Dividends. The holders of Common Stock shall be
entitled to received such dividends (payable in cash, stock, or
otherwise) as from time to time may be lawfully declared on the Common
Stock by the Board of Directors of the Corporation from funds legally
available therefor.
2. Voting Rights. The holders of Common Stock shall be
entitled to cast one vote per share of Common Stock on all matters
submitted for the vote of the stockholders of the Corporation and as
otherwise required by law.
3. Liquidation. In the event of the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
after satisfying claims of creditors, secured and unsecured, and after
distribution in full of the preferential amounts to be distributed to
the holders of Preferred Stock, if any, the holders of Common Stock
shall be entitled to receive all of the remaining assets of the
Corporation of whatever kind lawfully available for distribution to
stockholders, ratably and in proportion to the number of shares of
Common Stock held by them.
C. Preferred Stock. Each series of Preferred Stock shall have
such voting powers, full or limited, or no voting powers, and such preferences
and such relative, participating, optional or other special rights (including,
without limitation, the right to convert shares of such Preferred Stock into
shares of Common Stock at such rate and upon such terms and conditions as may
be fixed by the
2
<PAGE> 3
Corporation's Board of Directors), with such qualifications, limitations, or
restrictions of such preferences or rights as shall be stated in the resolution
or resolutions providing for the issue of such series of Preferred Stock, as
may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof, in accordance with the laws of the State of
Delaware.
ARTICLE V
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any such reorganization of this Corporation as a consequence of such compromise
or arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application had been made,
be binding on all the creditors or class of creditors and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE VI
The following provisions are inserted for the regulation and conduct
of the affairs of the Corporation, and it is hereby expressly provided that the
same are intended in furtherance and not in limitation or exclusion of the
powers conferred by statute:
A. The Board of Directors is expressly authorized to adopt,
repeal, alter or amend the ByLaws of the Corporation by the vote of a majority
of the entire Board of Directors. Alternatively, in addition to any
requirements of law or of any other provision of this Certificate of
Incorporation or any resolution or resolutions of the Board of Directors
adopted pursuant to Article IV of this Certificate of Incorporation (and
notwithstanding the fact that a lesser percentage may be specified by law, this
Certificate of Incorporation or any such resolution or resolutions), the
affirmative vote of the holders of eighty percent (80%) or more of the combined
voting power of the then outstanding shares of Voting Stock, voting together as
a single class, shall be required to adopt, amend, alter or repeal any
provision of the By-Laws. For purposes of this paragraph A, "Voting Stock"
shall have the meaning set forth in paragraph B.7 of this Article VI.
B. 1. Subject to the provisions of Article IV hereof
relating to the rights of the holders of any class or series of stock
having a preference over the common stock as to dividends or upon
liquidation, the number of the directors of the Corporation shall be
fixed from time to time by or pursuant to the By-Laws of the
Corporation.
3
<PAGE> 4
2. Beginning with the adoption of the First Amended and
Restated Certificate of Incorporation, the directors, other than those
who may be elected by holders of preferred stock or any class or
series of stock having a preference over the common stock as to
dividends or upon liquidation pursuant to the terms of this Amended
and Restated Certificate of Incorporation or any resolution or
resolutions providing for the issue of such class or series of stock
adopted by the Board of Directors, shall be classified, with respect
to the time for which they severally hold office, into three classes,
as nearly equal in number as possible, as shall be provided in the
By-Laws of the Corporation: (a) one class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in
1994, (b) another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1995, and (c)
another class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1996, with each class to
hold office until its successors are elected and qualified. At each
annual meeting of the stockholders of the Corporation, the date of
which shall be fixed by or pursuant to the By-Laws of the Corporation,
the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the
annual meeting of stockholders held in the third year following the
year of their election.
3. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent
director.
4. Advance notice of nominations for the election of
directors shall be given in the manner and to the extent provided in
the By-Laws of the Corporation.
5. Except as otherwise provided for or fixed by or
pursuant to the provisions of Article IV hereof relating to the rights
of the holders of any class or series of stock having a preference
over the common stock as to dividends or upon liquidation, newly
created directorships resulting from any increase in the number of
directors may be filled by the Board of Directors, or as otherwise
provided in the By-Laws, and any vacancies on the Board of Directors
resulting from death, resignation, removal or other cause shall only
be filled by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board
of Directors, or by a sole remaining director, or as otherwise
provided in the By-laws. Any director elected in accordance with the
preceding sentence of this subparagraph 5 shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
6. Any director may be removed from office following,
or in connection with, or in contemplation of, a Change in Control of
the Corporation (as defined in paragraph B.7 of this Article VI) only
for cause and only by the affirmative vote of the holders of a
majority of the combined voting power of the then outstanding shares
of Voting Stock (as defined in paragraph B.7 of this Article VI),
voting together as a single class. For purposes of this subparagraph
6, "cause" shall mean the willful and continuous failure of a director
to substantially perform such director's duties to the Corporation
(other than any such failure resulting from incapacity due to physical
or mental illness) or the willful engaging by a director in gross
misconduct materially and demonstrably injurious to the Corporation.
In
4
<PAGE> 5
all other instances, directors, other than those who may be elected by
holders of preferred stock or any class or series of stock having a
preference over the common stock as to dividends or upon liquidation
pursuant to the terms of this Amended and Restated Certificate of
Incorporation or any resolution or resolutions providing for the issue
of such class or series of stock adopted by the Board of Directors,
may be removed by the affirmative vote of a majority of shares present
or represented by proxy entitled to vote on the election of directors
and voting on any such removal resolution.
7. For the purposes of this Article VI:
"Voting Stock" shall mean the outstanding shares of all classes and
series of the Corporation entitled to vote generally in the election of
directors of the Corporation or of a Subsidiary as the context may require, and
shall not include any series of the preferred stock of the Corporation unless
the certificate of designation of rights and preferences for such series shall
specifically state that such series shall be deemed "Voting Stock" for purposes
of this Article VI.
A "Change in Control of the Corporation" shall be deemed to have
occurred if any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended, and the Rules and Regulations
promulgated thereunder) or group of persons, (a) becomes the beneficial owner,
directly or indirectly, of securities of the Corporation representing, or
convertible into or exchangeable for, securities representing more than 50% of
the combined voting power of the Corporation's then outstanding securities; or
(b) acquires the right or power to nominate and/or control, directly or
indirectly, whether through the ownership of voting securities of the
Corporation, by contract or otherwise, a majority of the members of the
Corporation's Board of Directors without having first received, prior to any
such person or group of persons acquiring such right or power, the prior
written consent of at least two-thirds of the members of the entire Board of
Directors of the Corporation then in office, including at least one director
who is not a Public Director (as defined in this paragraph B.7).
A "Public Director" shall mean a person other than an officer,
employee or "control person" (as such term is defined in Rule 405 of the
General Rules and Regulations of the Securities Act of 1933, as amended) of the
Corporation or its subsidiaries or any "affiliate" (as such term is defined in
Rule 405 of the General Rules and Regulations of the Securities Act of 1933, as
amended).
ARTICLE VII
Subject to the rights of the holders of preferred stock or any other
class or series of stock having a preference over the common stock as to
dividends or upon liquidation, any action required or permitted to be taken by
the stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Except as otherwise required by
law and subject to the rights of the holders of the preferred stock or any
other class or series of stock having a preference over the common stock as to
dividends or upon liquidation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors or as
otherwise provided in the By-Laws of the Corporation.
5
<PAGE> 6
ARTICLE VIII
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that nothing in this Article VIII shall
eliminate or limit the liability of any director (a) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of the State of Delaware, or (d) for any transaction from which the director
derived an improper personal benefit. Neither the amendment nor repeal of this
Article VIII, nor the adoption of any provision of the Certificate of
Incorporation inconsistent with this Article VIII, shall eliminate or reduce
the effect of this Article VIII in respect of any matter occurring, or any
cause of action, suit or claim that, but for this Article VIII, would accrue or
arise, prior to such amendment, repeal or adoption of an inconsistent
provision.
IN WITNESS WHEREOF, Scientific Games Holdings Corp. has caused its
corporate seal to be hereunto affixed and this Amended and Restated Certificate
of Incorporation to be signed, certified and attested by its Chief Executive
Officer and its Secretary, duly authorized officers of the Corporation, as of
the 28th day of June, 1994 and this Certificate shall be effective, pursuant to
Section 103(d) of the Delaware General Corporation Law, on the 30th day of
June, 1994. The signature of the Chief Executive Officer and the Secretary
constitute the affirmation and acknowledgement of such persons, under penalties
of perjury, that this instrument is the act and deed of said Corporation and
that the facts stated herein are true.
SCIENTIFIC GAMES HOLDINGS CORP.
By: William G. Malloy
-------------------------------
William G. Malloy
Chief Executive Officer and
Chairman of the Board
ATTEST:
C. Gray Bethea, Jr.
- ------------------------------
C. Gray Bethea, Jr., Secretary
[CORPORATE SEAL]
6
<PAGE> 7
STATE OF GEORGIA )
: SS.:
COUNTY OF FORSYTH )
The undersigned, a Notary Public in and for the aforesaid County and
State, certifies that on this 28th day of June, 1994, William G. Malloy, the
Chief Executive Officer and Chairman of the Board of Scientific Games Holdings
Corp. (the "Corporation"), and C. Gray Bethea, Jr., Secretary of the
Corporation, known to me personally to be such, duly executed the foregoing
Certificate before me and acknowledged said Certificate to be their act and
deed made on behalf of the Corporation, and acknowledged that the facts stated
therein are true. The signatures on the attached Certificate of said Chief
Executive officer and said Secretary of the Corporation are in the handwriting
of said Chief Executive Officer and said Secretary, respectively, and the seal
affixed to the Certificate is the corporate seal of the Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of office
this 28th day of June, 1994.
Linda Johnson Weaver
-------------------------------------
Notary Public
(Affix Notarial Seal)
7
<PAGE> 8
CERTIFICATE OF DESIGNATION
OF
SERIES A PARTICIPATING CUMULATIVE
PREFERRED STOCK
OF
SCIENTIFIC GAMES HOLDINGS CORP.
Pursuant to Section 151 of the
General Corporation Law of the
State of Delaware
We, William G. Malloy, President, Chief Executive Officer and Chairman
of the Board, and William F. Behm, Executive Vice President, of Scientific
Games Holding Corp. (the "Company"), a corporation organized and existing under
the General Corporation Law of the State of Delaware ("Delaware Law"), in
accordance with the provisions thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the Company, the Board of Directors on
July 10, 1997 adopted the following resolution creating a series of Preferred
Stock in the amount and having the designation, voting powers, preferences and
relative, participating, optional and other special rights and qualifications.,
limitations and restrictions thereof as follows:
Section 1. Designation and Number of Shares. The shares of such
series shall be designated as "Series A Participating Cumulative Preferred
Stock" (the "Series A Preferred Stock"), and the number of shares constituting
such series shall be 500,000. Such number of shares of the Series A Preferred
Stock may be increased or decreased by resolution of the Board of Directors;
provided that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares issuable upon exercise or conversion of outstanding
rights, options or other securities issued by the Company.
Section 2. Dividends and Distributions.
(a) The holders of shares of Series A Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable on the first day of February, May, August and
November of each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of any share or
fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00
and (b) subject to the provision for adjustment hereinafter set forth,
100 times the aggregate per share amount of
<PAGE> 9
all cash dividends or other distributions and 100 times the aggregate
per share amount of all non-cash dividends or other distributions
(other than (i) a dividend payable in shares of Common Stock, par
value $.00l per share, of the Company (the "Common Stock") or (ii) a
subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise)), declared on the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred
Stock. If the Company shall at any time after July 10, 1997 (the
"Rights Declaration Date") pay any dividend on Common Stock payable in
shares of Common Stock or effect a subdivision or combination of the
outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(b) The Company shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common
Stock (other than as described in clauses (i) and (ii) of the first
sentence of paragraph (A)); provided that if no dividend or
distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date (or, with respect to the
first Quarterly Dividend Payment Date, the period between the first
issuance of any share or fraction of a share of Series A Preferred
Stock and such first Quarterly Dividend Payment Date), a dividend of
$1.00 per share on the Series A Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares
of Series A Preferred Stock, unless the date of issue of such shares
is on or before the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to
accrue and be cumulative from the date of issue of such shares, or
unless the date of issue is a date after the record date for the
determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and on or before such
Quarterly Dividend Payment Date, in which case dividends shall begin
to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid
on shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall not be more
than 60 days prior to the date fixed for the payment thereof.
2
<PAGE> 10
Section 3. Voting Rights. In addition to any other voting
rights required by law, the holders of shares of Series A Preferred Stock shall
have the following voting rights:
(a) Subject to the provision for adjustment hereinafter
set forth, each share of Series A Preferred stock shall entitle the
holder thereof to 100 votes on all matters submitted to a vote of
stockholders of the Company. If the Company shall at any time after
the Rights Declaration Date pay any dividend on Common Stock payable
in shares of Common Stock or effect a subdivision or combination of
the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes per share to which holders
of shares of Series A Preferred Stock were entitled immediately prior
to such event shall be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein or by law, the
holders of shares of Series A Preferred Stock and the holders of
shares of Common Stock shall vote together as a single class on all
matters submitted to a vote of stockholders of the Company.
(c) (i) If at any time dividends on any series A
Preferred Stock shall be in arrears in an amount equal to six
quarterly dividends thereon, the occurrence of such contingency shall
mark the beginning of a period (herein called a "default period")
which shall extend until such time when all accrued and unpaid
dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preferred
Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Preferred
Stock and any other series of Preferred Stock then entitled as a class
to elect directors, voting together as a single class, irrespective of
series, shall have the right to elect two Directors.
(ii) During any default period, such voting
right of the holders of Series A Preferred Stock may be
exercised initially at a special meeting called pursuant to
subparagraph (iii) of this Section 3(C) or at any annual
meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting right nor the
right of the holders of any other series of Preferred Stock,
if any, to increase, in certain cases, the authorized number
of Directors shall be exercised unless the holders of 10% in
number of shares of Preferred Stock outstanding shall be
present in person or by proxy. The absence of a quorum of
holders of Common Stock shall not affect the exercise by
holders of Preferred Stock of such voting right. At any
meeting at which holders of Preferred Stock shall exercise
such voting right initially during an existing default
period, they shall have the right, voting as a class, to
elect Directors to fill such vacancies, if any, in the Board
of Directors as may then exist up to two Directors or, if
such right is exercised at an annual meeting, to elect two
3
<PAGE> 11
Directors. If the number which may be so elected at any
special meeting does not amount to the required number, the
holders of the Preferred Stock shall have the right to make
such increase in the number of Directors as shall be
necessary to permit the election by them of the required
number. After the holders of the Preferred Stock shall have
exercised their right to elect Directors in any default
period and during the continuance of such period, the number
of Directors shall not be increased or decreased except by
vote of the holders of Preferred Stock as herein provided or
pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Preferred Stock.
(iii) Unless the holders of Preferred Stock
shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of
Directors may order, or any stockholder or stockholders
owning in the aggregate not less than 10% of the total number
of shares of Preferred Stock outstanding, irrespective of
series, may request, the calling of special meeting of
holders of Preferred Stock, which meeting shall thereupon be
called by the President, a Vice President or the Secretary of
the Company. Notice of such meeting and of any annual meeting
at which holders of Preferred Stock are entitled to vote
pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Preferred Stock by mailing a copy of such
notice to him at his last address as the same appears on the
books of the Company. Such meeting shall be called for a time
not earlier than 20 days and not later than 60 days after
such order or request or in default of the calling of such
meeting within 60 days after such order or request, such
meeting may be called on similar notice by any stockholder or
stockholders owning in the aggregate not less than 10% of the
total number of shares of Preferred Stock outstanding,
irrespective of series. Notwithstanding the provisions of
this paragraph (C)(iii), no such special meeting shall be
called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of stockholders.
(iv) In any default period, the holders of
Common Stock, and other classes of stock of the Company if
applicable, shall continue to be entitled to elect the whole
number of Directors until the holders of Preferred Stock
shall have exercised their right to elect two Directors
voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of Preferred Stock shall
continue in office until their successors shall have been
elected by such holders or until the expiration of the
default period, and (y) any vacancy in the Board of Directors
may (except as provided in paragraph (C)(ii) of this Section
3) be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class of stock
which elected the Director whose office shall have become
vacant. References in this paragraph (C) to Directors elected
by the holders of a particular class of stock shall include
Directors elected by such Directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a
default period, (x) the right of
4
<PAGE> 12
the holders of Preferred Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the
holders of Preferred Stock as a class shall terminate, and
(z) the number of Directors shall be such number as may be
provided for in the certificate of incorporation or bylaws
irrespective of any increase made pursuant to the provisions
of paragraph (C)(ii) of this Section 3 (such number being
subject, however, to change thereafter in any manner provided
by law or in the certificate of incorporation or bylaws). Any
vacancies in the Board of Directors effected by the
provisions of clauses (y) and (z) in the preceding sentence
may be filled by a majority of the remaining Directors.
(d) The Certificate of Incorporation of the Company
shall not be amended in any manner (whether by merger or otherwise) so
as to adversely affect the powers, preferences or special rights of
the Series A Preferred Stock without the affirmative vote of the
holders of a majority of the outstanding shares of Series A Preferred
Stock, voting separately as a class.
(e) Except as otherwise provided herein, holders of
Series A Preferred Stock shall have no special voting rights, and
their consent shall not be required for taking any corporate action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding
shares of Series A Preferred Stock shall have been paid in full, the
Company shall not:
i. declare or pay dividends on, or make any
other distributions on, any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
ii. declare or pay dividends on, or make any
other distributions on, any shares of stock ranking on a
parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock
and all such other parity stock on which dividends are
payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
iii. redeem, purchase or otherwise acquire for
value any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock; provided that the Company may
at any time redeem, purchase or otherwise acquire shares of
any such junior stock in exchange for shares of stock of the
Company ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock;
or
5
<PAGE> 13
iv. redeem, purchase or otherwise acquire for
value any shares of Series A Preferred Stock, or any shares
of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of Series A Preferred Stock and
all such other parity stock upon such terms as the Board of
Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Company shall not permit any subsidiary of the
Company to purchase or otherwise acquire for value any shares
of stock of the Company unless the Company could, under
paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock redeemed, purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock without designation as to series and may be
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors as permitted by the Certificate of
Incorporation or as otherwise permitted under Delaware Law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Company, no distribution shall be
made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1.00 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment; provided that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of Common
Stock, or (2) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such other parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. If the Company shall at any time after the Rights
Declaration Date pay any dividend on Common Stock payable in shares of Common
Stock or effect a subdivision or combination of the outstanding shares of
Common Stock (by reclassification or otherwise) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior
to such event under the proviso in clause (1) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of
6
<PAGE> 14
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. If the Company shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash or any other property, as the case may be, into which or for
which each share of Common Stock is changed or exchanged. If the Company shall
at any time after the Rights Declaration Date pay any dividend on Common Stock
payable in shares of Common Stock or effect a subdivision or combination of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. No Redemption. The Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank junior
(as to dividends and upon liquidation, dissolution and winding up) to all other
series of the Company's preferred stock, except any series that specifically
provides that such series shall rank junior to the Series A Preferred Stock.
Section 10. Fractional Shares. Series A Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
7
<PAGE> 15
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
as of this 10th day of July, 1997.
William G. Malloy
-----------------------------------------
William G. Malloy
President, Chief Executive Officer and
Chairman of the Board
William F. Behm
-----------------------------------------
William F. Behm
Executive Vice President
Attest:
C. Gray Bethea, Jr.
- ---------------------------------
C. Gray Bethea, Jr.,
Vice President, Secretary and
General Counsel
8
<PAGE> 1
EXHIBIT 10.48
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "Amendment") is made and
entered into as of the 12th day of February, 1998, by and among SCIENTIFIC
GAMES HOLDINGS CORP., a corporation organized under the laws of Delaware
("Holdings"), SCIENTIFIC GAMES, INC. (the "Company"), a corporation organized
under the laws of Delaware and a wholly-owned Subsidiary of Holdings (Holdings
and the Company together are the "Co-Borrowers"), the financial institutions
which are party hereto (the "Lenders"), and FIRST UNION NATIONAL BANK, a
national banking association ("Administrative Agent"), as Administrative Agent
for the Lenders.
WITNESSETH:
WHEREAS, the Co-Borrowers and the Lenders made and entered into that
certain Credit Agreement (as further amended, modified, supplemented, or
restated from time to time, the "Credit Agreement"; capitalized terms used
herein and not otherwise defined shall have the meanings ascribed thereto in
the Credit Agreement);
WHEREAS, the Co-Borrowers wish to amend certain provisions of the
Credit Agreement, and the Lenders have agreed to such proposed amendments;
NOW THEREFORE, for and in consideration of the foregoing and for ten
dollars ($10.00) and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Amendment
Section 1.1. Section 1.1 of the Credit Agreement is hereby amended by
adding the following new definitions to read in their entirety as follows:
"First Amendment" means the First Amendment to Credit Agreement, dated
on February 12, 1998.
"First Amendment Effective Date" means the date on which the
conditions to the effectiveness of the First Amendment have been fully
satisfied.
<PAGE> 2
"SG Austria" means Scientific Games Kommunikations Und Computersysteme AG,
a Subsidiary of the Company.
"One-Time SG Austria Charge" means the one-time charge to Net Worth of the
Co-Borrowers recognized in the Fiscal Year ended December 31, 1997, and
representing the one-time write-off of in-process research and development
costs associated with the acquisition of SG Austria.
Section 1.2. Section 1.1 of the Credit Agreement is hereby amended by
deleting the following definitions as they exist in their current form in their
entirety and by substituting the following definitions therefor:
"Foreign Currency Sublimit" means the Assigned Dollar Value of
$45,000,000, plus $1,500,000 subject to the requirements of Section 2.1 with
respect to such Assigned Dollar Excess.
"Leverage Ratio" means at any date the ratio of (i) the Consolidated Debt
of Holdings and its Subsidiaries as of such date to (ii) the sum of (A) the
Consolidated Net Worth of Holdings and its Subsidiaries plus (B) the
Consolidated Debt of Holdings and its Subsidiaries, each as the date of
calculation, and, on and after the First Amendment Effective Date (with respect
to the determination of the Applicable Margin in Section 3.1 (c) but NOT in the
calculation of compliance with the financial covenant contained in Section
8.1), plus (C) the One-Time SG Austria Charge.
"Officer's Compliance Certificate" shall, until the First Amendment
Effective Date, have the meaning assigned thereto in Section 6.2, and,
thereafter, shall mean a certificate in the form attached hereto as Exhibit D-1.
Section 1.3. Section 6.1 of the Credit Agreement is hereby amended by
deleting subsection (c) in its entirety and by substituting the following
therefor:
(c) Annual Business Plan and Financial Projections. As soon as
practicable and in any event within sixty (60) days after the beginning of each
Fiscal Year, a business plan of Holdings and its Material Subsidiaries for the
ensuring four fiscal quarters, such plan to include, on a quarterly basis, the
following: a quarterly operating and capital budget, a projected income
statement, statement of cash flows and balance sheet and a report containing
management's discussion and analysis of such projections (such business plan
and projections, the "Projections"), accompanied by a certificate from the
chief financial officer of each Co-Borrowers to the effect that, to the best of
such officer's knowledge, the Projections are good faith estimates of the
-2-
<PAGE> 3
financial condition and operations of each Co-Borrowers and their Subsidiaries
for such four quarter period.
Section 1.4. All references to the "Credit Agreement" in any of the Loan
documents shall be deemed references to the Credit Agreement as amended by this
First Amendment.
ARTICLE 2
Conditions to Effectiveness
Section 2.1. Effective Date. The amendments to the Credit Agreement set
forth in this Amendment shall become effective as of the date first written
above (the "Effective Date") after all the conditions set forth in Sections 2.2
through 2.3 shall have been satisfied.
Section 2.2 Execution of Loan Documents. The Lenders shall have received
counterparts of this first Amendment duly executed by the Co-Borrowers.
Section 2.3. Satisfaction of Conditions. The Lenders shall have received
counterparts or evidence of each of the following, in form, scope and substance
satisfactory to the Lenders and their counsel:
(a) a certificate of the Co-Borrowers that the articles of incorporation
and by-laws of the Co-Borrowers as in effect on the First Amendment
Effective Date are the same as those in effect on the date the Credit
Agreement was executed, except that the bylaws of Holdings have been
amended and restated and a true and correct copy of said amended and
restated bylaws has been attached to the certificate,
(b) certified copies of all corporated action taken by the Co-Borrowers
to authorize the execution, delivery and performance of this
Amendment and the borrowings under this Amendment,
(c) such documents, including a Limited Foreign Guaranty, as may be
required by the Credit Agreement with respect to the acquisition of
SG Austria, and
(d) such other documents and instruments as the Lenders may request.
-3-
<PAGE> 4
ARTICLE 3
MISCELLANEOUS
Section 3.1. Cross References. References in this First Amendment to any
article or section are, unless otherwise specified, to such article or section
of this Amendment.
Section 3.2. Fees and Expenses. All reasonable fees and expenses of the
Lenders incurred in connection with the negotiation, preparation of documents
and closing of the transactions contemplated hereby shall be payable by the
Co-Borrowers promptly upon the submission of a bill therefor.
Section 3.3. Instrument Pursuant to Credit Agreement. This Amendment and
the other documents executed in connection herewith are Loan Documents executed
pursuant to the Credit Agreement and shall be construed, administered and
applied in accordance with all of the terms and provisions of the Credit
Agreement. Time is of the essence in the payment and performance of the Loan
Documents.
Section 3.4. No Other Changes. Except as expressly amended hereby, all
representations, warranties, terms, covenants and conditions of the Credit
Agreement and the other Loan Documents shall remain unamended and unwaived and
shall continue in full force and effect.
Section 3.5. Successors and Assigns. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
WITNESS the hand and seal of each of the undersigned as of the date first
written above.
[CORPORATE SEAL] SCIENTIFIC GAMES HOLDING CORP.
By:/s/ Cliff O. Bickell
-------------------------------
Name: Cliff O. Bickell
--------------------------
Title: Vice President, Treasurer
& Chief Financial Officer
--------------------------
-4-
<PAGE> 5
[CORPORATE SEAL] SCIENTIFIC GAMES HOLDING CORP.
By:/s/ C. Gray Bethea, Jr.
--------------------------------
Name: C. Gray Bethea, Jr.
---------------------------
Title: Vice President, Secretary
& General Counsel
--------------------------
FIRST UNION NATIONAL BANK
as Administrative Agent and Lender
By:/s/ James R. Mortimer
--------------------------------
Name: James R. Mortimer
---------------------------
Title: Senior Vice President
--------------------------
WACHOVIA BANK, N.A., as Lender
By:
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Name:
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Title:
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Domestic Office Address: ABN AMRO BANK, N.V.
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- ----------------------- BY:
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- ----------------------- Name:
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- ----------------------- Title:
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Euro Lending Office Address:
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<PAGE> 1
EXHIBIT 10.49
SCIENTIFIC GAMES HOLDINGS CORP.
1998 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF PLAN
This amended and restated Scientific Games Holdings Corp. 1998 Employee Stock
Purchase Plan (the "Plan") is intended to provide a method by which eligible
employees of Scientific Games Holdings Corp. ("Scientific Games") and of such
of Scientific Games's subsidiaries as Scientific Games's Board of Directors
(the "Board of Directors") may from time to time designate (such subsidiaries,
together with Scientific Games, being hereinafter referred to as the "Company")
may use voluntary, systematic payroll deductions to purchase shares of the
Common Stock of Scientific Games (the "Stock") and thereby acquire an interest
in the future of the Company. For purposes of the Plan, a "subsidiary" shall
mean a subsidiary corporation as defined in Section 424(f) of the Internal
Revenue Code of 1986, as amended (the "Code").
It is the intention of the Company that the Plan qualify as an "employee stock
purchase plan" under Section 423 of the Code. The provisions of the Plan shall
be construed so as to comply in all respects with the requirements of the Code
applicable to employee stock purchase plans.
SECTION 2. OPTIONS TO PURCHASE STOCK
Under the Plan, there is available an aggregate of not more than 200,000 shares
of Stock (subject to adjustment as provided in Section 15) for sale pursuant to
the exercise of options ("Options") granted under the Plan to employees of the
Company ("Employees") who meet the eligibility requirements set forth in
Section 3 hereof ("Eligible Employees"). The Stock to be delivered upon
exercise of Options under the Plan may be either shares of authorized but
unissued Stock or shares of reacquired Stock, as the Board of Directors may
determine.
SECTION 3. ELIGIBLE EMPLOYEES
Except as otherwise provided below, each individual who is an Employee of the
Company, who has a customary working schedule of at least 20 hours per week,
and who has been an Employee for at least one year will be eligible to
participate in the Plan.
(a) Any Employee who immediately after the grant of an Option to him would
(in accordance with the provisions of Sections 423 and 424(d) of the
Code) own stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the employer
corporation or of its parent or subsidiary corporations, as defined in
Section 424 of the Code, will not be eligible to receive an Option to
purchase Stock pursuant to the Plan.
<PAGE> 2
(b) The Plan will be operated in compliance with the limitations on
purchases of Stock contained in Section 423(b)(8) of the Code.
SECTION 4. METHOD OF PARTICIPATION
Each of the periods during which this Plan remains in effect is hereinafter
referred to as an "Option Period." Each Option Period shall be of six-months
duration; provided, however, that the first Option Period for which Options may
be granted hereunder shall expire on June 30, 1998 irrespective of the date on
which such initial Option Period begins. Each person who will be an Eligible
Employee on the first day of an Option Period may elect to participate in the
Plan by executing and delivering, within a reasonable time frame prior to the
first day of such Option Period as specified by the Committee (as defined
below), a payroll deduction authorization in accordance with Section 5. Such
Employee will thereby become a participant ("Participant") for such Option
Period. Any such payroll deduction authorization will remain in effect until
revoked or amended in writing by the Participant.
SECTION 5. PAYROLL DEDUCTION
The payroll deduction authorization will request withholding at a rate (in
whole percentages) of not less than 1% nor more than 15%, but in no event more
than $25,000 in any calendar year, from the Participant's Compensation (as
defined below) by means of payroll deductions over the Option Period. For
purposes of the Plan, "Compensation" means the Participant's base wages,
salary, bonuses, and commissions; in addition, in the event the Company
receives, prior to the first day of any Option Period, an administrative ruling
from the Internal Revenue Service to the effect that such amounts may be
included without adversely affecting the treatment of the Plan for federal
income tax purposes, Compensation shall include, for such Option Period and
succeeding Option Periods, and all calculations based upon the Participant's
Compensation, any amount that would be included in the Participant's taxable
income but for the fact that it was contributed to a qualified plan pursuant to
an elective deferral under Section 401(k) of the Code or contributed under a
salary reduction agreement pursuant to Section 125 of the Code or deferred
pursuant to a non-qualified deferred compensation plan in each case, to the
full extent permitted by law and applicable regulations, if any. A Participant
may reduce the withholding rate of his or her payroll deduction authorization
by one or more whole percentage points (but not to below 1%) at any time during
an Option Period by delivering written notice to the Company, such reduction to
take effect prospectively as soon as practicable following receipt of such
notice by the Company. In addition, and notwithstanding anything contained
herein to the contrary, as of the March 31 or September 30 which marks the
first day of the second three months of any Option Period, a Participant may
elect to increase or reduce the withholding rate of his or her payroll
deduction for such current Option Period by delivering written notice to the
Company of such election within a reasonable time period before such March 31
or September 30 date, as applicable, as specified by the Committee; provided,
however, that no such increase in the withholding rate will increase the
maximum number of shares for which such Participant may exercise an Option
granted for such Option Period. Such increases or decreases will
2
<PAGE> 3
take place as of the applicable date or dates or as soon thereafter as
practicable. A Participant may increase or reduce the withholding rate of his
or her payroll deduction authorization for a future Option Period by written
notice delivered to the Company, within a reasonable time period specified by
the Committee, prior to the first day of the Option Period as to which the
change is to be effective. All amounts withheld in accordance with a
Participant's payroll deduction authorization will be credited to a withholding
account for such Participant.
SECTION 6. GRANT OF OPTIONS
Each person who is a Participant on the first day of an Option Period will as
of such day be granted an Option for such Option Period. Such Option will be
for the number of whole and fractional shares of Stock to be determined by
dividing (i) an amount equal to 15% of such Participant's Compensation for the
two calendar quarters immediately preceding the first day of the Option Period
by (ii) 90% of the fair market value of a share of the Stock as of the first
day of the Option Period. The number of shares of Stock receivable by each
Participant upon exercise of his or her Option for an Option Period will be
reduced, on a substantially proportionate basis, in the event that the number
of shares then available under the Plan is otherwise insufficient.
SECTION 7. PURCHASE PRICE
The purchase price of Stock issued pursuant to the exercise of an Option will
be 90% of the fair market value of the Stock at (a) the time of grant of the
Option or (b) the time at which the Option is deemed exercised, whichever is
less. Unless the Board of Directors determines otherwise in good faith, fair
market value on any given day will mean the Closing Price (as defined below) of
the Stock on such day (or, if there was no Closing Price on such day, the
latest day prior thereto on which there was a Closing Price). The "Closing
Price" of the Stock on any business day will be the last sale price as reported
on the principal market on which the Stock is traded. A good faith
determination by the Board of Directors as to fair market value shall be final
and binding.
SECTION 8. EXERCISE OF OPTIONS
Each Employee who is a Participant in the Plan on the last day of an Option
Period will be deemed to have exercised, to the extent of such Participant's
withholding, the Option granted to him or her for that Option Period on the
last day of the Option Period. Upon each such exercise, the balance of the
Participant's withholding account will be applied to the purchase of the number
of whole and fractional shares of Stock determined under Section 6 and as soon
as practicable thereafter said shares will be maintained in separate brokerage
accounts for Participants with Smith Barney, or any successor brokerage firm.
In the event that the balance of the Participant's withholding account
following an Option Period is in excess of the total purchase price of the
shares so issued, the balance of the account shall be returned to the
Participant. The entire balance of the Participant's Withholding account
following the final Option Period shall be returned to the Participant.
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<PAGE> 4
Each brokerage account may be in the name of the Participant or, if he or she
so indicates on the appropriate form, in his or her name jointly with another
person, with right of survivorship. A Participant who is a resident of a
jurisdiction that does not recognize such a joint tenancy may have a brokerage
account in his or her name as tenant in common with another person, without
right of survivorship.
Notwithstanding anything herein to the contrary, Scientific Games's obligation
to issue and deliver shares of Stock under the Plan is subject to the approval
required of any governmental authority in connection with the authorization,
issuance, sale or transfer of said shares, to any requirements of any national
securities exchange applicable thereto, and to compliance by the Company with
other applicable legal requirements in effect from time to time, including
without limitation any applicable tax withholding requirements.
SECTION 9. USE OF FUNDS
All payroll deductions received or held by the Company under the Plan may be
used by the Company for any corporate purpose and the Company shall not be
obligated to segregate such payroll deductions; provided, however, that the
Company may elect, at its sole discretion, to segregate such payroll deductions
for the benefit of Participants.
No interest will be payable on withholding accounts; provided, however, that
the Company may elect, at its sole discretion, to pay interest on such
withholding accounts at a market rate of interest, as determined in good faith
by the Board of Directors in its sole discretion.
SECTION 10. CANCELLATION AND WITHDRAWAL
A Participant who holds an Option under the Plan may at any time prior to
exercise thereof under Section 8 cancel such Option as to all (but not less
than all) the Shares of Stock subject to such Option by written notice
delivered to the Company. Upon such cancellation, the balance in his or her
withholding account will be returned to him.
A Participant may terminate his or her payroll deduction authorization as of
any date by written notice delivered to the Company and will thereby cease to
be a Participant as of such date. Any Participant who voluntarily terminates
his or her payroll deduction authorization prior to the last business day of an
Option Period will be deemed to have canceled his or her Option.
Any Participant who cancels an Option or terminates his or her payroll
deduction authorization may as of the beginning of a subsequent Option Period
again become a Participant in accordance with Section 4; provided, however,
that, unless the Compensation Committee of the Board of Directors or a
committee duly authorized by the Board of Directors to administer the Plan (the
"Committee") determines otherwise, any such Participant who is at the time
subject to the provisions of Section 16 of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), may not again become a
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<PAGE> 5
Participant until at least six months have elapsed after the date on which he
or she ceased to be a participant.
SECTION 11. TERMINATION OF EMPLOYMENT
Subject to Section 12, upon the termination of a Participant's service with the
Company for any reason, he or she will cease to be a Participant, and any
Option held by such Participant under the Plan will be deemed canceled, the
balance of his or her withholding account will be returned to him or her, and
he or she will have no further rights under the Plan.
SECTION 12. DEATH OF PARTICIPANT
In the event of the death of a Participant, any Option outstanding to him or
her at such time shall be deemed to be immediately canceled and any cash and/or
Stock credited to the Participant under the Plan will be delivered to his or
her estate as soon as practicable after the end of the current Option Period.
SECTION 13. PARTICIPANT'S RIGHTS NOT TRANSFERABLE
All Participants will have the same rights and privileges under the Plan. Each
Participant's rights and privileges under any Option may be exercisable during
his or her lifetime only by him or her, and may not be sold, pledged, assigned,
or transferred in any manner. In the event any Participant violates the terms
of this Section, any Option held by him or her may be terminated by the Company
and upon return to the participant of the balance of his or her withholding
account, all his or her rights under the Plan will terminate.
SECTION 14. EMPLOYMENT RIGHTS
Nothing contained in the provisions of the Plan will be construed to give to
any Employee the right to be retained in the employ of the Company or to
interfere with the right of the Company to discharge any Employee at any time.
The loss of existing or potential profit in Options will not constitute an
element of damages in the event of termination of employment for any reason,
even if the termination is in violation of an obligation to the Participant.
SECTION 15. CHANGE IN CAPITALIZATION
In the event of any change in the outstanding Stock of Scientific Games by
reason of a stock dividend, split-up, recapitalization, merger, consolidation,
reorganization, or other capital change, after the effective date of this Plan,
the aggregate number of shares available under the Plan, the number of shares
under Options granted but not exercised, and the Option price will be
appropriately adjusted in the manner determined by the Committee, in its sole
discretion.
SECTION 16. ADMINISTRATION OF PLAN
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<PAGE> 6
The Committee shall have the right to determine all questions regarding the
interpretation and application of the provisions of the Plan and to make,
administer, and interpret such rules and regulations as it deems necessary or
advisable with respect to the Plan. The Committee's decisions will be final and
binding.
SECTION 17. AMENDMENT AND TERMINATION OF PLAN
(a) Scientific Games reserves the right at any time or times to amend
the Plan to any extent and in any manner it may deem advisable by proper action
of the Board of Directors; provided, however, that any amendment relating to
the aggregate number of shares which may be issued under the Plan (other than
an adjustment provided for in Section 15) or to the Employees (or class of
Employees) eligible to receive Options under the Plan will have no force or
effect unless it is approved by the shareholders of Scientific Games within
twelve months before or after its adoption.
(b) The Plan shall terminate: (i) automatically when all the Stock
reserved for the purposes of the Plan has been purchased or (ii) as of the
conclusion of any Option Period, as the Board, acting in its sole discretion
prior to the last day of such Option Period, shall specify.
SECTION 18. COSTS AND EXPENSES
No brokerage commissions or fees shall be charged by the Company in connection
with the purchase of shares of Common Stock by Participants under the Plan. All
costs and expenses incurred in administering the Plan shall be borne by the
Company.
SECTION 19. APPROVAL OF SHAREHOLDERS
The Plan is subject to the approval of the shareholders of Scientific Games,
which approval must be secured within twelve months before or after the date
the Plan is adopted by the Board of Directors, and any Option granted hereunder
prior to such approval is conditioned on such approval being obtained prior to
the exercise thereof.
IN WITNESS WHEREOF, the Company has caused this amended and restated Plan to be
executed on its behalf the 5th day of February, 1998.
SCIENTIFIC GAMES HOLDINGS CORP.
By: William G. Malloy
-----------------------------
6
<PAGE> 1
EXHIBIT 10.50
STOCK PURCHASE AGREEMENT
dated as of April 15, 1997
by and between
Scientific Games Holdings Corp.
and
Autotote Corporation
with respect to all
outstanding capital stock of
Tele Control Kommunikations und Computersysteme
Aktien Gesellschaft
<PAGE> 2
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience only.
<TABLE>
<CAPTION>
Page
No.
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<S> <C> <C>
ARTICLE I
SALE OF SHARES AND CLOSING .........................................................1
1.01 Purchase and Sale .................................................1
1.02 Purchase Price.....................................................1
1.03 Closing; Letter of Credit..........................................1
1.04 Post-Closing Adjustment of Purchase Price..........................4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER............................................6
2.01 Organization of Seller.............................................6
2.02 Authority..........................................................6
2.03 Organization of the Company........................................6
2.04 Capital Stock......................................................7
2.05 No Subsidiaries....................................................7
2.06 No Conflicts.......................................................7
2.07 Governmental Approvals and Filings; Other Approvals................7
2.08 Books and Records..................................................8
2.09 Financial Statements; Other Filings................................8
2.10 Absence of Changes.................................................9
2.11 No Undisclosed Liabilities........................................11
2.12 Taxes.............................................................11
2.13 Legal Proceedings.................................................12
2.14 Compliance With Laws and Orders...................................13
2.15 Employees; Labor Relations........................................13
2.16 Benefit Plans.....................................................14
2.17 Real Property.....................................................14
2.18 Tangible Personal Property; Investment Assets.....................15
2.19 Intellectual Property Rights......................................16
2.20 Contracts.........................................................17
2.21 Governmental Licenses.............................................19
2.22 Insurance.........................................................20
2.23 Affiliate Transactions............................................20
2.24 Environmental Matters.............................................21
2.25 Substantial Customers and Suppliers...............................22
</TABLE>
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<TABLE>
<S> <C> <C> <C>
2.26 Bank and Brokerage Accounts; Investment Assets......................22
2.27 No Powers of Attorney...............................................22
2.28 Accounts Receivable.................................................22
2.29 Inventory...........................................................24
2.30 Product Claims......................................................24
2.31 Brokers.............................................................24
2.32 Disclosure..........................................................25
2.33 Conduct of Business.................................................25
2.34 Contracts with Certain Customers....................................25
2.35 Resignations of Directors and Officers..............................25
2.36 Operative Agreements................................................25
2.37 IDJ Confirmation....................................................25
2.38 IDJ Claims..........................................................26
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER..........................................26
3.01 Organization........................................................26
3.02 Authority...........................................................26
3.03 No Conflicts........................................................26
3.04 Governmental Approvals and Filings..................................27
3.05 Legal Proceedings...................................................27
3.06 Brokers.............................................................27
ARTICLE IV
COVENANTS OF SELLER..................................................................27
4.01 Books and Records...................................................27
4.02 Non-Competition.....................................................27
4.03 Know-How License Agreement; Inspection Rights Agreement.............29
4.04 Subsequent Transactions.............................................29
ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER...............................................29
5.01 Officers' Certificates..............................................30
5.02 Opinion of Counsel..................................................30
5.03 Proceedings.........................................................30
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLER..................................................30
6.01 Officers' Certificates..............................................30
6.02 Opinion of Counsel..................................................30
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
6.03 Proceedings.........................................................30
ARTICLE VII
TAX MATTERS AND POST-CLOSING TAXES...................................................31
7.01 Tax Sharing Agreements..............................................31
7.02 Allocation of Tax Liability.........................................31
7.03 Returns and Payments................................................31
7.04 Cooperation and Exchange of Information.............................32
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS....................33
8.01 Survival of Representations, Warranties, Covenants and Agreements...33
8.02 Limitations on Indemnity............................................33
ARTICLE IX
INDEMNIFICATION......................................................................34
9.01 Indemnification.....................................................34
9.02 Method of Asserting Claims..........................................35
9.03 Method of Asserting Tax Claims......................................37
9.04 Method of Calculating Losses........................................38
9.05 Source of Funds to Satisfy Claims for Indemnification...............38
ARTICLE X
DEFINITIONS..........................................................................38
10.01 Definitions.........................................................38
ARTICLE XI
MISCELLANEOUS........................................................................47
11.01 Notices.............................................................47
11.02 Entire Agreement....................................................49
11.03 Expenses............................................................49
11.04 Public Announcements................................................49
11.05 Confidentiality.....................................................50
11.06 Further Assurances; Post-Closing Cooperation........................51
11.07 Waiver..............................................................52
11.08 Amendment...........................................................52
11.09 No Third Party Beneficiary..........................................52
11.10 No Assignment; Binding Effect.......................................53
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
11.11 Headings............................................................53
11.12 Invalid Provisions..................................................53
11.13 Governing Law.......................................................53
11.14 Counterparts........................................................53
11.15 Arbitration.........................................................54
11.16 Consent to Jurisdiction and Service of Process......................54
11.17 Construction........................................................55
11.18 Time................................................................55
</TABLE>
-iv-
<PAGE> 6
EXHIBITS
EXHIBIT A Assignment and Assumption Agreement
EXHIBIT B Letter of Credit
EXHIBIT C Escrow Agreement
EXHIBIT D Balance Sheet Data
EXHIBIT E Exclusive License Agreement
EXHIBIT F Inspection Rights and License Agreement
EXHIBIT G Right of First Refusal Agreement
EXHIBIT H Secretary's Certificate of Seller
EXHIBIT I Certificate of the Managing Director of the Company
EXHIBIT J Opinion of U.S. Counsel to Seller
EXHIBIT K Opinion of Austrian Counsel to Seller
EXHIBIT L Secretary's Certificate of Purchaser
EXHIBIT M Opinion of U.S. Counsel to Purchaser
EXHIBIT N Opinion of Austrian Counsel to Purchaser
-v-
<PAGE> 7
This STOCK PURCHASE AGREEMENT dated as of April 15, 1997 is made and
entered into by and between SCIENTIFIC GAMES HOLDINGS CORP., a Delaware
corporation ("SGHC" or the "Purchaser"), and AUTOTOTE CORPORATION, a Delaware
corporation ("Seller"). Capitalized terms not otherwise defined herein have the
meanings set forth in Section 10.01.
WHEREAS, Seller owns one thousand (1,000) shares of common stock,
nominal value one thousand (1,000) Austrian Schillings per share, of Tele
Control Kommunikations und Computersysteme Aktien Gesellschaft, an Austrian
stock company, constituting all the issued and outstanding shares of capital
stock of the Company (such shares being referred to herein as the "Shares");
WHEREAS, Seller desires to sell, and Purchaser desires to purchase,
the Shares on the terms and subject to the conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
SALE OF SHARES AND CLOSING
1.01 Purchase and Sale. Seller agrees to sell to Purchaser or its
assignee as permitted by Section 11.10 (any such assignee also hereinafter
being referred to as the Purchaser), and Purchaser agrees to purchase from
Seller, all of the right, title and interest of Seller in and to the Shares at
the Closing on the terms and subject to the conditions set forth in this
Agreement.
1.02 Purchase Price. The aggregate purchase price for the Shares
and for the covenant of Seller contained in Section 4.02 is $25,000,000 (the
"Purchase Price"), payable in immediately available United States funds at the
Closing in the manner provided in Section 1.03, all of which is allocable to,
and deemed to be in consideration of, the Shares. The Purchase Price shall be
subject to adjustment as provided in Section 1.04, and Section 1.04 of the
Disclosure Schedule , but in no event shall the Purchase Price, as adjusted,
exceed the sum of $25,000,000 plus 18,975,692 Austrian Schillings, which amount
is subject to further reduction as described in Section 1.04 of the Disclosure
Schedule (such 18,975,692 amount being hereinafter referred to as the "Maximum
Purchase Price Adjustment Increase"). Seller agrees that Purchaser may, in its
sole and absolute discretion, make an election under section 338(g) of the Code
to treat the transaction as an acquisition of assets for purposes of the Code
as provided in such section.
1.03 Closing; Letter of Credit. (a) The Closing will take place at
the offices of Smith, Gambrell & Russell, LLP, Suite 3100, Promenade II, 1230
Peachtree Street, N.E., Atlanta, Georgia 30309-3592 or at such other place as
Purchaser and Seller mutually agree, at 10:00 A.M. local time, on the Closing
Date; provided, however, the Closing shall not, in any event, be held in
Austria.
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<PAGE> 8
Notwithstanding anything in this Agreement to the contrary, the Closing
contemplated by this Agreement will be deemed to occur only after execution of
the Assignment and Assumption Agreement, substantially in the form of Exhibit A
hereto. At the Closing, Purchaser will pay the Purchase Price by wire transfer
of immediately available federal funds to such account in the United States as
Seller may direct by written notice delivered to Purchaser by Seller at least
two (2) Business Days before the Closing Date. Concurrently, Seller will assign
and transfer to Purchaser good and unrestricted title in and to the Shares,
free and clear of all Liens, by delivering to Purchaser a certificate or
certificates representing the Shares, in genuine and unaltered form, duly
endorsed in blank or accompanied by duly executed stock powers endorsed in
blank. At the Closing, there shall also be delivered to Seller and Purchaser
the opinions, and certificates and other Contracts, documents and instruments
to be delivered under Articles IV, V and VI;
(b) Concurrently at Closing, Seller shall provide Purchaser with
a letter of credit (the "Letter of Credit") in the original principal amount of
$2,500,000 naming SGHC and such other Persons as SGHC may designate as
beneficiaries thereunder to secure the obligations of Seller under this
Agreement and the Operative Agreements. Notwithstanding any assignment by SGHC
to any assignee permitted by Section 11.10 of this Agreement or the Operative
Agreements in accordance with the terms thereof, Seller agrees that SGHC may
enforce the rights granted to Purchaser hereunder on behalf of any such
assignee and that SGHC may continue to be named as the beneficiary of such
Letter of Credit, notwithstanding any such assignment. Such Letter of Credit
shall be in the form of Exhibit B hereto, shall be issued by a commercial bank
of recognized standing, chartered in the United States, with capital, surplus
and undivided profit aggregating in excess of $250 million, and be confirmed by
a commercial bank satisfactory to Purchaser, and shall provide that it may be
drawn upon by the beneficiaries thereof, in accordance with the terms thereof,
without further action by Seller.
Purchaser shall have the right at any time to draw under the Letter of
Credit the full amount of any claim (or the full amount of the Loss or Purchase
Price Adjustment ) asserted in good faith by Purchaser under this Agreement or
the Operative Agreements up to the then available balance under the Letter of
Credit without regard to any other limitation imposed on such claim by this
Agreement or the Operative Agreements, pending a determination of the
materiality or the merits of such claim or the amount of Purchaser's Loss or
the amount of the Purchase Price Adjustment owed to Purchaser under or with
respect to this Agreement or the Operative Agreements.
Purchaser shall endeavor in good faith to give Seller ten (10) days
prior notice of any intent to draw under the Letter of Credit with respect to
the good faith assertion of any claim under this Agreement or the Operative
Agreements, provided, however, that a shorter period of notice, or no notice at
all, may be given with respect to any draw under the Letter of Credit within
ten (10) days of the scheduled reduction dates set forth therein. Following any
draw under the Letter of Credit as to which no prior notice or less than ten
(10) day prior notice has been given, Purchaser will deposit the funds drawn
into the Escrow Account and the release of such funds from the Escrow Account
shall thereafter be governed by the terms of the Escrow Agreement. Purchaser
agrees that the Initial Set Aside Period as defined in the Escrow Agreement
shall be extended by ten (10) days if no notice of Purchaser's intent to draw
under the Letter of Credit has been given prior to a draw
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<PAGE> 9
under the Letter of Credit or, if less than ten (10) days notice has been
given, by a number of days equal to the difference between ten (10) days and
the number of days notice of Purchaser's intent to draw under the Letter of
Credit which are actually given. Promptly after any draw under the Letter of
Credit by Purchaser which is made without prior notice to Seller, Purchaser
shall provide Seller with notice of such draw and the claim upon which such
draw was based.
If Purchaser has furnished Seller with ten (10) days prior written
notice of its intent to draw under the Letter of Credit and Seller has not,
within such period, given Purchaser written notice that Seller, in good faith,
disputes the validity of Purchaser's claim under the Stock Purchase Agreement
or the Operative Agreements to the funds, or the applicable portion thereof,
which are the subject of Purchaser's notice of its intent to draw under the
Letter of Credit, then Purchaser may draw such funds under the Letter of Credit
without any obligation to deposit such funds in the Escrow Account and Seller
thereafter shall have no claim to such funds or with respect to the validity of
the claim on which such draw was based. In the event Seller furnishes Purchaser
with the foregoing written notice disputing Purchaser's claim or the amount
thereof, then Purchaser shall deposit the Disputed Amounts into the Escrow
Account established by the Escrow Agreement and the release of such funds from
the Escrow Account shall thereafter be governed by the terms of the Escrow
Agreement.
Seller shall pay all costs of issuance and confirmation of the Letter
of Credit. Unless claims for indemnification by the Purchaser shall have been
asserted under or in respect of Section 9.02 or Post-Closing Adjustments in
favor of Purchaser shall have been asserted under or in respect of Section
1.04, or unless Purchaser has attempted to draw under the Letter of Credit and
such draw has not been paid in accordance therewith (in which case, any
reductions contemplated herein or therein which have not previously occurred
shall not occur until resolution of the claim or payment of the draw, as the
case may be, the principal amount of the Letter of Credit will be reduced in
accordance with the terms of the Letter of Credit itself.
If the amount of any unresolved and unpaid claim or claims or
adjustment or adjustments asserted by Purchaser are for an unspecified amount,
then Seller may, in good faith at any time, draw against the full amount then
available under the Letter of Credit in any period in which such unliquidated
claims or adjustments are pending.
(c) If an amount is paid under the Letter of Credit and deposited
as a Disputed Amount under the Escrow Agreement and it is subsequently
determined that no payment or a smaller payment was due with respect to such
claim or adjustment (the "Original Claims or Adjustments"), and the Purchaser
has asserted other claims or adjustments in excess of the amount available
under the Letter of Credit for payment of such amounts or claims (the "Excess
Claims and Adjustments") at the time when such Original Claims or Adjustments
were asserted and such Excess Claims and Adjustments have not been fully paid,
then, Purchaser and Seller will direct the Escrow Agent to apply such excess
funds and use their best efforts to cause the Escrow Agent to apply such excess
funds: first, to satisfy any undisputed claims or adjustments due to Purchaser,
second, upon notice to the Escrow Agent by Purchaser that such funds represent
funds available to satisfy Excess Claims and Adjustments, shall be retained by
the Escrow Agent and treated as a draw under the Letter of Credit, based on the
availability thereunder when such funds were initially drawn, subject to
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withdrawal from the Escrow Account by Purchaser or Seller in accordance with
the terms thereof, and third, retained in the Escrow Account and treated as
available for payment of further claims or adjustments by Purchaser, but only
to the extent such funds would otherwise then be available under the Letter of
Credit if such funds had never been drawn thereunder; provided, however, that,
if Seller requests, Purchaser and Seller shall direct the Escrow Agent to
release such funds to Bankers Trust Company, as issuer of the Letter of Credit
pursuant to instructions to Bankers Trust Company to reinstate such funds as
funds which are available under the Letter of Credit, and to acknowledge
promptly such reinstatement in writing to Purchaser and Seller.
Without limiting the generality of the foregoing proviso, for purposes
of this Agreement and the Operative Agreements, neither the Purchaser nor the
Company shall be obligated to estimate the amount of any indemnification claim
where the underlying claim includes a demand for unspecified damages or where
the amount of the underlying claim is determinable only following the passage
of time or the completion of action, provided, however, that if Purchaser and
Company can estimate the maximum potential amount payable under any claim they
will endeavor in good faith to use reasonable efforts to do so.
Contemporaneously with the Closing Date, Seller and Purchaser shall enter into
the Escrow Agreement with the Escrow Agent named therein in the form attached
as Exhibit C hereto.
The Seller's rights and remedies under this Section 1.03 and the
Letter of Credit are in addition to and not in limitation of all other remedies
provided under this Agreement, the Operative Agreements or by law.
1.04 Post-Closing Adjustment of Purchase Price.
(a) As promptly as practicable following the Closing Date (and in
any case within thirty (30) days thereafter), the Seller shall prepare, at
Seller's expense, and the Purchaser's accountants shall audit, at Purchaser's
expense, a balance sheet of the Company as of the close of business on the
Closing Date (the "Closing Balance Sheet"). The Closing Balance Sheet shall be
(i) prepared in accordance with AAP and, to the extent consistent with AAP, in
the same manner as the Audited Financial Statements, and (ii) reasonably
satisfactory to Purchaser in all respects. The Purchaser shall provide the
Seller with such assistance and access to the Company's Books and Records as
shall be reasonably necessary to permit the preparation of the Closing Balance
Sheet within thirty (30) days following the Closing Date. The Seller shall
provide full access to all information reasonably available to Seller which is
requested by Purchaser's accountants for the audit of the Closing Balance
Sheet. The Purchaser's accountants shall use commercially reasonable efforts to
complete the audit of the Closing Balance Sheet within forty-five (45) days
following receipt from Seller of the Closing Balance Sheet. The Purchaser shall
deliver the audited Closing Balance Sheet to the Seller promptly upon its
completion. The Seller and its accountants shall be given full access upon
request to all work papers or other materials used by the Purchaser and its
accountants in the audit of the Closing Balance Sheet.
(b) Within thirty (30) days after receiving the audited Closing
Balance Sheet, the Seller shall deliver to the Purchaser a detailed statement
describing the Seller's objections, if any, to the
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Closing Balance Sheet. If no objections are delivered to the Purchaser within
such 30 day period, the audited Closing Balance Sheet shall become final and
binding upon the parties. If the Purchaser does receive a statement of
objections from the Seller, the parties will endeavor to reconcile any
differences and agree upon a final Closing Balance Sheet. If the parties are
unable to agree upon a final Closing Balance Sheet within ten (10) days
following Purchaser's receipt of Seller's list of objections, then, at the
request of Purchaser, the outstanding matters shall be submitted for resolution
by an independent certified public accounting firm of recognized standing in
the United States and Austria (which shall not otherwise be engaged by
Purchaser or Seller) selected by the Purchaser with the consent of the Seller,
which consent shall not be unreasonably withheld. Each of the parties shall
bear one-half of the fees and expenses of the accounting firm so selected. Such
accounting firm shall be instructed to use commercially reasonable efforts to
make a final determination of all issues and prepare a final Closing Balance
Sheet in accordance with AAP within thirty (30) days after such firm is
retained and, in any event, as promptly as practicable and both parties agree
to cooperate fully with such accounting firm. The Closing Balance Sheet
prepared by such accounting firm shall be final and binding upon the parties.
(c) To the extent the amount of the statutory net assets shown on
the final Closing Balance Sheet (total assets less total liabilities, excluding
from the beginning and closing balance sheets: (i) intercompany accounts
receivable, except for the amount equal to the 1997 Dividend Withholding Tax
Receivable; (ii) Deferred Revenue, (iii) intercompany accounts payable, and
(iv) cash in an amount equal to 5,345,000 Austrian Schillings) is less than
32,430,847 Austrian Schillings, the Seller shall, within five (5) days
following determination of the final Closing Balance Sheet pursuant to
subsection (b) above, pay to the Purchaser the full amount by which the
statutory net asset value, as computed above, is less than 32,430,847 Austrian
Schillings. The unaudited adjusted balance sheet in Austrian Schillings of the
Company, as of October 31, 1996, is set forth as Exhibit D hereto.
(d) To the extent the amount of the statutory net assets shown on
the final Closing Balance Sheet (total assets less total liabilities, excluding
from the beginning and closing balance sheets: (i) intercompany accounts
receivable except for the amount equal to the 1997 Dividend Withholding Tax
Receivable, (ii) Deferred Revenue, (iii) intercompany accounts payable, and
(iv) cash in an amount equal to 5,345,000 Austrian Schillings) is more than
32,430,847 Austrian Schillings, the Purchaser shall, within five (5) days
following final determination of the Closing Balance Sheet pursuant to
subsection (b) above, pay to the Seller the full amount by which the statutory
net asset value, as computed above, exceeds 32,430,847 Austrian Schillings;
provided, however, that notwithstanding anything to the contrary herein, the
aggregate amount payable by the Purchaser pursuant to such post-closing
adjustment shall not exceed the Maximum Purchase Price Adjustment Increase
(18,975,692 Austrian Schillings as of the date of this Agreement, subject to
further reduction in accordance with Section 1.02 of this Agreement as provided
in Section 1.04 of the Disclosure Schedule).
(e) Any adjustment to the Purchase Price payable by the Seller
pursuant to Section 1.04(c), or by the Purchaser pursuant to Section 1.04(d),
shall be paid by wire transfer in U.S. Dollars, Austrian Schillings or German
Deutschmarks, as determined by Purchaser, in its sole and
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<PAGE> 12
absolute discretion. In the case of any payments due to Purchaser, Purchaser
shall notify Seller of the currency selected for payment at least three (3)
Business Days prior to the date on which the purchase price adjustment is
scheduled for payment in the event Seller will be required to make such payment
in other than U.S. dollars.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents, warrants and covenants to Purchaser as
follows:
2.01 Organization of Seller. Seller is a corporation validly
existing and in good standing under the Laws of the State of Delaware. Seller
has full corporate power and authority to execute and deliver this Agreement
and the Operative Agreements to which it is a party and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby, including without limitation to own, hold,
sell and transfer the Shares pursuant to this Agreement.
2.02 Authority. The execution and delivery by Seller of this
Agreement and the Operative Agreements to which it is a party, and the
performance by Seller of its obligations hereunder and thereunder, have been
duly and validly authorized by the Board of Directors of Seller, no other
corporate action on the part of Seller or any class or series of its security
holders (equity or debt) is necessary and such Board has concluded that the
consideration to be received by Seller upon consummation of the transactions
contemplated hereby is fair to Seller from a financial point of view. This
Agreement and the Operative Agreements have been duly and validly executed and
delivered by Seller and constitute legal, valid and binding obligations of
Seller enforceable against Seller in accordance with their respective terms.
2.03 Organization of the Company. The Company is a stock
corporation duly registered on the company register of the Commercial Court of
Vienna, and duly organized and validly existing under the Laws of Austria, and
has full corporate power and authority to conduct its business as and to the
extent now conducted and to own, use and lease its Assets and Properties.
Included in Section 2.03 of the Disclosure Schedule is a copy of the report by
the auditor of the formation of the Company as a stock company. The registered
office of the Company is Klitschgasse 4, 1130 Wien, Austria. The Company is
duly qualified, licensed or admitted to do business in those jurisdictions
specified in Section 2.03 of the Disclosure Schedule, which are the only
jurisdictions in which the ownership, use or leasing of its Assets and
Properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary. The name of each member of the management
board and supervisory board of the Company on the date hereof, and the position
with the Company held by each (whether as a member of the executive board, the
supervisory board or otherwise), are listed in Section 2.03 of the Disclosure
Schedule. Contemporaneously with the execution of this Agreement, Seller has
delivered to Purchaser true and complete copies of the articles of association
of the Company as in effect on the date hereof, along with a certified abstract
from the Commercial Register.
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2.04 Capital Stock. The authorized capital stock of the Company
consists solely of one thousand (1,000) shares of common stock, all of which
have been issued. The Shares are duly authorized, validly issued, outstanding,
fully paid and nonassessable. Seller owns the Shares, beneficially and of
record, free and clear of all Liens (including Permitted Liens). Except for
this Agreement, there are no outstanding Options with respect to the Company.
The delivery of a certificate at the Closing representing the Shares in the
manner provided in Section 1.03 will transfer to Purchaser good and
unrestricted title to the Shares, free and clear of all Liens.
2.05 No Subsidiaries. Except as disclosed in Section 2.05 of the
Disclosure Schedule, since the date of the Audited Financial Statements, the
Company has not and, on and prior to the Closing Date, will not, have any
subsidiaries or own directly or indirectly any capital stock or other equity or
ownership or proprietary interest in or have any investment in, any
corporation, partnership, joint venture, limited liability company, limited
liability partnership, association or other Person.
2.06 No Conflicts. The execution and delivery by Seller of this
Agreement and the Operative Agreements do not, and the performance by Seller of
its obligations under this Agreement and the Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the Certification of Incorporation and
by-laws of the Seller or the articles of association of the Company;
(b) subject to the matters set forth in Section 2.06 of the
Disclosure Schedule, conflict with or result in a material violation or
material breach of any term or provision of any Law or Order applicable to
Seller or the Company or any of their respective Assets and Properties; or
(c) subject to the matters set forth in Section 2.06 of the
Disclosure Schedule, (i) materially conflict with or result in a material
violation or material breach of, (ii) constitute (with or without notice or
lapse of time or both) a material default under, (iii) require Seller or the
Company to obtain any material consent, approval or action of, make any
material filing with or give any notice to any Person as a result or under the
terms of, (iv) result in or give to any Person any right of termination,
cancellation, acceleration or modification in or with respect to, (v) result in
or give to any Person any additional material rights or entitlement to
increased, additional, accelerated or guaranteed payments under, or (vi) result
in the creation or imposition of any Lien upon the Company or any of its Assets
and Properties under, any Contract or Governmental License to which Seller or
the Company is a party or by which any of their respective Assets and
Properties is bound.
2.07 Governmental Approvals and Filings; Other Approvals. Except
as disclosed in Section 2.07 of the Disclosure Schedule, no consent, approval
or action of, filing with or notice to any Governmental or Regulatory Authority
or any other Person (including, without limitation, (i) any lenders or agents
under any financing or bank credit agreement of the Seller or the Company or
(ii) IDJ (whether under customer contracts for the implementation of lottery
systems where IDJ
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<PAGE> 14
is the prime contractor and the Company is the subcontractor with respect
thereto or otherwise)) on the part of Seller or the Company is required in
connection with the execution, delivery and performance of this Agreement or
any of the Operative Agreements to which either of them is a party or the
consummation of the transactions contemplated hereby or thereby. For the
avoidance of doubt, Seller further represents and warrants that the Company (a)
does not and, for the most recently completed calendar year and fiscal year,
did not: hold assets located in the United States (other than investment
assets, voting or non-voting securities of another person, and assets included
pursuant to 16 C.F.R. ss. 801.40(c)(2)), having an aggregate book value of $15
million or more, and (b) has not made aggregate sales in or into the United
States of $25 million or more in its most recent fiscal year.
2.08 Books and Records. The minute books and other similar records
of the Company as made available to Purchaser prior to the execution of this
Agreement contain a true and complete record, in all material respects, of all
corporate action taken at all meetings and by all written consents in lieu of
meetings of the stockholders and the board of directors of the Company. The
stock transfer ledgers and other similar records of the Company as made
available to Purchaser prior to the execution of this Agreement accurately
reflect all record transfers prior to the execution of this Agreement in the
capital stock of the Company. Except as set forth in Section 2.08 of the
Disclosure Schedule, the Company does not have any of its Books and Records
recorded, stored, maintained, operated or otherwise wholly or partly dependent
upon or held by any means (including any electronic, mechanical or photographic
process, whether computerized or not) which (including all means of access
thereto and therefrom) are not under the exclusive ownership and direct control
of the Company. Except as set forth in Section 2.08 of the Disclosure Schedule,
since the date of the Audited Financial Statements, the Books and Records of
the Company have been maintained in the usual, regular and ordinary manner in
accordance with AAP.
2.09 Financial Statements; Other Filings. (a) Prior to the
execution of this Agreement, Seller has delivered to Purchaser true and
complete copies of the following financial statements, which financial
statements have been prepared on a basis consistent with the Audited Financial
Statements.
(i) the audited balance sheets of the Company as of October 31,
1995 and 1996, and the related audited statements of operations and cash flows
for each of the fiscal years then ended, together with a true and correct copy
of the report on such audited information by KPMG Vienna; and
(ii) the unaudited balance sheets of the Company and the related
unaudited statements of operations, and cash flows for each month subsequent to
October 31, 1996, to the extent reasonably available and, if prepared by the
Company or Seller, for any quarter subsequent to October 31, 1996.
Except as disclosed in Section 2.09 of the Disclosure Schedule, (A)
all such financial statements (i) were prepared in accordance with AAP, (ii)
fairly present the financial condition and results of operations of the Company
as of the respective dates thereof and for the respective periods covered
thereby, and (iii) were compiled from the Books and Records of the Company
regularly
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<PAGE> 15
maintained by management and used to prepare the financial statements of the
Company and (B) except for correspondence internal to KPMG Peat Marwick, copies
of which, to Seller's Knowledge, have been made available for inspection by the
Purchaser, there are no letters with respect to results of the audits referred
to in Section 2.09(a)(i). The Company has maintained its Books and Records in a
manner sufficient to permit the preparation of financial statements in
accordance with AAP, such Books and Records fairly reflect, in all material
respects, the income, expenses, assets and liabilities of the Company and the
Books and Records provided a fair and accurate basis for the preparation of the
Audited Financial Statements and the Unaudited Financial Statements.
(b) Seller has delivered to Purchaser true and complete copies of
such other financial statements, reports and analyses (other than financial
reports and analyses by or at the direction of the Seller constituting analyses
of the transaction contemplated by this Agreement) as have been prepared by or
for Seller or the Company relating to the business or operations of the Company
since the date of the Audited Financial Statements.
(c) Seller has delivered to Purchaser copies of all material
Governmental License applications and other filings made by the Company after
the date of the Audited Financial Statements with any Governmental or
Regulatory Authority (other than routine, recurring filings made in the
ordinary course of business consistent with past practice).
2.10 Absence of Changes. Since the Audited Financial Statement
Date there has not been any material adverse change, or any event or
development which, individually or together with other such events, would
reasonably be expected to result in a material adverse change, in the Business
or Condition of the Company, other than (i) those occurring as a result of
general economic or financial conditions or other developments which are not
unique to the Company, but also generally affect other persons who participate
or are engaged in the lines of business in which the Company participates or is
engaged, or (ii) as disclosed by Seller in its filings with the Securities and
Exchange Commission pursuant to Section 13 of the Securities Exchange Act of
1934, as amended. Without limiting the foregoing, except for the execution and
delivery of this Agreement, the Operative Agreements and the transactions to
take place pursuant hereto on or prior to the Closing Date, or as disclosed in
Section 2.10 of the Disclosure Schedule, there has not occurred between the
Audited Financial Statement Date and the date hereof nor has the Company
entered into any Contract to do or engage in:
(i) any declaration, setting aside or payment of any
dividend or other distribution in respect of the capital stock of the
Company or any direct or indirect redemption, purchase or other
acquisition by the Seller or the Company of any such capital stock of
or any Option with respect to the Company;
(ii) any authorization, issuance, sale or other
disposition by the Company or the Seller of any shares of capital
stock of, or Option with respect to, the Company, or any modification
or amendment of any right of any holder of any outstanding shares of
capital stock of, or Option with respect to, the Company;
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<PAGE> 16
(iii) (x) any increase in excess of $10,000 in the salary,
wages or other compensation of any officer, employee or consultant of
the Company whose annual salary is, or after giving effect to such
change would be, $100,000 or more; (y) any establishment or
modification of (A) targets, goals, pools or similar provisions in
respect of any fiscal year under any Benefit Plan, employment-related
Contract or other employee compensation arrangement or (B) salary
ranges, increase guidelines or similar provisions in respect of any
Benefit Plan, employment-related Contract or other employee
compensation arrangement; or (z) any adoption, entering into or
becoming bound by any Benefit Plan, employment-related Contract or
collective bargaining agreement, or amendment, modification or
termination (partial or complete) of any Benefit Plan,
employment-related Contract or collective bargaining agreement;
(iv) (A) incurrences by the Company of Indebtedness in an
aggregate principal amount exceeding $25,000 (net of any amounts
discharged during such period), or (B) any voluntary purchase,
cancellation, prepayment or complete or partial discharge in advance
of a scheduled payment date with respect to, or waiver of any right of
the Company under, any Indebtedness of or owing to the Company;
(v) any physical damage, destruction or other casualty
loss (whether or not covered by insurance) affecting any of the plant,
real or personal property or equipment of the Company in an aggregate
amount exceeding $50,000;
(vi) any material change in (x) any pricing, investment,
accounting, financial reporting, inventory, credit, allowance or Tax
practice or policy of the Company, or (y) any method of calculating
any bad debt, contingency or other reserve of the Company for
accounting, financial reporting or Tax purposes, or any change in the
fiscal year of the Company;
(vii) any write-off or write-down of or any determination
to write off or write down any of the Assets and Properties of the
Company in an aggregate amount exceeding $10,000;
(viii) any acquisition or disposition of, or incurrence of
a Lien (other than a Permitted Lien) on, any Assets and Properties of
the Company, other than in the ordinary course of business consistent
with past practice;
(ix) other than the reincorporation of the Company as a
stock company from a limited liability company, (A) any amendment of
the articles of association of the Company (B) any amendment of the
certificate of incorporation or by-laws of the Seller, (C) any
recapitalization, reorganization, liquidation or dissolution of the
Company, or (D) any merger or other business combination involving the
Seller or the Company and any other Person;
(x) any entering into, amendment, modification,
termination (partial or complete) or granting of a waiver under or
giving any consent with respect to (A) any Contract which
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<PAGE> 17
is required (or had it been in effect on the date hereof would have
been required) to be disclosed in the Disclosure Schedule pursuant to
Section 2.20(a), (B) any material Governmental License held by the
Company (or the Seller, if such Governmental License is to be
assigned, sub-licensed or otherwise conveyed to the Purchaser) or (C)
any irrevocable powers of attorney or comparable delegations of
authority;
(xi) capital expenditures or commitments for additions to
property, plant or equipment of the Company constituting capital
assets in an aggregate amount exceeding $60,000;
(xii) any commencement or termination by the Company of
any line of business or any termination by the Seller of Seller's
Lottery Business or any portion thereof;
(xiii) any transaction in excess of $10,000 by the Company
with Seller, any officer, director, Affiliate (other than the Company)
or Associate of Seller or any Associate of any such officer, director
or Affiliate (A) outside the ordinary course of business consistent
with past practice or (B) other than on an arm's-length basis, other
than pursuant to any Contract in effect on the Audited Financial
Statement Date and disclosed pursuant to Section 2.20(a)(vii) of the
Disclosure Schedule; or
(xiv) any other transaction involving or development
affecting the Company outside the ordinary course of business
consistent with past practice.
2.11 No Undisclosed Liabilities. Except as reflected or reserved
against in the balance sheet included in the Audited Financial Statements or as
disclosed in Section 2.11 of the Disclosure Schedule or any other section of
the Disclosure Schedule, there are no Liabilities against, relating to or
affecting the Company or any of its Assets and Properties, which, in the
aggregate, are material to the Business or Condition of the Company, other than
Liabilities incurred in the ordinary course of business consistent with past
practice, which will be recorded on the Closing Balance Sheet.
2.12 Taxes.
(a) The Company has accurately filed all Tax Returns that it was
required to file and provided all information required to be furnished under
applicable Tax laws or requested by applicable Tax authorities in a timely
manner (taking into account all extensions of due dates), and has paid in a
timely manner all Taxes shown thereon as owing (or has established adequate
reserves therefor as reflected on the Financial Statements), except for Taxes
which are being contested in good faith as disclosed on Section 2.12(a) of the
Disclosure Statement. All information provided in such Tax Returns is true,
correct and complete in all material respects as to the Company or as to any
liability for Taxes for which it could be liable. The Company is in compliance
with and retains in its records all information and documents necessary to
comply in all material respects with all applicable Tax or information
reporting and any Tax withholding requirements under federal, state and local
Tax laws.
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(b) Section 2.12 of the Disclosure Schedule lists all Tax Returns
filed with respect to the Company or any of its properties, income or
operations for taxable periods since September 30, 1993. Section 2.12 of the
Disclosure Schedule lists all Tax Returns filed with respect to the Company for
any period for which there is any claim or assessment pending, or where, to the
Seller's Knowledge, such a claim or assessment is threatened, or where an audit
or investigation with respect to any liability of the Company exists. The
Seller has delivered to the Purchaser correct and complete copies of all Tax
Returns (including amendments thereto), and all examination reports, and
statements of deficiencies assessed against or agreed to by or on behalf of the
Company since September 30, 1993. All Taxes due with respect to completed and
settled examinations or concluded litigation regarding Tax Returns have been
paid or accrued.
(c) Except as set forth in Section 2.12(c) of the Disclosure
Schedule, the Company has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(d) Except as set forth in Section 2.12(d) of the Disclosure
Schedule, the Company is not a party to any Tax allocation or sharing
agreement.
(e) Except as disclosed on Schedule 2.12(e) of the Disclosure
Schedule, the Company has not been a member of an affiliated group for Tax
purposes.
(f) Except as set forth in Section 2.12(f) of the Disclosure
Schedule, the depreciation and write-offs reflected in the Audited Financial
Statements and the Unaudited Financial Statements do not exceed the rates
permissible for Tax purposes.
(g) All material Taxes payable by the Company on an annual basis
for 1997 and all material exemptions, deductions or credits to which the
Company is entitled for 1997 are described in Section 2.12(g) of the Disclosure
Schedule.
2.13 Legal Proceedings. Except as disclosed in Section 2.13 of the
Disclosure Schedule (with paragraph references corresponding to those set forth
below and except as limited by revocatory actions under the Austrian Insolvency
Code and the Settlement and Recomposition of Debts Act):
(a) there are no Actions or Proceedings pending or, to the
Knowledge of Seller, threatened against, relating to or affecting Seller or the
Company or any of their respective Assets and Properties which (i) could
reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or any of the Operative
Agreements or otherwise reasonably result in a diminution of the benefits
contemplated by this Agreement or any of the Operative Agreements to Purchaser,
or (ii) if determined adversely to Seller or the Company, could reasonably be
expected to result in (x) any injunction or other equitable relief against the
Company
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<PAGE> 19
that would interfere in any material respect with its business or operations or
(y) Losses by the Company individually or in the aggregate with Losses in
respect of other such Actions or Proceedings exceeding $50,000;
(b) there are no facts or circumstances Known to Seller that
could reasonably be expected to give rise to any Action or Proceeding that
would be required to be disclosed pursuant to clause (a) above; and
(c) there are no material Orders outstanding against the Company.
Prior to the execution of this Agreement, Seller has delivered to
Purchaser all responses of counsel for the Company or the Seller (in each case,
to the extent such responses exist) to auditors' requests for information
delivered in connection with the Audited Financial Statements (together with
any updates provided by such counsel) regarding Actions or Proceedings pending
or threatened against, relating to or affecting the Company.
2.14 Compliance With Laws and Orders. Except as disclosed in
Section 2.14 of the Disclosure Schedule, the Company is not, nor has it, at any
time within the last five (5) years been, nor has it received any notice that
it is (or alleging that it is) or has at any time within the last five (5)
years been, in violation of or in default under, in any material respect, any
Law or Order applicable to the Company or any of its Assets and Properties.
2.15 Employees; Labor Relations. (a) Section 2.15 of the
Disclosure Schedule contains a list of the name of each officer and employee of
the Company having an annual base salary or wages of at least $20,000 at the
date hereof, together with each such person's position or function, annual base
salary or wages and any incentive or bonus arrangement with respect to such
person in effect on such date. Seller has not received any information that
would lead it to believe that a material number of such persons will or may
cease to be employees, or will refuse offers of employment from Purchaser,
because of the consummation of the transactions contemplated by this Agreement
or the Operative Agreements.
(b) Except as disclosed in Section 2.15 of the Disclosure
Schedule and other than Austrian statutory requirements, (i) no employee of the
Company is presently a member of a collective bargaining unit and, to the
Knowledge of Seller, there are no threatened or contemplated attempts to
organize for collective bargaining purposes any of the employees of the
Company, and (ii) no unfair labor practice complaint or sex, age, race or other
discrimination claim has been brought during the last five (5) years against
the Company before any applicable Governmental or Regulatory Authority. Since
September 10, 1993, the Company has never suffered a material work stoppage,
strike or other concerted action by employees of the Company. The Company has
complied, and is in compliance, in all material respects with all applicable
Laws relating to the employment of labor, including, without limitation those
relating to wages, hours and collective bargaining.
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2.16 Benefit Plans
(a) Except as disclosed in Section 2.16(a) of the Disclosure
Schedule, the Company has no Benefit Plans. Section 2.16(a) of the Disclosure
Schedule (i) contains a true and complete list and description of each of the
Benefit Plans listed therein, the Persons entitled to participate therein, all
accrued rights thereunder, and a description of any dispute with regard to the
benefits described therein. The Company has not scheduled or agreed upon future
increases of benefit levels (or creations of new benefits) with respect to any
Benefit Plan, and no such increases or creation of benefits have been proposed,
made the subject of representations to employees or requested or demanded by
employees under circumstances which make it reasonable to expect that such
increases will be granted, nor will any benefits be established or become
accelerated, vested, funded or payable by reason of any transaction
contemplated by this Agreement. As of the date of this Agreement, there are no
works or other agreements with employees' representatives or trade unions,
practices or customs under which employees might raise claims exceeding those
listed in Sections 2.15 and 2.16 of the Disclosure Schedule. Sufficient
reserves have been accrued for all the employees' claims and such reserves are
reflected on the Company's Financial Statements.
(b) Since the date of the Audited Financial Statements, neither
Seller nor the Company has made any material increase in the salary, wages or
other compensation or other terms and conditions of engagement of any officer,
employee or consultant of the Company whose annual salary is or, after giving
effect to such change, would be $20,000 or more;
(c) Except as disclosed in Section 2.16(c) of the Disclosure
Schedule, since the date of the Audited Financial Statements, neither Seller
nor the Company has established or modified any (i) targets, goals, pools or
similar provisions in respect of any fiscal year under any employment-related
Contract or other employee compensation arrangement or (ii) salary ranges,
increase guidelines or similar provisions in respect of any employment-related
Contract or other employee compensation arrangement.
2.17 Real Property.
(a) Section 2.17(a) of the Disclosure Schedule contains
a true and correct list of (i) each parcel of real property owned by the
Company; (ii) each parcel of real property leased by the Company (as lessor or
lessee), if any; and (iii) all Liens, other than Permitted Liens, relating to
or affecting any parcel of real property referred to in clause (i).
(b) Except as disclosed in Section 2.17(a) of the
Disclosure Schedule, the Company has good and unrestricted title to each parcel
of real property owned by it, free and clear of all Liens, other than Permitted
Liens. The Company is in possession of each parcel of real property owned by
it, if any, together with all buildings, structures, facilities, fixtures and
other improvements thereon. To Seller's knowledge, none of such real property,
buildings, structures, facilities, fixtures or other improvements, or the use
thereof, contravenes or violates any building,
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<PAGE> 21
zoning, administrative, occupational safety and health or other applicable Law
in any material respect (whether or not permitted on the basis of prior
nonconforming use, waiver or variance).
(c) The Company has a valid and subsisting leasehold
estate in and the right to quiet enjoyment of the real properties leased by it
for the full term of the lease thereof. Each lease referred to in clause (ii)
of paragraph (a) above is a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Company and of each other Person that is a
party thereto, and except as set forth in Section 2.17(c) of the Disclosure
Schedule, there is no material default, and the Company has not received notice
of any default (or any condition or event which, after notice or lapse of time
or both, would constitute a default) thereunder and the sale of the Shares will
not result in any escalation of, or change in, any payments due thereunder. The
Company has adequate rights of ingress and egress with respect to the real
property listed in Section 2.17(c) of the Disclosure Schedule and all
buildings, structures, facilities, fixtures and other improvements thereon. To
Seller's Knowledge, none of such real property, buildings, structures,
facilities, fixtures or other improvements, or the use thereof, contravenes or
violates any building, zoning, administrative, occupational safety and health
or other applicable Law in any material respect (whether or not permitted on
the basis of prior nonconforming use, waiver or variance). The Company does not
owe any brokerage commissions with respect to any such leased space.
(d) Seller has delivered to Purchaser prior to the
execution of this Agreement true and complete copies of (i) all land registers,
deeds, leases, mortgages, deeds of trust, certificates of occupancy, title
insurance policies, title reports, surveys and similar documents, and all
amendments thereof, with respect to the real property owned, if any, by the
Company; and (ii) all leases (including any amendments and renewal letters)
and, to the extent reasonably available, all other documents referred to in
clause (i) of this paragraph (d) with respect to the real property leased by
the Company.
(e) Except as disclosed in Section 2.17(e) of the
Disclosure Schedule, no tenant or other party in possession of any of the real
properties owned, if any, by the Company, has any right to purchase, or holds
any right of first refusal to purchase, such properties.
(f) Except as disclosed in Section 2.17(f) of the
Disclosure Schedule, the improvements on the real property identified in
Section 2.17(a) and Section 2.17(c) of the Disclosure Schedule are in good
operating condition and in a state of good maintenance and repair, ordinary
wear and tear excepted, are adequate and suitable for the purposes for which
they are presently being used and, to the Knowledge of Seller, there are no
condemnation or appropriation proceedings pending or threatened against any of
such real property or the improvements thereon.
2.18 Tangible Personal Property; Investment Assets. (a) The
Company is in possession of and has good and unrestricted title to, or has
valid leasehold interests in or valid rights under Contract to use, all
tangible personal property used in or reasonably necessary for the conduct of
its business, including all tangible personal property reflected on the balance
sheet included in the
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<PAGE> 22
Unaudited Financial Statements and tangible personal property acquired since
the Unaudited Financial Statement Date other than property disposed of since
such date in the ordinary course of business consistent with past practice. All
such tangible personal property is free and clear of all Liens, other than
Permitted Liens and Liens disclosed in Section 2.18(a) of the Disclosure
Schedule, and is in good working order and condition, ordinary wear and tear
excepted, and its use complies in all material respects with all applicable
Laws.
(b) Section 2.18(b) of the Disclosure Schedule describes
each Investment Asset owned by the Company on the date hereof. Except as
disclosed in Section 2.18(b) of the Disclosure Schedule, all such Investment
Assets are owned by the Company free and clear of all Liens other than
Permitted Liens.
2.19 Intellectual Property Rights. (a) The Company has interests
in or uses only the Intellectual Property disclosed in Section 2.19 of the
Disclosure Schedule, each of which, as specified in such Section 2.19, the
Company either has all right, title and interest in or a valid and binding
right under Contract to use, and, to the extent applicable (and as of the dates
indicated in Section 2.19 of the Disclosure Schedule), such Intellectual
Property if registered, applied for filing, or issued, has been duly registered
in, applications have been filed in, or patents or certificates of registration
have been issued by, those jurisdictions set forth in Section 2.19 of the
Disclosure Schedule. For purposes of this Section 2.19, the term "use" includes
all variations of exploitation of Intellectual Property rights.
(b) Except as disclosed in Section 2.19 of the Disclosure
Schedule, (i) no other Intellectual Property is used or, to Seller's Knowledge,
necessary in the ordinary conduct of the business of the Company; (ii) the
Company has the exclusive right to use the Intellectual Property disclosed in
Section 2.19 of the Disclosure Schedule, (iii) except as expressly set forth in
Schedule 2.19 of the Disclosure Schedule, all patents, certificates and
registrations with and applications to Governmental or Regulatory Authorities
in respect of the Intellectual Property owned by the Company and set forth in
Section 2.19 of the Disclosure Schedule are valid and in full force and effect
and are not subject to the payment of any Taxes or maintenance fees or the
taking of any other actions by the Company to maintain their validity or
effectiveness, (iv) there are no material restrictions on the direct or
indirect transfer of any Contract, or any interest therein, held by the Company
in respect of the Intellectual Property set forth in Section 2.19 of the
Disclosure Schedule, (v) the Assets and Property of the Company include all
documentation with respect to any invention, process, design, computer program
or other know-how or trade secret included in such Intellectual Property, which
documentation is accurate in all material respects and reasonably sufficient in
detail and content to identify and explain such invention, process, design,
computer program or other know-how or trade secret and to facilitate its full
and proper use without reliance on the special knowledge or memory of any
Person other than Persons of the type customarily employed by the Company with
respect thereto, (vi) the Company and the Seller have taken reasonable security
measures to protect the secrecy, confidentiality and value of their trade
secrets, (vii) the Company is not in material default, nor has it received any
notice that it is, in default (or with the giving of
16
<PAGE> 23
notice or lapse of time or both, would be in default) under any Contract to use
the Intellectual Property set forth in Section 2.19 of the Disclosure Schedule,
and (viii) to the Knowledge of Seller, no Intellectual Property set forth in
Section 2.19 of the Disclosure Schedule is being infringed by any other Person.
Neither Seller nor the Company has received notice that the Company is
infringing any Intellectual Property of any other Person or challenging the
right of Seller or the Company, as applicable, to use any of the Intellectual
Property set forth in Section 2.19 of the Disclosure Schedule or any rights
thereunder. The current use of the Intellectual Property set forth in Section
2.19 of the Disclosure Schedule in the operations of the Company's business
does not, to the Knowledge of Seller and the Company, conflict with, infringe
upon or violate any intellectual property rights, including any patent,
copyright, trademark or trade name of any other Person.
(c) Except as set forth on Schedule 2.19 of the Disclosure
Schedule, neither Seller nor the Company has granted any licenses or other
rights, and neither Seller nor the Company has any obligation to grant licenses
or other rights to any of the Intellectual Property owned by the Company and
set forth in Section 2.19 of the Disclosure Schedule to any other Person.
Seller and the Company have taken all reasonable and prudent steps to protect
the Intellectual Property owned by the Company and set forth in Section 2.19 of
the Disclosure Schedule from infringement by any other Person. Neither Seller
nor the Company has made any claim of a violation or infringement by others of
its rights to or in connection with the Intellectual Property owned by the
Company and set forth in Section 2.19 of the Disclosure Schedule. There have
not been and are not pending, or to the Knowledge of Seller, threatened, any
suits, claims, actions or proceedings involving Seller or the Company
concerning the infringement or misappropriation of any intellectual property
rights of any other Person or otherwise concerning Seller's or the Company's
ownership in any of the Intellectual Property owned by the Company and set
forth in Section 2.19 of the Disclosure Schedule. There are no interferences or
other contested proceedings, either pending or, to the Knowledge of Seller,
threatened in the United States Copyright Office, the United States Patent and
Trademark Office the Austrian Patent Office (or with respect to the Austrian
copyright register) or any federal, state or local court or before any other
governmental entity, in the United States, Austria or otherwise, relating to
any pending application with respect to any of the Intellectual Property owned
by the Company and set forth in Section 2.19 of the Disclosure Schedule. Except
as affected by this Agreement and the Operative Agreements, the consummation of
the transactions contemplated by this Agreement and the Operative Agreements
will not alter, impair or modify Seller's or the Company's rights or
obligations with respect to the Intellectual Property and set forth in Section
2.19 of the Disclosure Schedule.
2.20 Contracts. (a) Section 2.20(a) of the Disclosure Schedule
(with paragraph references corresponding to those set forth below) contains a
true and complete list of each of the following Contracts or other arrangements
(true and complete copies or, if none, reasonably complete and accurate written
descriptions of which, together with all material amendments and supplements
thereto and all material waivers of any terms thereof, have been delivered to
Purchaser prior to the execution of this Agreement), to which the Company is a
party or by which any of its respective Assets and Properties is bound:
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<PAGE> 24
(i) (A) all Contracts (excluding Benefit Plans) providing for a
commitment of employment or consultation services for a specified or
unspecified term or otherwise relating to employment or the termination of
employment, the name, position and rate of compensation of each Person party to
such a Contract and the expiration date of each such Contract; and (B) any
written or unwritten representations, commitments, promises, communications or
courses of conduct (excluding Benefit Plans and any such Contracts referred to
in clause (A)) involving an obligation of the Company to make payments in any
year, other than with respect to salary or incentive compensation payments in
the ordinary course of business, in each case, to any employee or consultant
exceeding $100,000 or any group of employees or consultants exceeding $250,000
in the aggregate;
(ii) all Contracts with any Person containing any provision or
covenant prohibiting or limiting the ability of the Company to engage in any
business activity or compete with any Person or, except as provided in Section
4.02, prohibiting or limiting the ability of any Person to compete with the
Company.
(iii) all partnership, joint venture, shareholders' or other
similar Contracts with any Person;
(iv) all Contracts relating to Indebtedness of the Company in
excess of $50,000 or to preferred stock issued by the Company;
(v) all Contracts with distributors, dealers, manufacturer's
representatives, sales agencies or franchisees involving amounts individually
or in the aggregate in excess of $50,000;
(vi) all Contracts relating to (A) the future disposition or
acquisition of any Assets and Properties, other than dispositions or
acquisitions in the ordinary course of business consistent with past practice,
and (B) any merger or other business combination;
(vii) all Contracts between or among the Company, on the one hand,
and Seller, any officer, director, Affiliate (other than the Company) or
Associate of Seller or any Associate of any such officer, director or
Affiliate, on the other hand;
(viii) all collective bargaining or similar labor Contracts;
(ix) all Contracts that (A) limit or contain restrictions on the
ability of the Company to declare or pay dividends on, to make any other
distribution in respect of or to issue or purchase, redeem or otherwise acquire
its capital stock, to incur Indebtedness, to incur or suffer to exist any Lien,
to purchase or sell any Assets and Properties, to change the lines of business
in which it participates or engages or to engage in any Business Combination or
18
<PAGE> 25
(B) require the Company to maintain specified financial ratios or
levels of net worth or other indicia of financial condition;
(x) all Contracts with respect to the licensing of
technology to which the Company is a party, either as licensor or
licensee; and
(xi) all other Contracts (other than Benefit Plans,
leases listed in Section 2.17(a) of the Disclosure Schedule and
insurance policies listed in Section 2.22 of the Disclosure Schedule)
that (A) involve the payment or potential payment, pursuant to the
terms of any such Contract, by or to the Company of more than $50,000
annually and (B) cannot be terminated within thirty (30) days after
giving notice of termination without resulting in any material cost or
penalty to the Company.
(b) Each Contract required to be disclosed in Section 2.20(a) of
the Disclosure Schedule is in full force and effect and constitutes a legal,
valid and binding agreement of, and is enforceable in accordance with its terms
against, the Company and, to Seller's Knowledge, against each other party
thereto with respect to the rights of the Company therein or thereunder; and
except as disclosed in Section 2.20(b) of the Disclosure Schedule, neither the
Company nor, to the Knowledge of Seller, any other party to such Contract is,
or has received notice that it is, in violation or breach of or default under
any such Contract (or with notice or lapse of time or both, would be in
violation or breach of or default under any such Contract) in any material
respect. Except as separately identified in Schedule 2.20(b) of the Disclosure
Schedule, no approval or consent of any person is needed in order that the
Contracts as set forth on Schedule 2.20(a) or on any other Schedule continue in
full force and effect following the consummation of the transactions
contemplated by this Agreement.
2.21 Governmental Licenses. Section 2.21 of the Disclosure
Schedule contains a true and complete list of all Governmental Licenses used in
and material, individually or in the aggregate, to the business or operations
of the Company (and all pending applications for any such Governmental
Licenses), setting forth the grantor, the grantee, the function and the
expiration and renewal date of each. Prior to the execution of this Agreement,
Seller has delivered to Purchaser true and complete copies of all such material
Governmental Licenses. Except as disclosed in Section 2.21 of the Disclosure
Schedule:
(i) the Company owns or validly holds all material
Governmental Licenses that are material, individually or in the
aggregate, to its business or operations;
(ii) each material Governmental License listed in Section
2.21 of the Disclosure Schedule is valid, binding and in full force
and effect; and
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(iii) the Company is not, nor has it received any notice
that it is, in violation of, breach of, or default under (or with the
giving of notice or lapse of time or both, would be in violation of,
breach of, or default under) any such material Governmental License.
2.22 Insurance. Section 2.22 of the Disclosure Schedule contains a
true and complete list (including the names and addresses of the insurers, the
names of the Persons to whom such Policies have been issued, the expiration
dates thereof, the annual premiums and payment terms thereof, whether it is a
"claims made" or an "occurrence" policy and a brief description of the
interests insured thereby) of all liability, property, workers' compensation,
directors' and officers' liability and other insurance policies currently in
effect that insure the business, operations or employees of the Company or
affect or relate to the ownership, use or operation of any of the Assets and
Properties of the Company and that (i) have been issued to the Company, or (ii)
have been issued to any Person (other than the Company) for the benefit of the
Company. The insurance coverage provided by any of the policies described in
clause (i) above will not terminate or lapse by reason of the transactions
contemplated by this Agreement. Each policy listed in Section 2.22 of the
Disclosure Schedule is valid and binding and in full force and effect, no
premiums due thereunder have not been paid and neither the Company nor the
Person to whom such policy has been issued has received any notice of
cancellation or termination in respect of any such policy or is in default
thereunder. The insurance policies listed in Section 2.22 of the Disclosure
Schedule in light of the respective business, operations and Assets and
Properties of the Company are in amounts and have coverages that are reasonable
and customary for Persons engaged in such businesses and operations and having
such Assets and Properties. Neither the Company nor, to Seller's Knowledge, the
Person to whom such policy has been issued has received notice that any insurer
under any policy referred to in this Section is denying liability with respect
to a claim thereunder or defending under a reservation of rights clause. All
benefits under such policies paid or payable since September 10, 1993 under
such policies with respect to the business, operations, employees or Assets and
Properties of the Company have been paid to the Company.
2.23 Affiliate Transactions. Except as disclosed in Section 2.20(a)
(vii) or Section 2.23(a) of the Disclosure Schedule, (i) there are no
intercompany Liabilities or Contracts which could give rise to an intercompany
liability between the Company, on the one hand, and Seller, any officer,
director, Affiliate (other than the Company) or Associate of Seller or any
Associate of any such officer, director or Affiliate, on the other, (ii)
neither Seller nor any such officer, director, Affiliate or Associate provides
or causes to be provided any assets, services or facilities to the Company,
(iii) the Company does not provide or cause to be provided any assets, services
or facilities to Seller or any such officer, director, Affiliate or Associate,
and (iv) the Company does not beneficially own, directly or indirectly, any
Investment Assets issued by Seller or any such officer, director, Affiliate or
Associate. Except as disclosed in Section 2.23(b) of the Disclosure Schedule,
each of the Liabilities and transactions listed in Section 2.23(a) of the
Disclosure Schedule was incurred or engaged in, as the case may be, on an
arm's-length basis. Except as disclosed in Section 2.23(c) of the Disclosure
Schedule, since the Audited Financial Statement Date, (i) all settlements of
intercompany Liabilities between the Company, on the one hand, and Seller or
any such officer,
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<PAGE> 27
director, Affiliate or Associate, on the other, have been made, and all
allocations of intercompany expenses have been applied, in the ordinary course
of business consistent with past practice, and (ii) none of the Contracts or
Liabilities pertaining to Affiliate Transactions listed in Section 2.23 of the
Disclosure Schedule has been amended or modified since the Audited Financial
Statement Date, except as specifically disclosed in such Section.
2.24 Environmental Matters. Each of the Company and the Seller, as
the case may be, has obtained all material Governmental Licenses which are
required under applicable Environmental Laws in connection with the conduct of
the business or operations of the Company. Each of such material Governmental
Licenses is in full force and effect, will remain in full force and effect
notwithstanding the consummation of the transaction contemplated by this
Agreement and the Company is in compliance in all material respects with the
terms and conditions of all such material Governmental Licenses and with any
applicable Environmental Law. In addition, except as set forth in Section 2.24
of the Disclosure Schedule (with paragraph references corresponding to those
set forth below):
(a) No Order has been issued, no Environmental Claim has been
filed, no penalty has been assessed and no investigation or review is pending
or, to the Knowledge of Seller, threatened by any Governmental or Regulatory
Authority with respect to any alleged failure by the Company to have any
material Governmental License required under applicable Environmental Laws in
connection with the conduct of the business or operations of the Company or
with respect to any generation, treatment, storage, recycling, transportation,
discharge, disposal or Release of any Hazardous Material generated (i) by the
Company, or (ii) by any other Person on any Property owned or leased by or to
the Company, and, to the Knowledge of Seller, there are no facts or
circumstances in existence which could reasonably be expected to form the basis
for any such Order, Environmental Claim, penalty or investigation.
(b) The Company does not own, operate or lease a treatment,
storage or disposal facility requiring a permit under any applicable
Environmental Law; and, without limiting the foregoing, (i) no polychlorinated
biphenyl is or has been present, (ii) no asbestos or asbestos-containing
material is or has been present, (iii) there are no underground storage tanks
or surface impoundments for Hazardous Materials, active or abandoned, and (iv)
no Hazardous Material has been Released in a quantity reportable under, or in
violation of, any applicable Environmental Law or otherwise Released, in the
cases of clauses (i) through (iv), at, on or under any site or facility now or
previously owned, operated or leased by the Company.
(c) No Hazardous Material generated by the Company has been
recycled, treated, stored, disposed of or Released by the Company at any
location.
(d) No oral or written notification of a Release of a Hazardous
Material has been filed by or on behalf of the Company and no site or facility
now or previously owned, operated or leased
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<PAGE> 28
by the Company is listed or proposed for listing by any governmental authority
of any applicable jurisdiction as a site requiring investigation or clean-up.
(e) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, or that are in the
possession of, the Company or the Seller in relation to any site or facility
now or previously owned, operated or leased by the Company which have not been
delivered to Purchaser prior to the execution of this Agreement.
2.25 Substantial Customers and Suppliers. Section 2.25(a) of the
Disclosure Schedule lists the ten (10) largest customers of the Company on the
basis of revenues for goods sold or services provided for the most
recently-completed fiscal year. Section 2.25(b) of the Disclosure Schedule
lists the ten (ten) largest suppliers of the Company on the basis of cost of
goods or services purchased for the most recently-completed fiscal year. Except
as disclosed in Section 2.25(c) of the Disclosure Schedule, no such customer or
supplier has ceased or materially reduced its purchases from, use of the
services of, or sales to or provision of services to, the Company since the
Audited Financial Statement Date, or, to the Knowledge of Seller, has
threatened to cease or materially reduce such purchases, use, sales or
provision of services since October 31, 1996. Except as disclosed in Section
2.25(d) of the Disclosure Schedule, to the Knowledge of Seller, no such
customer or supplier is threatened with bankruptcy or insolvency.
2.26 Bank and Brokerage Accounts; Investment Assets. Section 2.26
of the Disclosure Schedule sets forth (a) a true and complete list of the names
and locations of all banks, trust companies, securities brokers and other
financial institutions at which the Company has an account or safe deposit box
or maintains a banking, custodial, trading or other similar relationship; (b) a
true and complete list and description of each such account, box and
relationship, indicating in each case the account number and the names of the
respective officers, employees, agents or other similar representatives of the
Company having signatory power with respect thereto; and (c) a list of each
Investment Asset, the name of the record and beneficial owner thereof, the
location of the certificates, if any, therefor, the maturity date, if any, and
any stock or bond powers or other authority for transfer granted with respect
thereto.
2.27 No Powers of Attorney. Except as set forth in Section 2.27 of
the Disclosure Schedule, neither the Company nor the Seller with respect to the
Assets and Properties of the Company have any powers of attorney or comparable
delegations of authority outstanding.
2.28 Accounts Receivable. Except as set forth in Section 2.28 of
the Disclosure Schedule, the accounts and notes receivable of the Company
reflected on the balance sheet included in the Unaudited Financial Statements,
and all accounts and notes receivable arising subsequent to the Unaudited
Financial Statement Date, (i) arose from bona fide sales transactions in the
ordinary course of business and are payable on ordinary trade terms, (ii) are
legal, valid and binding obligations of the respective debtors enforceable in
accordance with their terms, (iii) are not subject to any valid set-off or
counterclaim, (iv) do not represent obligations for goods sold on consignment,
22
<PAGE> 29
on approval or on a sale-or-return basis or subject to any other repurchase or
return arrangement, (v) are not the subject of any Actions or Proceedings
brought by or on behalf of the Company, and (vi) are collectible, on or before
the following dates, net of any applicable reserves reflected in the Closing
Balance Sheet:
(a) in the case of receivables attributable to IBM Oestereich
G.M.b.H. in the amount of 238,128 Austrian Schillings as of February 28, 1997,
within one hundred twenty (120) days of the Closing Date;
(b) with respect to payments in connection with the Zahlungsplan
fur alle dutschen Vertrage (the "IDJ Down Payment Plan"), in the aggregate
amount of 3,144,311 German Marks, after services are rendered thereunder in due
course and a request for payment is made by the Company;
(c) as to monies payable under the IDJ Down Payment Plan in the
aggregate amount of 10,219,174 German Marks as of February 28, 1997, no later
than July 31, 1997;
(d) as to monies payable under the IDJ Down Payment Plan in the
amount of 150,727 German Marks as of February 28, 1997, no later than December
15, 1997;
(e) with respect to the separate IDJ account receivable in the
aggregate amount of 11,523,056 Austrian Schillings as of February 28, 1997, no
later than one hundred twenty days (120) after the Closing Date;
(f) with respect to all other accounts receivable of the Company,
within ninety (90) days following the Closing Date, in the recorded amounts
thereof, net of any applicable reserve reflected in the Closing Balance Sheet.
With respect to payments on Accounts Receivable which are the subject
of this Section 2.28, the Company will, with respect to any payments collected
after the Closing Date, apply such payments: first, to the account or accounts
designated by, and in the order designated by, the Person making such payment;
and second, or if no such designation is made, to the oldest account or
accounts of the Person making such payment, or on whose behalf such payment was
made, as the case may be.
Section 2.28 of the Disclosure Schedule sets forth a description of
any security arrangements and collateral securing the repayment or other
satisfaction of receivables of the Company. All steps necessary to render all
such security arrangements legal, valid, binding and enforceable, and to give
and maintain for the Company a perfected security interest in the related
collateral, have been taken. To the extent any receivable is not collected by
the Company and a claim is made against Seller with respect thereto under this
Section 2.28 and such claim has been paid by Seller, Purchaser will assign its
rights in, and to collect, such receivable to Seller, but only to the extent of
such payment.
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2.29 Inventory. All inventory of the Company reflected on the
balance sheet included in the Unaudited Financial Statements consisted, and all
such inventory acquired since the Unaudited Financial Statement Date consists,
of a quality and quantity usable and salable in all material respects in the
ordinary course of business consistent with past practice, subject to normal
and customary allowances in the industry for spoilage, damage and outdated
items. The mix of particular components of inventory is consistent in all
material respects with the past practice of the Company. Except as disclosed in
Section 2.29 of the Disclosure Schedule, all items included in the inventory of
the Company are the property of the Company, free and clear of any Lien other
than Permitted Liens, have not been pledged as collateral, are not held by the
Company on consignment from others and conform in all material respects to all
standards applicable to such inventory or its use or sale imposed by applicable
Governmental or Regulatory Authorities.
2.30 Product Claims. Since September 10, 1993, to Seller's
Knowledge, the Company has not given or made any warranties to third parties
with respect to Products sold by or through the Company except for limited
warranties stated in customer contracts listed in Section 2.30 of the
Disclosure Schedule, copies of which contracts have been made available by
Seller to Purchaser. Except as set forth in Section 2.30 of the Disclosure
Schedule, to Seller's Knowledge no claims are pending or threatened against the
Company with respect to Products sold by or through the Company. Seller
represents and warrants that it has established reserves sufficient to pay
warranty or other contractual claims under Seller's existing Contracts,
consistent with the Company's reasonable and customary practices and consistent
with AAP, and with respect to Products in existence as of the Closing Date, and
agrees to indemnify and hold harmless Purchaser from all claims with respect to
Seller's Products in excess of the amount of such reserves as reflected on the
Closing Balance Sheet. Seller further represents and warrants that the
limitations on liability of the Company, whether as obligor, guarantor or
otherwise, contained in the Contracts are valid and fully enforceable in a
court or other forum of competent jurisdiction and Seller agrees to indemnify
and hold harmless Purchaser from all claims for liability in excess of such
contractual limitations. Seller shall not be entitled to receive any payment
from the Company or any Affiliate of the Company based on any payment by Seller
under the Guarantee identified in Section 2.32 of the Disclosure Schedule,
unless the Company shall have admitted the validity of the underlying claim or
claims on which any such payment was made or unless such claim or claims shall
have been adversely determined against the Company pursuant to a final,
non-applicable adjudication. Nothing herein shall preclude Seller from
asserting any cross claim against the Company in any proceeding in which both
Seller and the Company are named with respect to any purported obligations of
the Company for which the Seller also is sought to be held liable by virtue of
the Guarantee.
2.31 Brokers. All negotiations relative to this Agreement, the
Operative Agreements and the transactions contemplated hereby and thereby have
been carried out by Seller directly with Purchaser without the intervention of
any Person on behalf of Seller in such manner as to give rise to any valid
claim by any Person against Purchaser or the Company for a finder's fee,
brokerage commission or similar payment.
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2.32 Disclosure. To Seller's Knowledge, all material facts
relating to the Business or Condition of the Company have been disclosed to
Purchaser in or in connection with this Agreement and the Operative Agreements.
To Seller's Knowledge, no representation or warranty contained in this
Agreement or the Operative Agreements, and no statement contained in the
Disclosure Schedule or in any certificate, list or other writing furnished to
Purchaser pursuant to any provision of this Agreement (including without
limitation the Financial Statements) or the Operative Agreements, contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
2.33 Conduct of Business. Since the date of the Audited Financial
Statements, Seller has caused the Company to conduct business only in the
ordinary course consistent with past practice. Without limiting the generality
of the foregoing and except as disclosed in Section 2.25 of the Disclosure
Schedule, Seller has caused the Company to (i) preserve intact the business
organization and reputation of the Company, (ii) kept available (subject to
dismissals and retirements in the ordinary course of business consistent with
past practice) the services of the officers, employees and consultants of the
Company employed by the Company as of such date, other than Bruce Longhurst,
whom the Seller caused to resign from all positions with the Company effective
concurrently with the Closing Date, (iii) maintained the Assets and Properties
of the Company in good working order and condition, ordinary wear and tear
excepted, (iv) maintained the good will of customers, suppliers, lenders and
other Persons to whom the Company sells goods or provides services or with whom
the Company otherwise has significant business relationships, and (v) continued
all sales, marketing and promotional activities relating to the business and
operations of the Company.
2.34 Contracts with Certain Customers. All contracts and business
arrangements between the Company and any Person for the provision of on-line
lottery services, on-line banking services, off track betting services or
credit card processing services are in full force and effect, and except as
disclosed in Section 2.25 of the Disclosure Schedule, neither Seller, the
Company nor their respective Affiliates, or Associates has been notified by any
one of such customers of the termination or proposed termination of such
contract or business arrangement.
2.35 Resignations of Directors and Officers. The members of the
board of directors and the officers of the Company, designated in the written
notice delivered by Purchaser to Seller, have tendered, effective at the
Closing, their resignations as such directors and officers.
2.36 Operative Agreements. Seller has caused the Operative
Agreements to which it is a party to have been executed and delivered.
2.37 IDJ Confirmation. Prior to execution of this Agreement,
Seller has furnished Purchaser with the written confirmation of accounts from
IDJ, a true and correct copy of which fully executed confirmation is attached
to Section 2.37 of the Disclosure Schedule.
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2.38 IDJ Claims. The Company has no obligation to IDJ with respect
to the amounts asserted for claims identified in the last paragraph of that IDJ
confirmation letter dated as of April 9, 1997 and shall assume the defense of
any claims asserted with respect thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
3.01 Organization. Purchaser is a corporation validly existing and
in good standing under the Laws of Delaware or its jurisdiction of
organization. Purchaser has full corporate power and authority to execute and
deliver this Agreement and the Operative Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
3.02 Authority. The execution and delivery by Purchaser of this
Agreement and the Operative Agreements to which it is a party, and the
performance by Purchaser of its obligations hereunder and thereunder, have been
duly and validly authorized by the Board of Directors or other governing body
of Purchaser, including, if the Purchaser is an Austrian corporate entity, the
supervisory board thereof, no other corporate action on the part of Purchaser
or its stockholders being necessary. This Agreement and the Operative
Agreements have been duly and validly executed and delivered by Purchaser and
constitute legal, valid and binding obligations of Purchaser enforceable
against Purchaser in accordance with their respective terms.
3.03 No Conflicts. The execution and delivery by Purchaser of this
Agreement and the Operative Agreements do not, and the performance by Purchaser
of its obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the certificate of incorporation or
by-laws (or other comparable corporate charter documents of Purchaser) of
Purchaser;
(b) subject to obtaining the consents, approvals and actions,
making the filings and giving the notices disclosed in Schedule 3.03 hereto,
conflict with or result in a violation or breach of any term or provision of
any Law or Order applicable to Purchaser or any of its Assets and Properties;
or
(c) except as disclosed in Schedule 3.03 hereto, (i) conflict
with or result in a violation or breach of, (ii) constitute (with or without
notice or lapse of time or both) a default under, or (iii) require Purchaser to
obtain any consent, approval or action of, make any filing with or give any
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notice to any Person as a result or under the terms of any Contract or License
to which Purchaser is a party or by which any of its Assets and Properties is
bound.
3.04 Governmental Approvals and Filings. Except as disclosed in
Schedule 3.04 hereto, no consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority on the part of Purchaser is
required in connection with the execution, delivery and performance of this
Agreement or the Operative Agreements or the consummation of the transactions
contemplated hereby or thereby.
3.05 Legal Proceedings. There are no Actions or Proceedings
pending or, to the Knowledge of Purchaser, threatened against, relating to or
affecting Purchaser or any of its Assets and Properties which could reasonably
be expected to result in the issuance of an Order restraining, enjoining or
otherwise prohibiting or making illegal the consummation of any of the
transactions contemplated by this Agreement or any of the Operative Agreements.
3.06 Brokers. All negotiations relative to this Agreement and the
Operative Agreements and the transactions contemplated hereby have been carried
out by Purchaser directly with Seller without the intervention of any Person on
behalf of Purchaser in such manner as to give rise to any valid claim by any
Person against Seller or the Company for a finder's fee, brokerage commission
or similar payment.
ARTICLE IV
COVENANTS OF SELLER
Seller covenants and agrees with Purchaser that, as of the date hereof
and, with respect to any covenant or agreement by its terms to be performed in
whole or in part after the Closing, for the period specified herein or, if no
period is specified herein, then for the longest applicable statute of
limitations under which a claim could be brought, Seller will comply with all
covenants and provisions of this Article IV, except to the extent Purchaser may
otherwise consent in writing.
4.01 Books and Records. Seller has delivered or made available to
Purchaser at the offices of the Company all of the Books and Records, and if,
at any time after the Closing, Seller discovers in its possession or under its
control any other Books and Records (without regard to the materiality
thereof), it will forthwith deliver such Books and Records to Purchaser.
4.02 Non-Competition. (a) Seller shall, for a period of three (3)
years from the Closing Date, refrain from, either alone or in conjunction with
any other Person, or directly or indirectly through its present or future
Affiliates:
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(i) employing, engaging or seeking to employ or engage
any Person (other than Bruce Longhurst) who has been an officer or
employee of the Company at Closing or six months prior thereto, unless
such officer or employee (A) resigns voluntarily (without any
solicitation from Seller or any of its Affiliates), or (B) is
terminated by the Company after the Closing Date;
(ii) causing or attempting to cause (A) any client,
customer or supplier of the Company to terminate or materially reduce
its business with the Company, or (B) any officer, employee or
consultant of the Company to resign or sever a relationship with the
Company;
(iii) disclosing (unless compelled by judicial or
administrative process) or using any confidential or secret
information relating to the Company or any of its respective clients,
customers or suppliers; or
(iv) participating or engaging in, directly or indirectly
(whether through distributorships, representative agreements, sales
agencies or otherwise, other than through the ownership of five
percent (5%) or less of any class of securities of any Person whose
securities are publicly traded on any internationally recognized stock
exchange, as to which the companies listed thereon have an aggregate
market value of not less than five billion U.S. dollars) or by
otherwise lending assistance (financial or otherwise) to any Person
participating or engaging in directly or indirectly (x) the on-line
lottery business, or (y) any of the lines of business in which the
Company is participating or engaged on the Closing Date in any
jurisdiction other than in the United States and Canada and other than
with respect to the customers or proposed customers listed in the
jurisdictions listed in Section 4.02 of the Disclosure Schedule. The
foregoing exception for competitive activities in jurisdictions listed
in Section 4.02 of the Disclosure Schedule shall be limited to
competition involving (A) existing customers of Seller identified in
Section 4.02 of the Disclosure Schedule (which lists all existing
customers of Seller or any of its subsidiaries, in respect of any
business in competition with the business of the Company or
constituting an on-line lottery business outside the United States or
Canada, the date and parties to the contract and which describes the
nature and scope of the business conducted with such customer and the
jurisdiction in which it is conducted), or (B) proposed customers who
become actual customers as the direct and proximate result of the
proposals identified in Section 4.02 of the Disclosure Schedule (which
lists all jurisdictions in which the Seller or any of its subsidiaries
has an outstanding, good faith proposal as of January 14, 1997 in
respect of any business in competition with the business of the
Company or constituting an on-line lottery business outside the United
States or Canada, the nature and scope of the business proposed to be
conducted and the jurisdiction in which it is proposed to be
conducted). The limitations of this Section 4.02(a)(iv) on Seller's
right to compete shall not apply to business activities consisting of
(C) the totalisator business as operated at horse (thoroughbred and
harness) race tracks, dog race tracks, off-track betting
establishments, jai
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alai frontons and casino/sports betting facilities, (D) simulcasting
such activities in connection with gaming thereon so long as such
activities are not engaged in a manner so as to be a lottery, as such
term is customarily understood in the gaming industry, and (E) the
manufacture, operation, sale and use of Terminals for lottery
application, or other wagering terminals for non-lottery application,
anywhere except to existing customers of the Company.
(b) The parties hereto recognize that the Laws and public
policies of the various states of the United States and other jurisdictions may
differ as to the validity and enforceability of covenants similar to those set
forth in this Section. It is the intention of the parties that the provisions
of this Section be enforced to the fullest extent permissible under the Laws
and policies of each jurisdiction in which enforcement may be sought, and that
the unenforceability (or the modification to conform to such Laws or policies)
of any provisions of this Section shall not render unenforceable, or impair,
the remainder of the provisions of this Section. Accordingly, if any provision
of this Section shall be determined to be invalid or unenforceable, such
invalidity or unenforceability shall be deemed to apply only with respect to
the operation of such provision in the particular jurisdiction in which such
determination is made and not with respect to any other provision or
jurisdiction.
(c) The parties hereto acknowledge and agree that any remedy at
Law for any breach of the provisions of this Section would be inadequate, and
Seller hereby consents to the granting by any court of an injunction or other
equitable relief, without the necessity of actual monetary loss being proved,
in order that the breach or threatened breach of such provisions may be
effectively restrained.
4.03 Know-How License Agreement; Inspection Rights Agreement. As
of the Closing, Seller (and its subsidiaries and Affiliates, as appropriate)
shall execute and deliver to the Company (a) the Exclusive License Agreement
set forth as Exhibit E hereto, and (b) the Inspection Rights and License
Agreement set forth as Exhibit F hereto and perform its obligations thereunder
in accordance with the terms thereof.
4.04 Subsequent Transactions. As of the Closing, Seller shall
execute and deliver to the Company the Right of First Refusal Agreement in the
form set forth as Exhibit G and perform its obligations thereunder in
accordance with the terms thereof.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER
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The obligations of Purchaser hereunder to purchase the Shares are
subject to the fulfillment, at or before the Closing, of each of the following
conditions (all or any of which may be waived in whole or in part by Purchaser
in its sole discretion):
5.01 Officers' Certificates. Seller shall have delivered to
Purchaser certificates, dated the Closing Date and executed by the Secretary or
any Assistant Secretary of Seller and the Managing Director of the Company,
substantially in the form and to the effect of Exhibits H and I hereto.
5.02 Opinion of Counsel. Purchaser shall have received the opinion
of Rosenman & Colin LLP, and Austrian counsel to Seller and the Company, dated
the Closing Date, substantially in the form and to the effect of Exhibits J and
K hereto.
5.03 Proceedings. All proceedings to be taken on the part of
Seller in connection with the transactions contemplated by this Agreement and
the Operative Agreements and all documents incident thereto shall be reasonably
satisfactory in form and substance to Purchaser, and Purchaser shall have
received copies of all such documents and other evidences as Purchaser may
reasonably request in order to establish the consummation of such transactions
and the taking of all proceedings in connection therewith.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder to sell the Shares are subject to
the fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by Seller in its sole
discretion):
6.01 Officers' Certificates. Purchaser shall have delivered to
Seller a certificate, dated the Closing Date and executed by the Secretary or
any Assistant Secretary of Purchaser, substantially in the form and to the
effect of Exhibit L hereto.
6.02 Opinion of Counsel. Seller shall have received the opinion of
Smith, Gambrell & Russell, LLP, and Austrian counsel to Purchaser, dated the
Closing Date, substantially in the form and to the effect of Exhibit M and N
hereto.
6.03 Proceedings. All proceedings to be taken on the part of
Purchaser in connection with the transactions contemplated by this Agreement,
the Operative Agreements and all documents incident thereto shall be reasonably
satisfactory in form and substance to Seller, and Seller shall have received
copies of all such documents and other evidences as Seller may reasonably
request in order to establish the consummation of such transactions and the
taking of all proceedings in connection therewith.
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ARTICLE VII
TAX MATTERS AND POST-CLOSING TAXES
7.01 Tax Sharing Agreements. Since September 10, 1993, there have
not been and, as of the Closing Date, there are no Tax sharing agreements
between the Company and any other Person.
7.02 Allocation of Tax Liability. In the case of Taxes that are
payable with respect to a taxable period that begins before the Closing Date
and ends after the Closing Date, the portion of any such Tax that is allocable
to the portion of the period ending on the Closing Date shall have been paid or
reserved by the Company on or prior to the Closing Date and: (i) in the case of
Taxes that are either (x) based upon or related to income or receipts or (y)
imposed in connection with any sale, other transfer or assignment or any deemed
sale, transfer or assignment of property (real or personal, tangible or
intangible), shall be deemed equal to the amount that would be payable if the
taxable year ended on the Closing Date, (ii) in the case of Taxes imposed on a
periodic basis with respect to the assets of the Company, or otherwise measured
by the level of any item, shall be deemed to be the amount of such Taxes for
the entire Taxable period (or, in the case of such Taxes determined on an
arrears basis, the amount of such Taxes for the immediately preceding period)
multiplied by a fraction the numerator of which is the number of calendar days
in the portion of such period ending on the Closing Date and the denominator of
which is the number of calendar days in the entire Taxable period, and (iii) in
the case of Taxes, exemptions, deductions or credits that cannot otherwise be
allocated to the periods before and after the Closing Date shall be determined
by the amount of the Tax, exemption, deduction or credit that would be
allowable if the taxable year of the Company ended on the Closing Date.
7.03 Returns and Payments.
(a) From and after the Closing Date, the Seller shall prepare and
file or otherwise furnish to the appropriate party (or cause to be prepared and
filed or so furnished) in a timely manner all Tax Returns with respect to the
Company, for any taxable period ending on or before the Closing Date, and the
Purchaser shall do the same for any taxable period ending after the Closing
Date. With respect to any Tax Return required to be filed with respect to the
Company after the Closing Date and as to which an amount of Tax, if any, is
allocable to the Seller under Section 7.02, the Purchaser shall provide the
Seller and its authorized Representatives with a copy of such completed Tax
Return and a statement (including all necessary supporting schedules and
information required to support such statement) that certifies and sets forth
the calculation of the amount of Tax shown on such Tax Return that is allocable
to the Seller pursuant to Section 7.02 at least thirty (30) days prior to the
due date (including any extension thereof) for the filing of such Tax Return,
and the Seller and its authorized Representatives shall have the right to
review such Tax Return and statement (including any supporting Schedules or
other documents relevant thereto) prior to the filing of such Tax Return. The
Seller and the Purchaser agree to consult and to attempt in good faith to
resolve any issues arising as a result of the review of such Tax Return and
statement by the Seller or its authorized
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Representatives. If the Seller and Purchaser are unable to resolve any such
issues, they shall be submitted to arbitration by a nationally recognized
accounting firm (which shall be mutually acceptable to the parties) and the
decision of such firm shall be binding on the parties.
(b) The Seller and the Purchaser shall each pay or cause to be
paid when due and payable all Taxes that have not been paid or reserved on the
financial statements of the Company as of the Closing Date that are allocable
to them pursuant to the provisions of Section 7.02.
(c) Payment of any amounts due under this Article VII shall be
made (i) with respect to agreed amounts, at least three (3) calendar days
before the payment of any such Tax is due, provided that no such payment shall
be due prior to ten (10) business days following receipt of written notice that
payment of such tax is due, or (ii) within ten (10) business days following
either an agreement between the Seller and the Purchaser that an amount is
payable by the Seller or the Purchaser to the other or within ten (10) business
days of a final "determination". Seller may contest such determination at its
sole cost and expense but shall indemnify the Company against any Loss due to
such contest or a failure to pay such Taxes as of the determination date.
7.04 Cooperation and Exchange of Information. The Seller and the
Purchaser will provide each other with such cooperation and information as
either of them reasonably may request of the other in filing any Tax Return,
amended return or claim for refund, determining a liability for Taxes or a
right to a refund of Taxes or participating in or conducting any audit or other
proceeding in respect of Taxes. Such cooperation and information shall include
providing copies of the relevant Tax Return or portions thereof, together with
accompanying schedules and related work papers and documents relating to
rulings or other determinations by taxing authorities, but in no event shall
the Seller or the Purchaser be required to disclose to the other any
information relating to the operations of either, as the case may be, other
than information relating to a liability for Taxes of the Company. The Seller
and the Purchaser shall make their respective employees available on a mutually
convenient basis to provide explanations of any documents or information
provided hereunder. The Seller and the Purchaser will retain all Tax Returns,
schedules and work papers and all material records or other documents relating
to Tax matters of the Company for its taxable period first ending after the
Closing Date and for all prior taxable periods until the expiration of the
statute of limitations of the taxable periods to which such returns and other
documents relate, without regard to extensions (but taking into account any
extended statute of limitations applicable to a year in which a net operating
loss is reported) except to the extent notified by the other party in writing
of such extensions for the respective Tax periods. After such time, before the
Purchaser shall dispose of any such books and records, at least ninety (90)
calendar days prior written notice to such effect shall be given by the
Purchaser to the Seller, and the Seller shall be given an opportunity, at its
cost and expense, to remove and retain all or any part of such books and
records as the Seller may select. Any information obtained under this Section
7.04 shall be kept confidential, except as may be otherwise necessary in
connection with the filing of returns or claims for refund or in conducting an
audit or other proceeding.
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ARTICLE VIII
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
8.01 Survival of Representations, Warranties, Covenants and
Agreements. Notwithstanding any right of Purchaser (whether or not exercised)
to investigate the affairs of the Company or any right of any party (whether or
not exercised) to investigate the accuracy of the representations and
warranties of the other party contained in this Agreement and the Operative
Agreements, Seller and Purchaser have the right to rely fully upon the
representations, warranties, covenants and agreements of the other contained in
this Agreement and the Operative Agreements. Except as may otherwise be
provided by the term of the Operative Agreements as to such Operative
Agreements, the representations, warranties, covenants and agreements of Seller
and Purchaser contained in this Agreement and the Operative Agreements will
survive the Closing (a) indefinitely with respect to the representations and
warranties contained in Section 2.04 (but only insofar as it relates to the
capital stock of the Company), (b) until sixty (60) days after the expiration
of all applicable statutes of limitation (including all periods of extension,
whether automatic or permissive) with respect to matters covered by Section
2.12 and Article VII of this Agreement, (c) until the date which is thirty (30)
months after the Closing Date, in the case of all other representations and
warranties and any covenant or agreement to be performed in whole or in part on
or prior to the Closing, or (d) with respect to each other covenant or
agreement contained in this Agreement or the Operative Agreements, until sixty
(60) days following the last date on which such covenant or agreement is to be
performed or, if no such date is specified, for a period equal to the longest
statute of limitations applicable to a claim based thereon, except that any
representation, warranty, covenant or agreement that would otherwise terminate
in accordance with clause (b), (c) or (d) above will continue to survive if a
Claim Notice or Indemnity Notice (as applicable) shall have been timely given
under Article IX on or prior to such termination date, until the related claim
for indemnification has been satisfied or otherwise resolved as provided in
Article IX.
8.02 Limitations on Indemnity. The Seller's liability for Losses
under this Agreement shall be limited as follows:
(a) The maximum liability of the Seller in respect of Losses to
which the Purchaser Indemnified Parties shall be entitled to indemnification
hereunder shall not exceed $25,000,000; and
(b) Except as provided in Section 11.06(e) of this Agreement or
with respect to a claim based on a breach of Seller's obligations under
Sections 1.03(c), 1.04 or 2.38 of this Agreement or in connection with the
asserted tax liability identified on Schedule 2.12(a) in the last paragraph
thereof, the Seller shall have no liability to the Purchaser Indemnified
Parties under this Agreement until and unless the amount of all Losses incurred
by them, individually or in the aggregate, exceeds the sum of $150,000 (but in
such event, the Purchaser Indemnified Parties shall be indemnified for the full
amount of their Loss and not merely that in excess of $150,000).
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ARTICLE IX
INDEMNIFICATION
9.01 Indemnification.
(a) Subject to the other Sections of this Article IX,
Seller shall indemnify the Purchaser Indemnified Parties in respect of, and
hold each of them harmless from and against, any and all Losses suffered,
incurred or sustained by any of them or to which any of them becomes subject,
resulting from, arising out of or relating to
(i) any misrepresentation, breach of warranty
or nonfulfillment of or failure to perform any covenant or
agreement on the part of Seller contained in this Agreement
or the Operative Agreements; and
(ii) all Taxes (A) imposed on the Company with
respect to any taxable period or portion thereof that ends on
or before the Closing Date, (B) imposed on the Seller or any
member of an Affiliated Group with which Seller files a
consolidated or combined income tax return (other than the
Company) with respect to any taxable period that ends on or
before the Closing Date or includes the Closing Date which
have not been reserved for and which reserve is not reflected
on the Audited Closing Balance Sheet, (C) imposed on the
Company arising out of, or resulting from, (a) the payment of
any dividends to Seller by the Company subsequent to the date
of the Audited Financial Statements, which Taxes are in
excess of the 1997 Withholding Taxes, or (b) the offset or
cancellation of the management fees identified in Section
1.04 of the Disclosure Schedule; or (D) resulting from,
arising out of, relating to, in the nature of, or caused by
any Liability of the Company for Taxes of any Person other
than the Company (i) under Reg. ss. 1.1502-6 under the Code
(or any similar provision of U.S. or Austrian federal, state,
local law or any applicable foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv)
otherwise.
(b) Subject to the other Sections of this Article IX, Purchaser
shall indemnify the Seller Indemnified Parties in respect of, and hold each of
them harmless from and against, any and all Losses suffered, incurred or
sustained by any of them or to which any of them becomes subject, resulting
from, arising out of or relating (i) to any misrepresentation, breach of
warranty or nonfulfillment of or failure to perform any covenant or agreement
on the part of Purchaser contained in this Agreement or the Operative
Agreements, or (ii) all Taxes imposed on the Company with respect to their
income, business, property or operations for any taxable period or portion
thereof that begins after the Closing Date,
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9.02 Method of Asserting Claims. All claims for indemnification by
any Indemnified Party under Section 9.02 (other than Tax claims asserted
pursuant to Section 9.03 below) will be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which an
Indemnified Party might seek indemnity under Section 9.02 is asserted against
or sought to be collected from such Indemnified Party by a Person other than
Seller, the Company, Purchaser or any Affiliate of Seller or Purchaser (a
"Third Party Claim"), the Indemnified Party shall deliver a Claim Notice with
reasonable promptness to the Indemnifying Party. If the Indemnified Party fails
to provide the Claim Notice with reasonable promptness after the Indemnified
Party receives notice of such Third Party Claim, the Indemnifying Party will
not be obligated to indemnify the Indemnified Party with respect to such Third
Party Claim to the extent that the Indemnifying Party's ability to defend has
been irreparably prejudiced by such failure of the Indemnified Party. The
Indemnifying Party will notify the Indemnified Party as soon as practicable
within the Dispute Period whether the Indemnifying Party disputes its liability
to the Indemnified Party under Section 9.02 and whether the Indemnifying Party
desires, at its sole cost and expense, to defend the Indemnified Party against
such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that the Indemnifying Party desires to
defend the Indemnified Party with respect to the Third Party Claim
pursuant to this Section 9.02(a), then the Indemnifying Party will
have the right to defend, with counsel reasonably satisfactory to the
Indemnified Party, at the sole cost and expense of the Indemnifying
Party, such Third Party Claim by all appropriate proceedings, which
proceedings will be vigorously and diligently prosecuted by the
Indemnifying Party to a final conclusion or will be settled at the
discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party in the case of any settlement that provides for any
relief other than the payment of monetary damages), the Indemnifying
Party will have full control of such defense and proceedings,
including any compromise or settlement thereof; provided, however,
that the Indemnified Party may, at the sole cost and expense of the
Indemnified Party, at any time prior to the Indemnifying Party's
delivery of the notice referred to in the first sentence of this
clause (i), file any motion, answer or other pleadings or take any
other action that the Indemnified Party reasonably believes to be
necessary or appropriate to protect its interests; and provided
further, that if requested by the Indemnifying Party, the Indemnified
Party will, at the sole cost and expense of the Indemnifying Party,
provide reasonable cooperation to the Indemnifying Party in contesting
any Third Party Claim that the Indemnifying Party elects to contest.
The Indemnified Party may participate in, but not control, any defense
or settlement of any Third Party Claim controlled by the Indemnifying
Party pursuant to this clause (i), and except as provided in the
preceding sentence, the Indemnified Party will bear its own costs and
expenses with respect to such participation. Notwithstanding the
foregoing, the Indemnified Party may take over the control of the
defense or settlement of a Third Party Claim at any time if it
irrevocably waives its right to indemnity under Section 9.02 with
respect to such Third Party Claim.
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(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the Indemnifying
Party desires to defend the Third Party Claim pursuant to Section
9.02(a), or if the Indemnifying Party gives such notice but fails to
prosecute vigorously and diligently or settle the Third Party Claim,
or if the Indemnifying Party fails to give any notice whatsoever
within the Dispute Period, then the Indemnified Party will have the
right to defend, at the sole cost and expense of the Indemnifying
Party, the Third Party Claim by all appropriate proceedings, which
proceedings will be prosecuted by the Indemnified Party in a
reasonable manner and in good faith or will be settled, if the claim
is solely for monetary damages, at the discretion of the Indemnified
Party (with the consent of the Indemnifying Party, which consent will
not be unreasonably withheld). The Indemnified Party will have full
control of such defense and proceedings, including, if the claim is
solely for monetary damages, any compromise or settlement thereof;
provided, however, that if requested by the Indemnified Party, the
Indemnifying Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to the Indemnified
Party and its counsel in contesting any Third Party Claim which the
Indemnified Party is contesting. Notwithstanding the foregoing
provisions of this clause (ii), if the Indemnifying Party has notified
the Indemnified Party within the Dispute Period that the Indemnifying
Party disputes its liability hereunder to the Indemnified Party with
respect to such Third Party Claim and if such dispute is resolved in
favor of the Indemnifying Party in the manner provided in clause (iii)
below, the Indemnifying Party will not be required to bear the costs
and expenses of the Indemnified Party's defense pursuant to this
clause (ii) or of the Indemnifying Party's participation therein at
the Indemnified Party's request, and the Indemnified Party will
reimburse the Indemnifying Party in full for all reasonable costs and
expenses incurred by the Indemnifying Party in connection with such
litigation. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party
pursuant to this clause (ii), and the Indemnifying Party will bear its
own costs and expenses with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability to the Indemnified Party
with respect to the Third Party Claim under Section 9.02 or fails to
notify the Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes its liability to the Indemnified Party
with respect to such Third Party Claim, the Loss in the amount
specified in the Claim Notice will be conclusively deemed a liability
of the Indemnifying Party under Section 9.02 and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified Party on
demand. If the Indemnifying Party has timely disputed its liability
with respect to such claim, the Indemnifying Party and the Indemnified
Party will proceed in good faith to negotiate a resolution of such
dispute, and if not resolved through negotiations within the
Resolution Period, such dispute shall be resolved by arbitration in
accordance with Section 11.15, except as otherwise permitted by the
terms of this Agreement.
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(b) In the event any Indemnified Party should have a claim under
Section 9.02 against any Indemnifying Party that does not involve a Third Party
Claim, the Indemnified Party shall deliver an Indemnity Notice with reasonable
promptness to the Indemnifying Party. The failure by any Indemnified Party to
give the Indemnity Notice shall not impair such party's rights hereunder except
to the extent that an Indemnifying Party demonstrates that it has been
irreparably prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim described in such
Indemnity Notice or fails to notify the Indemnified Party within the Dispute
Period whether the Indemnifying Party disputes the claim described in such
Indemnity Notice, the Loss in the amount specified in the Indemnity Notice will
be conclusively deemed a liability of the Indemnifying Party under Section 9.02
and the Indemnifying Party shall pay the amount of such Loss to the Indemnified
Party on demand. If the Indemnifying Party has timely disputed its liability
with respect to such claim, the Indemnifying Party and the Indemnified Party
will proceed in good faith to negotiate a resolution of such dispute, and if
not resolved through negotiations within the Resolution Period, such dispute
shall be resolved by arbitration accordance with Section 11.15, except as
otherwise permitted by the terms of this Agreement.
9.03 Method of Asserting Tax Claims.
(a) After the Closing, Purchaser and Seller each shall promptly
notify the other party in writing of the commencement of any Tax audit or
administrative or judicial proceeding affecting the Company, which, if
determined adversely to the taxpayer or after the lapse of time would be
grounds for indemnification of either Seller or Purchaser ("Tax Indemnitee")
under this Article IX by the other party ("Tax Indemnitor"). Such notice shall
contain factual information describing the asserted Tax liability in reasonable
detail and shall include copies of any notice or other document received from
any taxing authority in respect of any such asserted Tax liability. If either
Purchaser or Seller fails to give the other party prompt notice of an asserted
Tax liability as required by this Section 9.03, then, if such failure to give
prompt notice results in a detriment to the indemnifying party, then any amount
which the indemnifying party is otherwise required to pay pursuant to this
Article IX with respect to such liability shall be reduced by the amount of
such detriment.
(b) The Seller may participate, through counsel of its own
choosing and at its own expense, in any audit, or administrative or judicial
proceeding involving any asserted Tax liability with respect to which indemnity
may be sought under this Article IX (any such audit or proceeding relating to
an asserted Tax liability are referred to herein collectively as a "Contest").
If the Seller elects to participate in the Contest of an asserted Tax
liability, it shall within thirty (30) calendar days of receipt of the notice
of an asserted Tax liability notify the Purchaser of its intent to do so, and
the Purchaser shall cooperate in good faith and shall cause the Company or its
successor to cooperate in good faith, at the Seller's expense, in each phase of
such Contest. If the Seller elects not to participate in the Contest, fails to
notify the Purchaser of its election as herein provided or contests its
obligation to indemnify hereunder, the Purchaser or the Company may pay,
compromise or contest such asserted liability. However, in such case, neither
the Purchaser nor the Company (including any designated Representative of
either) may settle or compromise any asserted liability
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in a manner that would create an indemnification obligation unless such
settlement or compromise would be reasonable in the case of a person that owned
the Company before and after the Closing Date. In any event, each of the
Purchaser (or the Company) and the Seller may participate, at its own expenses,
in the Contest.
9.04 Method of Calculating Losses. The liability of the
Indemnifying Party with respect to any Indemnification Claim shall be reduced
by the tax benefit actually realized by the Indemnified Party as the result of
any Loss upon which such Indemnification Claim is based, and shall be increased
by any tax detriment actually suffered by the Indemnified Party as a result of
such Loss or the receipt of indemnification payments hereunder. The amount of
any such tax benefit or detriment shall be determined by taking into account
the effect, if any, and to the extent determinable, of timing differences
resulting from the acceleration or deferral of items of income or loss
resulting from such Loss or indemnification payments and shall otherwise be
determined so that payment by the Indemnifying Party of the Indemnification
Claim, as adjusted to give effect to any such tax benefit or detriment, will
make the Indemnitee as economically whole as is reasonably practical with
respect to the Losses upon which the Indemnification Claim is based.
9.05 Source of Funds to Satisfy Claims for Indemnification.
Notwithstanding anything else in this Agreement or the Operative Agreements to
the contrary, all claims by Seller for indemnification under this Agreement or
the Operative Agreements shall, in Purchaser's sole and absolute discretion, be
paid under the Letter of Credit or from the proceeds thereof which have been
deposited pursuant to the Escrow Agreement.
In the event that Purchaser shall elect to receive payment for any
claim asserted under or with respect to this Agreement or the Operative
Agreements, other than pursuant to a draw under the Letter of Credit or a
distribution from the Escrow Account, and such payment is thereafter disallowed
or treated as a preference under Title 11, U.S. Code or any similar Federal or
state law for the relief of debtors (a "Bankruptcy Law"), then Purchaser may
draw under the Letter of Credit or the Escrow Account the full amount of any
such payments constituting or treated as a preference under applicable
Bankruptcy Law or as to which the Purchaser does not have full and unfettered
right, title and interest in, by virtue of any legal proceeding or by reason of
any order or judgement of any court or governmental authority enjoining,
restraining or otherwise contesting the Company's right to such funds in each
case under any applicable Bankruptcy Law.
ARTICLE X
DEFINITIONS
10.01 Definitions.
(a) Defined Terms. As used in this Agreement, the following
defined terms have the meanings indicated below:
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"AAP" means Austrian statutory accounting principles
consistently applied throughout the specified period and in the immediately
prior comparable period.
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
"Affiliate" means any Person that directly, or indirectly
through one of more intermediaries, controls or is controlled by or is under
common control with the Person specified. For purposes of this definition,
control of a Person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such Person whether by Contract or
otherwise and, in any event and without limitation of the previous sentence,
any Person owning ten percent (10%) or more of the voting securities of another
Person shall be deemed to control that Person.
"Agreement" means this Stock Purchase Agreement and the
Exhibits, the Disclosure Schedule and the Schedules hereto and the certificates
delivered in accordance with Sections 5.01 and 6.01, as the same shall be
amended from time to time.
"Assets and Properties" of any Person means all assets and
properties of every kind, nature, character and description (whether real,
personal or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person, including without
limitation cash, cash equivalents, Investment Assets, accounts and notes
receivable, chattel paper, documents, instruments, general intangibles, real
estate, equipment, inventory, goods and Intellectual Property.
"Associate" means, with respect to any Person, any
corporation or other business organization of which such Person is an officer
or partner or is the beneficial owner, directly or indirectly, of ten percent
(10%) or more of any class of equity securities, any trust or estate in which
such Person has a substantial beneficial interest or as to which such Person
serves as a trustee or in a similar capacity and any relative or spouse of such
Person, or any relative of such spouse, who has the same home as such Person.
"Audited Financial Statement Date" means the last day of the
most recent fiscal year of the Company for which Audited Financial Statements
are delivered to Purchaser pursuant to Section 2.09.
"Audited Financial Statements" means the Financial Statements
for the most recent fiscal year of the Company, upon which an Austrian
certified accounting firm rendered an opinion as to the fairness of the
presentation thereof, and which were delivered to Purchaser pursuant to Section
2.09.
"Benefit Plan" means any bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock purchase,
stock option, stock ownership, stock appreciation
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rights, phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, accident, disability, workmen's
compensation or other insurance, severance, separation or other employee
benefit plan, practice, policy or arrangement of any kind, whether written or
oral, established by the Company or any predecessor or Affiliate of any of the
Company, existing at the Closing Date or prior thereto, to which the Company
contributes or has contributed, or under which any employee, former employee or
director of the Company or any beneficiary thereof is covered, is eligible for
coverage or has benefit rights.
"Books and Records" means all material, and, to Seller's
Knowledge, all other files, documents, instruments, papers, books and records
relating to the Business or Condition of the Company, including without
limitation financial statements, Tax Returns and related work papers and
letters from accountants, budgets, pricing guidelines, ledgers, journals,
deeds, title policies, minute books, stock certificates and books, stock
transfer ledgers, Contracts, Governmental Licenses, customer lists, computer
files and programs, retrieval programs, operating data and plans and
environmental studies and plans, provided however that as to budgets or
projections such documents shall not be a warranty or guarantee of future
performance.
"Business" means the business of the Company as carried on
during the year immediately prior to the execution of this Agreement.
"Business Day" means a day other than Saturday, Sunday or any
day on which banks located in the States of New York or Georgia are authorized
or obligated to close.
"Business or Condition of the Company" means the business,
condition (financial or otherwise), results of operations, Assets and
Properties and opportunities of the Company taken as a whole.
"Claim Notice" means written notification pursuant to Section
9.02(a) of a Third Party Claim as to which indemnity under Section 9.02 is
sought by an Indemnified Party, enclosing a copy of all papers served, if any,
and specifying the nature of and basis for such Third Party Claim and for the
Indemnified Party's claim against the Indemnifying Party under Section 9.02,
together with the amount or, if not then reasonably ascertainable, the
estimated amount, determined in good faith, of such Third Party Claim.
"Closing" means the closing of the transactions contemplated
by Section 1.03.
"Closing Date" means the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder.
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"Common Stock" means the common stock, nominal value Austrian
Schillings 1,000 per share, of the Company.
"Company" means Tele Control Kommunications und
Computersysteme Aktien Gesellschaft and, for any period prior to its
organization as an A.G., also means Tele Control Kommunications und
Computersysteme Gesellschaft M.b.H.
"Contract" means any agreement, lease, license, evidence of
Indebtedness, mortgage, indenture, security agreement, stockholders agreement,
voting trust or other contract (whether written or oral).
"Deferred Revenue" means the sum of (i) 3,465,000 Austrian
Schillings as of October 31, 1996, and (ii) all cash received by the Company
after October 31, 1996 from Internationale des Jeux.
"Disclosure Schedule" means the record delivered to Purchaser
by Seller herewith and dated as of the date hereof, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Seller pursuant to this Agreement.
"Disputed Amount" means the amount of any draw by Scientific
Games Holdings Corp. or SGBAG under the Letter of Credit and deposited in the
Escrow Account which the Seller has, in good faith, contended is not properly
payable either to Scientific Games Holding Corp. or SGBAG under the provisions
of Article IX of this Agreement.
"Dispute Period" means the period ending ten (10) days
following receipt by an Indemnifying Party of either a Claim Notice or an
Indemnity Notice.
"Environmental Claim" means, with respect to any Person, any
written or oral notice, claim, demand or other communication (collectively, a
"claim") by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, Governmental or Regulatory Authority
response costs, damages to natural resources or other property, personal
injuries, fines or penalties arising out of, based on or resulting from (a) the
presence, or Release into the environment, of any Hazardous Material at any
location, whether or not owned by such Person, or (b) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law. The
term "Environmental Claim" shall include, without limitation, any claim by any
Governmental or Regulatory Authority for enforcement, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law, and any claim by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from the presence of Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.
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"Environmental Law" means any material Law or Order relating
to the regulation or protection of human health, safety or the environment or
to emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or wastes
into the environment (including, without limitation, ambient air, soil, surface
water, ground water, wetlands, land or subsurface strata), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or wastes.
"Escrow Account" means the escrow account established by the
Escrow Agreement.
"Escrow Agreement" means the escrow agreement in the form of
Exhibit B entered into by the Purchaser, Seller and First Union National Bank
of Georgia contemporaneously with this Agreement.
"Financial Statements" means the balance sheets, statements
of operations and cash flow statements of the Company prepared under AAP.
"Governmental Licenses" means all licenses, permits,
certificates of authority, authorizations, approvals, registrations, franchises
and similar consents granted or issued by any Governmental or Regulatory
Authority.
"Governmental or Regulatory Authority" means any court,
tribunal, arbitrator, authority, agency, commission, official or other
instrumentality of the United States, any foreign country or any domestic or
foreign state, county, city or other political subdivision.
"Hazardous Material" means (a) any petroleum or petroleum
products, flammable explosives, radioactive materials, asbestos in any form
that is or could become friable, urea formaldehyde foam insulation and
transformers or other equipment that contain dielectric fluid containing levels
of polychlorinated biphenyls (PCBs); (b) any chemicals or other materials or
substances which are now or hereafter become defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants" or words of similar import under any
Environmental Law; and (c) any other chemical or other material or substance,
exposure to which is now or hereafter prohibited, limited or regulated by any
Governmental or Regulatory Authority under any Environmental Law.
"IDJ" means Internationale des Jeux, a French societe
anonyme.
"Indebtedness" of any Person means all obligations of such
Person (a) for borrowed money, (b) evidenced by notes, bonds, debentures or
similar instruments, (c) for the deferred purchase price of goods or services
(other than trade payables or accruals incurred in the ordinary
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course of business), (d) under capital leases and (e) in the nature of
guarantees of the obligations described in clauses (a) through (d) above of any
other Person.
"Indemnified Party" means any Person claiming indemnification
under any provision of Article IX.
"Indemnifying Party" means any Person against whom a claim
for indemnification is being asserted under any provision of Article IX.
"Indemnity Notice" means written notification pursuant to
Section 9.02(b) of a claim for indemnity under Article IX by an Indemnified
Party, specifying the nature of and basis for such claim, together with the
amount or, if not then reasonably ascertainable, the estimated amount,
determined in good faith, of such claim.
"Intellectual Property" means all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, research records, records of
invention, test information, market surveys, marketing know-how, applications,
trade secrets, industrial models, processes, designs, methodologies, computer
programs (including all source codes) and related documentation, technical
information, manufacturing, engineering and technical documentation and
drawings, shop-rights, plans, know-how, technologies and all pending
applications for and registrations of patents, trademarks, service marks and
copyrights.
"Investment Assets" means all debentures, notes and other
evidences of Indebtedness, stocks, securities (including rights to purchase and
securities convertible into or exchangeable for other securities), interests in
joint ventures and general and limited partnerships, mortgage loans and other
investment or portfolio assets owned of record or beneficially by the Company
and issued by any Person other than the Company (other than trade receivables
generated in the ordinary course of business of the Company).
"IRS" means the Internal Revenue Service.
"January Loan" has the meaning ascribed to it in Section 1.04
of the Disclosure Schedule.
"Knowledge of Seller" or "Known to Seller" or "to Seller's
Knowledge" means the knowledge of any officer, director or key employee of
Seller or the Company.
"Laws" means all material laws, statutes, rules, regulations,
ordinances and other pronouncements having the effect of law of the United
States, Austria or other country or any
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domestic or foreign state, district, county, city or other political
subdivision or of any Governmental or Regulatory Authority.
"Letter of Credit" means a letter of credit as defined in
Section 1.03.
"Liabilities" means all Indebtedness, obligations and other
liabilities of a Person (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due).
"Liens" means any mortgage, pledge, assessment, security
interest, lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, or any conditional sale Contract, title retention Contract or other
Contract to give any of the foregoing.
"Loss" means any and all damages (including, without
limitation, damages resulting in material diminution in value of assets),
fines, fees, penalties, deficiencies, losses, and expenses (including without
limitation interest, court costs, reasonable fees of attorneys, accountants,
consultants, engineers and other experts or other expenses of litigation or
other proceedings or of any claim, default or assessment).
"Material Adverse Effect" means any material adverse effect
on the business, financial condition, opportunities, properties or otherwise of
the Company.
"1997 Dividend" has the meaning ascribed to it in Section
1.04 of the Disclosure Schedule.
"1997 Dividend Withholding Tax Receivable" means the
receivable of the Company with respect to the Austrian withholding tax related
to the 1997 Dividend.
"1997 Interest Accrual" has the meaning ascribed to it in
Section 1.04 of the Disclosure Schedule.
"1997 Management Fee" has the meaning ascribed to it in
Section 1.04 of the Disclosure Schedule.
"1997 Withholding Taxes" means the amount of Austrian
withholding taxes paid or payable by the Company with respect to the 1997
Dividend in the amount of 78,297,846.80 Austrian Schillings.
"Operative Agreements" means the Escrow Agreement, the Letter
of Credit, the Right of First Refusal Agreement, the Exclusive License
Agreement, the Inspection Rights and License Agreement, and any support or
other agreements to be entered into in connection with this Agreement. As to
Seller or Purchaser, as the case may be, Operative Agreements means only the
Operative Agreements to which such person is a party.
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"Option" with respect to any Person means any security,
right, subscription, warrant, option, "phantom" stock right, rights of
takeover, rights to conversion, or other Contract that gives the right to (a)
purchase or otherwise receive or be issued any shares of capital stock of such
Person or any security of any kind convertible into or exchangeable or
exercisable for any shares of capital stock of such Person or (b) receive or
exercise any benefits or rights (legal or economic) similar to any rights
enjoyed by or accruing to the holder of shares of capital stock of such Person,
including any rights to participate in the equity or income of such Person or
to participate in or direct the election of any directors or officers of such
Person or the manner in which any shares of capital stock of such Person are
voted.
"Order" means any writ, judgment, decree, injunction or
similar order of any Governmental or Regulatory Authority (in each such case
whether preliminary or final).
"Permitted Lien" means (a) any Lien for Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for
which adequate reserves have been established in accordance with AAP, (b) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent and (c) any minor
imperfection of title or similar Lien which individually or in the aggregate
with other such Liens does not materially impair the value of the property
subject to such Lien or the use of such property in the conduct of the business
of the Company.
"Person" means any natural person, corporation, general
partnership, limited partnership, limited liability corporation,
proprietorship, joint venture, other business organization, trust, union,
association or Governmental or Regulatory Authority.
"Product" means all tangible and intangible goods and
services sold by or through the Company, including, without limitation,
computer hardware and computer software sold or produced by the Company or
provided by the Company under license or sublicense arrangements.
"Purchase Price" has the meaning ascribed to it in Section
1.02.
"Purchaser" has the meaning ascribed to it in the forepart of
this Agreement.
"Purchaser Indemnified Parties" means Purchaser and its
officers, directors, employees, agents and Affiliates.
"Release" means any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, leaching or
migration into the indoor or outdoor environment, including, without
limitation, the movement of Hazardous Materials through ambient air, soil,
surface water, ground water, wetlands, land or subsurface strata.
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"Representatives" means, as to any Person, such Person's
officers, directors, employees, agents, counsel, accountants, financial
advisors, consultants and other representatives.
"Resolution Period" means the period ending twenty (20) days
following receipt by an Indemnified Party of a written notice from an
Indemnifying Party stating that it disputes all or any portion of a claim set
forth in a Claim Notice or an Indemnity Notice.
"Seller" has the meaning ascribed to it in the forepart of
this Agreement.
"Seller Indemnified Parties" means Seller and its officers,
directors, employees, agents and Affiliates.
"Seller's Banks" means the financial institutions party to
that certain Amended and Restated Credit Agreement, dated as of January 26,
1996, among Autotote Corporation, Autotote Systems, Inc., certain financial
institutions identified therein as "Banks", and Bankers Trust Company, as
"Agent" for the Banks, as amended from time to time.
"Seller's Lottery Business" means all of Autotote's lottery
businesses (excluding the Company but including, without limitation, its
central processing system, data communications networks, on-line/off-line
lottery terminals, operating contracts, technical and software support
contracts, sale contracts and its on-line contract with the State of
Connecticut), whether conducted through Autotote Lottery Corporation, Autotote
Lottery Canada, Inc., or Autotote Israel, Ltd., whether now owned or hereafter
acquired during the term of the Right of First Refusal Agreement. Seller's
Lottery Business shall not be deemed to include the totalisator business as
operated at horse (thoroughbred and harness) race tracks, dog race tracks,
off-track betting establishments, jai alai frontons and casino/sports betting
facilities or simulcasting such activities in connection with gaming thereon so
long as such activities are not engaged in a manner so as to be a lottery, as
such term is customarily understood in the gaming industry.
"SGBAG" means Scientific Games Beteiligung A.G., an Austrian
stock company.
"Shares" has the meaning ascribed to it in the forepart of
this Agreement.
"Subsidiary" means any Person in which the Company, directly
or indirectly, through a subsidiary or otherwise, beneficially owns more than
fifty percent (50%) of either the equity interests in, or the voting control
of, such Person.
"Tax Returns" means all returns, declarations, reports and
forms, claims for refunds, or information returns and reports relating to
Taxes, including any schedule or attachment thereto, and including any
amendments thereof.
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"Tax" or "Taxes" means all Federal, state, local and foreign
income, gross receipts, profits, windfall profits, capital gains, franchise,
sales, use, license, occupation, property, property transfer, capital stock,
premium, excise, employment, payroll, withholding, estimated, severance, stamp,
environmental (including taxes under section 59A of the Code), customs duties,
franchise, social security, unemployment, disability, sales, use, registration,
value added, alternative or add-on minimum and other taxes, assessments or
governmental charges of any nature, kind or character, and including any
interest, additions to tax and penalties thereon, whether disputed or not.
"Terminals" means the Seller's Probe * L on-line retailer
terminals.
"Third Party Claim" has the meaning ascribed to it in Section
9.02(a).
"Transfer Taxes" means any sales, use, excise, transfer or
other similar tax imposed with respect to the transactions provided for in this
Agreement, and any interest or penalties related thereto.
"Unaudited Financial Statement Date" means the last day of
the most recent fiscal period of the Company for which Financial Statements are
delivered to Purchaser pursuant to Section 2.09.
"Unaudited Financial Statements" means the Financial
Statements for the most recent fiscal period of the Company delivered to
Purchaser pursuant to Section 2.09.
(b) Construction of Certain Terms and Phrases. Unless the context
of this Agreement or an Operative Agreement otherwise requires, (a) words of
any gender include each other gender; (b) words using the singular or plural
number also include the plural or singular number, respectively; (c) the terms
"hereof," "herein," "hereby" and derivative or similar words refer to this
entire Agreement or the entire applicable Operative Agreement, as the case may
be; (d) the terms "Article" or "Section" refer to the specified Article or
Section of this Agreement (or the Operative Agreement, as the case may be); and
(e) the phrases "ordinary course of business" and "ordinary course of business
consistent with past practice" refer to the business and practice of the
Company. Whenever this Agreement or an Operative Agreement refers to a number
of days, such number shall refer to calendar days unless Business Days are
specified. All accounting terms used herein and not expressly defined herein
shall have the meanings given to them under AAP.
ARTICLE XI
MISCELLANEOUS
11.01 Notices. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile
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<PAGE> 54
transmission sent (and receipted for) by overnight delivery service or mailed
(prepaid certified mail with return receipt requested) to the parties at the
following addresses or facsimile numbers:
If to Purchaser, to:
Scientific Games Holdings Corp.
1500 Bluegrass Lakes Parkway
Alpharetta, Georgia 30201-7712
Attn: C. Gray Bethea, Jr., Esq.
Telephone: 770/664-3700
Facsimile: 770/343-8798
with a copy to:
Smith, Gambrell & Russell, LLP
1230 Peachtree Street, N. E.
Suite 3100, Promenade II
Atlanta, Georgia 30309-3592
Attn: Howard E. Turner, Esq.
Telephone: 404/815-3594
Facsimile: 404/815-3509
If to Seller, to:
Autotote Corporation
750 Lexington Avenue
25th Floor
New York, New York 10022
Attn: Martin E. Schloss, Esq.
Telephone: 212/754-2233
Facsimile: 212/754-2372
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attn: Howard Schneider, Esq.
Telephone: 212/940-8787
Facsimile: 212/940-7079
48
<PAGE> 55
All such notices, requests and other communications will (i) if delivered
personally or by a nationally recognized overnight delivery service to the
address as provided in this Section, be deemed given upon delivery, (ii) if
delivered by facsimile transmission to the facsimile number as provided in this
Section, be deemed given upon receipt as evidenced by sender's telecopy
confirmation, and (iii) if delivered by mail in the manner described above to
the address as provided in this Section, be deemed given upon receipt or
refusal of delivery by the intended recipient (in each case regardless of
whether such notice, request or other communication is received by any other
Person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section). Any party from time to time may change its
address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other party hereto.
11.02 Entire Agreement. This Agreement, the Operative Agreements
and the side letter, dated the date hereof, relating to the 1997 Withholding
Taxes supersede all prior discussions and agreements, including the Letter of
Intent dated January 14, 1997, between the parties with respect to the subject
matter hereof and thereof and contain the sole and entire agreement between the
parties hereto with respect to the subject matter hereof and thereof.
11.03 Expenses.
(a) Except as otherwise expressly provided in this
Agreement or an Operative Agreement, whether or not the transactions
contemplated hereby are consummated, Purchaser will pay its own costs and
expenses, and Seller and the Company shall each pay its own costs and expenses
incurred in connection with, or in preparation for, the negotiation, execution
and closing of this Agreement and the Operative Agreements and the transactions
contemplated hereby and thereby, all of which as it relates to the Company
shall be charged to the period prior to the Closing Date.
(b) Purchaser agrees to pay, and to indemnify, defend
and hold Seller harmless from and against any United States or Austrian sales,
use, excise, transfer or other similar tax imposed with respect to this
Agreement, the Operative Agreements and the transactions arising as a result
thereof, and any interest or penalties related thereto.
(c) The parties agree that the prevailing party in any
action or arbitration proceeding brought with respect to or to enforce any
right or remedy under this Agreement shall be entitled to recover from the
other party or parties all reasonable costs and expenses of any nature
whatsoever incurred by the prevailing party in connection with such action,
including without limitation, attorneys' fees and prejudgment interest.
11.04 Public Announcements. Seller and Purchaser will obtain the
other party's prior approval of any press release to be issued immediately
following the Closing announcing the consummation of the transactions
contemplated by this Agreement.
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<PAGE> 56
11.05 Confidentiality.
(a) Since January 14, 1997, each party hereto has held, and has
used its best efforts to cause its Affiliates and their respective
Representatives to hold, in strict confidence from any Person (other than any
such Affiliate or Representative), all Confidential Information, as hereinafter
defined, unless (i) compelled to disclose by judicial or administrative process
(including without limitation in connection with obtaining the necessary
approvals of this Agreement and the transactions contemplated hereby of
Governmental or Regulatory Authorities) or by other requirements of Law or (ii)
disclosed in an Action or Proceeding brought by a party hereto in pursuit of
its rights or in the exercise of its remedies hereunder, provided that,
following the Closing, the foregoing restrictions do not apply to Purchaser's
use of documents and information concerning the Company furnished by Seller and
the Company hereunder or any Confidential Information arising from or
pertaining to the Company. For purposes of this Section 11.05(a), the term
"Confidential Information" shall mean all documents and information concerning
the other party or any of its Affiliates furnished to it by the other party or
such other party's Representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (A) previously known by the party
receiving such documents or information, as evidenced by a writing truly and
correctly dated prior to its date of disclosure, (B) in the public domain
(either prior to or after the furnishing of such documents or information
hereunder) through no fault of such receiving party, (C) later acquired by the
receiving party from another unaffiliated source if such source is under no
obligation to another party hereto to keep such documents and information
confidential, (D) is independently developed by the receiving party or its
affiliates by personnel who have not had access to the Confidential
Information, or (E) is approved in advance for release by written authorization
of an officer of the party to whom the Confidential Information relates;
(b) Seller agrees that, subsequent to the Closing Date, Seller
shall, and shall cause its subsidiaries and Affiliates to, and will use its
best efforts to cause all of their respective Representatives to, hold in
strict confidence and in a fiduciary capacity for the benefit of the Purchaser
and the Company, and shall not directly or indirectly use or disclose any
Confidential Information, as hereinafter defined, that Seller or its
subsidiaries or Affiliates or Representatives may have or acquire (whether or
not developed or compiled by the Seller or the Company prior to the Closing
Date, unless (i) compelled to disclose by judicial or administrative process in
a court or other venue of competent jurisdiction or as otherwise required by
applicable Law or legal process, or (ii) disclosed in an Action or Proceeding
brought by a party to this Agreement or an assignee thereunder in pursuit of
rights of a party thereunder, or in the exercise of a party's remedies
thereunder, provided that, in the event Seller or its subsidiaries, or
Affiliates or their Representatives are so required to disclose such
Confidential Information pursuant to the foregoing clauses (i) and (ii) of this
Section 11.05(b), Seller or its subsidiaries or Affiliates or their
Representatives, as the case may be, shall promptly notify Purchaser so that
Purchaser or any of its subsidiaries or Affiliates, as the case may be, may
seek a protective order or other appropriate remedy with respect to such
proposed disclosure. For purposes of this Section 11.05(b), the term
"Confidential
50
<PAGE> 57
Information" shall mean and include any information, documents, data and
know-how relating to the Company or its business that has been disclosed to the
Seller or its subsidiaries or Affiliates or their Representatives by or on
behalf of the Company, or known to such Persons as a result of their
relationship with the Company and not generally within the public domain
(whether constituting a trade secret or not), including, without limitation,
the following: financial information, supply and service information, marketing
information, personnel information, customer information, and information with
respect to any corporate affairs that the Company, prior to the Closing Date,
has treated as confidential. The term "Confidential Information" shall not
include information that has become generally available to the public by the
act of a Person who has the right to disclose such information without
violating any rights of the Purchaser, the Company or any of their
subsidiaries, Affiliates or Representatives or the rights of any customer or
other Person to which such information pertains;
(c) Each party to this Agreement acknowledges that the disclosure
of Confidential Information (as defined, as the case may be, in Section
11.05(a) or (b) above) of the other party, the Company or their subsidiaries or
Affiliates would cause irreparable harm for which monetary damages are not an
adequate remedy. Accordingly, if any Person bound or intended to be bound by
the foregoing provisions should ever violate or threaten to violate such
provisions, the party seeking to invoke the protection of the foregoing
subsections will be entitled to injunctive and other equitable relief,
reimbursement of all fees, costs and expenses incurred in enforcing such
provisions and compensatory damages, as well as all other damages permitted by
law, jointly and severally from the Person or Persons violating or threatening
to violate such provisions or otherwise failing to fulfill its obligations as
set forth above.
11.06 Further Assurances; Post-Closing Cooperation. (a) At any time
or from time to time after the Closing, Seller shall execute and deliver to
Purchaser, at Purchaser's expense, except as provided in Section 11.06(e)
below, such other documents and instruments, provide such materials and
information and take such other actions as Purchaser may reasonably request
more effectively to vest title to the Shares in Purchaser and, to the full
extent permitted by Law, to put Purchaser in actual possession and operating
control of the Company and its Assets and Properties and Books and Records, and
otherwise to cause Seller to fulfill its obligations under this Agreement and
the Operative Agreements to which it is a party.
(b) Following the Closing, each party will afford the other
party, its counsel and its accountants, during normal business hours,
reasonable access to the books, records and other data relating to the Business
or Condition of the Company in its possession with respect to periods prior to
the Closing and the right to make copies and extracts therefrom, to the extent
that such access may be reasonably required by the requesting party in
connection with (i) the preparation of Tax Returns, (ii) the determination or
enforcement of rights and obligations under this Agreement, (iii) compliance
with the requirements of any Governmental or Regulatory Authority, (iv) the
determination or enforcement of the rights and obligations of any Indemnified
or Indemnifying Party, or (v) in connection with any actual or threatened
Action or Proceeding. Further, each party
51
<PAGE> 58
agrees for a period extending six (6) years after the Closing Date not to
destroy or otherwise dispose of any such books, records and other data unless
such party shall first offer in writing to surrender such books, records and
other data to the other party and such other party shall not agree in writing
to take possession thereof during the ten (10) day period after such offer is
made.
(c) If, in order properly to prepare its Tax Returns, other
documents or reports required to be filed with Governmental or Regulatory
Authorities or its financial statements or to fulfill its obligations
hereunder, it is necessary that a party be furnished with additional
information, documents or records relating to the Business or Condition of the
Company not referred to in paragraph (b) above, and such information, documents
or records are in the possession or control of the other party, such other
party shall use its commercially reasonable efforts to furnish or make
available such information, documents or records (or copies thereof) at the
recipient's request, cost and expense. Any information obtained by Seller in
accordance with this paragraph shall be held confidential by Seller in
accordance with Section 11.05.
(d) Notwithstanding anything to the contrary contained in this
Section, if the parties are in an adversarial relationship in litigation or
arbitration, the furnishing of information, documents or records in accordance
with any provision of subsections (a) - (d) this Section shall be subject to
applicable rules relating to discovery.
(e) Seller will use commercially reasonable efforts to cooperate
with Purchaser as promptly as practicable in obtaining, at Purchaser's cost,
all consents, approvals or actions of, making all filings with and giving all
notices to Governmental or Regulatory Authorities or other Persons required
following the consummation of the transactions contemplated hereby and by the
Operative Agreements; provided, however, that all further consents, approvals,
actions or filings required from or with respect to Seller's Banks shall be at
Seller's expense and that any damages to Purchaser arising out of Seller's
breach of this Section 11.06(e) shall not be subject to the limits on liability
set forth in Section 8.02 (b) of this Agreement.
11.07 Waiver. Any term or condition of this Agreement may be waived
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No waiver
by any party of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion. All remedies,
either under this Agreement or by Law or otherwise afforded, will be cumulative
and not alternative.
11.08 Amendment. This Agreement may be amended, supplemented or
modified only by a written instrument duly executed by or on behalf of each
party hereto.
11.09 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and
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<PAGE> 59
it is not the intention of the parties to confer third-party beneficiary rights
upon any other Person other than any Person entitled to indemnity under Article
IX.
11.10 No Assignment; Binding Effect. Neither this Agreement nor any
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other party hereto and any attempt to
do so will be void, except (a) for assignments and transfers by operation of
Law and (b) that Purchaser may assign any or all of its rights, interests and
obligations hereunder (including without limitation its rights under Article
IX) to (i) a direct or indirect Subsidiary, provided that any such Subsidiary
agrees in writing to be bound by all of the terms, conditions and provisions
contained herein, (ii) any post-Closing purchaser of all of the issued and
outstanding stock of the Company or a substantial part of its assets or (iii)
any financial institution providing purchase money or other financing to
Purchaser or the Company from time to time as collateral security for such
financing, but no such assignment referred to in clause (i) or (ii) shall
relieve Purchaser of its obligations hereunder. Subject to the preceding
sentence, this Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.
11.11 Headings. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
11.12 Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future Law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (a) such provision will be
fully severable, (b) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(c) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (d) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
11.13 Governing Law. This Agreement shall be governed by and
construed in accordance with the Laws of the State of New York applicable to a
contract executed and performed in such State, without giving effect to the
conflicts of law principles thereof.
11.14 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
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<PAGE> 60
11.15 Arbitration.
(a) Except as otherwise expressly provided by this Agreement, any
controversy or claim arising out of or relating to this Agreement or the
transactions contemplated hereby and thereby, shall be submitted to and be
finally resolved by arbitration pursuant to the provisions of the United States
Arbitration Act (9 U.S.C. ss. 1 et seq.), to be conducted by the American
Arbitration Association ("AAA"), with such arbitration to be held in New York,
New York, if the party sought to be charged is the Seller or in Atlanta,
Georgia if the party sought to be charged is the Purchaser in accordance with
the AAA's Commercial Arbitration Rules then in effect. Each party hereby
irrevocably agrees that service of process, summons, notices or other
communications related to the arbitration procedure shall be deemed served and
accepted by the other party if given in accordance with Section 11.01. The
arbitrators shall render a judgment of default against any party who fails to
appear in a properly noticed arbitration proceeding. The arbitration shall be
conducted by a panel of three arbitrators selected pursuant to AAA Rules. Any
award or decision rendered in such arbitration shall be final and binding on
both parties, and judgment may be entered thereon in any court of competent
jurisdiction if necessary.
(b) Notwithstanding subsection (a) above to the contrary, any
party may seek temporary or preliminary injunctive relief against the other
party in any court of proper jurisdiction with respect to any and all
preliminary injunctive or restraining procedures pertaining to this Agreement
or the breach thereof, pending the outcome of any arbitration proceeding.
(c) Notwithstanding subsection (a) above to the contrary, any
proceeding involving a claim with respect to amounts deposited under the Escrow
Agreement shall be held in Atlanta, Georgia.
11.16 Consent to Jurisdiction and Service of Process. Seller
hereby irrevocably appoints Martin E. Schloss, Esq., at its office at Autotote
Corporation, 750 Lexington Avenue, 25th Floor, New York, New York 10022, and
Purchaser hereby appoints C. Gray Bethea, Jr., Esq. at its office at Scientific
Games Holdings Corp., 1500 Bluegrass Lakes Parkway, Alpharetta, Georgia 30201-
7712, its lawful agent and attorney to accept and acknowledge service of any
and all process against it in any action, suit or proceeding arising out of or
relating to this Agreement or any of the Operative Agreements or any of the
transactions contemplated hereby or thereby, and upon whom such process may be
serviced with the same effect as if such party were a resident of the State of
Georgia or New York, as the case may be, and had been lawfully served with such
process in such jurisdiction, and waives all claims of error by reason of such
service, provided that in the case of any service upon such agent and attorney,
the party effecting such service shall also deliver a copy thereof to the other
party at the address and in the manner specified in Section 11.01. Seller and
Purchaser will enter into such agreements with such agents as may be necessary
to constitute and continue the appointment of such agents hereunder. In the
event that such agent and attorney resigns or otherwise becomes incapable of
acting as such, such party will appoint a successor agent and attorney in the
United States, reasonably satisfactory to the other party, with like powers.
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<PAGE> 61
For purposes of the arbitration proceedings contemplated by Section
11.15, each party agrees to the jurisdiction set forth in Section 11.15 for any
arbitration proceeding and hereby irrevocably waives, to the fullest extent
permitted by Law, any objection that it may now or hereafter have to the laying
of the venue of such arbitration proceeding brought in such jurisdiction and
any claim that any such arbitration proceeding brought in such jurisdiction has
been brought in an inconvenient forum. Nothing herein shall affect the right of
any party to serve process in any other manner permitted by Law or to commence
legal proceedings or otherwise proceed against the other in any other
jurisdiction.
11.17 Construction. This Agreement, the Operative Agreements and
any documents or instruments delivered pursuant hereto shall be construed
without regard to the identity of the party who drafted the various provisions
of the same. The parties and their respective counsel have actively negotiated
and participated equally in the drafting of each and every provision of this
Agreement, the Operative Agreements and such other documents and instruments.
Consequently, the parties acknowledge and agree that any rule of construction
that a document is to be construed against the drafting party shall not be
applicable either to this Agreement, the Operative Agreements or such other
documents and instruments.
11.18 Time. Time is of the essence of each and every provision of
this Agreement as to which time is a factor.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party hereto under seal as of
the date first above written.
PURCHASER
SCIENTIFIC GAMES HOLDINGS CORP.
By: Cliff O. Bickell
---------------------------------------
Name: Cliff O. Bickell
Title: VP & CFO
55
<PAGE> 62
SELLER
AUTOTOTE CORPORATION
By: William Luke
---------------------------------------
Name: William Luke
Title: Vice President
56
<PAGE> 1
EXHIBIT 10.51
October 1, 1997
Mr. William F. Behm
12180 King Road
Roswell, GA 30075
Dear Mr. Behm:
Scientific Games Inc. (formerly known as Scientific Games Operating Corp. and
hereinafter referred to as the "Company") and William F. Behm (the "Executive")
are parties to that certain Employment Agreement dated as of October 1, 1991, as
amended by that certain letter agreement dated August 23, 1993 (collectively,
the "Agreement"). Terms defined in the Agreement and not otherwise defined
herein, when used in this letter agreement, shall have the respective meanings
provided for in the Agreement. Anything in the Agreement to the contrary
notwithstanding, the Company and Executive hereby agree as follows:
1. The Term of Employment shall extend to and through September 30, 2000.
To acknowledge your agreement with the provisions of this letter, please sign a
counterpart of this letter in the space below and return it to me.
Very truly yours,
SCIENTIFIC GAMES INC.
By: /s/ William G. Malloy
---------------------
William G. Malloy
President and Chief
Executive Officer
Accepted and Agreed:
/s/ William F. Behm
- -------------------
William F. Behm
<PAGE> 1
EXHIBIT 10.52
March 31, 1997
Mr. Thomas F. Little
546 Gramercy Drive
Marietta, GA 30068
Dear Mr. Little:
Scientific Games Inc. (formerly known as Scientific Games Operating Corp. and
hereinafter referred to as the "Company") and Thomas F. Little (the
"Executive") are parties to that certain Employment Agreement dated as of
October 1, 1991, as amended by that certain letter agreement dated August 23,
1993 (collectively, the "Agreement"). Terms defined in the Agreement and not
otherwise defined herein, when used in this letter agreement, shall have the
respective meanings provided for in the Agreement. Anything in the Agreement to
the contrary notwithstanding, the Company and Executive hereby agree as follows:
1. The Executive's annual base salary shall be $212,500 effective as of March
31, 1997.
2. The Term of Employment shall extend to and through September 30, 2000.
To acknowledge your agreement with the provisions of this letter, please sign a
counterpart of this letter in the space below and return it to me.
Very truly yours,
SCIENTIFIC GAMES INC.
By: /s/ William G. Malloy
---------------------
William G. Malloy
President and Chief
Executive Officer
Accepted and Agreed:
/s/ Thomas F. Little
- --------------------
Thomas F. Little
<PAGE> 1
EXHIBIT 11
SCIENTIFIC GAMES HOLDINGS CORP.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three-month period Year
ended December 31 ended December 31
----------------- -----------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 5,108 $ 5,513 $ 5,923 $ 8,972 $18,726 $22,428
======= ======= ======= ======= ======= =======
Weighted Average Common stock outstanding 11,876 12,127 13,006 12,020 12,682 12,929
Effect of common stock equivalents (stock) 399 461 720 407 584 724
------- ------- ------- ------- ------- -------
Total 12,275 12,588 13,726 12,427 13,266 13,653
======= ======= ======= ======= ======= =======
Net earnings per common share - diluted $ .42 $ .44 $ .43 $ .72 $ 1.41 $ 1.64
======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE> 1
EXHIBIT 13.1
FIVE-YEAR SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997(1) 1996(2) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Revenues $197,456 $146,620 $149,240 $119,756 $100,128
- ---------------------------------------------------------------------------------------------------------
Net income 8,972 18,726 22,428 16,080 4,716
=========================================================================================================
Earnings per common share (diluted) .72 1.41 1.64 1.21 .47
- ---------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets 164,410 127,529 110,186 81,169 65,914
- ---------------------------------------------------------------------------------------------------------
Long-term debt, including lease obligations 32,716 4,429 376 1,620 1,566
- ---------------------------------------------------------------------------------------------------------
Shareholders' equity 98,127(3) 93,789(4) 94,580 67,233 49,333
=========================================================================================================
</TABLE>
(1)Includes the operations of SGIL for the full year and SG-Austria since the
acquisition in April 1997.
(2)Includes the operations of SGIL since the acquisition in October 1996.
(3)Reflects the purchase of $5.8 million of Company Stock.
(4)Reflects the purchase of $24.6 million of Company Stock.
SCIENTIFIC GAMES HOLDINGS CORP.
14
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The Company's revenues are generated from the sale of instant tickets to
lotteries and promotional (commercial) customers, from the provision of
cooperative services, instant ticket hardware and software system development
and services, pull-tab tickets, and on-line lottery hardware and software system
development. Instant ticket revenues are generally based on a price per 1,000
tickets. Revenues from the sale of tickets, cooperative services, software and
hardware development may be recognized based upon ticket shipments, a percentage
of the lottery's instant ticket sales to the public, a contracted price, a
license agreement, an equipment lease agreement or any combination of the
foregoing. Current on-line revenues are generated from the sale of hardware and
software to lotteries, as well as support and maintenance contracts on the
on-line systems.
The Company's operating results can vary significantly from period to
period. Revenues and capital expenditures can be difficult to forecast because
the Company's sales cycle can vary and depend upon factors such as the size and
timing of awarded contracts, changes in customer budgets, ticket inventory
position, lottery retail sales and general economic conditions. Contracts with
governmental entities operating newly authorized instant lotteries tend to
generate higher levels of ticket sales in the initial months. All of the
Company's domestic lottery contracts currently are with jurisdictions whose
lotteries have been in operation at least one year. Operating results may be
affected by the working capital requirements associated with preparing
facilities and equipment, establishing a distribution system and printing
tickets for recently awarded contracts, and by the amount of time elapsing
before the receipt and/or recognition of revenues from the sale of lottery
tickets. Cooperative Services contracts typically include, in addition to
instant lottery tickets, field sales support, distribution and marketing
services. New Cooperative Services customers may require additional resources
and infrastructures that may be required to be constructed before revenues are
realized. Revenues generated by cooperative service agreements accounted for
approximately 22.8% of the Company's total revenues. Operating results may also
be affected by the utilization of overtime labor and the Company's ability to
smoothly integrate new and/or upgraded production equipment with its existing
production operations. Lottery revenues and particular product sales to
lotteries may vary in a quarter, causing fluctuations in the Company's revenue
from quarter to quarter. Additionally, circumstances encountered in
international markets, including the substantial amount of time involved in
bidding on an international contract, the evaluation of such bid and the
resultant contract award or rejection can vary significantly from that
originally anticipated when the bid is prepared. All of these factors may make
it difficult to forecast revenues and expenditures related to the Company's
operations over extended periods and may result in fluctuations in the Company's
quarterly financial results.
The Company's domestic lottery contracts typically have an initial term of
from one to five years and usually provide the customer with options to extend
the contract one or more times under the same, or mutually agreeable, terms and
conditions for additional periods generally ranging from one to five years. The
Company's international lottery contracts are less likely to have firm contract
periods and, historically, international lottery ticket customers have sought
competitive bids for such contracts more frequently. The Company's customers
have exercised extension options in the Company's domestic instant lottery
contracts a majority of the time. Upon the expiration of a contract (including
any extensions which may have been exercised), lottery authorities often award
new contracts through a competitive procurement process. During any quarter,
some lottery contract is typically expiring and/or reaching an optional
extension date.
The Company's operations are international in scope. Sales outside the
United States may consist of sales of goods and services exported from the
United States to customers located overseas, sales of goods and services to
customers in countries in which the Company's foreign subsidiaries have
manufacturing facilities or sales of goods and services by the Company's foreign
subsidiaries to customers located outside the country of production. For a
discussion of the Company's net revenues, operating income and identifiable
assets attributable to U.S. production operations and European production
operations, see Note 11 of Notes to Consolidated Financial Statements set forth
elsewhere in this report. For a discussion of revenues from lottery agencies and
other customers domiciled in foreign countries, also see Note 11. Although the
Company does business worldwide, a majority of the Company's current foreign
operations are conducted in, and U.S. export sales are made to, customers
located in Europe.
SCIENTIFIC GAMES HOLDINGS CORP.
15
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
During 1997, the Company had 12 domestic contracts subject to extensions or
scheduled to expire. Of such contracts, eight contained extension options. With
respect to the foregoing contracts, the Company received six contract extensions
and was the successful bidder on five contracts. Such later contracts were
awarded through the bidding process, either because no additional extension
options were available under the former contract or as a result of a decision by
the customer not to exercise available extension options. The Company also
negotiated one additional contract extension in advance of the scheduled
expiration of such contract. Certain of the contract extensions also involved
renegotiation of one or more terms of such contracts. The Company estimates,
based in part upon industry and lottery furnished information, that the
Company's domestic (U.S.) customers with contracts scheduled to expire in 1997
(regardless of whether renewal options were available under such contracts)
represented, in the aggregate, retail sales equal to approximately 17.3% of
total 1997 domestic instant ticket retail sales by lotteries ("1997 Lottery
Sales"). Industry sources estimate that 1997 Lottery Sales were approximately
$14.1 billion. In comparison, seven domestic contracts previously held by the
Company's competitors were subject to extensions or scheduled to expire in 1997.
The Company thinks that its competitors' domestic customers with contracts
scheduled to expire in 1997 represented aggregate retail sales equal to
approximately 8.7% of 1997 Lottery Sales. Of the contacts formerly held by the
Company's competitors in 1997 and as to which the Company was the apparent
successful bidder in 1997, the Company estimates that such contracts accounted
for approximately 3.1% of 1997 Lottery Sales. For a discussion of the Company's
domestic contracts and the scheduled expiration dates, also see Item I Business
- - "Markets" in its Annual Report in Form 10-K. With regard to contracts held by
the Company, it was not the successful bidder on the contract for the New
Hampshire Lottery, and it received a split award on the Arizona and New Mexico
lottery contracts.
The Company was awarded a five-year contract by the Virginia Lottery to
provide software and hardware for a new automated ticket redemption system. The
contract includes installation of approximately 6,000 units of the Company's new
SciScan Technology(R) keyless validation terminals, as well as software to
interface with the Lottery's existing instant ticket software system and
automated administration and ticket validation support. As part of its
cooperative services agreements with West Virginia and Maine, the Company
installed approximately 1,900 and 2,000 of its new SciScan Technology terminals
in each state, respectively.
The Kentucky Lottery Corp. awarded its instant ticket contract to the
Company. The Kentucky contract runs through September 1999, with three, one-year
extensions possible. The Company was the successful bidder for approximately 60%
of the instant ticket business for the New Mexico Lottery. A new three-year
contract was awarded to the Company by the Arizona Lottery to produce instant
tickets (excluding extended play tickets) and provide related services until
2001, with two, one-year extensions possible. The State Lottery Commission of
Indiana awarded the Company a two-year contract to produce instant tickets and
provide related services for the Hoosier Lottery, with two, one-year extensions
possible. Also in 1997, the Minnesota State Lottery, the South Dakota Lottery
and the Washington State Lottery each exercised one-year extensions with the
Company to produce instant tickets, and the Wisconsin Lottery extended its
secondary printer contract with the Company, with further extensions possible.
The Georgia Lottery Corporation exercised the maximum contract extension of
the Company's cooperative services agreement, thus extending its agreement
through the year 2003; such extension was entered into in advance of the
scheduled expiration of such contract in the year 1998. The Delaware Lottery
awarded the Company a three-year Cooperative Services Program contract to run
through the end of 2000. The Nebraska Lottery extended its Cooperative Services
contract with the Company for an additional four years. The Nebraska contract
also includes upgrading the Lottery retailers' instant ticket validation
equipment by installing approximately 1,300 of its new SciScan Technology
terminals.
Internationally, the Company was awarded short-term contracts or extensions
for instant tickets in the Philippines, Finland, Zimbabwe, Kenya, Maderia, Ivory
Coast, Benin, Venezuela, South Africa, Netherlands, Mexico, Denmark, Armenia and
Cyprus. In addition, the Company was awarded several other international
one-game contracts for various other countries. Also, the Company entered into a
joint venture agreement with a
SCIENTIFIC GAMES HOLDINGS CORP.
16
<PAGE> 4
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South Korean company to provide instant tickets to South Korea, although no
tickets have yet been produced under this agreement. Additionally, the Company
was awarded three new contracts for on-line services in Europe. These contracts
are with the lottery of the German state of Mecklenburg-Vorpommern, the Dutch
State Lottery and the German national horse race betting operator DataSport Toto
Dienstleistung.
With regard to contracts previously held by its competitors, the Company was
the successful bidder for the Pennsylvania Lottery, which is a now a Cooperative
Services contract. The Pennsylvania contract includes instant tickets, marketing
and operations support, as well as ticket warehousing, inventory control, ticket
distribution and ticket delivery to retailers, field sales and marketing
services.
As previously disclosed in the Company's periodic reports, the Company's
business is highly competitive and is in a period of intense price-based
competition. Over the past several years, suppliers in the instant ticket
portion of the lottery industry have experienced significant downward pressure
on prices as a result of excess capacity. This has occurred in spite of
increasing instant ticket sales by lotteries and a trend toward larger tickets
and smaller game quantities, both consumers of capacity. Despite Scientific
Games' continued expansion of its Cooperative Services Program and the Company's
recent re-entry into the on-line lottery systems business, a significant portion
of the Company's value remains linked to the manufacture and servicing of
instant tickets. The successful maintenance of the Company's leadership position
during this period has required an aggressive pricing strategy for its instant
ticket products. The effect of this effort is embodied in many of the Company's
existing contracts and may be expected to continue to depress performance for a
few quarters. Many of the lottery contracts awarded or re-awarded to the Company
in 1997 (and the orders thereunder), including contracts with the Georgia
Lottery Corporation and Hoosier Lottery, have certain lower equivalent prices
than charged in the previous contracts. To the extent such contracts contain
lower equivalent prices, the Company's profit margins are adversely affected.
The impact of lower equivalent prices in certain contracts, however, may be
offset, in part, by other factors, including higher order levels from new and
existing customers, increased production efficiencies and other savings
associated with economies of scale. While the timing and extent, both of lower
equivalent price contracts and offsetting factors, cannot be predicted with
certainty, the Company expects significant competition on the basis of price to
continue in 1998.
While the Company has frequently been awarded new contracts when its prior
domestic contracts and extensions have expired, there can be no assurance that
any of the Company's contracts will be extended or that it will be awarded new
contracts as a result of future competitive procurement processes. Nor can any
assurances be given with respect to the Company's ability to offset, in whole or
in part, the effects of any intensified price competition. The lottery industry,
in general, and the sale of instant tickets, in particular, has witnessed from
time to time, periods of intense price competition. However, management does not
anticipate that such price competition will have a material adverse effect on
the Company's long-term prospects or its business as a whole.
During 1998, the Company will have seven domestic contracts subject to
extensions or scheduled to expire. Of such contracts, five contain contract
extension options. The Company estimates that its domestic customers with
lottery contracts which are subject to extensions or scheduled to expire in 1998
had aggregate retail sales equal to approximately 22.1% of 1997 Lottery Sales.
The Company estimates that the seven domestic contracts of the Company's
competitors which are scheduled to expire in 1998 represent approximately 24.2%
of 1997 Lottery Sales.
RECENT DEVELOPMENTS
In February 1998, the Company announced that it had entered into a joint venture
agreement with La Francaise des Jeux, the operator of the French National
Lottery, to develop a new generation of on-line terminals incorporating the
Company's SciScan Technology. The agreement also provides for the assumption by
the joint venture of La Francaise des Jeux's terminal and software maintenance
contracts with six German State Lottery customers. The joint venture is subject
to the approval of the French Minister of Finance and the execution of
definitive agreements for products and services.
SCIENTIFIC GAMES HOLDINGS CORP.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table illustrates certain components of the consolidated results
of operations expressed as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Gross Margin 36.8 38.3 40.8
Selling, general and administrative 13.0 11.9 9.9
Depreciation and amortization 6.7 6.2 5.9
One-time write-offs 6.8 0.0 0.0
Interest income 0.2 0.6 0.4
Gain on foreign currency 0.3 0.5 0.0
Interest expense 0.5 0.1 0.2
Income before income taxes 10.3 21.2 25.3
Income tax expense 5.8 8.4 10.2
Net Income 4.5% 12.8% 15.0%
================================================================================
</TABLE>
Year ended December 31, 1997 compared to year ended
December 31, 1996
Revenues for the year ended December 31, 1997 increased $50.8 million or 34.7%
over the revenues for the year ended December 31, 1996. The increase was
primarily due to $17.3 million in additional sales generated as a result of the
acquisition of the Company's Scientific Games International Limited ("SGIL")
subsidiary, which was acquired on October 1, 1996 and also due to an additional
$15.2 million of sales generated as a result of the acquisition of the Company's
Scientific Games Kommunikations - und Computersysteme A.G. subsidiary,
(hereinafter referred to as "SG Austria"), which was acquired in April 1997. The
remaining increase in revenue resulted from sales to new domestic and
international customers and an increase in sales to existing customers. As
discussed more fully above, lotteries may have periods of increasing and
decreasing retail sales which, in turn, can have an impact on the operating
results of the Company.
Gross margins decreased to 36.8% for the year ended December 31, 1997 from
38.3% for the year ended December 31, 1996. The margin decline was attributable
to lottery contracts awarded or re-awarded having lower equivalent sales prices
than charged in previous contracts, higher production costs due to a change in
the mix of materials used, and more frequent production runs with fewer tickets
per run. The lower equivalent sales prices are a result of competitive pricing
pressures in the industry. Also contributing to the decrease in gross margins in
1997, was the inclusion of SGIL's traditional lower margins for a full twelve
months versus only three months in 1996. Contributing to higher costs incurred
by SGIL were a higher percentage of subcontracted work to third parties and
lower production volumes in 1997. These costs were partially offset in 1997 by a
number of factors including continued efficiency improvements resulting from the
1994 and 1995 capital investment program, higher margins from SG Austria's
on-line business and the movement of a higher percentage of production to lower
cost production facilities.
Selling, general and administrative ("SG&A") expenses increased $8.2 million
for the year ended December 31, 1997 over the same period of 1996. SG&A expenses
also increased as a percentage of revenues to 13.0% from 11.9%. Approximately
71% of the increase was attributable to the additional SG&A costs of SGIL and SG
Austria. Other factors resulting in the higher expenses included increases in
international marketing and sales expenses, including the establishment of a
sales branch in South Africa, higher trade show and travel expenses, as well as
an increase in overall compensation costs. For the fourth quarter of 1997, SG&A
expenses were $7.5 million or approximately 14.9% of sales for such quarter.
Management anticipates that SG&A expenses for 1998 will slightly decrease from
levels experienced in the fourth quarter of 1997. SG&A expenses are subject to
change both as a percentage of sales and dollar volume dependent upon the amount
of revenues for the applicable period.
Depreciation and amortization expenses increased for the year ended December
31, 1997 by $4.1 million over the comparable period of 1996. The increase was
attributable to the additional depreciation expense of SGIL and SG Austria fixed
assets, the amortization of the goodwill related to acquisition of SGIL and SG
Austria, the acquisition of certain customers of ILS, a Netherlands company and
subsidiary of De La Rue PLC of the United Kingdom in 1996, and the
representation agreement with De La Rue also entered into in 1996.
The Company recognized a one-time write-off of $10.1 million for in-process
technology acquired in connection with the April 15, 1997 acquisition of SG
Austria. This write-off is consistent with accounting practices related to other
technology-based acquisitions.
In July 1997, the Company discontinued its charity pull-tab ticket business
line which was produced and distributed by its then named subsidiary GameTec
Inc.
SCIENTIFIC GAMES HOLDINGS CORP.
18
<PAGE> 6
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("GameTec"). The Company continued to produce pull-tab tickets for its state
lottery customers until such time as alternate production facilities could be
arranged for these customers. In October 1997, the Company sold substantially
all of the assets of GameTec to International Gamco, Inc. ("Gamco") The
Company also entered into a three-year extendible marketing agreement with
Gamco to provide marketing and related services to state lotteries for pull-tab
tickets printed by Gamco. The Company will continue to provide pull-tab tickets
to its lottery customers through the marketing agreement. A one-time write-off
of $3.4 million (pre-tax) was recognized in the year ended December 31, 1997 for
losses from disposition of the assets of its pull-tab ticket business line.
Interest income for the year ended December 31, 1997 decreased by
approximately $563,000 from the year ended December 31, 1996. The decrease was
due to the lower average cash balances during 1997, resulting from the use of
cash to fund the purchase of SGIL and SG Austria, purchase additional fixed
assets and repurchase 302,000 shares of the Company's common stock during the
12-month period ended December 31, 1997.
Gains on foreign currency in 1996 were primarily attributable to hedging of
the SGIL purchase price. Gains on foreign currency decreased by approximately
$241,000 in 1997, and the 1997 gains were primarily attributable to gains on the
hedging of the purchase price of SG Austria, as well as net gains on non-U.S.
dollar transactions in the normal course of business.
Interest expense for the year ended December 31, 1997 increased
approximately $758,000 from the year ended December 31, 1996. The increase in
interest expense was due to additional borrowings under the Company's credit
facility to fund the purchase of SGIL and SG Austria, purchase additional fixed
assets and repurchase shares of the Company's common stock during the year ended
December 31, 1997.
The effective tax rate for the year ended December 31, 1997 was 55.9% as
compared to 39.7% for the year ended December 31, 1996. The increase in the
effective tax rate was primarily a result of the $10.1 million write-off of
in-process technology, which was partially offset by tax credits. The Company
expects its annual effective tax rate for 1998 to be slightly lower than the
effective tax rate the Company experienced in 1996.
Net earnings were $9.0 million for the year ended December 31, 1997 and
$18.7 million for the year ended December 31, 1996. The decrease in net income
of $9.7 million was due primarily to the pull-tab business and in-process
technology one-time write-offs of approximately $3.4 million and $10.1 million,
respectively, in 1997.
Earnings per common share (diluted) for the year ended December 31, 1997
were $0.72 cents per share compared to $1.41 for the comparable period in 1996.
The 48.9% decrease in earnings per share was primarily due to the one-time
write-offs discussed above and was partially offset by a reduction in the
weighted average number of common equivalent shares outstanding, resulting from
the Company's repurchase of shares of its Common Stock during 1997 and the full
benefit of the shares repurchased in 1996. The weighted average number of
diluted shares outstanding decreased from 13.3 million in 1996 to 12.5 million
in 1997. Earnings per common share for the year ended December 31, 1997,
excluding the one-time write-offs would have been $1.70.
Year ended December 31, 1996 compared to year ended
December 31, 1995
Revenues for the year ended December 31, 1996 decreased $2.6 million or 1.7%
over the revenues for the year ended December 31, 1995. The decrease was
primarily due to a decrease in sales to international customers and domestic
customers of approximately $7.4 million and $1.3 million, respectively, as
compared to the same period in 1995, which decrease was partially offset by the
$6.1 million of sales by the Company's Scientific Games International Limited
subsidiary acquired on October 1, 1996, during the fourth quarter.
The decline in revenues to international customers was due mainly to a
decline in lottery retail sales of two customers. The decline in domestic sales
was due to the decline in sales during the first quarter of the year, resulting
mainly from customer inventory adjustments.
Gross margins decreased to 38.3% for the year ended December 31, 1996 from
40.8% for the year ended December 31, 1995. The margin decline can be attributed
to lottery contracts awarded or re-awarded having lower equivalent prices than
charged in previous contracts, higher production costs due to a change in the
mix of materials used, more frequent production runs with fewer tickets per run
and the impact of SGIL's traditional lower margins. These higher costs were
partially offset by a number of events, including efficiency improvements
resulting from the 1994 and 1995 capital investment program, the absence of the
startup costs related to such program during the twelve-month period ended
December 31, 1996 and the movement of a higher percentage of production to lower
cost production facilities.
SCIENTIFIC GAMES HOLDINGS CORP.
19
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses increased $2.7
million for the year ended December 31, 1996 over the comparable period of 1995.
SG&A expenses also increased as a percentage of revenues to 11.9% from 9.9%.
Approximately half of the dollar increase was attributable to the additional
SG&A expenses of SGIL as well as an increase in international marketing and
sales expenses, including trade show expenses, travel expenses, and an increase
in overall compensation costs. The percentage increase in SG&A expenses was due
to the dollar increase of SG&A expenses and the slightly lower sales in the year
ended December 31, 1996, as compared to the same period in 1995.
Depreciation and amortization expenses increased for the year ended December
31, 1996 by $316,000 over the comparable period of 1995. The increase was
attributable to the addition of the depreciation expense of SGIL, as well as the
amortization of the goodwill related to acquisition of SGIL, the customers of
ILS and the representation agreement with De La Rue.
Interest income for the year ended December 31, 1996 exceeded the year ended
December 31, 1995, due to the increase in average cash and cash equivalent
balance during the year.
Gains on foreign currency for the year ended December 31, 1996, increased by
$730,000 over the comparable period of 1995. The increase was attributable to
activity related to the acquisition of SGIL, as well as net gains on non-U.S.
dollar transactions in the normal course of business.
Interest expense decreased because of a lower capitalized lease balance in
1996 as compared to 1995.
Net earnings were $18.7 million for year ended December 31, 1996 and $22.4
million for the year ended December 31, 1995. The decrease in net income of $3.7
million was due primarily to the drop in income in the first quarter of 1996 of
approximately $3.6 million. The decrease in net income in the first quarter of
1996 was due mainly to a decrease in revenues caused by customer inventory
adjustments.
The effective tax rate for the year ended December 31, 1996 was 39.7% as
compared to 40.5% for the year ended December 31, 1995. The decrease in the
effective tax rate is the result of the Company taking advantage of certain tax
reductions regarding research and development tax credits and export tax credits
brought about by the formation of a Company-owned foreign sales corporation.
Earnings per common share (diluted) for the year ended December 31, 1996
were $1.41 cents per share compared to $1.64 for the comparable period in 1995.
The 14.0% decrease in earnings per share was due to a 16.5% decrease in net
income, which was partially offset by a reduction in the weighted average number
of common equivalent shares outstanding, resulting from the Company's repurchase
of shares of its Common Stock during 1996. The weighted average number of shares
outstanding decreased from 13.7 million in 1995 to 13.3 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the year, the Company made substantial investments and stock repurchases
with the cash that had been generated in 1997, as well as cash that had been
generated and accumulated in prior years. Cash provided by operations was used
to partially fund the purchase of SG Austria, purchase additional property and
equipment, and to fund working capital requirements.
The Company's cash and cash equivalents balance decreased by approximately
$3.4 million during 1997, declining from $6.3 million to $2.9 million, while
debt, including capital lease obligations increased from approximately $4.4
million to $32.7 million. The Company increased its net borrowings under its
credit facility by $26.6 million. The borrowings were used to partially fund the
purchase of SG Austria, purchase additional property and equipment, and to fund
working capital requirements. Increases in total shareholders' equity due to
option exercises in the period were offset as a result of repurchases under the
Company's stock repurchase program, resulting in a net increase in stockholders'
equity.
In 1997, the Company generated $21.5 million in cash from operating
activities, as compared to $26.5 million in 1996. The primary contributions to
cash from operating activities in 1997 were net income, depreciation and
amortization, one-time write-offs for in-process technology and the disposition
of the pull-tab business, which were offset by a slight increase in net
operating assets and liabilities and deferred income taxes.
Investing activities increased from $27.2 million in 1996 to $45.6 million
in 1997. The increase was due to the acquisitions of businesses for $24.1
million and the purchase of additional property and equipment in the amount of
approximately $22.3 million.
Financing activities provided cash of approximately $20.9 million in 1997
as compared to utilizing approximately $19.5 million 1996. The primary reason
for the increase was additional borrowings under the Company's credit facility
of $36.1 million offset by payments on
SCIENTIFIC GAMES HOLDINGS CORP.
20
<PAGE> 8
- --------------------------------------------------------------------------------
the credit facility of $9.4 million and the repurchase of approximately 302,000
shares of Common Stock for the aggregate cost of approximately $5.8 million. The
Company currently has authorization from its Board of Directors to purchase,
from time to time, depending on market conditions, up to 1.5 million additional
shares of Common Stock.
In connection with the October 1, 1991 acquisition of the assets of the
Company from Bally Entertainment Corporation ("Bally"), the Company agreed to
make an earnout payment (the "Earnout") of up to $5 million on April 30, 1997 if
total cumulative earnings before interest, income taxes, depreciation and
amortization ("EBITDA") from October 1, 1991 through December 31, 1996 equaled
or exceeded $95.4 million. At December 31, 1996, cumulative EBITDA from October
1, 1991 exceeded $95.4 million without any Adjustments as discussed below.
Management believes that the Company has competing claims, offsets and other
potential adjustments (collectively, "Adjustments") which could reduce the
amount ultimately determined to be owed to Bally, if any. However, the effect of
such Adjustments cannot be quantified at this time and there can be no assurance
that such Adjustments ultimately will affect the amount of any Earnout payments
which may be required. The maximum amount payable to Bally has been accrued as
additional goodwill and will be amortized over 34.5 years. No Earnout payment
has been made.
As of December 31, 1997, the Company has borrowed approximately $31 million
under its $80 million revolving credit facility. The Company believes that the
availability of funds under its bank credit facility and cash flows from
operations and the ability to obtain alternative sources of financing should
permit the Company to fund the expansion of its systems business, including the
production and leasing of equipment utilizing the Company's SciScan Technology,
potential expansion of the business and operations of SGIL, as well as other
potential investment opportunities and working capital requirements. The Company
believes that in the event it has additional capital requirements for new
business opportunities that it has the ability to obtain additional financing
from the capital markets.
The Company's current revolving bank credit facility ("Bank Credit
Agreement") expires in December of 1999 with one, one-year extension option
available with the consent of the lenders. The Bank Credit Agreement offers
borrowing rate options under prime rate, London Interbank Offered Rate
("LIBOR")or Interbank Offered Rate ("IBOR"), plus or minus an applicable margin
depending on the type of borrowing and the Company's debt-to-total
capitalization ratio as defined in such agreement. The Bank Credit Agreement
contains covenants that, among other things, govern a defined debt to total
capitalization ratio, a certain fixed charge ratio, the imposition of liens on
assets, and asset sales.
The Company has interest swap agreements that effectively fix the interest
rate on Deutsche mark equivalent of $8,349,000 of borrowings under the revolving
credit agreement until October 2000. This amount was borrowed at a fixed rate of
4.065% plus a credit spread. The credit spread, ranging in 1/8% increments from
0.375% to 0.625%, is set depending on SGI's debt-to-capital ratio (as defined)
at the time of each three-month loan renewal. At December 31, 1997, the
effective interest rate on its Deutsche mark borrowings was 4.4%. These swap
agreements involve the receipt of amounts when the floating rates exceed the
fixed rates and the payment of amounts when the fixed rates exceed the floating
rates in such agreements over the life of the agreements. The differential to be
paid or received is accrued as interest rates change and is recognized as an
adjustment to the floating rate interest expense related to the debt. The
related amount payable to or receivable from counterparties is included in
accrued liabilities or other assets. If, in the future, the interest swap
agreements were terminated, any resulting gain or loss would be deferred and
amortized to interest expense over the remaining life of the underlying debt.
The fair values of the swap agreements, which are not recognized in the
financial statements, are estimated not to be significant at December 31, 1997.
The fair value of the Company's bank debt approximates it carrying value.
For a discussion of a dispute under a foreign contract of an affiliated
company in Colombia, see Note 10 of Notes to Consolidated Financial Statements.
INFLATION, CHANGING PRICES AND FOREIGN
CURRENCY FLUCTUATIONS
Management does not believe that inflation has had an abnormal or unanticipated
effect on Scientific Games' operations. Inflationary pressures would be
significant to the Company's business if raw materials used for instant lottery
ticket production are significantly affected. Available supply from the paper
industry tends to fluctuate, and prices may be affected by supply.
In 1997, inflation was not a significant factor in the Company's results of
operations, and the Company was not impacted by significant pricing changes,
except for personnel related expenditures. The Company is not in a position
SCIENTIFIC GAMES HOLDINGS CORP.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
to forecast the prices or supply of its substrate or other raw materials in 1998
but does not anticipate substantial changes which will materially affect
operating results.
In certain limited cases, the Company's contracts with its customers contain
provisions to adjust for inflation on an annual basis, but there is no assurance
that this adjustment would cover raw material price increases. Although the
Company has long-term and generally satisfactory relationships with most of its
suppliers, the Company believes alternative sources to meet its raw material
needs are available.
The Company attempts to manage its foreign currency exchange risks on a
global basis by one or more of the following: (i) by securing payment from its
customers in U.S. dollars, (ii) by utilizing borrowings denominated in foreign
currency, and (iii) by entering into foreign currency exchange contracts. In
addition, a significant portion of the cost attributable to the Company's
foreign operations is incurred in the local currencies.
The Company may, from time to time, enter into foreign currency exchange or
other contracts to hedge the risk associated with certain firm sales
commitments, anticipated revenue streams and certain assets and liabilities
denominated in foreign currencies. The Company's bank credit agreement also
allows it to borrow in certain European currencies. The Company does not engage
in currency speculation. Assets and liabilities of foreign operations are
translated from the local currency into U.S. dollars at the approximate rate of
currency exchange at the end of the fiscal period. Translation gains and losses
of foreign operations that use local currencies as the functional currency are
accumulated and reported as a separate component of shareholders' equity.
Revenues and expenses are translated at average monthly exchange rates for the
preceding month. Transaction gains and losses arising from exchange rate
fluctuations on transactions denominated in a currency other than the local
functional currency are included in the results of operations.
To the extent the Company does not hedge its foreign currency exchange risk,
such transactions may have the effect of reducing or increasing the amount of
revenue recorded in dollars or which is actually repatriated to the United
States. Conversely, by entering into hedging contracts, the Company may, in
exchange for minimizing the risk of potential losses associated with foreign
currency transactions, also thereby necessarily minimize the potential for
additional gain associated with foreign currency translation. While the Company
has always been able to enter into foreign currency exchange hedging
transactions when it has sought such arrangements, no assurances can be given
that its ability to enter into such transactions will not adversely be affected
in the future by one or more of the following: (i) doing business in a country
with limitations on the expatriation of earnings or other governmental
regulations, (ii) doing business in a country for which there is only limited
international interest in the provision of hedging arrangements by financial
institutions, and (iii) the inability to procure hedging agreements as the
result of some financial crisis associated with that country, or which has
otherwise affected the interest of financial institutions in entering into
hedging transactions in general.
IMPACT OF YEAR 2000
Currently, there is significant uncertainty within the software industry and
among software users regarding the impact of installed software that has been
programmed to accept only two digit entries in the date code field and use such
two digit entries in the software's calculation and report generation features.
Beginning with the year 2000, software modifications or upgrades will be
required to enable such software to distinguish between 21st and 20th century
dates. Current versions of the Company's products are being assessed to
determine the impact of becoming "Year 2000" compliant. The Company currently
believes it will be able to modify or replace its affected systems in time to
minimize any detrimental effects in its installed customer base.
While it is not possible, at present, to give an accurate estimate of the
difficulty or cost of this effort, the Company expects to allocate the necessary
staff and/or monetary resources to address this issue and does not expect the
Year 2000 issue will pose significant operational problems for the Company's
computer systems or that the Company will incur significant operating expenses
or be required to invest heavily in new computer systems or in updates to its
existing computer systems to avoid any problems associated with the coming of
the year 2000 and does not expect that such compliance costs will be material to
the Company's results of operation. However, the Company's investigation is in
its preliminary stages, and no assurances can be given that the Company's
initial assessments will continue to be correct or that the Company will not be
exposed to any potential claims resulting from system problems associated with
the century change.
SCIENTIFIC GAMES HOLDINGS CORP.
22
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues $197,456 $146,620 $149,240
Cost of revenues 124,718 90,442 88,276
- --------------------------------------------------------------------------------
72,738 56,178 60,964
Selling, general and administrative expenses 25,653 17,494 14,778
Depreciation and amortization 13,229 9,133 8,817
Pull-tab business write-off 3,376 -- --
In-process technology write-off 10,102 -- --
Interest income 354 917 613
Gain on foreign currency 507 748 18
Interest expense 911 153 289
- --------------------------------------------------------------------------------
Income before income taxes 20,328 31,063 37,711
Income tax expense 11,356 12,337 15,283
- --------------------------------------------------------------------------------
Net income $ 8,972 $ 18,726 $ 22,428
================================================================================
Basic net income per common share $ 0.75 $ 1.48 $ 1.73
================================================================================
Diluted net income per common share $ 0.72 $ 1.41 $ 1.64
================================================================================
Average common shares outstanding - basic 12,020 12,682 12,929
Dilutive effect of stock options and
non-vested restricted stock awards 407 584 724
- --------------------------------------------------------------------------------
Average common shares outstanding - diluted 12,472 13,266 13,653
================================================================================
</TABLE>
See accompanying notes.
SCIENTIFIC GAMES HOLDINGS CORP.
23
<PAGE> 11
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------------------------------
(In thousands, except share numbers and par value)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,843 $ 6,252
Trade receivables 34,448 27,045
Inventories 11,602 11,290
Prepaid expenses and other current assets 1,853 1,547
Deferred income tax benefits 1,681 1,254
- --------------------------------------------------------------------------------
Total current assets 52,427 47,388
Property and equipment, at cost:
Land 2,521 2,521
Buildings 11,662 11,719
Production and other equipment 90,996 69,806
Construction-in-progress 4,035 994
- --------------------------------------------------------------------------------
109,214 85,040
Less accumulated depreciation and amortization (45,464) (33,029)
- --------------------------------------------------------------------------------
63,750 52,011
Goodwill 34,448 23,921
Other assets 13,785 4,209
- --------------------------------------------------------------------------------
$ 164,410 $ 127,529
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,505 $ 8,280
Accrued liabilities 19,681 14,319
Income taxes payable 4,272 2,854
- --------------------------------------------------------------------------------
Total current liabilities 30,458 25,453
Credit facility 30,624 3,984
Other long-term liabilities 2,092 745
Deferred income taxes payable 3,109 3,558
Commitments and contingencies (Notes 8 and 10)
SHAREHOLDERS' EQUITY
Preferred stock - 3,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock - par value $.001 per share:
25,750,000 shares authorized;
11,875,514 shares and 12,158,362
shares issued and outstanding, respectively 12 12
Additional paid-in capital 57,949 56,486
Accumulated earnings 39,856 36,671
- --------------------------------------------------------------------------------
97,817 93,169
================================================================================
Less notes receivable from officers for the sale of stock (71) (71)
Cumulative foreign currency translation adjustment 381 691
- --------------------------------------------------------------------------------
Total shareholders' equity 98,127 93,789
- --------------------------------------------------------------------------------
$ 164,410 $ 127,529
================================================================================
</TABLE>
See accompanying notes.
SCIENTIFIC GAMES HOLDINGS CORP.
24
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 8,972 $ 18,726 $ 22,428
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 10,361 8,424 8,510
Amortization of intangibles 2,868 709 307
In-process technology write-off 10,102 -- --
Pull-tab business write-off 3,376 -- --
Gain on disposal of property and equipment -- (15) (52)
Deferred income taxes (1,513) (36) 121
Stock compensation expense 1,313 1,764 1,754
Changes in operating assets and liabilities:
Accounts receivable 536 (1,526) (8,887)
Inventories 1,376 (3,174) (502)
Prepaid expenses and other assets (10,156) (4,176) (27)
Accounts payable (4,256) 1,399 228
Accrued liabilities 2,718 1,293 393
Deferred revenue (5,653) -- --
Income taxes payable 1,421 3,126 539
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 21,465 26,514 24,812
INVESTING ACTIVITIES
Proceeds from sale of assets 800 173 52
Payments for property and equipment (22,280) (3,910) (9,109)
Acquisitions of businesses, net of cash acquired (24,091) (23,482) --
- -----------------------------------------------------------------------------------
Net cash used in investing activities (45,571) (27,219) (9,057)
FINANCING ACTIVITIES
Payments on notes receivable from officers -- 28 35
Borrowings under credit facility 36,060 8,984 --
Payments on credit facility and other long-term debt (9,420) (5,000) --
Repurchase of common stock (5,787) (24,559) --
Proceeds from the exercise of common stock options 57 1,070 3,130
- -----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 20,910 (19,477) 3,165
Effect of exchange rate changes on cash (213) 21 --
- -----------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,409) (20,161) 18,920
Cash and cash equivalents at beginning of year 6,252 26,413 7,493
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,843 $ 6,252 $ 26,413
===================================================================================
</TABLE>
See accompanying notes.
SCIENTIFIC GAMES HOLDINGS CORP.
25
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Notes Receivable Foreign Currency
-------------- Paid-In Accumulated from the Translation
Shares Amount Capital Earnings Sale of Stock Adjustment Total
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 12,785 $ 13 $47,279 $ 20,075 $(134) $ -- $ 67,233
Repayment of notes
receivable -- -- -- -- 35 -- 35
Exercise of stock options,
including tax benefit 279 -- 3,130 -- -- -- 3,130
Compensation expense in
connection with stock
option plans -- -- 1,754 -- -- -- 1,754
Net income -- -- -- 22,428 -- -- 22,428
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 13,064 13 52,163 42,503 (99) -- 94,580
Repayment of notes
receivable -- -- -- -- 28 -- 28
Foreign currency translation
adjustment -- -- -- -- -- 691 691
Exercise of stock options,
including tax benefit 298 -- 2,559 -- -- -- 2,559
Compensation expense in
connection with stock
option plans -- -- 1,764 -- -- -- 1,764
Repurchase and retirement
of common stock (1,204) (1) -- (24,558) -- -- (24,559)
Net income -- -- -- 18,726 -- -- 18,726
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 12,158 12 56,486 36,671 (71) 691 93,789
Foreign currency translation
adjustment -- -- -- -- -- (310) (310)
Exercise of stock options,
including tax benefit 20 -- 150 -- -- -- 150
Compensation expense in
connection with stock
option plans -- -- 1,313 -- -- -- 1,313
Repurchase and retirement
of common stock (302) -- -- (5,787) -- -- (5,787)
Net income -- -- -- 8,972 -- -- 8,972
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 11,876 $ 12 $57,949 $ 39,856 $ (71) $ 381 $ 98,127
===========================================================================================================================
</TABLE>
See accompanying notes.
SCIENTIFIC GAMES HOLDINGS CORP.
26
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION
Scientific Games Holdings Corp. ("Company") provides a full range of lottery
game consulting and production services including the printing and distribution
of instant tickets and related instant ticket services, lottery systems and
systems-related services, including lottery hardware and software development,
on-line lottery ticket and transaction processing and cooperative services, all
of which the Company considers to be a single line of business. These products
and services are provided primarily to domestic and international governmentally
sanctioned lotteries. Domestic products and services are provided through the
Company's wholly owned subsidiary, Alpharetta, Georgia-based Scientific Games
Inc. ("SGI"). International services are provided by SGI and United
Kingdom-based Scientific Games International Limited ("SGIL") and Austria-based
Scientific Games Kommunikations - und Computersysteme A.G. ("SG Austria") See
Note 3.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL The following summarizes the Company's principal accounting policies.
Consolidated financial statements presented herein include the accounts and
operations of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUES AND COST OF REVENUES Revenues from the sale of instant tickets and
instant ticket services, systems and systems services and cooperative services
may be recognized based upon one or more of the following: instant ticket and/or
systems shipment, a percentage of the lottery's instant ticket sales to the
public, a contracted price, a license agreement, an equipment lease agreement, a
percentage of completion of the development project or any combination of the
foregoing. All costs related to the design, planning and production of lottery
tickets are capitalized as inventories and recognized as cost of revenues when
the tickets are shipped. Costs related to the planning and development of the
systems and systems-related services are recorded in costs of revenues, and
revenues are recognized based upon the percentage of completion method.
CASH AND CASH EQUIVALENTS Cash and cash equivalents consist principally of cash
and institutional money market funds on deposit with banks. The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE The Company generally does not require collateral or other
security for its receivables. For certain foreign receivables, the Company
requires letters of credit backing such amounts. Credit losses have been within
management's expectations.
INVENTORIES Inventories consist principally of instant lottery tickets and
materials related to their production, which are valued at the lower of cost
(first-in, first-out method) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31 1997 1996
- ---------------------------------------------
(In thousands)
<S> <C> <C>
Finished goods $ 5,841 4,684
Work-in-process 1,827 2,468
Raw materials 3,934 4,138
- ---------------------------------------------
$11,602 $11,290
=============================================
</TABLE>
PROPERTY AND EQUIPMENT Leasehold improvements are amortized on the straight-line
method over the lives of the respective leases or, where applicable, the related
lottery game contracts. Amortization associated with capitalized leases is
included in depreciation expense. Production and other equipment and office
furniture and equipment are depreciated on the straight-line method, generally
over four to 14 years. Buildings are depreciated on the straight-line method
over 31.5 years.
ACCRUED LIABILITIES Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31 1997 1996
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Potential legal claims and
other assessments $1,107 $1,221
Reserves for defective ticket adjustments 900 600
Accrued compensation 3,201 1,815
Due to other entities 8,328 6,031
Other 6,145 4,652
- ------------------------------------------------------------------
$19,681 $14,319
==================================================================
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
27
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GOODWILL Goodwill represents the excess purchase price paid over the net assets
acquired in connection with business combinations accounted for under the
purchase method. Goodwill is being amortized on the straight-line method.
Goodwill related to SGIL and SG Austria is being amortized over a period of 30
years and 15 years, respectively. Accumulated amortization of goodwill totaled
approximately $1,629,000 and $362,000 at December 31, 1997 and 1996,
respectively.
In the event facts and circumstances indicate that goodwill or other assets
may be impaired, an evaluation of recoverability would then be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.
In connection with the formation of the Company and acquisition of certain
assets and assumption of certain liabilities, the Company agreed to pay Bally
Entertainment Corporation ("Bally") an additional amount if the Company met or
exceeded its operating projections for the period October 1, 1991 through
December 31, 1996. The maximum amount that could be owed to Bally under this
agreement is $5,000,000. The amount payable to Bally under this contingency, if
any, has been recorded as an intangible asset in the form of additional goodwill
which is being amortized over the remainder of the 40-year amortization period.
The Company has accrued for the maximum amount which may be owed under such
agreement.
INCOME PER COMMON SHARE In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations are
translated from the local currency into U.S. dollars at the approximate rate of
currency exchange at the end of the fiscal period. Translation gains and losses
of foreign operations that use local currencies as the functional currency are
accumulated and reported as a separate component of shareholders' equity.
Revenues and expenses are translated at average monthly exchange rates.
Transaction gains and losses arising from exchange rate fluctuations on
transactions denominated in a currency other than the local functional currency
are included in the results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting
Standards Board issued Statement No.130, Reporting Comprehensive Income and
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information. Statement No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement No. 131 generally requires that
companies report segment information for operating segments which are revenue
producing components and for which separate financial information is produced
internally.
The Company plans to adopt Statement No. 130 and Statement No. 131 in 1998,
but has not yet completed its analysis of the impact, if any, that Statement No.
131 may have on its financial statements. Statement 130 is only expected to
effect the disclosure of comprehensive income when adopted by the Company.
NOTE 3. ACQUISITIONS AND DISPOSITIONS
In October 1996, the Company acquired Opax International Limited, a United
Kingdom corporation, which was renamed Scientific Games International Limited
("SGIL"). SGIL is a producer of instant lottery and promotional game tickets
with an international customer base and two printing plants in the United
Kingdom. The accompanying financial statements include the results of operations
of SGIL for the three-month period ended December 31, 1996. In October 1996, the
Company also purchased certain sales contracts of ILS Systems bv, and a sales
representation agreement with De La Rue plc. The Company paid $22.8 million for
SGIL and $2.5 million for the sales contracts and sales representation
agreement. Goodwill, representing the excess of the purchase price over the net
assets acquired, totaled approximately $15.3 million.
On April 15, 1997, the Company completed its stock acquisition of Tele
Control Kommunications - und Computersysteme Gesellschaft m.b.h., an Austrian
SCIENTIFIC GAMES HOLDINGS CORP.
28
<PAGE> 16
- --------------------------------------------------------------------------------
corporation which was renamed Scientific Games Kommunikations - und
Computersysteme A.G. ("SG Austria"), an on-line lottery and transaction company
located in Vienna, Austria, from Autotote Corporation. The purchase price was
$26.9 million net of 2.8 million of SG Austria's acquired cash. The purchase was
accounted for under the purchase method of accounting. The purchase price was
allocated to approximately $5.1 million of net assets and to a one-time
write-off of $10.1 million in connection with in-process research and
development costs based on an appraisal, with the remainder allocated to
goodwill to be amortized over 15 years.
The following table summarizes the Company's estimated pro forma results of
operations as if the purchase of SG Austria and SGIL occurred on January 1, 1996
and January 1, 1995, respectively.
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenues $200,225 $193,930 $175,036
Net income 18,841 7,565 22,909
Earnings per common
share - basic 1.57 .60 1.77
Earnings per common
share - diluted 1.51 .57 1.68
</TABLE>
The pro forma results presented above include adjustments to reflect
interest expense on borrowings for the acquisitions, amortization of assets
acquired including intangibles, certain management expenses related to the
Company's combined operations, the $10.1 million in-process research and
development costs write-off reflected in the 1996 amounts, lease expense for a
building owned by the former owner of SGIL which was not purchased as part of
the acquisition, and the income tax effect of such pro forma adjustments and
income taxes on earnings.
These pro forma unaudited results of operations do not purport to represent
what the Company's actual results of operations would have been if the SG
Austria and SGIL acquisition had occurred on January 1, 1996 and 1995,
respectively, and should not serve as a forecast of the Company's operating
results for any future periods. The pro forma adjustments are based solely upon
certain assumptions that management believes are reasonable under the
circumstances at this time. However, the full impact of potential cost savings
has not been reflected in the pro forma results presented above, although there
can be no assurances such cost savings will be achieved.
In 1997, the Company discontinued its charity pull-tab ticket business line
which was produced and distributed by its then named subsidiary GameTec, Inc.
("GameTec"). A write-off of $3.4 million (pre-tax) was recognized for the
disposition of the assets of this business line in 1997. In connection with the
disposition, the Company sold substantially all of the assets of GameTec. The
Company entered into a three-year extendible marketing agreement with the buyer
to provide marketing and related services to state lotteries for pull-tab
tickets. The Company will continue to provide pull-tab tickets to its lottery
customers through the marketing agreement.
NOTE 4. CREDIT FACILITY
On December 20, 1996, the Company entered into a three-year, $80 million credit
facility with three banks (the "Credit Facility"). The Credit Facility contains
provisions for foreign currency loans whereby, at the request of the Company,
amounts up to a maximum of $30 million may be borrowed and repaid in either
British pounds sterling, French francs or Deutsche marks. LIBOR, IBOR and the
Base Rate (the higher of the prime rate, or the federal funds rate plus .5%),
plus the applicable margin as defined in the Credit Facility, are the interest
rate options available to the Company under the Credit Facility. These interest
rates options are applicable and available in varying circumstances based upon
among other things, the amount and nature of the borrowings and the Company's
leverage ratio at the time such amounts are borrowed. The weighted-average
interest rate on the outstanding borrowings under the Credit Facility, including
foreign currency debt during 1997 was 4.7%. A per annum fee of .125% is payable
on the average daily unused portion of the commitment.
The Credit Facility Agreement contains covenants that restrict the Company's
ability to incur additional debt, create liens on any of its property, except as
permitted, and require the Company to maintain a leverage ratio, as defined, of
or below 50% and a fixed charge coverage ratio of a least three to one.
The Company has interest rate swap agreements that effectively fix the
interest rate on Deutsche mark equivalent of $8,349,000 of borrowings under the
revolving credit agreement until October 2000. This amount was borrowed at a
fixed rate of 4.065%, plus a credit spread. The credit spread, ranging in 1/8%
increments from 0.375%
SCIENTIFIC GAMES HOLDINGS CORP.
29
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to 0.625%, is set depending on the Company's leverage ratio at the time of each
three-month loan renewal. At December 31, 1997, the effective interest rate on
the Deutsche mark borrowings was 4.4%. These swap agreements involve the receipt
of amounts when the floating rates exceed the fixed rates and the payment of
amounts when the fixed rates exceed the floating rates in such agreements over
the life of the agreements. The differential to be paid or received is accrued
as interest rates change and is recognized as an adjustment to the floating rate
interest expense related to the debt. The related amount payable to or
receivable from counterparties is included in accrued liabilities or other
assets. If, in the future, the interest rate swap agreement were terminated, any
resulting gain or loss would be deferred and amortized to interest expense over
the remaining life of the underlying debt. In the event of early extinguishment
of a designated debt obligation, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment. The
fair values of the swap agreement, which is not recognized in the financial
statements, is estimated not to be significant at December 31, 1997. The fair
value of the Company's bank debt approximates its carrying value.
For the year ended December 31, 1997, total interest paid and incurred
totaled $955,000, of which $44,000 was capitalized. For the years ended December
31, 1996 and 1995, total interest paid totaled $153,000 and $288,000,
respectively. These amounts include interest on bank debt, interest on capital
leases, and commitment fees.
NOTE 5. SHAREHOLDERS' EQUITY
In July 1997, the Company adopted a shareholders rights plan which provided for
the issuance to each holder of the Company's common stock, certain rights (the
"Rights") to purchase shares of the Company's redeemable Series A Participating
Cumulative Preferred Stock pursuant to the terms of a Rights Agreement. Such
Rights are exercisable after distribution by the holders thereof, other than
"Acquiring Persons" as defined in the Rights Agreement, in the event of certain
ownership changes and in connection with certain business combinations. The
Rights have certain anti-takeover effects. The Rights may cause substantial
dilution to a person that attempts to acquire the Company without a condition to
such an offer being that a substantial number of the Rights be acquired or that
the Rights be redeemed or declared invalid. The Rights should not interfere with
any merger or other business combination approved by the Board of Directors
(under some circumstances with the concurrence of the continuing directors, as
defined) since the rights may be redeemed by the Company.
NOTE 6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options.
The Company has stock option plans that provide for the granting of
non-qualified options to purchase the Company's common stock to selected key
employees, officers and directors. Such options generally have ratable, annual
vesting periods ranging from four to seven years from the date of the grant, and
maximum terms ranging from seven to 10 years from the date of the grant.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 1,271 $ 11.41 1,459 $ 8.31 1,416 $ 4.30
Granted 125 20.60 115 26.00 325 21.00
Exercised (18) 3.17 (298) 3.63 (280) 2.06
Forfeited (2) 3.06 (5) 3.27 (2) 2.86
- --------------------------------------------------------------------------------------------
Outstanding -
end of year 1,376 $ 12.46 1,271 $ 11.41 1,459 $ 8.31
============================================================================================
Exercisable -
end of year 885 $ 9.59 592 $ 6.90 563 $ 3.34
============================================================================================
Weighted-average
fair value of options
granted during
the year $ 13.16 $ 18.77 $ 10.72
============================================================================================
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
30
<PAGE> 18
- --------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1997 ranged from
$1.46 to $38.00. The weighted-average remaining contractual life of those
options is 4.9 years.
The Company charged approximately $1,313,000, $1,764,000 and $1,754,000 to
operations in 1997, 1996 and 1995, respectively, representing the amortization
of the difference in the option price and the fair market value of the option
shares at the date of grant.
At December 31, 1997, the Company has reserved approximately 2,252,000
shares of Common Stock for possible future issuance in connection with its
stock option plans.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.7%, 6.6% and 7.0%, a dividend yield of 0.0%; volatility factors of the
expected market price of the Company's common stock of .46, .41 and .44; and a
weighted-average expected life of the option of 8.7, 8.0 and 5.7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands, except earnings per share)
<S> <C> <C> <C>
Pro forma net income $ 7,689 $17,803 $21,958
Pro forma earnings per
share - diluted $ .62 $ 1.34 $ 1.61
</TABLE>
Because Statement 123 is applicable to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
years.
NOTE 7. INCOME TAXES
Income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $10,457 $ 9,919 $12,479
State 2,600 2,308 2,683
Foreign 842 132 --
Deferred:
Federal (1,433) 6 100
State (213) 1 21
Foreign (897) (29) --
- --------------------------------------------------------------------------------
Income tax expense $11,356 $12,337 $15,283
================================================================================
</TABLE>
The difference between the provision for income taxes and amounts computed
by applying Federal statutory rates to income before income taxes is summarized
as follows:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Federal income tax expense
at statutory rates $ 7,115 $10,872 $13,199
State income taxes net
of Federal income
tax effect 1,551 1,499 1,723
Non-deductible expenses 450 278 305
In-process technology
write-off 3,535 -- --
Tax credits (582) (186) --
Interest on tax-exempt
securities -- (301) (241)
Other (713) 175 297
- --------------------------------------------------------------------------------
Income tax provision $11,356 $12,337 $15,283
================================================================================
</TABLE>
SCIENTIFIC GAMES HOLDINGS CORP.
31
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 4,789 $ 4,740
Other - net 1,465 991
- -------------------------------------------------------------------------------
Total deferred tax liabilities 6,254 5,731
Deferred tax assets:
Accruals and reserves 2,737 1,834
Stock compensation 2,089 1,593
- -------------------------------------------------------------------------------
Total deferred tax assets 4,826 3,427
- -------------------------------------------------------------------------------
Net deferred tax liabilities $ 1,428 $ 2,304
===============================================================================
</TABLE>
The Company made Federal and state income tax payments of approximately
$11,731,000, $9,948,000 and $11,470,000 in the years ended December 31, 1997,
1996 and 1995, respectively. The Company made $750,000 in foreign income tax
payments in the year ended December 31, 1997.
NOTE 8. LEASES
The Company leases certain office and warehouse facilities under operating
leases. Lease expense for operating leases totaled approximately $2,337,000
$1,838,000 and $1,378,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Future minimum lease obligations at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Operating
Leases
- --------------------------------------------------------------------------------
(In thousands)
<S> <C>
1998 $ 2,747
1999 2,235
2000 2,031
2001 1,693
2002 1,693
Thereafter 6,223
- --------------------------------------------------------------------------------
Total lease obligations $16,622
================================================================================
</TABLE>
NOTE 9. BENEFIT PLANS
The Company sponsors the following benefit plans for its employees and
directors.
SCIENTIFIC GAMES INC. SAVINGS AND INVESTMENT PLAN The Company sponsors the
Scientific Games Inc. Savings and Investment Plan, a savings plan which covers
all SGI employees who elect to participate. Employees are eligible for
participation on the enrollment date following six months of service. The
Company contributes an amount equal to 33% of the portion of the employee's
elective deferral contributions which do not exceed 6% of the employee's total
pay for each payroll period in which an elective deferral is made, subject to
the limitations of the Internal Revenue Code. The Company's matching portion of
employees' contributions is made with the Company's Common Stock, which is
purchased on the open market. In 1995, the Company matched the employees,
contributions with cash. Matching contributions of the Company are 100% vested
upon receipt. Approximately $331,000, $314,000 and $267,000 was expensed by the
Company as a result of this plan during 1997, 1996 and 1995, respectively.
SGIL PLAN Certain employees of SGIL are participants in a defined benefit
pension plan administered by the SGIL. The benefits are based on an average of
the employee's compensation over two years preceding retirement or leave of
service. During the year ended December 31, 1997, SGIL recognized expenses of
approximately $726,000 associated with this plan. The projected benefit
obligations and plan assets of the plan are not material.
SCIENTIFIC GAMES INC. MANAGEMENT DEFERRED COMPENSATION PLAN On October 1, 1996,
the Company established the Scientific Games Inc. Management Deferred
Compensation Plan ("MDCP") to provide deferred compensation for a select group
of management or highly compensated employees. Generally, participants in the
MDCP may elect to defer up to 50% of their salary and up to 100% of their annual
cash incentive bonus.
Assets of the MDCP are held by a rabbi trust and are accounted for as assets
of the Company; therefore all earnings and expenses are recorded in the
Company's financial statements. The net amount of the MDCP's earnings and losses
is recorded as additional liability to
SCIENTIFIC GAMES HOLDINGS CORP.
32
<PAGE> 20
- --------------------------------------------------------------------------------
the participants and is an expense of the Company. Assets and liabilities of the
MDCP totaled approximately $603,000 and $695,000, respectively, at December 31,
1997. Compensation expense associated with the MDCP was approximately $649,000
and $46,000 for the years ended December 31, 1997 and 1996, respectively.
SCIENTIFIC GAMES HOLDINGSS CORP. DIRECTORS DEFERRED COMPENSATION PLAN Effective
July 11, 1996, the Company established Scientific Games Holdings Corp. Directors
Deferred Compensation Plan ("DCCP") to provide each member of the Board of
Directors who is not an employee of the Company (a "Director") an opportunity,
on an annual basis, to defer all or any portion of his or her director's fees.
Similar to the MDCP discussed above, assets of the DCCP are held by a rabbi
trust. Assets and liabilities of the DCCP totaled approximately $110,000 and
$122,000, respectively, at December 31, 1997.
Compensation expense associated with the DCCP was approximately $71,000 and
$51,000 for the years ended December 31, 1997 and 1996, respectively.
SCIENTIFIC GAMES INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective January
1, 1996, the Company established the Scientific Games Inc. Supplemental
Executive Retirement Plan ("SERP"). Effective with the establishment of the
Plan, nine executives as defined in the SERP became participants in the SERP.
The Compensation Committee of the Board of Directors may subsequently add
participants to the SERP. All current participants are 100% vested in their
benefits. Generally, participants will receive benefits for 15 years in an
amount equal to 53% of his or her compensation in the final three calendar years
of employment. Such amounts may be reduced based upon length of service and
vesting schedules for participants entering the SERP after January 1, 1996. The
liability associated with SERP which is recorded at December 31, 1997 is
approximately $953,000.
To provide a funding source for the payment of benefits under the SERP, the
Company owns whole-life insurance contracts on the participants. The cash value
of these policies was approximately $1,605,000 at December 31, 1997. The Company
made cash payments of approximately $787,000 during each of 1997 and 1996,
associated with the policies. These policies have been placed in a rabbi trust
which will hold the policies and death benefits as they are received.
Compensation expense associated with the SERP was approximately $555,000 and
$398,000 for the years ended December 31, 1997 and 1996, respectively.
NOTE 10. CONTINGENCIES
The Company's SGI subsidiary owns a minority interest in Wintech de Colombia
S.A. ("Wintech"), which has operated the Colombian national lottery under
contract with Empresa Colombiana de Recursos para la Salud, S.A. ("Ecosalud"),
an agency of the Colombian government. The contract projected that certain
levels of lottery ticket sales would be attained and provided for a penalty
against Wintech, SGI and the other shareholders of up to $5,000,000 if such
levels were not achieved. In addition, with respect to a further guarantee of
performance under the contract with Ecosalud, SGI delivered to Ecosalud a
$4,000,000 bond issued by a Colombian surety. Wintech started the instant
lottery in Colombia but due to difficulties beyond its control the projected
sales level was not met for the year ending 1993. On July 1, 1993, Ecosalud
adopted resolutions declaring, among other things, that the contract was in
default and asserted various claims for compensation and penalties against
Wintech, SGI and shareholders of Wintech. Litigation is pending in Colombia
concerning various claims among Ecosalud, Wintech and the Company relating to
the termination of the contracts with Ecosalud (the "Colombian Litigation").
Ecosalud's claims in the Colombian Litigation are for, among other things,
realization on the full amount of the penalty plus interest and costs of the
bond.
SGI has consulted with Colombian counsel and has been advised that SGI has
various legal defenses to Ecosalud's claims. SGI also has certain cross
indemnities and undertakings from the two other private shareholders of Wintech
for their respective shares of any liability to Ecosalud. That obligation is
secured in part by a $1,500,000 confirmed letter of credit in favor of SGI. The
Colombian surety which issued a $4,000,000 bond to Ecosalud under the contract
has reportedly paid $2,400,000 to Ecosalud under the bond, and made demand upon
SGI for that amount under the indemnity agreement entered into by the surety and
SGI.
SCIENTIFIC GAMES HOLDINGS CORP.
33
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SGI declined to make or authorize any such payment and notified the surety that
any payment in response to Ecosalud's demand on the bond is at the surety's
risk. No suit by the Colombian surety has been filed to date. No assurance can
be given that the other shareholders of Wintech will, or have sufficient assets
to, honor their indemnity undertakings to SGI when the claims by Ecosalud
against SGI and Wintech are resolved in the event such claims result in any
liability.
In June 1996, Ecosalud filed a complaint against the Company in the United
States District Court for the Northern District of Georgia, Atlanta Division
(the "Georgia Litigation"). Total damages claimed in the original Complaint were
"not less than $84,423,267." The complaint also sought reasonable attorneys'
fees and costs allegedly pursuant to the contract. In response to the Complaint,
SGI filed a motion to dismiss the action on multiple grounds, including the
mandatory arbitration clause contained within the contract. Ecosalud then filed
an "Amended Complaint" in which it withdrew its claim for in excess of
$84,000,000 and, instead, is seeking $5,000,000 under an "Executive Title," a
purported joint and several guarantee by the Company, Wintech and other
shareholders in Wintech that projected levels of lottery ticket sales would be
attained. In addition, Ecosalud also seeks attorneys' fees and interest on the
claim. SGI has filed a motion to dismiss the Amended Complaint on the grounds,
inter alia, that litigation involving the same subject matter is pending in
Colombia, the dispute is subject to an arbitration clause and forum non
conveniens. On March 19, 1997 judgment was entered on behalf of the Company. The
Court dismissed the action on the grounds that it was governed by the
arbitration and forum selecting clauses in the contract which require that all
disputes be settled either by arbitration in Colombia or in the administrative
courts of Colombia. The Court also dismissed the action on the grounds of lis
alibi pendens. On April 16, 1997, the Plaintiff filed a Notice of Appeal. The
United States Court of Appeals for the Eleventh Circuit heard oral argument on
the appeal of the dismissal of the complaint of Ecosalud on January 16, 1998 and
thereafter affirmed the holding of the trial Court. Ecosalud did not seek
reconsideration by the Eleventh Circuit; accordingly, the Georgia Litigation has
been concluded.
SGI intends to vigorously defend the Colombian Litigation and has been
advised by counsel that the Company has numerous defenses on the merits, as well
as procedural defenses to the litigation. Although it is not possible to
determine the outcome of the litigation in Colombia, or the other related surety
and indemnity claims, management believes, based upon, among other things, the
advice of counsel, that the Company has various defenses (which it has asserted
in response to such proceedings and claims), that adequate provision has been
made for such claims and the disposition thereof should not have a material
adverse effect on the Company's consolidated financial condition or consolidated
results of operations.
NOTE 11. GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net revenues:
United States $ 159,706 $ 140,519 $ 149,240
Europe 38,545 6,101 --
Adjustments and
eliminations (795) -- --
- ---------------------------------------------------------------------------------
Total $ 197,456 $ 146,620 $ 149,240
=================================================================================
Operating income:
United States $ 28,513(1) $ 29,532 $ 37,369
Europe (8,135)(2) 19 --
Other income 507 748 18
Net interest income (expense) (557) 764 324
Income tax expense 11,356 12,337 15,283
- ---------------------------------------------------------------------------------
Net income $ 8,972 $ 18,726 $ 22,428
=================================================================================
Identifiable assets (at end
of year):
United States $ 135,090 $ 121,697 $ 110,186
Europe 36,075 14,521 --
Adjustments and
eliminations (6,755) (8,689) --
- ---------------------------------------------------------------------------------
Total $ 164,410 $ 127,529 $ 110,186
=================================================================================
</TABLE>
(1) Includes one-time write-off of $3.4 million.
(2) Includes one-time write-off of $10.1 million.
For the years ended December 31, 1997, 1996 and 1995, aggregate revenues
from lottery agencies and other customers domiciled in foreign countries totaled
SCIENTIFIC GAMES HOLDINGS CORP.
34
<PAGE> 22
- --------------------------------------------------------------------------------
approximately $66,986,000, $31,123,000 and 31,846,000, or 34%, 21% and 21%, of
total revenues, respectively.
During the year ended December 31, 1997, no single customer accounted for
over 10% of the Company's total revenues. During the years ended December 31,
1996 and 1995, one customer in each period comprised approximately 13% of the
Company's total revenues.
Export sales from the United States for the years ended December 31, 1997,
1996 and 1995 were approximately $27,977,000, $22,500,000 and $31,041,000,
respectively.
NOTE 12. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended December 31 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
1997
Revenues $45,612 $ 50,511 $50,669 $50,664
Gross profit 16,963 19,528 17,643 18,604
Income (loss) before taxes 9,237 (4,333) 7,923 7,501
Net income (loss) 5,487 (6,653) 5,030 5,108
- -------------------------------------------------------------------------------------
Net income (loss)
per share - basic $ .45 $ (.55) $ .42 $ .43
=====================================================================================
Net income (loss)
per share - diluted $ .44 $ (.55) $ .41 $ .42
=====================================================================================
1996
Revenues $26,591 $ 37,562 $38,210 $44,257
Gross profit 8,432 15,772 15,458 16,516
Income before taxes 2,519 9,701 9,829 9,014
Net income 1,511 5,809 5,894 5,512
- -------------------------------------------------------------------------------------
Net income
per share - basic $ .12 $ .45 $ .47 $ .46
=====================================================================================
Net income
per share - diluted $ .11 $ .42 $ .45 $ .45
=====================================================================================
</TABLE>
As discussed in Note 3, on April 11, 1997 and on October 1, 1996 the Company
acquired SG Austria and SGIL, respectively. The results of operations of SG
Austria and SGIL are included in the respective quarters from the date of such
acquisitions.
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
SCIENTIFIC GAMES HOLDINGSS CORP.
We have audited the consolidated balance sheets of Scientific Games Holdings
Corp. (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Scientific
Games Holdings Corp. at December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 3, 1998
SCIENTIFIC GAMES HOLDINGS CORP.
35
<PAGE> 1
Exhibit 21.0
Scientific Games Holdings Corp.
Subsidiaries
<TABLE>
<CAPTION>
State/jurisdiction
of incorporation/ Other names under which
Name organization business is conducted
- --------------------------------- ------------------ ------------------------------------
<S> <C> <C>
Scientific Games Inc. Delaware
Scientific Games (Greece), Inc. Delaware
GameTec Inc. Delaware Scientific Games Acquisition, Inc.
Scientific Games Foreign Sales Corporation Barbados
Scientific Games International Limited United Kingdom Formerly known as Opax International Limited
Line of business: instant ticket manufacturer
Number of subsidiaries within US = 0
Number of subsidiaries outside US = 4
Scientific Games Kommunikations - und Austria Formerly known as TeleControl Kommunikations
Computersysteme A.G. und Computersysteme Gesellschaft m.b.h.
Line of business: on-line lottery systems
Number of subsidiaries within US = 0
Number of subsidiaries outside US = 0
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Scientific Games Holdings Corp. of our report dated February 3, 1998,
included in the 1997 Annual Report to Shareholders of Scientific Games Holdings
Corp.
We also consent to the incorporation by reference in the Registration
Statements of Scientific Games Holdings Corp. listed below of our report dated
February 3, 1998, with respect to the consolidated financial statements of
Scientific Games Holdings Corp. incorporated by reference in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
- - Registration Statement No. 33-78322 on Form S-8 dated April 29, 1994 and
related Prospectus.
- - Registration Statement No. 33-78324 on Form S-8 dated April 29, 1994 and
related Prospectus.
- - Registration Statement No. 33-78326 on Form S-8 dated April 29, 1994 and
related Prospectus.
- - Registration Statement No. 33-78328 on Form S-8 dated April 29, 1994 and
related Prospectus.
- - Registration Statement No. 33-78330 on Form S-8 dated April 29, 1994 and
related Prospectus.
- - Registration Statement No. 33-90948 on Form S-8 dated April 5, 1995 and
related Prospectus.
- - Registration Statement No. 33-90950 on Form S-8 dated April 4, 1995 and
related Prospectus.
- - Registration Statement No. 333-3034 on Form S-8 dated April 1, 1996 and
related Prospectus.
- - Registration Statement No. 33-05847 on Form S-8 dated June 12, 1996 and
related Prospectus.
- - Registration Statement No. 333-30637 on Form S-8 dated July 2,1997 and
related Prospectus.
- - Registration Statement No. 333-42833 on Form S-8 dated December 22, 1997
and related Prospectus.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,843
<SECURITIES> 0
<RECEIVABLES> 34,448
<ALLOWANCES> (321)
<INVENTORY> 11,602
<CURRENT-ASSETS> 52,427
<PP&E> 109,214
<DEPRECIATION> (45,464)
<TOTAL-ASSETS> 164,410
<CURRENT-LIABILITIES> 30,458
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 98,115
<TOTAL-LIABILITY-AND-EQUITY> 164,410
<SALES> 197,456
<TOTAL-REVENUES> 197,456
<CGS> 124,718
<TOTAL-COSTS> 124,718
<OTHER-EXPENSES> 25,653
<LOSS-PROVISION> 109
<INTEREST-EXPENSE> 911
<INCOME-PRETAX> 20,328<F1>
<INCOME-TAX> 11,356
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,972
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.72
<FN>
<F1>Income-Pretax includes two one-time write-offs
totaling 13,478.
</FN>
</TABLE>
