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<SEC-DOCUMENT>0000912057-01-003265.txt : 20010130
<SEC-HEADER>0000912057-01-003265.hdr.sgml : 20010130
ACCESSION NUMBER: 0000912057-01-003265
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20001031
FILED AS OF DATE: 20010129
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOTOTE CORP
CENTRAL INDEX KEY: 0000750004
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990]
IRS NUMBER: 810422894
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-11693
FILM NUMBER: 1518222
BUSINESS ADDRESS:
STREET 1: 750 LEXINGTON AVE
CITY: NEW YORK
STATE: NY
ZIP: 10022
BUSINESS PHONE: 3027374300
MAIL ADDRESS:
STREET 1: 750 LEXINGTON AVE
CITY: NEW YORK
STATE: NY
ZIP: 10022
FORMER COMPANY:
FORMER CONFORMED NAME: UNITED TOTE INC
DATE OF NAME CHANGE: 19920317
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>a2036456z10-k.txt
<DESCRIPTION>10-K
<TEXT>
<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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: OCTOBER 31, 2000,
OR
/ / 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: 0-13063
AUTOTOTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 81-0422894
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (212) 754-2233
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- -------------------------------
REGISTERED
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<S> <C>
Class A Common Stock, $.01 par value American Stock Exchange
</TABLE>
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 Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of January 25, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $136,530,369.
Common shares outstanding as of January 25, 2001 were 40,155,991.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated herein by reference:
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<CAPTION>
DOCUMENT PARTS INTO WHICH INCORPORATED
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<S> <C>
Proxy Statement for the Company's 2001 Annual Part III
Meeting of Stockholders
</TABLE>
EXHIBIT INDEX APPEARS ON PAGE 86
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<PAGE>
PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K we make "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Forward-looking statements include the
words "may," "will," "estimate," "intend," "continue," "believe," "except" or
"anticipate" and other similar words. The forward-looking statements contained
in this Annual Report are generally located in the material set forth under the
headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," but may be found in other locations as
well. These forward-looking statements generally relate to plans and objectives
for future operations and are based upon management's reasonable estimates of
future results or trends. Although we believe that the plans and objectives
reflected in or suggested by such forward-looking statements are reasonable,
such plans or objectives may not be achieved. Actual results may differ from
projected results due, but not limited, to unforeseen developments, including
developments relating to the following:
o the availability and adequacy of our cash flow to satisfy our obligations,
including our debt service obligations and our need for additional funds
required to support capital improvements and development;
o economic, competitive, demographic, business and other conditions in
our local and regional markets;
o changes or developments in the laws, regulations or taxes in the gaming
and lottery industries;
o actions taken or omitted to be taken by third parties, including
customers, suppliers, competitors, members and shareholders, as well as
legislative, regulatory, judicial and other governmental authorities;
o changes in business strategy, capital improvements, development plans,
including those due to environmental remediation concerns, or changes in
personnel or their compensation, including federal, state and local
minimum wage requirements; and
o the loss of any license or permit, including the failure to obtain an
unconditional renewal of a required gaming license on a timely basis.
Actual future results may be materially different from what we expect. We
will not update forward-looking statements even though our situation may change
in the future.
ITEM 1. BUSINESS
OVERVIEW
As a result of Autotote's acquisition of Scientific Games Holdings Corp.
("Scientific Games") on September 6, 2000, we are the largest provider of
services, systems and products to both the pari-mutuel gaming and instant ticket
lottery industries, and we believe we are the only fully integrated lottery
service provider in the world. We believe that we offer the broadest and most
technologically advanced array of products and services in these industries and
that we are the market leader in creating innovative pari-mutuel wagering and
lottery products. Our lottery group is the leading provider of instant lottery
tickets and related services, accounting for approximately 68% of all retail
sales of instant lottery tickets in the United States in 1999. Our lottery group
also supplies technologically advanced on-line lottery systems and instant
ticket validation equipment to lotteries in the U.S. and internationally. Our
pari-mutuel group is the leading provider of pari-mutuel wagering systems
worldwide and has an approximate 65% share of the estimated $20.0 billion of
North American racing industry wagers, or "Handle." Our venue management group,
utilizing our pari-mutuel business expertise, owns or operates off-track betting
venues or "OTBs" in Connecticut, The Netherlands and Germany, from which we earn
a significantly higher percentage of the Handle than we earn by providing
services to third-party operators. Finally, our telecommunications products
group leverages our superior lottery technology to create highly secure,
paper-based, prepaid phone cards for the rapidly growing international cellular
telephone markets.
On September 6, 2000, Autotote completed the acquisition of Scientific
Games, a world leading supplier of lottery products, integrated lottery systems
and support services, and prepaid telephone cards. This acquisition combines
Autotote's pari-mutuel wagering, venue management and on-line lottery businesses
with Scientific
2
<PAGE>
Games' complementary instant lottery ticket and related services, on-line
lottery and instant ticket validation, and rapidly growing prepaid phone card
businesses. The acquisition was completed through a merger in which Scientific
Games became a wholly-owned subsidiary of Autotote at a cost of approximately
$308 million in aggregate merger consideration to Scientific Games stockholders,
plus related fees and expenses. The acquisition has been recorded using the
purchase method of accounting, and the acquired assets and liabilities have been
recorded at their estimated fair value at the date of acquisition and the
operating results of Scientific Games businesses have been included in the
consolidated statements of operations from the date of the acquisition.
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both Autotote and Scientific Games, along with the payment of
related fees and expenses, was completed with funds provided by: (1) proceeds
from the issuance of $150.0 million principal amount of our series A notes; (2)
$280.0 million of term loan borrowings under our new senior credit facilities;
(3) $2.98 million of borrowings under the revolving credit facility of our new
senior credit facilities; (4) $4.805 million of cash on hand; and (5) $110.0
million of gross proceeds from the sale of new convertible preferred stock,
principally to an affiliated entity of Olivetti S.p.A.
We filed a registration statement on Form S-4 under the Securities Act of
1933, as amended, with the Securities Exchange Commission with respect to an
offer to exchange up to $150.0 million of new 12 1/2% Senior Subordinated
Notes due 2010, Seires B, for any and all of our outstanding 12 1/2% Senior
Subordinated Notes due 2010, Series A. The terms of the Series B notes are
substantially identical to the Series A notes, except for certain transfer
restrictions and registration rights relating to the Series A notes. That
registration statement was declared effective by the Securities Exchange
Commission on January 2, 2001 and we subsequently commenced the exchange
offer, which is scheduled to expire on February 7, 2001, unless extended.
With the combined operations of Autotote and Scientific Games, we are
engaged primarily in the following businesses:
o LOTTERY GROUP (55% of Pro-forma Revenues). We believe that we are the
world's only fully integrated service provider for both on-line and
instant ticket lotteries, the two principal types of lottery games. Our
instant ticket and related services business is the industry leader,
with approximately 68% of all retail sales in the U.S. instant ticket
market. Our instant ticket customers include 26 of the 39 U.S.
jurisdictions where lotteries are authorized as well as lotteries in
over 50 other countries. In addition to ticket design and
manufacturing, we provide lotteries with related value-added services
through our branded Cooperative Services Program, including game
design, sales and marketing support, inventory management and
warehousing and fulfillment services. We have recently introduced our
probability instant lottery tickets, which permit every ticket to have
the potential to become a winner based on the choices made by the
player, and probability ticket validation terminals based on our
proprietary security technology. We believe that these innovative
products will allow lotteries to increase retail sales of instant
tickets while enabling us to generate higher revenues and margins from
tickets, terminals and systems. Our instant ticket contracts generally
run for one to five years and frequently include renewal options. We
typically collect either a fixed fee per thousand instant tickets or a
percentage of the instant ticket retail sales of the lottery customer,
depending on the nature of the contract and the extent of the
cooperative services we provide. Instant tickets and related services
accounted for approximately 85% of the pro forma revenue of our Lottery
Group.
Our lottery systems business primarily provides sophisticated,
customized computer software, equipment (including state-of-the-art
lottery terminals) and data communication services to lotteries for
on-line and instant ticket games. To U.S.-based lotteries, we typically
provide the necessary equipment, software and maintenance services
pursuant to five to seven year contracts, under which we are generally
paid a percentage of retail sales. Our U.S. systems contracts
frequently include renewal options that have generally been exercised
by our customers. Internationally, we typically sell terminals and
systems to lotteries outright and provide ongoing fee-based software
support under long-term contracts. We have agreements to provide
systems and services to 10 states in the United States and to lotteries
in 24 countries internationally.
We have recently been selected by the Iowa Lottery to provide a 7-year
on-line lottery contract, beginning on July 1, 2001, with an estimated
$40.0 million of potential revenue generated over the life of the
contract. We also have been selected by the Maine State Lottery to
provide instant tickets and an on-line lottery system, beginning July
2001, with an estimated $45.0 million of potential revenue generated
over the six-year life of the contract. In January 2001, the British
Columbia
3
<PAGE>
Lottery Corporation announced that it had chosen
us to upgrade its lottery central gaming system. The arrangement is
expected to provide revenues of approximately $8.0 million. In
addition, in January 2001, the Jamaica Lottery Company Limited
announced that it has chosen us to supply terminals, central system and
support services for five years. When finalized, the arrangement will
have the potential to generate revenues of $10.9 million and may
include three two-year renewals.
o PARI-MUTUEL GROUP (23% of Pro-forma Revenues). We are the leading
worldwide supplier of technologically advanced computerized wagering
systems and related equipment. We provide technology, software,
equipment and services for pari-mutuel wagering conducted at
thoroughbred, harness and greyhound racetracks and OTBs worldwide. We
have approximately 65% of the market for pari-mutuel services in North
America based on total Handle, and have benefited from the growth in
remote wagering over the past ten years in the markets we serve. We
also provide simulcasting and telecommunications services, video gaming
terminals, and telephone and Internet account wagering. Based on
Handle, our customers include 10 of the 15 largest thoroughbred
racetracks in North America and 10 of the 12 largest North American OTB
networks, among the more than 800 OTBs we service. We typically
provide, install and maintain the necessary pari-mutuel systems and
equipment for these customers pursuant to five-year contracts under
which we receive a weighted average of approximately 0.35% of the
Handle wagered.
o VENUE MANAGEMENT GROUP (14% of Pro-forma Revenues). We own and, subject
to our compliance with certain licensing requirements, have the right
to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our operations include 12 stand-alone OTBs
state-wide, including two simulcasting teletheaters and three
simulcasting raceview centers, and telephone account wagering to
customers in 31 states. We are also the exclusive licensed operator for
all pari-mutuel wagering in The Netherlands, with five racetracks and
39 OTBs under a contract with an initial term continuing through June
2003. In addition, we are a 50% participant in a joint venture to
operate up to approximately 2,500 OTBs in Germany. Our revenues are
based on a percentage of the Handle wagered at our OTB venues, which
ranges from 20% to 32%. We also provide facilities management services
to the Mohegan Sun Casino racebook.
o TELECOMMUNICATIONS PRODUCTS GROUP (8% of Pro-forma Revenues). In Europe
we are a leading manufacturer of prepaid scratch-off phone cards, which
entitle cellular phone users to a defined value of airtime. In 1999,
approximately 47% of all European cellular phone subscribers used
prepaid calling services. While less common in the U.S., prepaid phone
cards offer consumers worldwide a cost-effective way to purchase
cellular airtime while avoiding credit checks, connection fees and
contract commitments. We estimate that we have approximately 14% of the
fragmented European market for prepaid cellular phone cards and are the
largest supplier to Vodafone Limited and Orange Personal
Communications, two of Europe's leading cellular companies. To prevent
fraud, our phone cards incorporate proprietary security technology
originally developed for our lottery ticket operations. We have
invested approximately $22.0 million in the past two years in our U.K.
operations, to modernize our facilities and increase our annual prepaid
phone card manufacturing capacity from 120 million cards in early 1999
to an estimated one billion cards by early 2001.
For information concerning the Company's business and geographic segments,
see Note 20 to the Consolidated Financial Statements.
On December 20, 2000, we determined to change our fiscal year from the year
ending October 31 to a calendar year, beginning with the year ending December
31, 2001. This change will result in a two month transition period ending
December 31, 2000, with the next fiscal year commencing on January 1, 2001. We
expect to file with the SEC a transition report on Form 10-Q covering the
transition period from November 1, 2000 to December 31, 2000.
4
<PAGE>
INDUSTRY OVERVIEW
LOTTERY MARKET. 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 and
on-line lottery tickets. 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 lottery games worldwide, governmentally
authorized lotteries may generally be categorized into three principal groups:
instant lotteries, on-line lotteries and the traditional draw-type lotteries. An
instant ticket lottery is typically played by removing a coating from a
preprinted ticket to determine whether it is a winner. On-line lotteries, such
as Powerball, are based on a random selection of a series of numbers selected by
the player. On-line lotteries are generally pari-mutuel in nature in that the
prize is based on Handle and the number of winners who share the prize pool,
comprised of Handle less a predefined commission (although fixed prizes are also
offered). On-line lotteries are conducted through a computerized lottery system
in which lottery terminals are connected to a central computer, usually by
dedicated telephone lines. On-line lottery systems may also be used to validate
instant tickets to confirm large prize levels and prevent duplicate payments, or
separate instant ticket validation systems may be installed. 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 a popular form of play. In addition, lotteries may offer keno, video
lottery, sports and other lottery games. Quick draw keno is typically played
every 5 minutes in restricted social settings such as bars and is usually
offered as an extension of on-line lottery systems. There are video lotteries
played on video lottery terminals ("VLTs") featuring "line-up" and card games,
typically targeted to locations such as horse and dog racing tracks, athletic
arenas, certain bars, clubs and similar establishments. Video lotteries
generally use a system different from an on-line system for accounting, security
and control of VLTs. In addition, in Oregon, several provinces in Canada and
several countries outside the U.S., lotteries offer pari-mutuel or fixed odds
wagers on various sports.
Instant and on-line lottery retail sales comprise 92.7% of the U.S. market
for lotteries. Based on industry information, it is estimated that 1999 U.S. and
international on-line lottery retail sales totaled approximately $19.0 billion
and $56.6 billion, respectively, and 1999 U.S. and international instant ticket
lottery sales totaled approximately $14.8 billion and $27.5 billion,
respectively. The U.S. instant ticket market grew at a compound annual growth
rate of 8.2% from 1994 to 1999. Industry data indicates that instant ticket
retail sales have been growing faster than on-line games because of "instant"
rewards, marketing promotions and game interactivity compared to the delayed
rewards of on-line games with periodic or weekly drawings.
PARI-MUTUEL MARKET. Pari-mutuel wagering is currently authorized in 43
states in the United States, Puerto Rico, all provinces in Canada and
approximately 100 other countries around the world. We estimate that total
worldwide Handle in the pari-mutuel business was approximately $116.0 billion in
1999. According to the most recent industry statistics, pari-mutuel thoroughbred
wagering Handle in the United States grew from $9.9 billion in 1994 to $13.7
billion in 1999, a compound annual growth rate of 6.7%.
Similar to on-line lotteries, pari-mutuel wagering patrons place specific
types of wagers (e.g., on a specified horse to win) and a patron's winnings are
"pari-mutuelly" determined based on dividing the total Handle wagered, less a
set commission, among the winners. Wagering is generally conducted at horse
racetracks, greyhound dog races, jai alai frontons and OTBs. Licenses to conduct
races and/or offer pari-mutuel wagering are granted by governments to private
enterprises, non-profit racing associations and occasionally government
organizations including lotteries.
The increases in remote Handle (i.e. Handle generated where customers place
wagers on location at one racetrack or OTB on races held at another racetrack)
have more than offset declines in live Handle (i.e., Handle at the race or event
itself). Remote wagering has increased its share of total Handle from 15% in
1986 to 83% of the U.S. thoroughbred pari-mutuel racing industry Handle in 1999.
The dollar volume of remote wagering in North America on thoroughbred racing has
grown from $5.4 billion in 1993 to $11.8 billion in 1999, a compound annual
growth rate of nearly 13.5%. A number of factors have led to this increase,
including simulcasting of live races on private satellite video networks, public
broadcasting and Internet video streaming, changes in pari-mutuel wagering
regulations enabling simulcasting and the expansion of distribution channels
including wagering at OTBs and by
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telephone and other interactive devices including personal computers. Remote
wagering has resulted in increased Handle by facilitating virtually around the
clock wagering availability, year-round racing events upon which to wager
(previously impracticable because of the seasonal nature of regional racing
activity) as well as the consolidation of "live" racing.
PREPAID PHONE CARDS MARKET. Prepaid phone cards offer consumers convenient
and less expensive cellular airtime purchases without credit checks, connection
fees or contract commitments. While less common in the U.S., prepaid phone cards
offer consumers worldwide a cost-effective way to purchase cellular airtime
while avoiding credit checks, connection fees and contract commitments.
OPERATIONAL OVERVIEW
LOTTERY GROUP
Our Lottery Group provides two product lines: Instant Tickets and Related
Services ("ITRS") and Lottery Systems. Our Cooperative Services Program is the
branded marketing name we have given to the combination of any of the products
and services offered by both the Instant Ticket and Related Services and the
Lottery Systems product lines when bundled under one customer contract.
INSTANT TICKETS AND RELATED SERVICES. We are a leading provider of game
design, instant ticket manufacturing and the associated logistics and marketing
of instant tickets. We market instant tickets and related services to domestic
lottery jurisdictions, foreign lottery jurisdictions and commercial customers.
We presently have contracts with 26 of the 39 jurisdictions in the U.S. which
currently sell instant lottery tickets. These U.S. Instant Ticket and Related
Services contracts typically pay us a fixed price per thousand tickets or a
percentage of lottery sales to the public and typically range from one to five
years in duration, although they usually include one or more extension options
which our customers generally exercise. Our U.S. based customers have typically
exercised these extension options. In addition, we have instant lottery
customers in over 50 countries internationally. In most international markets,
lotteries typically purchase tickets and systems in an unbundled fashion. Of the
approximately 8.4 billion instant tickets (12.3 billion 2x4 equivalent card
size) we sold in 1999, approximately 20% were sold outside the United States.
Some international customers purchase instant tickets as needed rather than
through supply contracts. Central computer systems, terminals and associated
software are typically purchased in the U.S. through facilities management
contracts and internationally through outright sales, often from different
vendors.
In 1974, we introduced the first secure instant game ticket. Today, the
instant tickets we manufacture are typically printed on recyclable ticket stock
by a series of computer controlled presses and ink-jet imagers, which we believe
incorporate the most advanced technology and security currently available in the
industry. Instant tickets generally 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 increased application of computer-based and communications technologies
(including proprietary technologies) to the manufacturing and servicing of
instant tickets continues to separate the instant ticket from conventional forms
of printing. We are 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 our position as a leading innovator within the
lottery industry, we intend to continue to explore and develop new technologies
and their application to instant lottery tickets and systems. However, we also
expect continued price-based competition in the instant ticket segment.
We also manufacture instant tickets for promotional games and sell pull-tab
tickets to our lottery customers through a marketing agreement with
International Gamco, Inc.
In addition, we pioneered the idea of privatizing lottery functions, branded
as the Cooperative Services Program, as a means of reducing the operating costs
of lotteries while increasing lottery revenues and are the only instant ticket
manufacturer which offers separate lottery ticket cooperative support services
to supplement its manufacturing operations. Cooperative service contracts bundle
instant tickets, systems facilities management and/or other cooperative
services, including designing and installing game management software,
telemarketing, field sales, accounting, instant ticket distribution, sales staff
training, estimating ticket needs, managing staff, advising with respect to
security, maintenance, communication network and sales agent hot-line service
for lottery jurisdictions. While the majority of lottery jurisdictions to date
have chosen to control the distribution and sales of tickets, we have been
successful in demonstrating to a number of jurisdictions that we can perform
these functions
6
<PAGE>
effectively and at a low cost. We expect that more state or foreign governments
will decide to privatize or outsource various lottery operations. We have
significant experience in these services for lotteries and pari-mutuel
operations and are well-positioned to offer this privatization or outsourcing
option to lotteries.
We now have contracts for expanded or cooperative services with the states
of Delaware, Florida, Georgia, Kentucky, Maine, Nebraska, New York, and
Pennsylvania. Under such contracts, we are paid a percentage of the lottery's
total instant ticket revenues. Customers select those services which they desire
to privatize from a menu of cooperative services offered. Replacement of these
agreements may be associated with large conversion costs incurred by the lottery
to hire and/or retrain staff and redesign and install a software system and
other protocols to manage its instant ticket business.
LOTTERY SYSTEMS. We are a leading provider of sophisticated, customized
computer software, equipment and data communication services to
government-sponsored and privately operated lotteries in the United States and
internationally. This business includes the sale of on-line systems, instant
ticket validation systems and terminals. Our lottery systems utilize proprietary
technology that is similar to that used for pari-mutuel wagering, but is
specialized for lottery operations. Our systems facilitate high speed processing
of on-line wagers as well as validation of winning on-line and instant play
tickets, including probability tickets. Our lottery business includes the supply
of transaction processing software that accommodates instant ticket accounting
and validation and on-line lottery games, point-of-sale terminal hardware which
connects to these systems, central site computers and communication hardware
which run these systems, and on-going operation support and maintenance
services. We also provide software, hardware and support for sports betting and
credit card processing systems for non-lottery customers.
In the U.S., we currently provide on-line systems and services to the
Connecticut, Montana, Vermont and New Hampshire state lotteries. We also
provide instant ticket validation systems to Nebraska, Maine, New York,
Missouri and Kentucky. Virginia leased our SciScan Technology(R) terminals,
including ongoing technical support. Recent on-line lottery system
procurements have requested the capability to support the secure validation
of probability tickets and we have both bid our on-line systems with SciScan
Technology's(R) terminals and bid SciScan Technology's(R) terminals through
other on-line lottery system providers.
Internationally, we have systems in France, The Netherlands, Switzerland,
Spain, Greece, Australia, Canada, Mexico, nine states in Germany and other
countries, and provide on-line system facilities management services to
nationwide lotteries in Barbados and the Dominican Republic.
We have recently been selected to provide on-line services to Iowa, Maine
and Jamaica lotteries and to provide an on-line lottery central system to the
British Columbia lottery.
We also sell standalone terminals for lottery applications. This includes
the EXTREMA(TM) on-line lottery terminals and our SciScan Technology(R)
terminals. Our EXTREMA(TM) on-line terminals utilize a standard PC
architecture, graphical interface touch screens for teller input without a
keyboard and high speed thermal printers. Beginning in the fourth quarter of
1998 and throughout fiscal 1999, we shipped approximately 12,500 terminals to
Sisal Sport Italia S.p.A. pursuant to a contract to deliver a total of 20,000
EXTREMA(TM) lottery terminals by August 2000. SciScan Technologys(R) is a
keyless validation system for retailers which significantly reduces the time
required for ticket validation while at the same time improving security of
the game. SciScan Technologys(R) terminals can be operated standalone or
attached to an on-line lottery terminal to validate traditional instant
tickets utilizing optical bar code technology, or our proprietary Winner's
Choice(TM) probability tickets. Through our joint venture agreement with La
Francaise des Jeux, the operator of the French National Lottery, we are
developing a new generation of integrated on-line terminals with SciScan
Technologys(R).
7
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UNITED STATES LOTTERY CONTRACTS
The table below lists the United States lottery contracts for which we had
executed agreements as of January 26, 2001 and certain information with respect
thereto. We are the primary provider of systems and services unless otherwise
noted. The table also includes 1999 instant ticket or on-line retail sales, as
applicable, for each state or district.
<TABLE>
<CAPTION>
1999 INSTANT
TICKET/
ON-LINE RETAIL COMMENCEMENT EXPIRATION DATE
SALES DATE OF OF
(DOLLARS CURRENT CURRENT CURRENT RENEWAL TYPE OF
STATE/DISTRICT IN MILLIONS) CONTRACT CONTRACT OPTIONS REMAINING CONTRACT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona........ $125.0 January 1998 January 2001 2 one-year ITRS
Colorado....... 240.4 July 2000 June 2004 1 one-year ITRS
Connecticut.... 503.3 August 1998 August 2001 1 one-year ITRS
Connecticut.... 326.9 May 1998 May 2003 5 one-year On-line
Delaware....... 19.7 November 2000 November 2001 3 one-year ITRS
District of
Columbia..... 31.5 May 1996 May 2001 none ITRS
Florida........ 664.6 April 1997 September 2002 none ITRS
Georgia........ 900.7 May 1993 June 2003 none ITRS
Idaho.......... 56.9 October 1999 October 2001 2 one-year ITRS (1)
Iowa........... 93.1 January 2001 June 2008 3 one-year on-line
Illinois....... 549.4 July 1996 June 2001 1 one-year ITRS
Indiana........ 337.1 December 1997 December 2001 none ITRS
Kentucky....... 252.4 October 1997 September 2002 none ITRS and Systems
Maine (4)...... 39.0 July 2001 June 2007 2 two-year ITRS and On-line
Maine.......... 107.7 July 1990 June 2001 none ITRS and Systems
Massachusetts.. 2,305.4 August 1999 August 2001 3 one-year ITRS
Minnesota...... 280.0 February 2000 January 2002 3 one-year ITRS (1)
Missouri....... 259.6 July 1993 June 2001 none ITRS
Montana........ 19.6 March 1999 May 2006 none On-line
Nebraska....... 36.1 July 1993 June 2001 none ITRS and Systems
New Hampshire.. 62.8 July 2000 June 2006 2 two-year On-line
New Jersey..... 547.1 November 1996 October 2001 none ITRS
New Mexico..... 58.2 March 1997 March 2001 2 one-year ITRS (1)
New York(3).... 937.5 July 1996 July 2001 none ITRS
New York(3).... 2,634.0 January 2000 March 2002 none ITRS and Systems
Oregon......... 143.7 June 1998 June 2001 3 one-year ITRS (1)
Pennsylvania... 457.0 April 1997 April 2002 5 one-year ITRS
Rhode Island... 59.5 April 1998 April 2001 2 one-year ITRS (1)
South Dakota... 13.1 June 2000 June 2003 2 one-year ITRS
Texas.......... 1,426.0 September 1999 September 2002 none ITRS
Vermont........ 13.7 July 2000 June 2006 2 two-year On-line
Virginia....... 576.7 January 1997 July 2002 1 three- or five-year Systems(2)
Washington..... 261.3 March 2000 March 2003 3 one-year ITRS
W. Virginia.... 77.0 June 2000 June 2003 2 one-year ITRS
</TABLE>
(1) Secondary supplier
(2) Support of previously sold lottery system; fee not based on Handle
(3) There are separate contracts for the supply of instant tickets and the
supply of warehousing, distribution, telemarketing and systems.
(4) Contract awarded but not executed.
ITRS = Instant Ticket and Related Services
Systems = Instant ticket validation systems
8
<PAGE>
PARI-MUTUEL GROUP
We are the leading worldwide supplier of technologically advanced
computerized wagering systems and related equipment. We also provide
simulcasting and telecommunications services, video gaming terminals and
telephone and Internet account wagering.
NORTH AMERICAN PARI-MUTUEL OPERATIONS. We processed approximately 65% of the
estimated $20 billion of pari-mutuel wagering Handle in North America during
1999, and have benefited from the growth in remote wagering over the past ten
years in the markets we serve. Based on Handle, our customers include 10 of the
15 largest thoroughbred racetracks in North America and 10 of the 12 largest
North American OTB networks, among the more than 800 OTBs we service. We
typically provide, install and maintain the necessary pari-mutuel systems and
equipment for our customers.
The pari-mutuel wagering systems we provide in North America typically
include the terminals that issue the wagering tickets, the central processing
unit which calculates the betting odds of a particular event and tabulates and
accounts for the Handle, the display board which indicates the betting odds of a
particular event and the communication equipment necessary for additional
wagering from sources outside the wagering facility. These systems utilize high
volume, real-time transaction and data processing networks managed by central
computers, communications equipment, special purpose microcomputer-based
terminals, peripheral and display equipment and operations and applications
software. The type of central processing unit and the number of ticket-issuing
terminals used in a system are generally determined by physical layout and
amount of wagering at, each facility. We also provide additional software and
other support functions.
In recent years, we have focused on the creation of regional networks of
large and medium sized racetracks and OTB networks, rather than single
facilities at smaller racetracks. These networks allow achievement of economies
of scale by centralizing our computer system operations into hubs. Additionally,
when linked to our other regional and national pari-mutuel wagering networks,
these networks provide our customers with access to new markets and revenue
sources by increasing the number and variety of wagering opportunities that
customers can offer to their patrons. We believe our established wagering
networks will give us a competitive advantage in renewing existing contracts and
winning new contracts in regions where such networks exist because of our
ability to offer customers greater services more efficiently than our
competitors. We currently operate regional pari-mutuel wagering networks in
California, Connecticut, Florida, Illinois, New Jersey, New York, Oregon,
Pennsylvania, Texas, Washington, West Virginia, Puerto Rico, British Columbia
and Ontario.
Our pari-mutuel wagering system contracts typically run five years and
contain certain warranties regarding implementation, operation, performance, and
reliability of our wagering systems relating to, among other things, data
accuracy, repairs and validation procedures. The particulars of our warranties
vary from contract to contract, depending on the outcome of negotiations. We
also provide the operations, maintenance and supervisory personnel necessary to
operate the pari-mutuel wagering system. We maintain ownership of the
pari-mutuel wagering systems, which enables us to employ such equipment in more
than one racetrack at different times during the year if a given customer does
not operate wagering all year long.
We typically receive revenue for our services in North America as a varying
percentage of Handle, generally ranging up to approximately 0.55% of the Handle
on a particular event (with a weighted average of approximately 0.31% of the
Handle), subject, in many instances, to minimum fees which are usually exceeded
under normal operating conditions. Minimum fees under our service contracts are
generally based on the number of days the facility operates, as well as other
factors, including the type of system and number of terminals installed at the
facility. In addition to the Handle-based fees and minimums, fees for extra
equipment and services may be charged, particularly for new terminal models and
equipment levels which exceed those originally contracted.
As part of our Handle-based fees, we may also receive an "interface fee" of
0.125% of Handle for combining these wagers into the "combined pools" of host
tracks that we operate. This interface fee is collected from all tracks and OTBs
that bet into host tracks, regardless whether we or another vendor provides
wagering services for on-track wagering. We hold contracts with most of the
U.S.'s premier thoroughbred venues which typically attract the greatest levels
of simulcast and remote wagering, and therefore generate the highest interface
revenues.
INTERNATIONAL PARI-MUTUEL OPERATIONS. In Europe, we provide and operate
pari-mutuel wagering systems at all of the racetracks in Germany, Ireland, The
Netherlands, Turkey and Austria, as well as all of the OTBs in The
9
<PAGE>
Netherlands and Germany. In France, we provide these systems and services to
approximately 30% of the racetracks in the provinces. Our high volume, real-time
data processing systems are comparable to those deployed in North America, and
include computer software, ticket terminals, a central processing unit, display
boards and communication equipment. Our European services are provided under
long-term contracts of five to ten years.
In Germany, we have been providing pari-mutuel wagering systems and services
to the nine major harness racetracks since 1994, and simulcasting services since
January 1998. In September 1999, we began providing both pari-mutuel and
simulcasting services to the 16 major thoroughbred racetracks, approximately 50
OTBs and approximately 120 bookmaker shops as a result of our acquisition of
selected pari-mutuel assets of Datasport Toto Dienstleistung GmbH & Co KG. In
April 1999 we sold a pari-mutuel wagering system and began to provide ongoing
maintenance and operating services for the next 10 years to Tote Ireland Ltd., a
wholly-owned subsidiary of the Irish Horseracing Authority. In Turkey, we have
been providing a pari-mutuel system and associated maintenance services since
1995 for five racetracks and approximately 1,250 OTBs.
In other international markets, we generally sell, deliver and install
pari-mutuel wagering systems in racetracks and OTBs rather than operating them
pursuant to service contracts. We have sold systems in approximately 25
countries. Each of these systems is customized to meet the unique needs of each
customer, including game designs, regulatory requirements, language preferences,
network communication standards and other key elements. The sale of a
pari-mutuel wagering system includes a license for use of our proprietary system
software, as well as installation, training, technical assistance, support,
accessories and limited spare parts.
OTHER PARI-MUTUEL OPERATIONS:
o SIMULCASTING. We are one of the leading providers of simulcasts of live
horse and greyhound racing and jai alai events to racing facilities,
OTBs and casinos in North America and Europe. We simulcast racing
events from over 60 racetracks and jai alai frontons to more than 200
racetracks and more than 1,100 OTBs throughout North America. We
provide similar services in Europe, particularly in The Netherlands and
Germany, where we service all 29 racetracks and more than 250 OTBs and
bookmaker shops.
In general, we receive a daily event fee from the racetracks for
up-linking the video and audio signals and a monthly fee from
racetracks, OTBs and casinos for the use of our decoders which are
needed to unscramble the simulcast transmission. In addition, we sell
any excess satellite transponder capacity to other users of satellite
communications outside the racing industry, generally for short
periods, but, from time to time, under long-term contracts.
o NASRIN(TM). In conjunction with our 70% interest in a joint venture
with Churchill Downs, we operate a national voice/data
telecommunications network, known as the North American Simulcast
Racing Information Network ("NASRIN(TM)"), that serves more than 50
racetracks. In 1997, Autotote was selected by the Thoroughbred Racing
Association to implement this telecommunication system in partnership
with AT&T, our primary telecommunications service provider. The system
is designed to link all racing and simulcasting locations in North
America and to be a platform for future technology developments. Built
around AT&T's international frame relay network, NASRIN(TM) securely
transmits betting data at a fraction of the cost previously paid by the
racetracks and other facilities, allowing racetracks and OTBs to expand
their simulcast wagering opportunities. In exchange for our services,
we are paid certain fees based on bandwidth and level of service.
o VIDEO GAMING MACHINES. We have developed a proprietary line of
progressive video gaming machines for use at racetracks in North
America, which combine full gaming functionality, such as video poker,
blackjack, simulated spinning reels and keno, with full race betting
functionality, including picture-in-picture capabilities. As a result,
our video gaming machines allow patrons to wager on horse races and
watch simulcasted races or other televised programs on a
picture-in-picture video window, while continuing to wager on selected
video games. We typically collect a flat fee per terminal plus fees for
software upgrades and maintenance.
VENUE MANAGEMENT GROUP
Subject to certain licensing and operational requirements, we own and have
the right to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our operations include 12 stand-alone OTBs state-
10
<PAGE>
wide, including two simulcasting teletheaters and three simulcasting raceview
centers, and telephone account wagering to customers in 31 states. We are also
the exclusive licensed operator for all pari-mutuel wagering in The Netherlands,
with five racetracks and 39 OTBs under a contract whose initial term continues
through June 2003. In addition, we are a 50% participant in a joint venture to
operate up to 2,500 OTBs in Germany. Our revenues are based on a percentage of
the Handle wagered at our OTB venues, which ranges from 20% to 32%. We also
provide facilities management services to the Mohegan Sun Casino racebook.
In Connecticut, approximately $214.0 million was wagered in fiscal 1999 on
more than 60 U.S. based thoroughbred, harness and greyhound racetracks and jai
alai frontons at or through our facilities. Since we commenced operations in
1993, we have implemented several important product and service enhancements,
including expanded simulcasting from across the country, common-pool wagering,
seven day per week operations at nine locations and expanded telephone betting.
In addition, our teletheaters and raceview centers feature large screen
televisions and numerous other televisions throughout the facility to enhance
the customer's entertainment experience. In September 1998, we began providing
an extension of our OTB services, including pari-mutuel wagering and
simulcasting services, to the Mohegan Tribal Gaming Authority for its new
racebook located at the Mohegan Sun Casino in Uncasville, Connecticut under a
seven-year agreement. We believe this racebook is a state-of-the-art facility
which incorporates the latest wagering technology and the most advanced audio
and video simulcasting signals. Since our license permits us to add an
additional teletheater location to our operations, we have undertaken to explore
new and upgraded site locations around the state.
Our revenues are based on an allowed percentage of Handle wagered through
the Connecticut OTB. The percentage of the total Handle, or commission, which we
may receive is determined by the track where the event is held and varies by
type of wager. Our weighted average commission, based on Handle is approximately
22%.
In July 1998, we acquired the rights to and began operating, all on-track
and off-track pari-mutuel wagering in The Netherlands under a license granted by
the Dutch Ministry of Agriculture which extends through June 30, 2003. We
received additional license approvals to allow us to modernize and expand
pari-mutuel wagering in The Netherlands. These approvals allow us to open up to
10 teletheaters, increase the number of OTBs, expand into arcade shops,
implement interactive account wagering, and expand national and international
simulcasting of racing.
In fiscal 1999, approximately $42 million was wagered in The Netherlands
primarily on racing from The Netherlands, UK, and Germany. This is the first
year since 1991 that Handle in The Netherlands has increased over the
previous year. This improvement was possible because, in fiscal 1999, we
provided simulcasting of Dutch racing to all of the OTBs throughout the
entire year, and, in August 1999, we added simulcasting of French racing. We
currently operate 33 OTB locations countrywide, including three sports cafes,
and four on-track OTBs, as well as four on-track wagering systems. Our
weighted average commission, based on Handle, for our Dutch operations is
approximately 32%.
TELECOMMUNICATIONS PRODUCTS GROUP
In Europe we are a leading manufacturer of prepaid scratch-off phone cards,
which entitle cellular phone users to a defined value of airtime. In 1999,
approximately 47% of all European cellular phone subscribers used prepaid
calling services. While less common in the U.S., prepaid phone cards offer
consumers worldwide a cost-effective way to purchase cellular airtime while
avoiding credit checks, connection fees and contract commitments. We estimate
that we have approximately 14% of the fragmented European market for prepaid
cellular phone cards and are the largest supplier to Vodafone Limited and Orange
Personal Communications, two of Europe's leading cellular companies. To prevent
fraud, our phone cards incorporate proprietary security technology originally
developed for our lottery ticket operations. We have invested approximately $22
million in our U.K. operations in the past two years to modernize our facilities
and increase our annual prepaid phone card manufacturing capacity from 120
million cards in early 1999 to an estimated one billion cards by early 2001.
11
<PAGE>
SEASONALITY
The first quarter of our fiscal year and a portion of our second fiscal
quarter traditionally comprise the weakest season for pari-mutuel wagering
service revenue. Wagering equipment sales and software license revenues usually
reflect a limited number of large transactions which do not recur on an annual
basis. Consequently, revenues and operating results can vary substantially from
period to period as a result of the timing of revenue recognition for major
equipment sales and software license revenue. In addition, instant ticket and
prepaid phone card sales may vary depending on the size and timing of contract
awards, changes in customer budgets, inventory ticket position, lottery retail
sales and general economic conditions.
CONTRACT PROCUREMENT
LOTTERY GROUP
Government operated lotteries in the United States typically operate under
state mandated public procurement regulations. Lotteries select an instant
ticket or on-line supplier by issuing a Request for Proposal ("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. We believe that our
product functionality, the quality of our personnel, our technical expertise and
our manufacturing efficiency give us 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. Internationally, lottery authorities do not always
utilize such a formal bidding process, but rather negotiate with one or more
potential vendors.
Our contracts 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 the competitive procurement process
described above. There can be no assurance that our current contracts will be
extended or that we will be awarded new contracts as a result of competitive
procurement processes in the future. 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 revenue derived thereunder, the termination,
expiration or failure to renew one or more instant lottery contracts could have
a material adverse effect on our results of operation, business or prospects.
U.S. instant ticket 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
average term of a U.S. systems contract is five to ten years, with additional
extension options, which limits the number of contracts available for bidding in
any given year.
PARI-MUTUEL GROUP
Contract awards by owners of horse and greyhound racetracks, OTBs and
casinos and jai alai frontons, and from state and foreign governments, often
involve a lengthy competitive bid process, spanning from specification
development to contract negotiation and award. Our contracts for the provision
of pari-mutuel services in North America are typically for terms of five years.
We have historically been successful in renewing our largest contracts as they
have come due for renewal. However, there can be no assurance that we will
continue to be able to renew our pari-mutuel systems contracts with our largest
customers or our lottery contracts or our other major agreements. If we are
unable to renew these contracts, there would be a material adverse effect on us.
VENUE MANAGEMENT GROUP
Subject to certain licensing and operational requirements, we own and have
the right to operate in perpetuity substantially all off-track pari-mutuel
wagering in Connecticut. Our license to provide on-track and off-track services
in The Netherlands expires in the year 2003. New venue management opportunities
generally occur via the privatization of existing government operated OTBs, as
in the case of Connecticut and The Netherlands, the acquisition or outsourcing
of an existing private racetrack or OTB operations, or new legislation or
regulation
12
<PAGE>
enabling new distribution channels. These opportunities occur infrequently and
may be subject to public procurement bidding requirements.
TELECOMMUNICATIONS PRODUCTS GROUP
We have contracts with customers representing approximately 25% of our
telecommunications products revenues. The remaining customers issue purchase
orders with agreed upon terms and conditions. In addition, certain customer
purchase orders contain numerous orders for varying periods of time.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that our ability to attract new lottery and wagering system
customers and retain existing customers depends in part on our ability to
continue to incorporate technological advances into, and to improve, our systems
and related equipment. We maintain a development program directed toward systems
development as well as toward the improvement and refinement of our present
products and the expansion of their uses and applications. Many of our product
developments and innovations have quickly become industry standards.
INTELLECTUAL PROPERTY
Certain technology associated with our pari-mutuel wagering and lottery
products is the subject of issued patents and patent applications currently
pending with the United States and selected other countries. Most notable are
our patents for the secure printing and validation of probability tickets. We
have a number of registered trademarks and other common law trademark rights
for certain of our products, including Winner's Choice(TM), Terra 2000(R),
SciScan Technologys(R), PROBEs(R), EXTREMA(TM), AEGIS(TM), SGI-NET(TM),
ECLIPSE(TM), SAMs(R), MAX(TM), TINY TIMs(R) and others. The software and
control systems for our wagering systems are also the subject of copyright
and/or trade secret laws. We are not aware of any pending claims of
infringement or other challenges to our right to use our patents, trademarks
or other intellectual property in any of our current businesses in the United
States.
PRODUCTION PROCESSES; SOURCES AND AVAILABILITY OF COMPONENTS
Our instant lottery ticket production process uses a series of dedicated
computer-controlled printing presses and ink-jet imagers. We believe that our
tickets incorporate the most advanced technology and security methodology
available in the industry. Our 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.
Our dedicated computer-controlled printing process is specifically designed
for producing instant lottery game tickets for governmentally sanctioned
lotteries and promotional games as well as prepaid phone cards. Our 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 us in the jurisdictions which are part of an instant
ticket contract with cooperative services provided by us.
Paper and ink are the principal raw materials consumed in our ticket
manufacturing operations. We have a variety of sources for both paper and ink
and should, therefore, not be dependent on any particular supplier.
Production of our systems and related component products primarily involve
the assembly of electronic components into more complex systems and products. We
produce our terminal products primarily at our manufacturing facility in
Ballymahon, Ireland, or on a limited basis at our Newark, Delaware
administration and development facility. Other manufacturing may be contracted
out to third-party vendors, as needed.
We normally have sufficient lead-time between reaching an agreement to
provide a system and the commencement of operations so that we are able to
provide the customer with a fully functioning system, customized to meet their
requirements. In the event that current suppliers of central processing units
were no longer available, we believe we would be able to adapt our application
software to run on the then available hardware in time to allow us to meet new
contractual obligations, although the price competitiveness of our products
might diminish. The lead-time for obtaining most of the electronic components we
use is approximately 90 days. We believe that this is consistent with our
competitors' lead-times and is also consistent with the needs of our customers.
13
<PAGE>
COMPETITION
LOTTERY GROUP
The instant and on-line lottery businesses are highly competitive, and we
face competition from a number of domestic and foreign instant ticket
manufacturers, on-line lottery system providers and other competitors.
We currently have two primary instant lottery ticket competitors in the
U.S.: Pollard Banknote Limited ("Pollard") and Oberthur Gaming Technologies
("OGT", a subsidiary of Group Francois-Charles Oberthur of France). In addition,
Creative Games International, Inc. ("Creative Games", a subsidiary of Canadian
Bank Note Company, Ltd.) is a competitor in the U.S. We estimate that the retail
sales value of our U.S. customer base was approximately 68% of total U.S.
instant ticket retail sales in 1999--approximately twice as large as our next
largest competitor. 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.
Our 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 compete with us including, among others, OGT, Pollard,
Creative Games, GPS Honsel and various other vendors.
Our principal competitors in the on-line lottery systems business are GTECH
Holdings Corporation ("GTECH") (our major competitor in the on-line market with
approximately 72% of the U.S. market based on retail sales) and Automated
Wagering International Inc. ("AWI"), a subsidiary of Anchor Gaming Inc. GTECH
is also our major competitor in the international on-line market with the
balance of the market being served by AWI, EssNet AB, International Lottery and
Totalizator Systems, Inc. and a few other companies.
The market for our products is affected by changing technology, new
legislation and evolving industry standards. Our ability to anticipate such
changes and to develop and introduce new and enhanced products on a timely basis
will be significant factors in our ability to expand, remain competitive,
attract new customers and retain existing contracts. There can be no assurance
that we will have the financial or other resources to respond to such changes or
to develop and introduce new products on a timely basis.
PARI-MUTUEL GROUP
The market for pari-mutuel wagering systems is also highly competitive. We
compete primarily on the basis of design, performance, reliability and pricing
of our products as well as customer service.
To effectively compete, we expect to make continued investments in product
development and/or acquisitions of technology.
Our two principal competitors in the North American pari-mutuel wagering
systems business are AmTote International, Inc. and Anchor Gaming, Inc., which
operates its pari-mutuel wagering systems business through its subsidiary United
Tote. Our competition outside of North America is more fragmented, with
competition being provided by several international and regional companies.
Competition in the video and data simulcasting business is highly fragmented
with ourselves and Roberts Communications Network, LLC having achieved among the
most significant market shares in North America. Current and future competitors
in Internet-based wagering include YouBet.com and TVG.
VENUE MANAGEMENT GROUP
While we have exclusive licenses for the operation of our Connecticut and
Dutch OTB operations, our revenues may be adversely affected by competition for
the consumer's wagering dollar. Other pari-mutuel operations compete with us in
Connecticut as well as other gaming entertainment including the lottery, two
casinos in Connecticut as well as surrounding states and illegal gambling. Any
new non-gaming products in a given market may result in increased competition
for wagering dollars. Competition for wagers comes from casinos, lotteries and
other forms of legal and illegal gambling. In addition, there are other
entertainment options for the consumer's recreational time and dollars.
TELECOMMUNICATIONS PRODUCTS GROUP
14
<PAGE>
The market for prepaid phone cards is highly fragmented but competition
comes from other instant ticket lottery printers utilizing similar lottery
security and printing technologies, as well as alternative printing and
non-printing technologies. In addition, there are alternative technologies such
as smart cards or alternative means to provide the funding of telephone
services. We are investing in new higher speed and higher capacity printing and
packaging technologies that we believe, in combination with our lottery security
and logistics expertise, will provide us a competitive advantage in this market.
Our competitors in this area include OGT, Schlumberger Limited and Gemplus S.A.
REGULATION
GENERAL
Lotteries, pari-mutuel wagering, sports wagering, and video gaming may be
lawfully conducted only in jurisdictions that have enacted enabling legislation.
In jurisdictions that currently permit various wagering activities, regulation
is extensive and evolving but customarily includes some form of licensing of a
company and its subsidiaries. Regulators in those jurisdictions review many
facets of an applicant for or holder of a license including, among other items,
financial stability, integrity and business experience. We believe that we are
currently in substantial compliance with all regulatory requirements in the
jurisdictions where we operate. Any failure to receive a material license or the
loss of a material license that we currently hold could have a material adverse
effect on our overall operations and financial condition.
In 1996, the United States Congress passed legislation authorizing a
comprehensive study of gaming, including segments of the gaming industry served
by us. That study was completed and released in 1999. In part, as a result of
this study, legislation further regulating various forms of wagering on the
Internet and telephone wagering on pari-mutuel events is pending in the United
States Congress. Current legislation before the U.S. Congress known as the Kyl
Bill would generally ban Internet wagering except for, subject to any contrary
state law, pari-mutuel wagering and intrastate lotteries. Various proposed
amendments to the Kyl Bill may impact intrastate Internet lotteries or
inter-state pari-mutuel wagering. In December 2000, Congress enacted legislation
authorizing patrons to place pari-mutuel wagers, where lawful in each state
involved, by "telephone or other electronic media" with off track betting
systems in the same or a different state. This legislation may expand the number
of jurisdictions from which we and our customers may accept pari-mutuel wagers
by phone or the internet and reduce legal uncertainties concerning such wagers.
We are unable to predict how this legislation will be interpreted by regulatory
authorities, whether other legislation may be enacted that would impose other
regulations or restrictions on telephone and Internet wagering operations, and
whether such interpretations or legislation, if any, would have a material
adverse impact on us.
Furthermore, law enforcement in certain jurisdictions have aggressively
opposed the expansion of wagering via the Internet and telecommunications
facilities through criminal prosecutions and civil actions. While we believe
that our current and planned business activities comply with all applicable
laws, and we have not been materially challenged, there can be no assurance that
that such activities might not be challenged in the future or that such
challenges would not have a material adverse impact on us or our business plans.
We have developed and implemented an extensive internal compliance program
in an effort to assure that we comply with legal requirements imposed in
connection with our wagering-related activities, as well as legal requirements
generally applicable to all publicly traded corporations. The compliance program
is run on a day-to-day basis by a full-time compliance officer, and is overseen
by the Compliance Committee authorized by our Board of Directors. While we are
firmly committed to full compliance with all applicable laws, there can be no
assurance that such steps will prevent the violation of one or more laws or
regulations, or that a violation by us or an employee will not result in the
imposition of a monetary fine or suspension or revocation of one or more of our
licenses.
LOTTERY OPERATIONS
At the present time, 37 states, the District of Columbia, Puerto Rico, all
the Canadian provinces, Mexico and many other foreign countries authorize
lotteries. Lottery contracts and ongoing operations of lotteries both
domestically and abroad are subject to extensive regulation. Although certain of
the features of a lottery, such as the percentage of gross revenues which must
be paid back to players in prize money, are usually fixed by legislation, the
various lottery regulatory authorities generally exercise significant
discretion, including the determination of the types of games played, the price
of each wager, the manner in which the lottery is marketed and the selection of
the vendors of equipment and services and retailers of lottery products.
Furthermore, laws and regulations applicable to lotteries in
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the United States and foreign jurisdictions are subject to change and the effect
of such changes on our ongoing and potential operations cannot be predicted with
certainty.
To ensure the integrity of the contract award and wagering process, most
jurisdictions require detailed background disclosure on a continuous basis from,
and conduct background investigations of, the vendor, its subsidiaries and
affiliates and its principal shareholders. Background investigations of the
vendor's employees who will be directly responsible for the operation of the
system are also generally conducted, and most states reserve the right to
require the removal of employees whom they deem to be unsuitable or whose
presence they believe may adversely affect the operational security or integrity
of the lottery. Certain jurisdictions also require extensive personal and
financial disclosure and background checks from persons and entities
beneficially owning a specified percentage (typically five percent or more) of a
company's securities. The failure of beneficial owners of our securities to
submit to background checks and provide such disclosure could result in the
imposition of penalties upon these beneficial owners and could jeopardize the
award of a lottery contract to us or provide grounds for termination of an
existing lottery contract.
We from time to time retain governmental affairs representatives in various
states of the United States to advise legislators and the public concerning our
views on lottery legislation, to monitor such legislation and to advise us in
our relations with lottery authorities. We also make campaign contributions to
various state political parties and state political candidates. We believe we
have 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, we have, in a number of
instances, allied ourselves 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 change and the effect of such changes on
our ongoing and potential operations cannot be predicted with certainty.
PARI-MUTUEL WAGERING
Forty-three states, Puerto Rico, all of the Canadian provinces, Mexico and
many other foreign countries have authorized pari-mutuel wagering on horse
races, and nineteen states and many foreign countries, including Mexico, have
authorized pari-mutuel wagering on dog races. In addition, Connecticut, Rhode
Island, Nevada, Florida and Mexico also allow pari-mutuel betting on jai alai
matches.
Companies that manufacture, distribute and operate pari-mutuel wagering
systems in these jurisdictions are subject to the regulations of the applicable
regulatory authorities there. These authorities generally require a company, as
well as its directors, officers, certain employees and holders of 5% or more of
the company's common stock, to obtain various licenses, permits and approvals.
Regulatory authorities may also conduct background investigations of the company
and its key personnel and stockholders in order to ensure the integrity of the
wagering system. These authorities have the power to refuse, revoke or restrict
a license for any cause they deem reasonable. The loss of a license in one
jurisdiction may cause the company's licensing status to come under review in
other jurisdictions as well.
In order for our subsidiary to provide pari-mutuel wagering equipment and/or
services to certain casinos located in Atlantic City, New Jersey, it must be
licensed by the New Jersey Casino Control Commission ("New Jersey Commission")
as a gaming related casino service industry and by the New Jersey Racing
Commission in accordance with the New Jersey Casino Control Act ("Casino Control
Act"). An applicant for a gaming related casino service industry license is
required to establish, by clear and convincing evidence, financial stability,
integrity and responsibility; good character, honesty and integrity; and
sufficient business ability and experience to conduct a successful operation. We
must also qualify under the standards of the Casino Control Act. We and our
subsidiary may also be required to produce such information, documentation and
assurances as required by the regulators to establish the integrity of all our
directors, officers and financial backers, who may be required to seek
qualification or waiver of qualification. For casino holding companies, the New
Jersey Commission traditionally has waived the qualification requirement for
non-institutional investors holding less than 15% of a debt issue and for
institutional investors holding less than 50% of a debt issue and less than 20%
of the issuer's overall debt.
The New Jersey Commission has broad discretion in licensing matters and may
at any time condition a license or suspend or revoke a license or impose fines
upon a finding of disqualification or non-compliance. The New Jersey
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Commission may require that persons holding five percent or more of our Class A
Common Stock qualify under the Casino Control Act. Under the Casino Control Act,
a security holder is rebuttably presumed to control a publicly traded
corporation if the holder owns at least five percent of the corporation's equity
securities; however, for passive institutional investors, qualification is
generally not required for a position of less than 10%, and upon a showing of
good cause, qualification may be excused for a position of 10% or more. Failure
to qualify could jeopardize our license. In addition, the New Jersey Racing
Commission also licenses our subsidiary and retains concurrent regulatory
oversight over this subsidiary with the New Jersey Commission.
As a consequence of the sale of our new convertible preferred stock, the
Casino Control Act required our subsidiary that held a casino service industry
license to relinquish said license upon the closing of that sale and apply anew
for licensure. We obtained preliminary approval from the New Jersey Racing
Commission and a transactional waiver from the New Jersey Commission that allows
us to continue providing services to Atlantic City casinos pending investigation
of the new application that we filed and until our subsidiary is relicensed and
our directors, officers and certain security holders are qualified. The
prospective purchasers of the convertible preferred stock and certain of their
directors and officers will be required to seek qualification, and to seek
waiver of qualification, of their directors, officers and shareholders. We
believe that all the foregoing actions will be satisfactorily concluded in due
course. However, there can be no assurance that this will be the case, and our
failure to obtain any of the foregoing approvals could have a material adverse
effect on us or our business plans.
Our rights to operate the Connecticut OTB system are conditioned on our
continuing to hold all licenses required for the operation of the system. In
addition, our officers and directors and certain other employees must be
licensed. Licensees are generally required to submit to background
investigations and provide required disclosures. The Division of Special Revenue
of the State of Connecticut (the "Division") may revoke the license to operate
the system under certain circumstances, including a false statement in the
licensing disclosure materials, a transfer of ownership of the licensed entity
without Division approval and failure to meet financial obligations. The
approval of the Connecticut regulatory authorities is required before any
off-track betting facility is closed or relocated or any new branch or simulcast
facility is established. Our telephone wagering operations, based in
Connecticut, are subject to the Division's regulation. Legislation recently
enacted by Congress may subject these operations to regulation by states in
which patrons are located when they call the telephone wagering operation. We
are unable to predict whether and how such legislation will effect telephone
wagering operations conducted by us and our customers. We have begun to expand
the market for our "business-to-consumer" On the Wire(TM) account wagering
business through our Connecticut OTB from 13 states to over 30.
While in the past and at present we have been the subject of enforcement
proceedings instituted by one or more regulatory bodies, we have been able to
consensually resolve any such proceedings upon the implementation of remedial
measures and/or the payment of settlements or monetary fines to such bodies. We
do not believe that any of these proceedings, past or pending, will have a
material adverse effect on us. However, there can be no assurance that similar
proceedings in the future will be similarly resolved, or that such proceedings
will not have a material adverse impact on our ability to retain and renew
existing licenses or to obtain new licenses in other jurisdictions.
VIDEO GAMING
Coin or voucher operated gambling devices offering electronic, video
versions of spinning reels, poker, blackjack and similar games are known as VGMs
or video lottery terminals ("VLTs"), depending on the jurisdiction. These
devices represent a growing area in the wagering industry. We or our
subsidiaries manufacture and supply terminals and wagering systems designed for
use as VGMs or VLTs.
Twenty-four states and Puerto Rico authorize wagering on VGMs or VLTs at
casinos, riverboats, racetracks and/or other licensed facilities. Although some
states, such as Rhode Island and West Virginia, currently restrict VGMs or VLTs
to already existing wagering facilities, others permit these devices to be
placed at bars and restaurants as well. Several Indian tribes throughout the
United States are also authorized to operate these devices on reservation lands.
In addition, all of the Canadian provinces and various foreign countries have
authorized their use.
From time to time, government officials in other states are considering
proposals to legalize or expand video gaming, or video lottery in their states.
Many legislators have been enthusiastic about the potential of video gaming to
raise significant additional revenues. Some officials, however, are reluctant to
expand gaming industry opportunities or have expressed a desire to limit video
gaming to established wagering facilities if video gaming is authorized in their
jurisdiction at all.
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Companies that manufacture, sell or distribute VGMs or VLTs are subject to
various provincial, state, county and municipal laws and regulations. The
primary purposes of these rules are (i) to ensure the responsibility, financial
stability and character of equipment manufacturers and their key personnel and
stockholders through licensing requirements, (ii) to ensure the integrity and
randomness of the machines, and (iii) to prohibit the use of VGMs or VLTs at
unauthorized locations or for the benefit of undesirable individuals or
entities. The regulations governing VGMs and VLTs generally resemble the
pari-mutuel and sports wagering regulations in all the basic elements described
above.
However, every jurisdiction has differing terminal design and operational
requirements, and terminals generally must be certified by local regulatory
authorities before being distributed in any particular jurisdiction. These
requirements may require us or our subsidiaries to modify our terminals to some
degree in order to achieve certification in particular locales. In addition, the
intrastate movement of such devices in a jurisdiction where they will be used by
the general public is usually allowed only upon prior notification and/or
approval of the relevant regulatory authorities.
The West Virginia Lottery Commission has licensed us or our subsidiaries to
supply VLTs to authorized pari-mutuel racing facilities in that state in
accordance with the Racetrack Video Lottery Act.
In Canada, one of our subsidiaries has been granted registration as a casino
gaming related supplier by the Alcohol and Gaming Commission of Ontario in
accordance with the Gaming Control Act, 1992 of Ontario and the Alberta Gaming
and Liquor Commission in accordance with the Gaming and Liquor Act of Alberta.
Another subsidiary has been granted interim registration as a gaming related
supplier to the Manitoba Lottery Commission by the Manitoba Gaming Control
Commission. The gaming laws of Ontario, Alberta and Manitoba primarily deal with
the responsibility, honesty, integrity and financial stability of gaming
equipment manufacturers, distributors and operators as well as persons
financially interested or involved in gaming operations. To ensure the integrity
of manufacturers and suppliers of gaming supplies, gaming regulators in Ontario,
Alberta and Manitoba have the authority to conduct thorough background
investigations of us, our officers, directors, key personnel and significant
stockholders who are required to file applications detailing their personal and
financial information. The gaming regulators may at any time revoke, suspend,
condition or restrict a registration for an appropriate cause as determined
under the applicable gaming legislation. We believe that we are in compliance
with the terms and conditions of its registrations in Ontario, Alberta and
Manitoba.
We may apply for all necessary licenses in other jurisdictions that may now
or in the future authorize video gaming or video lottery operations. We cannot
predict the nature of the regulatory schemes or the terminal requirements that
will be adopted in any of these jurisdictions, nor whether we or any of our
subsidiaries can obtain any required licenses and equipment certifications or
will be found suitable.
Federal law also affects our video gaming industry activities. The Federal
Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful for any
person to manufacture, deliver or receive gambling devices, including VGMs and
VLTs, across interstate lines unless that person has first registered with the
Attorney General of the United States, or to transport such devices into
jurisdictions where their possession is not specifically authorized by state
law. The Devices Act permits states to exempt themselves from its prohibition on
transportation, and several states that authorize the manufacture or use of such
devices within their jurisdictions have done so. Certain of our products, such
as the PROBE? XLC terminal, are gaming devices subject to the Devices Act and
state laws governing such devices. The Devices Act does not apply to machines
designed for pari-mutuel betting at a racetrack, such as our pari-mutuel
wagering terminals. We have registered under the Devices Act, and believe that
we are substantially in compliance with all of the Devices Act's record-keeping
and equipment identification requirements.
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SIMULCASTING
The Federal Communications Commission (the "FCC") regulates the use and
transfer of earth station licenses used to operate our domestic simulcasting
operations.
At present, 43 states, Puerto Rico, all of the Canadian provinces, Mexico
and many other foreign countries authorize interstate and/or intrastate
pari-mutuel wagering, which may involve the simulcasting of the races in
question. Licensing and other regulatory requirements associated with such
simulcasting activities are similar to those governing pari-mutuel wagering, and
are generally enforced by pari-mutuel regulators. In addition, contracts with
host tracks whose races are simulcast by us to other facilities within or
outside the jurisdictions in which such races are held may be subject to
approval by regulatory authorities in the jurisdictions from and/or to which the
races are simulcast. We believe that we are in substantial compliance with
applicable regulations and that we, and/or the appropriate third parties, have
entered into contracts and obtained the necessary regulatory approvals to
lawfully conduct current simulcast operations.
NEVADA REGULATORY MATTERS
We and certain of our wholly-owned subsidiaries are applicants or will be
applicants for certain registrations, approvals, findings of suitability and
licenses in the State of Nevada (collectively, the "Applications"). There can be
no assurances that the pending Applications by us and our Nevada Operating
Subsidiaries will be approved or that if approved, they will be approved on a
timely basis or without conditions or limitations.
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, the operation of an off-track
pari-mutuel wagering system in Nevada, the operation an off-track pari-mutuel
sports wagering system in Nevada and the operation of slot machine routes in
Nevada are subject to: (i) The Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act"); and (ii) various local
ordinances and regulations. Such activities are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), and various local, city and
county regulatory agencies (collectively referred to as the "Nevada Gaming
Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) to provide a
source of state and local revenues through taxation and licensing fees. Changes
in such laws, regulations and procedures could have an adverse effect on our
various Applications in the event they are granted. No assurances can be given
that the Applications will be granted by the Nevada Gaming Authorities. The
grant or denial of the Applications is within the discretion of the Nevada
Gaming Authorities.
We are an applicant for registration by the Nevada Commission as a publicly
traded corporation (a "Registered Corporation") and are or will be an applicant
to be found suitable to own the stock, both directly and indirectly of various
wholly-owned subsidiaries which are or will be applicants for approvals and
licensing as a manufacturer, distributor an operator of a slot machine route, an
operator of an off-track pari-mutuel wagering system and an operator of an
off-track pari-mutuel sports wagering system (our "Nevada Operating
Subsidiaries"). As a Registered Corporation, we will be required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information that the Nevada Commission may require. No person
may become a stockholder of, or receive any percentage of profits from, our
Nevada Operating Subsidiaries without first obtaining licenses and approvals
from the Nevada Gaming Authorities. We and our Nevada Operating Subsidiaries
have or will apply to the Nevada Gaming Authorities for the various
registrations, approvals, permits, findings of suitability and licenses
(collectively "Gaming Licenses") in order to engage in manufacturing,
distribution, slot route activities, and off-track pari-mutuel wagering systems
operations in Nevada. The following regulatory requirements will apply to us and
our Nevada Operating Subsidiaries if they are approved and licensed. All gaming
devices and cashless wagering
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systems that are manufactured, sold or distributed for use or play in Nevada, or
for distribution outside of Nevada, must be manufactured by licensed
manufacturers and distributed or sold by licensed distributors. All gaming
devices manufactured for use or play in Nevada must be approved by the Nevada
Commission before distribution or exposure for play. The approval process for
gaming devices includes rigorous testing by the Nevada Board, a field trial and
a determination as to whether the gaming device meets strict technical standards
that are set forth in the regulations of the Nevada Commission. Associated
equipment must be administratively approved by the Chairman of the Nevada Board
before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us or our Nevada
Operating Subsidiaries in order to determine whether such individual is suitable
or should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of our Nevada Operating Subsidiaries are
required to file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities. Our
officers, directors and key employees who are actively and directly involved in
the licensed activities of our Nevada Operating Subsidiaries may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause that they
deem reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal and financial information followed by a
thorough investigation. The entity with which the applicant is employed or for
which the applicant serves must pay all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities and in
addition to their authority to deny an application for a finding of suitability
or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us or our Nevada Operating Subsidiaries, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require us and our Nevada Operating Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
We and our Nevada Operating Subsidiaries will be required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by our Nevada Operating Subsidiaries will be required to be reported to or
approved by the Nevada Commission. If we are licensed by the Nevada Gaming
Authorities, any (i) guarantees issued by our Nevada Operating Subsidiaries in
connection with any financing; (ii) hypothecation of the assets of our Nevada
Operating Subsidiaries as security in connection with any financing; and/or
(iii) pledges of the equity securities of our Nevada Operating Subsidiaries as
security in connection with any financing will require the approval of the
Nevada Commission to remain effective. If it were determined that the Nevada Act
was violated by us or any of our Nevada Operating Subsidiaries, the licenses we
or they hold could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, any of
our Nevada Operating Subsidiaries, us and the persons involved could be subject
to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Limitation, conditioning or suspension of
the licenses held by us and our Nevada Operating Subsidiaries could (and
revocation of any license would) materially adversely affect our manufacturing,
distribution and system operations in Nevada.
Any beneficial holder of our voting securities, regardless of the number of
shares owned, may be required to file an application, be investigated, and have
his suitability determined as a beneficial holder of our voting securities if
the Nevada Commission has reason to believe that such ownership would otherwise
be inconsistent with the declared policies of the state of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation. The Nevada Act requires any person who
acquires beneficial ownership of more than 5% of a Registered Corporation's
voting securities to report the acquisition to the Nevada Commission. The Nevada
Act requires that beneficial owners of more than 10% of a Registered
Corporation's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10%, but not more than 15%, of the Registered Corporation's voting securities
may apply to the Nevada Commission for a waiver of such finding of suitability
if such institutional investor holds the voting securities for investment
purposes only. An institutional investor shall not be deemed to hold voting
securities for investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an institutional investor and
not for the purpose of causing, directly or indirectly, the election of a
majority of the members of the board of directors of the Registered Corporation,
any change in the Registered
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Corporation's corporate charter, bylaws, management, policies or operations of
the Registered Corporation, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. We will be subject to disciplinary action if,
after we receive notice that a person is unsuitable to be a stockholder or to
have any other relationship with us, our Nevada Operating Subsidiaries or we (i)
pay that person any dividend or interest upon our voting securities, (ii) allow
that person to exercise, directly or indirectly, any voting right conferred
through securities held by that person, (iii) pay remuneration in any form to
that person for services rendered or otherwise, or (iv) fail to pursue all
lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that his acquisition of such debt
security would otherwise be inconsistent with the declared policy of the State
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it: (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever; (ii) recognizes any voting
right by such unsuitable person in connection with such securities; (iii) pays
the unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
We and our Nevada Operating Subsidiaries will be required to maintain a
current stock ledger in Nevada, which may be examined by the Nevada Gaming
Authorities at any time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be grounds for finding the record holder unsuitable. We are also
required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require our stock
certificates to bear a legend indicating that the securities are subject to the
Nevada Act.
After becoming a Registered Corporation, we may not make a public offering
of our securities without the prior approval of the Nevada Commission if the
securities or proceeds from that sale are intended to be used to construct,
acquire or finance gaming facilities in Nevada, or to retire or extend
obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful. While we are not yet subject to the provisions of the Nevada Act or
the regulations of the Nevada Commission, such regulations also provide that any
entity that is not an "affiliated company," as such term is defined in the
Nevada Act, or which is not otherwise subject to the Nevada Act or such
regulations, which plans to make a public offering of securities intending to
use such securities, or the proceeds from the sale thereof, for the construction
or operation of gaming facilities in Nevada, or to retire or extend obligations
incurred for such purposes, may apply to the Nevada Commission for prior
approval of such offering. The Nevada Commission may find an applicant
unsuitable based solely on the fact that it did not submit such an application,
unless upon a written request for a ruling, the Nevada Board Chairman has ruled
that it is not necessary to submit an application. The exchange offer to
exchange publicly registered notes for the notes offered hereby may constitute
such a public offering. In response to our request for a ruling from the Nevada
Board Chairman that it is not necessary to submit the exchange offer for the
Nevada Commission's prior approval, the Nevada Board Chairman ruled that the
exchange offer is not subject to the prior approval requirement.
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Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada Legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either: (i) a percentage of
the gross revenues received; or (ii) the number of gaming devices operated.
Annual fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor, operator of a slot machine route and operator of an
off-track pari-mutuel wagering system.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
APPLICATION OF ADDITIONAL OR FUTURE REGULATORY REQUIREMENTS
In the future, we intend to seek the necessary licenses, approvals and
findings of suitability for us, our personnel and products in other
jurisdictions throughout the world wherever significant sales are anticipated to
be made. There can be no assurance, however, that such licenses, approvals or
findings of suitability will be obtained or, if obtained, will not be
conditioned, suspended or revoked or that we will be able to obtain the
necessary approvals for any future products as they are developed. If a license,
approval or a finding of suitability is required by a regulatory authority and
we fail to obtain the necessary license, we may be prohibited from selling our
products for use in the respective jurisdiction or may be required to sell our
products through other licensed entities at a reduced profit.
22
<PAGE>
SECURITY
We recognize 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 employees 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. We are not aware
of any practical, economically feasible way to breach the security of our
instant lottery tickets or on-line games which could result in a material loss
to any of our customers, nor are we aware of any breach thereof which has
resulted in any material loss to any of our lottery customers.
We constantly assess the adequacy of our security systems, incorporating
various improvements, such as bar coding and additional layers of protection in
our instant tickets. There must be well-planned security measures in place at
every stage of the lottery operation. We have 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 our data processing and the computer
operations phase. We also retain a major public accounting firm to perform
agreed upon procedures for each game produced before it is sent to the customer.
EMPLOYEES
As of October 31, 2000, we employed approximately 2,560 persons. Most of
Autotote's North American pari-mutuel employees involved in field operations and
repairs are represented by the International Brotherhood of Electrical Workers
under two separate contracts, extending through October 2001 and May 2004,
respectively. Two of Scientific Games' employee groups are represented by a
labor union. SG Austria's employees are represented by a Worker's Council, which
is typical in many European companies. At the Leeds and Bradford facilities in
the United Kingdom, approximately 328 employees are members of the Graphic Print
and Media Union.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information concerning Autotote Corporation's executive
officers is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
A. Lorne Weil.............54 Chairman of the Board, President and Chief Executive Officer
Martin E. Schloss.........54 Vice President, General Counsel and Secretary
DeWayne E. Laird..........53 Vice President, Chief Financial Officer and Controller
Gerald Lawrence...........61 Executive Vice President
William J. Huntley........51 President, Scientific Games Systems Division
Cliff O. Bickell..........57 President, Printed Products Division of Scientific Games
</TABLE>
Our Executive Officers hold office for an indefinite term, subject to the
discretion of our Board of Directors.
MR. A. LORNE WEIL has been an Autotote director since December 1989,
Chairman of the Board since October 31, 1991, Chief Executive Officer since
April 1992 and President since August 1997. Mr. Weil held various senior
management positions with us and our subsidiaries from October 1990 to April
1992 and was a director and consultant to Autotote Systems, Incorporated from
1982 until we acquired it in 1989. Mr. Weil was President of Lorne Weil, Inc., a
firm providing strategic planning and corporate development services to high
technology industries, from 1979 to November 1992. Mr. Weil is currently a
director of Fruit of the Loom, Inc., General Growth Properties, Inc. and
XESystems Inc., a subsidiary of XEROX Corporation.
MR. MARTIN E. SCHLOSS has been Autotote's Vice President and General Counsel
since December 1992 and Secretary since May 1995. Mr. Schloss also serves as a
Vice President and Secretary of most of our subsidiaries.
23
<PAGE>
From 1976 to 1992, Mr. Schloss served in various positions in the legal
department of General Instrument Corporation, with the exception of a hiatus of
approximately one and one-half years.
MR. DEWAYNE E. LAIRD has been Autotote's Vice President and Chief Financial
Officer since November 1998 and our Corporate Controller since April 1996. From
January 1992 to March 1996, Mr. Laird was President of Laird Associates, PC, a
CPA firm providing financial consulting services to a variety of industries.
From April 1984 to December 1991, he held various senior positions with
Philadelphia Suburban Corporation, including Chief Financial Officer and
Treasurer.
MR. GERALD LAWRENCE has been Autotote's Executive Vice President and
President of Autotote Enterprises, Inc., the Autotote subsidiary that operates
the Connecticut OTB, since June 1998. Mr. Lawrence served as President of
Autotote Systems, Inc., Autotote's principal pari-mutuel subsidiary, from March
1996 to June 1998 and as Vice President from November 1994 to June 1998. From
January 1991 to August 1994, Mr. Lawrence held the position of Executive Vice
President of The New York Racing Association, Inc. From November 1984 through
December 1990, he served as Executive Vice President and Chief Operating Officer
of Churchill Downs Incorporated.
MR. WILLIAM J. HUNTLEY joined Autotote in 1973 and has served as
President of Autotote Lottery Corporation, Autotote's lottery subsidiary,
since November 1997. Mr. Huntley served as Vice President of Autotote
Systems, Inc. from June 1989 to November 1997 and as Vice President of
Operations from 1991 to 1994. In September, 2000, after the Scientific Games
acquisition, Mr. Huntley was named President of Scientific Games' Systems
division.
MR. CLIFF O. BICKELL became President-Printed Products Division of
Scientific Games Inc. in September, 2000 after Scientific Games acquisition.
Since joining Scientific Games in 1995, he served as Vice President, Treasurer
and Chief Financial Officer until the acquisition was completed. 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. In addition, Mr. Bickell has held positions as Senior
Vice President, Corporate Administration--Chief Financial Officer of W.A.
Krueger Co., a commercial printing company, and Treasurer of Dataproducts
Corporation, a multinational electronics manufacturer.
24
<PAGE>
ITEM 2. PROPERTIES
The following is a list of facilities that we use in the operation of our
business. Under the terms of our Credit Facility, all of our interests in the
following facilities are subject to a Security interest in favor of Our
Senior Secured lenders.
<TABLE>
<CAPTION>
BUSINESS LOCATION SQUARE FEET OWNED/LEASED PURPOSE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate.......... New York, NY 12,000 Leased Corporate Headquarters
Pari-Mutuel........ Newark, DE 45,000 Leased Administration, operations and manufacturing
Essen, Germany 4,000 Leased Operations
Various 28,500 Leased Warehouse space
Cedex, France 10,000 Owned Administration and operations
Venue Management... Various cities, CT 44,000 Leased OTB facilities
New Haven, CT 2,000 Leased Administration
Netherlands 16,000 Leased Administration and operations
Various cities, Netherlands 44,000 Leased OTB facilities Netherlands
Windsor Locks, CT 39,000 Owned OTB facility
New Haven, CT 55,000 Owned OTB facility, administration and operations
Lottery............ Rocky Hill, CT 17,000 Leased Administration and operations
Barre, VT 3,100 Leased Administration
Concord, NH 5,600 Leased Administration and operations
Helena, MT 4,000 Leased Administration and operations
Urbandale, IA 7,500 Leased Administration and operations
Gardner, ME 10,000 Leased Administration and operations
Ballymahon, Ireland 10,000 Leased Manufacturing
Bradford, England 30,000 Leased Manufacturing
Vienna, Austria 10,000 Leased Administration and operations
Paris, France 12,000 Leased Administration and operations
Various 200,000 Leased Warehouse space
Alpharetta, GA (1) 245,000 Owned Manufacturing
Telecommunication
Products......... Leeds, England 112,000 Leased Manufacturing
</TABLE>
- ----------
(1) We have expanded the Alpharetta, Georgia facility by 60,000 square feet to
accommodate additional manufacturing and office space. We commenced
manufacturing operations in our expanded manufacturing facility in
December of 2000 and expect to achieve full operational capacity by March
2001.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is a party to various claims and legal actions
arising in the ordinary course of business, management believes, on the basis
of information presently available to it, that the ultimate disposition of
these matters will not likely have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority
interest in Wintech de Colombia S.A. ("Wintech"), which formerly 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 a penalty against Wintech, SGI and the other shareholders of
Wintech of up to $5.0 million if such performance levels were not achieved. In
addition, with respect to a further guarantee of performance under the contract
with Ecosalud, SGI delivered to Ecosalud a $4.0 million bond issued by a
Colombian surety, Seguros del Estado ("Seguros"). Wintech started the instant
lottery in Colombia, but, due to difficulties beyond its control, including,
among other factors, social and political unrest in Colombia, frequently
interrupted telephone service and power outages, and competition from another
lottery being operated in a province of Colombia in violation of Wintech's
exclusive license from Ecosalud, the projected sales level was not met for the
year ended June 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 other shareholders of
Wintech. Litigation is pending in Colombia concerning various claims among
Ecosalud, Wintech and SGI, relating to the termination of the contracts with
Ecosalud (the "Colombian
25
<PAGE>
Litigation"). Ecosalud's claims in the Colombian Litigation were for, among
other things, realization on the full amount of the penalty, plus interest and
costs of the bond.
The Colombian surety, Seguros, paid $2.4 million to Ecosalud under its $4.0
million bond, and made demand upon SGI for that amount under the indemnity
agreement between 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 was at the surety's risk. On April 2, 1998, Seguros brought
suit against SGI in the District Court for the Northern District of Georgia,
Atlanta Division seeking $2.4 million for sums paid by Seguros to Ecosalud under
the surety bond on November 1, 1994, plus interest at the Colombian bank rate of
interest.
On September 29, 1999, the District Court denied various motions of SGI,
including a motion to dismiss, based on the Colombian statute of limitations of
two years, and granted Seguros' motion for summary judgment, which was filed on
May 6, 1998, and entered judgment for Seguros in the amount of $2.4 million or
the equivalent in Colombian pesos as of the judgment date, plus pre-judgment
interest at a rate of 38.76% per annum, equivalent to approximately $4.6
million. SGI has appealed the District Court's order and judgment and posted a
$7.0 million appeal bond. SGI continues to believe that it has meritorious
defenses, including that the amount paid by Seguros was improperly paid because
of the default by Ecosalud of its obligations to SGI, which claims remain the
subject of separate litigation in Colombia.
SGI has been advised by Colombian counsel that SGI has various legal
defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has
certain cross indemnities and undertakings from the two other privately held
shareholders of Wintech for their respective shares of any liability to
Ecosalud. That obligation is secured in part by a $1.5 million confirmed letter
of credit in favor of SGI. No assurance can be given that the other shareholders
of Wintech will, or have sufficient assets, to honor their indemnity
undertakings to SGI when the claims by Ecosalud against SGI and Wintech are
finally resolved, in the event such claims result in any final liability.
Although it is not possible to determine the ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia, management, believes that any potential losses will
not have a material adverse effect on the consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of fiscal 2001.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE
STOCKHOLDER MATTERS
Our Class A Common Stock is traded under the symbol "TTE" on the American
Stock Exchange. The following table sets forth, for the periods indicated, the
range of high and low closing prices of our Class A Common Stock.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 2000
--------------- -----------------
High Low High Low
-------- ------ ------- --------
<S> <C> <C> <C> <C>
First Quarter.............................$ 2.38 1.69 4.69 2.25
Second Quarter............................ 2.06 1.50 5.31 3.06
Third Quarter............................. 3.38 1.75 4.88 3.00
Fourth Quarter............................ 3.63 2.50 4.75 2.95
</TABLE>
On January 25, 2001, the last reported sales price for our Class A Common
Stock on the American Stock Exchange was $3.40 per share. The approximate number
of holders of record of our Class A Common Stock as of January 26, 2001 was
1,791.
We have never paid any cash dividends on our Class A Common Stock. The Board
presently intends to retain all earnings, if any, for use in the business. Any
future determination as to payment of dividends will depend upon our financial
condition and results of operations and such other factors as are deemed
relevant by the Board. Further, under the terms of the Indenture governing our
Senior Notes, we and our Restricted Subsidiaries (as defined) are not permitted
to pay any cash dividends or make certain other restricted payments (other than
stock dividends) on our Class A Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS FROM REGISTERED
SECURITIES
As of October 2, 2000, we issued Warrants to purchase up to 250,000 shares
of our Class A Common Stock at a price of $3.58 per share to Ramius Securities,
LLC (together with its affiliates, "Ramius") in connection with the services of
Ramius as our financial advisor in obtaining certain financing commitments in
connection with the acquisition of Scientific Games. Based on representations of
Ramius, such Warrants were issued in a private transaction in reliance upon an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). Holders of the Warrants will be entitled to
certain registration rights.
As of October 5, 2000, certain Warrants to purchase up to 2.9 million shares
of our Class A Common Stock originally issued to our financial advisors,
Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group, Inc. (an
affiliate of Lehman Brothers), were retired in exchange for the issuance of 2.9
million shares of such Common Stock, pro rata to the Warrant holders, in a
transaction exempt from registration under the Securities Act pursuant to
Sections 3(a)(9) and 4(2) thereof. Holders of such shares will be entitled to
certain registration rights.
The terms of the Company's outstanding Series A Convertible Preferred Stock
provide for quarterly dividends at a rate equal to 6% per annum, which must be
paid in kind in the form of additional shares of Preferred Stock until the ninth
dividend payment, in September 2002, and thereafter may be paid in kind at the
Company's option. An aggregate of 21.6 thousand shares of Preferred Stock were
issued by the Company in payment of the September 2000 and December 2000
dividends, pro rata to the holders of the outstanding Preferred Stock, as a
dividend on the Preferred Stock originally issued in a private transaction
exempt from registration under the Securities Act in reliance on Section 4(2)
thereof, and without additional consideration.
The foregoing is only a summary of certain terms of our Series A
Convertible Preferred Stock, the Warrants and related agreements and is
qualified by reference to Exhibits 3.2, 10.11, 10.26 and 99.5 which are
hereby incorporated by this reference.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the five
years ended October 31, 2000 have been derived from the audited consolidated
financial statements of the Company, which financial statements have been
audited by KPMG LLP, independent certified public accountants. The following
financial information reflects the acquisitions and dispositions of certain
businesses during the period 1995 through 2000, including the acquisition of
Scientific Games since September 6, 2000, and should be read in conjunction with
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, and the Consolidated Financial Statements of the Company and the
notes thereto, included in Item 8 of this Annual Report.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Operating Revenues:
Services ....................................... $ 137,794 132,989 135,790 148,660 186,520
Sales .......................................... 38,441 24,343 23,523 62,488 46,828
--------- --------- --------- --------- ---------
176,235 157,332 159,313 211,148 233,348
--------- --------- --------- --------- ---------
Costs and Expenses:
Cost of services ............................... 86,674 80,496 88,916 99,496 126,601
Cost of sales .................................. 25,864 15,396 15,739 43,937 29,299
Selling, general and administrative ............ 31,921 28,444 26,205 27,178 35,664
Restructuring and write-off of assets .......... (649) -- -- -- --
Depreciation and amortization .................. 40,853 36,728 29,489 22,189 27,826
Interest expense ............................... 14,837 14,367 15,521 16,177 31,231
Other (income) expense ......................... 560 79 (1,064) 15 (456)
Litigation settlement .......................... 6,800 -- -- -- --
(Gain) loss on sale of businesses .............. 1,127 (1,823) 66 1,600 --
--------- --------- --------- --------- ---------
Total costs and expenses ......................... 207,987 173,687 174,872 210,592 250,165
--------- --------- --------- --------- ---------
Income (loss) before income tax
expense and extraordinary item ................... (31,752) (16,355) (15,559) 556 (16,817)
Income tax expense .................................. 2,443 906 321 177 1,603
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............. (34,195) (17,261) (15,880) 379 (18,420)
Extraordinary item .................................. -- (426) -- -- 12,567
--------- --------- --------- --------- ---------
Net income (loss) ................................... (34,195) (17,687) (15,880) 379 (30,987)
Preferred dividend .................................. $ -- -- -- -- 1,014
========= ========= ========= ========= =========
Net Income (loss) available to common stockholders .. $ (34,195) (17,687) (15,880) 379 (32,001)
========= ========= ========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary items ............ $ (1.09) (0.50) (0.44) 0.01 (0.50)
Extraordinary items ................................. -- (0.01) -- -- (0.34)
--------- --------- --------- --------- ---------
Net Income (loss) ................................... $ (1.09) (0.51) (0.44) 0.01 (0.84)
========= ========= ========= ========= =========
Net Income (loss) available to common stockholders .. $ (1.09) (0.51) (0.44) 0.01 (0.87)
========= ========= ========= ========= =========
SELECTED BALANCE SHEET DATA (END OF PERIOD):
Total assets ........................................ $ 196,793 153,541 156,500 165,559 647,215
Total long-term debt, including
current installments ............................... $ 169,024 149,857 158,870 157,144 443,834
Stockholders' equity (deficit) ...................... $ (20,196) (33,240) (48,638) (48,219) 34,319
Weighted average number of shares used in per share
calculation:
Basic shares ................................... 31,305 34,469 35,696 36,118 36,928
Diluted shares ................................. 31,305 34,469 35,696 38,343 36,928
========= ========= ========= ========= =========
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
As a result of the Scientific Games acquisition, we are the largest provider
of services, systems and products to both the pari-mutuel gaming and instant
ticket lottery industries, and we believe we are the only fully integrated
lottery service provider in the world. We believe that we offer the broadest and
most technologically advanced array of products and services in these industries
and that we are the market leader in creating innovative pari-mutuel wagering
and lottery products. Our Lottery Group is the leading provider of instant
lottery tickets and related services, accounting for approximately 68% of all
retail sales of instant lottery tickets in the United States in 1999. Our
Lottery Group also supplies technologically advanced on-line lottery systems and
instant ticket validation equipment to lotteries in the U.S. and
internationally. Our Pari-mutuel Group is the leading provider of pari-mutuel
wagering systems worldwide and has an approximate 65% share of the estimated
$20.0 billion of North American racing industry wagers, or "Handle." Our Venue
Management Group, utilizing our pari-mutuel business expertise, owns or operates
off-track betting venues or "OTBs" in Connecticut, The Netherlands and Germany,
from which we earn a significantly higher percentage of the Handle than we earn
by providing services to third-party operators. Finally, our Telecommunications
Products Group leverages our superior lottery technology to create highly
secure, paper-based, prepaid phone cards for the rapidly growing international
cellular telephone markets.
On September 6, 2000, Autotote completed the acquisition of Scientific
Games, a world leading supplier of lottery products, integrated lottery systems
and support services, and prepaid telephone cards. This acquisition combines
Autotote's pari-mutuel wagering, venue management and on-line lottery businesses
with Scientific Games' complementary instant lottery ticket and related
services, on-line lottery and instant ticket validation, and rapidly growing
prepaid phone card businesses. The acquisition was completed through a merger in
which Scientific Games became a wholly-owned subsidiary of Autotote at a cost of
approximately $308 million in aggregate merger consideration to Scientific Games
stockholders, plus related fees and expenses. The acquisition has been recorded
using the purchase method of accounting, and the acquired assets and liabilities
have been recorded at their estimated fair value at the date of acquisition and
the operating results of Scientific Games businesses have been included in the
consolidated statements of operations from the date of the acquisition.
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both Autotote and Scientific Games, along with the payment of
related fees and expenses, was completed with funds provided by: (1) proceeds
from the issuance of $150.0 million principal amount of our series A notes; (2)
$280.0 million of term loan borrowings under our new senior credit facility; (3)
$2.98 million of borrowings under the revolving credit facility of our new
senior credit facility; (4) $4.805 million of cash on hand; and (5) $110.0
million of gross proceeds from the sale of new convertible preferred stock,
principally to an affiliated entity of Olivetti S.p.A.
Autotote historically operated primarily in three business segments:
Pari-mutuel Operations, Venue Management Operations and Lottery Operations.
Autotote's Lottery Operations have historically included both domestic and
international lottery service operations, including the sale of lottery systems
and equipment. Autotote's Pari-mutuel Operations have included all aspects of
its pari-mutuel service business, encompassing Autotote's North American and
international on-track, off-track and inter-track pari-mutuel services,
simulcasting and communications services, video gaming, and sales of pari-mutuel
systems and equipment. Autotote's Venue Management Operations have included its
Connecticut off-track betting operations and its Dutch on-track and off-track
betting operations.
Subsequent to the Scientific Games acquisition, we reorganized our
operations into four business segments: Lottery Group, Pari-Mutuel Group, Venue
Management Group and Telecommunications Products Group.
Our Lottery Group consists of two product lines: Instant Tickets and Related
Services ("ITRS") and Lottery Systems. ITRS includes ticket design and
manufacturing as well as value-added services, including game design, sales and
marketing support, inventory management and warehousing and fulfillment
services. In addition, this division includes promotional instant tickets and
pull-tab tickets that we sell to both lottery and non-lottery customers. Lottery
Systems is comprised of our historical Lottery Operations segment as well as
Scientific Games' systems business, both of which include the supply of
transaction processing software for the accounting and validation of both
instant ticket and on-line lottery games, point-of-sale terminal hardware sales,
central site computers and communication hardware sales, and ongoing support and
maintenance services for these products.
29
<PAGE>
This product line also includes software and hardware and support service for
sports betting and credit card processing systems.
Our Pari-Mutuel Group is comprised of the same businesses historically
reported in Autotote's Pari-mutuel Operations segment which encompasses our
North American and international on-track, off-track and inter-track pari-mutuel
services, simulcasting and communications services, and video gaming, as well as
sales of pari-mutuel systems and equipment.
Our Venue Management Group is comprised of the same businesses historically
reported in Autotote's Venue Management Operations segment and include the
Connecticut off-track betting operations, and Autotote's Netherlands on-track
and off-track betting operations.
Our Telecommunications Products Group is comprised of the prepaid cellular
phone cards business.
In the second quarter of fiscal 2000, Autotote completed the sale of its SJC
Video business, which had previously been reported as a separate segment.
Autotote's revenues are derived from two principal sources: service revenues
and sales revenues. Service revenues are earned pursuant to multi-year contracts
to provide ITRS and wagering systems and services; or are derived from wagering
by customers at facilities owned or leased by Autotote. Sales revenues are
derived from sales of prepaid phone cards, and from contracts for the sale of
wagering systems, equipment, and software licenses.
The first quarter of Autotote's fiscal year and a portion of its second
fiscal quarter traditionally comprise the weakest season for pari-mutuel
wagering service revenue. Wagering equipment sales and software license revenues
usually reflect a limited number of large transactions which do not recur on an
annual basis. Consequently, revenues and operating results can vary
substantially from period to period as a result of the timing of revenue
recognition for major equipment sales and software license revenue. In addition,
instant ticket and prepaid phone card sales may vary depending on the size and
timing of contract awards, changes in customer budgets, inventory ticket
position, lottery retail sales and general economic conditions.
Operating results may also vary significantly from period to period
depending on the addition or disposition of business units in each period. The
acquisition of Scientific Games in fiscal 2000, the German pari-mutuel service
business in fiscal 1999, and the Netherlands pari-mutuel venue management
business in fiscal 1998, which were all accounted for as purchases, all affect
the comparability of operations from period to period (see Note 3 to Autotote's
Consolidated Financial Statements).
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS:
YEARS ENDED OCTOBER 31,
-------------------------------
1998 1999 2000
------- ------- -------
LOTTERY GROUP (IN THOUSANDS)
<S> <C> <C> <C>
Service revenue ........................ $ 9,217 10,238 43,219
Sales revenue .......................... $ 8,830 39,102 21,161
------- ------- -------
Total operating revenue ................ $18,047 49,340 64,380
======= ======= =======
Gross Profit (excluding depreciation and
amortization) .......................... $ 5,313 12,672 17,136
======= ======= =======
PARI-MUTUEL GROUP
Service revenue ........................ $74,171 75,788 81,563
Sales revenue .......................... $14,693 23,386 19,678
------- ------- -------
Total operating revenue ................ $88,864 99,174 101,241
======= ======= =======
Gross Profit (excluding depreciation and
amortization) .......................... $35,317 39,612 40,885
======= ======= =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
VENUE MANAGEMENT GROUP
Service revenue ........................ $ 50,525 61,562 61,411
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 13,569 15,121 16,785
======== ======== ========
TELECOMMUNICATIONS PRODUCTS GROUP
Sales revenue .......................... $ -- -- 5,989
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ -- -- 2,642
======== ======== ========
SJC VIDEO GROUP
Service revenue ........................ $ 1,877 1,072 327
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 459 310 --
======== ======== ========
COMPANY TOTAL
Service revenue ........................ $135,790 148,660 186,520
Sales revenue .......................... $ 23,523 62,488 46,828
-------- -------- --------
Total operating revenue ................ $159,313 211,148 233,348
======== ======== ========
Gross Profit (excluding depreciation and
amortization) .......................... $ 54,658 67,715 77,448
======== ======== ========
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
REVENUE ANALYSIS
Lottery Group service revenue of $43.2 million in fiscal 2000 improved $33.0
million from fiscal 1999 due to the addition of Scientific Games in September
2000, plus a full year of service to the Montana lottery which was launched in
April 1999, and the start-up of the Vermont and New Hampshire lotteries in July
2000. Sales revenue of $21.2 million in fiscal 2000 decreased $17.9 million from
fiscal 1999 due to the April 1999 equipment sale to the Montana lottery plus
completion of the 20,000 terminal sale to Sisal Sport Italia SpA.
Pari-mutuel Group service revenue of $81.6 million in fiscal 2000 improved
$5.8 million or 7.6% from fiscal 1999. $4.0 million of this increase is
attributable to the addition of the expanded German operations in the fourth
quarter of fiscal 1999, plus revenue improvements in Ireland and in the
NASRIN(TM) service operation. These revenue increases were partially offset by
lower revenues in the French racing operations and in the North American
simulcasting operations. Sales revenue of $19.7 million in fiscal 2000 decreased
$3.7 million or 15.9% from fiscal 1999 primarily due to the fiscal 1999 sale of
terminals to the UK Tote, partially offset by fiscal 2000 sales to Italy and
Chile.
Venue Management Group service revenue of $61.4 million in fiscal 2000 were
slightly lower than in fiscal 1999 as Handle related revenue increases of 3.4%
in the Connecticut OTB operations were completely offset by the effect of the
lower Euro exchange rate on the Netherlands revenues.
Telecommunications Group sales revenue of $6.0 million in fiscal 2000 are
the result of the acquisition of Scientific Games in September 2000.
SJC Video Group service revenue of $.3 million in fiscal 2000 are $.7
million less than fiscal 1999 as a result of the sale of the business in
February 2000.
GROSS PROFIT ANALYSIS
The total gross profit earned, exclusive of depreciation and amortization,
of $77.4 million in fiscal 2000 increased by $9.7 million, or 14.4%, from fiscal
1999.
31
<PAGE>
Lottery Group gross profit of $17.2 million or 26.9% of revenues improved
$4.5 million in fiscal 2000 from $12.7 million or 25.7% of revenues in fiscal
1999. The improvement is attributable to the addition of the Scientific Games
business coupled with the addition of a full year of operation on the Montana
lottery contract and the addition of the Vermont and New Hampshire lottery
contracts since July 2000. These increases were offset by lower equipment
sales revenues in fiscal 2000 plus Scientific Games business integration
costs. In addition, the increases were impacted by the shutdown of the
California plant and corresponding start-up of the new press in the Atlanta
plant in the Scientific Games manufacturing operation. The combination of the
interrupted production and unusually high costs (such as overtime and scrap),
coupled with excess costs in the systems business of Scientific Games, is
estimated to have had a $5.0 million negative impact on EBITDA in the fourth
quarter of fiscal 2000.
Pari-mutuel Group gross profit of $40.9 million in fiscal 2000 or 40.4% of
revenues improved $1.3 million from $39.6 million or 39.9% of revenues in fiscal
1999. This improvement primarily reflects the benefits of additional revenue in
the German operations and the continued growth of the NASRIN operations, plus
higher equipment sales, all partially offset by lower revenues in the French
operations, reduced satellite transponder bulk market sales, and higher
satellite service fees due to a credit received in fiscal 1999 from our
satellite provider as a result of a service interruption. During the year, the
Company largely completed the conversion of its satellite network to 8 to 1
compression but was unable to eliminate the resulting excess transponder
capacity until late in the year due to market softness. Consequently an
annualized saving of approximately $2.0 million that was expected to contribute
to profitability in fiscal 2000 will not begin until 2001.
Venue Management Group gross profit of $16.8 million in fiscal 2000 or 27.3%
of revenues improved $1.7 million from $15.1 million or 24.6% of revenues in
fiscal 1999. This improvement primarily reflects higher Handle and reduced
operating costs in the Connecticut OTB operation, partially offset by
approximately $1.0 million of start-up costs incurred in connection with the
German OTB joint venture.
Telecommunications Group gross profit of $2.6 million in fiscal 2000
represents the Group's results since their acquisition as part of Scientific
Games in September 2000.
SJC Video Group gross profit of nil in fiscal 2000 is $.3 million less than
fiscal 1999 as a result of the sale of the business in January 2000.
Gross profit as a percent of service revenues decreased to 32% in fiscal
2000 compared to 33% in fiscal 1999, primarily as a result of the unusual
production problems and excess systems costs in the Lottery Group in the fourth
quarter of fiscal 2000. The gross profit as a percent of sales revenues was 37%
in fiscal 2000, an increase from the gross profit percent of 30% in fiscal 1999
as a result of changes in the mix of equipment and systems sold, and the
addition of the Telecommunications Products Group.
EXPENSE ANALYSIS
Selling, general and administrative expenses, including software development
costs, of $35.7 million were $8.5 million or 31.2% higher than in fiscal 1999.
This increase is attributable to the addition of the Scientific Games business,
expanded German pari-mutuel operations, growing domestic lottery operations in
Vermont and New Hampshire, the $1.1 million write-off of the option to purchase
Atlantic City Raceway, and Scientific Games business integration costs. These
increases were partially offset by cost reductions in NASRIN(TM) and France, and
the absence of the SJC Video business.
Depreciation and amortization expense of $27.8 million in fiscal 2000
increased $5.6 million from $22.2 million in fiscal 1999. This increase is
primarily attributable to the acquisition of Scientific Games, coupled with the
expanded domestic lottery business and the expanded German pari-mutuel business.
These increases were partially offset by the absence of the SJC Video business
and the full depreciation of certain assets in prior periods.
Interest expense of $31.2 million in fiscal 2000 increased $15.1 million
from $16.2 million in fiscal 1999. $7.5 million of this increase is attributable
to payments, in the form of warrants to purchase 2.9 million shares of Autotote
common stock, to certain financial advisors in connection with their services in
obtaining certain financial commitments; an additional $1.2 million is due to
the required pre-funding of the new subordinated debt; and the balance is a
result of higher debt levels incurred in connection with the acquisition of
Scientific Games.
Other income of $.5 million in fiscal 2000 consisted primarily of interest
on invested excess cash, and other expense in fiscal 1999 consisted primarily of
currency translation expense.
32
<PAGE>
INCOME TAX EXPENSE
Income tax expense was $1.6 million in fiscal 2000, up from $0.2 million in
fiscal 1999. The increase reflects the effects of the acquisition of Scientific
Games. Income tax expense principally reflects federal alternative minimum tax,
state taxes and foreign taxes, since no tax benefit has been recognized on
domestic operating losses.
EXTRAORDINARY ITEMS
In connection with the fiscal 2000 issuance of the Notes and the subsequent
repayment of all amounts outstanding under the existing bank credit facility
(see Note 9 and 10 to the Consolidated Financial Statements), Autotote wrote off
$2.9 million of unamortized deferred financing fees associated with the Old
Notes and the 1998 and 2000 Term Loans and expensed $9.7 million of call premium
paid in connection with the redemption of the Old Notes. There were no tax
benefits recognized on the net extraordinary loss because Autotote is currently
in a tax loss carryforward position.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUE ANALYSIS
Revenues increased 32.5% or $51.8 million to $211.1 million in fiscal 1999
from $159.3 million in fiscal 1998.
Pari-mutuel Group services revenues of $75.8 million in fiscal 1999 improved
$1.6 million or 2.2% from the prior year. This improvement primarily reflects
revenues from the new NASRIN(TM) operation and improved simulcasting revenues in
Germany. These improvements were partially offset by the loss of a French
pari-mutuel service contract and fewer sales of excess transponder time in the
domestic simulcasting operations. Pari-mutuel equipment sales revenues of $23.4
million in fiscal 1999 increased $8.7 million or 59.2% from the prior year,
primarily due to sales of a system to the Irish Horseracing Association,
EXTREMA(TM) terminals to the UK Tote and Max 3000 terminals to other
international customers.
Venue Management Group service revenues of $61.6 million in fiscal 1999
improved $11.0 million or 21.8% from the prior year. This improvement primarily
reflects revenues from the Netherlands operations that were acquired in July
1998, higher Connecticut OTB revenues attributable to increased Handle and the
September 1998 opening of the racebook at the Mohegan Sun Casino.
Lottery Group service revenues increased $1.0 million in fiscal 1999 to
$10.2 million primarily due to the April 1999 launch of the Montana lottery.
Lottery equipment sales revenues increased to $39.1 million in fiscal 1999 from
$8.8 million in fiscal 1998. This increase is primarily attributable to the
fiscal 1999 sales of approximately 10,600 EXTREMA(TM) terminals for use in the
Sisal Sport Italia SpA lottery operations, and the March 1999 delivery of a
central system, terminals and communications equipment to the Montana Lottery.
SJC Video Group service revenues decreased $0.8 million in fiscal 1999 to
$1.1 million due to changes in customer preference from video production to
film.
GROSS PROFIT ANALYSIS
The total gross profit earned, exclusive of depreciation and amortization,
of $67.7 million in fiscal 1999 increased by $13.1 million, or 23.9%, from
fiscal 1998.
Gross profits earned by the Pari-mutuel Group of $39.6 million in fiscal
1999 increased $4.3 million from $35.3 million in fiscal 1998, principally due
to higher profits in North American pari-mutuel service operations, sales of
EXTREMA(TM) terminals to the UK Tote operations, sales of Max 3000 terminals to
other international customers, and a full year of operation of the NASRIN(TM)
business. These gross profit increases were partially offset by lower profit in
the French pari-mutuel operations due to the loss of a service contract in
fiscal 1998.
Gross profits earned by the Venue Management Group of $15.1 million in
fiscal 1999 increased $1.5 million from $13.6 million in fiscal 1998,
principally due to the growth in Handle in the Connecticut OTB operations.
33
<PAGE>
Gross profits earned by the Lottery Group of $12.7 million for fiscal 1999
increased $7.4 million from $5.3 million in fiscal 1998, primarily due to sales
of EXTREMA(TM) terminals for use in the Sisal Sport Italia SpA lottery
operations and the March 1999 delivery of a central system, terminals and
communications equipment to the Montana Lottery.
Gross profit as a percent of service revenues was 33% in fiscal 1999
compared to 35% in fiscal 1998, primarily reflecting lower margins on the
Netherlands operations that were acquired in July 1998, partially offset by
improved margins in the OTB operations and a full year of NASRIN(TM) operations.
The gross profit earned from systems and equipment sales was 30% in fiscal 1999,
a decrease from the gross profit percent of 33% in fiscal 1998 as a result of
changes in the mix of equipment and systems sold.
EXPENSE ANALYSIS
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. Selling, general and administrative expenses increased $1.0 million or
4% to $27.2 million in fiscal 1999 from $26.2 million in fiscal 1998. The
increase is primarily the result of the inclusion of the Netherlands operations
acquired in July 1998 and lower expenses reported in fiscal 1998 resulting from
the collection of receivables previously reserved due to concerns about their
recoverability.
Depreciation and amortization expenses decreased $7.3 million or 25% to
$22.2 million in fiscal 1999 from $29.5 million in fiscal 1998. Depreciation
decreased by $5.2 million primarily due to the lengthening of depreciable lives
of pari-mutuel terminals from seven to ten years effective November 1, 1998, as
the result of the renewal of a number of service contracts and realized
equipment durability. Additionally, in fiscal 1998, we completed the
installation of new lottery terminals for the Connecticut State Lottery under a
contract with an initial five-year term plus five one-year options to extend the
contract through May 2008. Based on industry practice of lottery contracts and
our historical relationship with the Connecticut State Lottery for the past ten
years, we are depreciating the terminals and installation costs on a
straight-line method over their estimated useful lives of 10 years. Amortization
expenses decreased by $2.1 million primarily as a result of the full
amortization of certain intangible assets in fiscal 1998.
Interest expense of $16.2 million in fiscal 1999 increased $0.7 million from
fiscal 1998 as a result of borrowings in connection with the fiscal 1998
installation of the Connecticut lottery terminals.
Other expense in fiscal 1999 consisted primarily of currency translation
expenses, and other income of $1.1 million in fiscal 1998 consisted primarily of
interest on invested excess cash.
LOSS ON DISPOSITION OF BUSINESS
A charge of $1.6 million was recorded to reflect the expected loss on
disposition by sale of the SJC Video production business as compared to a net
loss on disposition of businesses of $0.1 million in fiscal 1998. In fiscal
1999, the SJC Video production business incurred an operating loss of $2.5
million.
INCOME TAXES
Income tax expense was $0.2 million in fiscal 1999 compared to $0.3 million
in fiscal 1998. Income tax expense principally reflects state taxes on
Connecticut OTB operations and foreign taxes in fiscal 1999, and foreign taxes
in fiscal 1998, since no tax benefit has been recognized on domestic operating
losses.
LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL DEFICIENCY
In order to finance the Scientific Games acquisition and refinance certain
existing indebtedness, we conducted a series of financings. As a result, our
capital structure changed significantly and, among other things, we are a
significantly leveraged company. As a result of the Transactions, at October
31, 2000 we have total indebtedness outstanding of approximately $443.8
million. We have also recorded a substantial increase in goodwill and other
intangible assets in connection with the Scientific Games acquisition and a
corresponding increase in amortization expense.
Under our new senior secured credit facilities, a group of lenders has
provided aggregate facilities totaling $345.0 million, comprised of (1) a
six-year Term A Loan of $60.0 million, (2) a seven-year Term B Loan of
34
<PAGE>
$220.0 million, and (3) a six-year Revolver of $65.0 million. We borrowed the
entire $280.0 million of the term loan facilities in connection with the
consummation of the Scientific Games acquisition. See Note 9 to the Consolidated
Financial Statements for a more detailed explanation of these loan facilities,
including interest rates, amortization requirements and other terms.
In connection with the consummation of the Scientific Games acquisition, we
issued $110.0 million of new convertible preferred stock. The dividends on the
new convertible preferred stock accrue at the annual rate of 6% per annum and
are payable-in-kind until the ninth dividend payment, at which time we have the
option, subject to the terms of the Facility and Notes, to pay dividends in
cash; the new convertible preferred stock also has the right to participate in
common stock dividends, if any, on an as-converted basis. The new convertible
preferred stock is convertible at any time into shares of our common stock at
the adjusted conversion price of $5.56 per share, subject to a potential reset
to not less than $5.00 per share, and will automatically convert into common
stock five years after issuance at the conversion price then in effect. The
initial conversion price of $6 per share was adjusted to $5.56 per share due to
the issuance of 2.9 million shares in redemption of the warrants issued to our
financial advisors. See Note 13 to the Consolidated Financial Statements for a
more detailed description of the new convertible preferred stock.
At October 31, 2000, Autotote's available cash and borrowing capacity
totaled $67.4 million compared to $29.0 million at October 31, 1999. Net cash
provided by operating activities was $25.4 million for the year ended October
31, 2000. In fiscal 2000, we spent $34.9 million for wagering systems and
capital expenditures, including $6.6 million for the installation of a
pari-mutuel system for the Monmouth and Meadowlands Racetrack, $8.8 million in
connection with the installation of the New Hampshire and Vermont on-line
lotteries and $2.9 million to upgrade our satellite communications
infrastructure. In addition, we invested an additional $5.0 million in software,
primarily in connection with the above start-up projects. These investments were
funded primarily with net cash provided by operating activities, $1.9 million of
proceeds from the sale of common stock, and long-term debt.
A substantial portion of our cash flows from operations must be used to
pay our interest expense and repay our indebtedness, which will reduce the
funds that would otherwise be available to us for our operations, and capital
expenditures. Based on our current level of operations and anticipated cost
savings and operating improvements, we believe that our cash flow from
operations, available cash and available borrowings under our new revolving
credit facility will be sufficient to meet our liquidity needs for the
foreseeable future; however, we cannot assure you that this will be the case.
We also may need to refinance all or part of our indebtedness, including the
Notes, on or before their maturity; however, we cannot assure that we will
able to refinance any of our indebtedness, including our new senior credit
facilities and the notes on commercially reasonable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), as amended by SFAS 138. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires entities to record all derivative
instruments on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded in each period in current operations or other
comprehensive income (loss), based on whether a derivative is designated as
part of a hedge transaction and the type of hedge transaction. The
ineffective portion of all hedges is recognized in operations. The Company is
required to adopt SFAS 133, as amended, effective November 1, 2000.
Pursuant to the terms of the Company's credit facility, the Company is
required to maintain interest rate hedges for a notional amount of not less
than $140 million for a period of not less than two years. In satisfaction of
this requirement, the Company entered into three interest rate swap
agreements in November 2000 which obligate the Company to pay a fixed LIBOR
rate and entitle the Company to receive a variable LIBOR rate on an aggregate
$140 million notional amount of debt. The Company has structured these
interest rate swap agreements and intends to structure all future such
agreements to qualify for hedge accounting pursuant to the provisions of SFAS
133. The Adoption of SFAS 133 did not have a material affect on the
Company's consolidated operations or financial position at November 1, 2000.
Based on current derivative usage and hedging activities, the Company does
not expect the adoption of SFAS 133 to have a material impact on its future
consolidated operations or financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Management believes that
the Company's revenue recognition policy is in compliance with the provisions
of SAB 101 and that SAB 101 will have not material effect on the consolidated
financial positon or results of operations of the Company.
RECENT DEVELOPMENTS
On January 8, 2001, we announced that the Jamaica Lottery Company Limited
had chosen Autotote to supply 750 EXTREMA(TM) terminals, a central system and
support services for five years. When finalized, the arrangement will have
the potential to generate revenue of $10.9 million and may include three
two-year renewals.
On January 3, 2001, we announced that the British Columbia Lottery
Corporation has chosen us to provide an upgrade of its lottery central gaming
system and related lottery support systems. The arrangement is expected to
provide revenues of approximately $8.0 million and the new system should be
operational in 12-18 months.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our products and services are sold to a diverse group of customers
throughout the world. As such, we are subject to certain risks and uncertainties
as a result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity and breadth of our products and geographic
operations mitigate the risk that adverse changes in any event would materially
affect our financial position. Additionally, as a result of the diversity of our
customer base, we do not consider ourselves exposed to concentration of credit
risks. These risks are further minimized by setting credit limits, ongoing
monitoring of customer account balances, and assessment of the customers'
financial strengths.
Inflation has not had an abnormal or unanticipated effect on our operations.
Inflationary pressures would be significant to our business if raw materials
used for instant lottery ticket production, prepaid phone card production or
terminal manufacturing are significantly affected. Available supply from the
paper and electronics industries tends to fluctuate and prices may be affected
by supply.
For fiscal 2000, inflation was not a significant factor in our results of
operations, and we were not impacted by significant pricing changes in our
costs, except for personnel related expenditures. We are unable to forecast the
prices or supply of substrate, component parts or other raw materials in 2001,
but we currently do not anticipate any substantial changes that will materially
affect our operating results.
In certain limited cases, our lottery contracts with our customers contain
provisions to adjust for inflation on an annual basis, but we cannot be assured
that this adjustment would cover raw material price increases or other costs of
services. While we have long-term and generally satisfactory relationships with
most of our suppliers, we also believe alternative sources to meet our raw
material and production needs are available.
In the normal course of business, the Company is exposed to fluctuations in
interest rates and equity market risks as the Company seeks debt and equity
capital to sustain its operations. At October 31, 2000, approximately one-third
of the Company's debt was in fixed rate instruments. We consider the fair value
of all financial instruments to be not materially different from their carrying
value at year-end. The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
PRINCIPAL AMOUNT BY EXPECTED MATURITY - AVERAGE INTEREST RATE
OCTOBER 31, 2000
EXPECTED MATURITY DATE (DOLLARS IN $000)
<TABLE>
<CAPTION>
THERE
2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE
---------- --------- ---------- --------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed interest rate debt $ 150,000 150,000 147,750
Interest rate 12.5%
Variable interest rate $ 5,200 8,200 11,200 14,200 17,200 235,250 291,250 291,250
Average interest rate 10.48% 10.35% 10.29% 10.26% 10.24% 10.88% 10.77%
</TABLE>
In November 2000, to reduce the risks associated with fluctuations in market
interest rates and in response to requirements in the Facility (see Note 9 to
the Consolidated Financial Statements) the Company entered into three interest
rate swap contracts for an aggregate notional amount of $140,000. The following
table provides information about the Company's derivative financial instruments.
The table presents notional amounts and weighted-average swap rates by
contractual maturity dates. The Company does not hold any market risk
instruments for trading purposes.
36
<PAGE>
NOTIONAL AMOUNT BY EXPECTED MATURITY - AVERAGE SWAP RATE
EXPECTED MATURITY DATE (DOLLARS IN $000)
<TABLE>
<CAPTION>
THERE
2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE
---------- --------- ---------- --------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps:
Fixed to variable $ -- -- 140,000 -- -- -- 140,000 137,605
Receive fixed-3-month
LIBOR -- -- 6.52% -- -- -- 6.52%
</TABLE>
The Company is also exposed to fluctuations in foreign currency exchange
rates as the financial results of its foreign subsidiaries are translated into
U.S. dollars in consolidation. Assets and liabilities outside the United States
are primarily located in the United Kingdom, Germany, Netherlands, France and
Austria. The Company's investment in foreign subsidiaries with a functional
currency other than the U.S. dollar are generally considered long-term
investments. Accordingly, the Company does not hedge these net investments.
Translation gains and losses historically have not been material. We manage our
foreign currency exchange risks on a global basis by one or more of the
following: (i) securing payment from our customers in U.S. dollars, when
possible, (ii) utilizing borrowings denominated in foreign currency, and (iii)
entering into foreign currency exchange contracts. In addition, a significant
portion of the cost attributable to our foreign operations is incurred in the
local currencies. We believe that a 10% adverse change in currency exchange
rates would not have a significant adverse effect on the net earnings or cash
flows of the Company. We 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. We do not engage in currency speculation.
Our cash and cash equivalents and investments are in high-quality securities
placed with a wide array of financial institutions with high credit ratings.
This investment policy limits our exposure to concentration of credit risks.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
AUTOTOTE CORPORATION AND SUBSIDIARIES
FORM 10-K
(PAGE)
Independent Auditors' Report......................................... 40
Consolidated Financial Statements:
Balance Sheets as of October 31, 1999 and 2000.................. 41
Statements of Operations for the years ended
October 31, 1998, 1999 and 2000.............................. 42
Statements of Stockholders' Equity (Deficit) and Comprehensive
Loss for the years ended October 31, 1998, 1999 and 2000..... 43
Statements of Cash Flows for the years ended
October 31, 1998, 1999 and 2000.............................. 44
Notes to Consolidated Financial Statements........................... 46
Schedule:
II. Valuation and Qualifying Accounts................................ 80
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Autotote Corporation:
We have audited the consolidated financial statements of Autotote
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Autotote
Corporation and subsidiaries as of October 31, 1999 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Short Hills, New Jersey
December 15, 2000
39
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 2000
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 5,067 15,308
Restricted cash ....................................... 771 758
Accounts receivable, net of allowance for doubtful
accounts of $2,789 and $4,308 in 1999 and 2000,
respectively ......................................... 25,755 54,263
Inventories ........................................... 14,636 24,678
Prepaid expenses, deposits and other current assets ... 2,319 17,420
--------- ---------
Total current assets ............................... 48,548 112,427
--------- ---------
Property and equipment, at cost ........................... 199,767 317,549
Less accumulated depreciation ......................... 123,039 130,895
--------- ---------
Net property and equipment ......................... 76,728 186,654
--------- ---------
Goodwill, net ............................................. 5,237 156,557
Operating right, net ...................................... 13,848 12,848
Other intangible assets, net .............................. -- 119,871
Other assets and investments .............................. 21,198 58,858
--------- ---------
Total assets ......................................... $ 165,559 647,215
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt ................ $ 4,253 5,823
Accounts payable ...................................... 20,102 29,746
Accrued liabilities ................................... 28,015 66,875
Interest payable ...................................... 3,898 4,126
--------- ---------
Total current liabilities .......................... 56,268 106,570
--------- ---------
Deferred income taxes ..................................... 1,656 60,834
Other long-term liabilities ............................... 2,963 7,481
Long-term debt, excluding current installments ............ 117,891 438,011
Long-term debt, convertible subordinated debentures ....... 35,000 --
--------- ---------
Total liabilities .................................. 213,778 612,896
--------- ---------
Stockholders' equity (deficit):
Convertible preferred stock, par value $1.00 per share,
2,000 shares authorized, none and 1,132 shares
outstanding at October 31, 1999 and 2000,
respectively.......................................... -- 1,132
Class A common stock, par value $0.01 per share, 99,300
shares authorized, 36,268 and 39,922 shares
outstanding at October 31, 1999 and 2000,
respectively ......................................... 364 371
Class B non-voting common stock, par value $0.01 per
share, 700 shares authorized, none outstanding ....... -- --
Additional paid-in capital ............................ 149,622 264,987
Accumulated losses .................................... (196,852) (228,853)
Treasury stock, at cost ............................... (102) (102)
Accumulated other comprehensive loss .................. (1,251) (3,216)
--------- ---------
Total stockholders' equity (deficit) ............... (48,219) 34,319
--------- ---------
Commitments and contingencies (Notes 9, 11, 13, 15 and 23). $ 165,559 647,215
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues:
Services .............................................................. $ 135,790 148,660 186,520
Sales ................................................................. 23,523 62,488 46,828
--------- --------- ---------
159,313 211,148 233,348
--------- --------- ---------
Operating expenses (exclusive of depreciation and amortization shown below):
Services .............................................................. 88,916 99,496 126,601
Sales ................................................................. 15,739 43,937 29,299
--------- --------- ---------
104,655 143,433 155,900
--------- --------- ---------
Total gross profit ............................................... 54,658 67,715 77,448
Selling, general and administrative expenses ............................... 26,205 27,178 35,664
Loss on sale of businesses ................................................. 66 1,600 --
Depreciation and amortization .............................................. 29,489 22,189 27,826
--------- --------- ---------
Operating income (loss) .......................................... (1,102) 16,748 13,958
Other (income) deductions:
Interest expense ...................................................... 15,521 16,177 31,231
Other (income) expense ................................................ (1,064) 15 (456)
--------- --------- ---------
14,457 16,192 30,775
--------- --------- ---------
Income (loss) before income tax expense and extraordinary items ....... (15,559) 556 (16,817)
Income tax expense ......................................................... 321 177 1,603
--------- --------- ---------
Income (loss) before extraordinary items .............................. (15,880) 379 (18,420)
Extraordinary items--write-off of deferred financing fees and
debt call premium ....................................................... -- -- 12,567
--------- --------- ---------
Net income (loss) ..................................................... (15,880) 379 (30,987)
Convertible preferred stock dividend ....................................... -- -- 1,014
--------- --------- ---------
Net income (loss) available to common stockholders ......................... $ (15,880) 379 (32,001)
========= ========= =========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary items ................................... $ (0.44) 0.01 (0.50)
Extraordinary items ........................................................ -- -- (0.34)
--------- --------- ---------
Net income (loss) .......................................................... $ (0.44) 0.01 (0.84)
========= ========= =========
Net income (loss) available to common stockholders ......................... $ (0.44) 0.01 (0.87)
========= ========= =========
Weighted average number of shares used in per share calculations:
Basic shares .......................................................... 35,696 36,118 36,928
Diluted shares ........................................................ 35,696 38,343 36,928
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE LOSS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK:
Beginning balance .......................................................... $ 354 360 364
Issuance of Class A common stock, net of issuance expenses ............ 6 4 4
Issuance of 2,900 shares of Class A common stock in warrant exercises . -- -- 3
--------- --------- ---------
Ending balance ............................................................. 360 364 371
--------- --------- ---------
PREFERRED STOCK:
Beginning balance .......................................................... -- -- --
Issuance of 1,128 shares of convertible preferred stock,
net of issuance expenses .......................................... -- -- 1,128
Issuance of 4 shares of convertible preferred stock as in-kind dividend -- -- 4
--------- --------- ---------
Ending balance ............................................................. -- -- 1,132
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance .......................................................... 148,238 149,119 149,622
Issuance of Class A common stock, net of issuance expenses ............ 511 233 1,107
Issuance of convertible preferred stock, net of issuance expenses ..... -- -- 105,673
Issuance and exercise of warrants ..................................... -- -- 8,321
Deferred compensation ................................................. 370 270 264
--------- --------- ---------
Ending balance ............................................................. 149,119 149,622 264,987
--------- --------- ---------
ACCUMULATED LOSSES:
Beginning balance .......................................................... (181,351) (197,231) (196,852)
Net income (loss) ..................................................... (15,880) 379 (30,987)
Convertible preferred stock dividend .................................. -- -- (1,014)
--------- --------- ---------
Ending balance ............................................................. (197,231) (196,852) (228,853)
--------- --------- ---------
TREASURY STOCK ............................................................. (102) (102) (102)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning balance .......................................................... (379) (784) (1,251)
Other comprehensive loss .............................................. (405) (467) (1,965)
--------- --------- ---------
Ending balance ............................................................. (784) (1,251) (3,216)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ (48,638) (48,219) 34,319
========= ========= =========
COMPREHENSIVE LOSS:
Net income (loss) .......................................................... $ (15,880) 379 (30,987)
Other comprehensive loss:
Minimum pension liability adjustment .................................. (495) (107) (5)
Foreign currency translation adjustment ............................... 90 (360) (2,277)
Unrealized gain on investments ........................................ -- -- 317
--------- --------- ---------
Other comprehensive loss ................................................... (405) (467) (1,965)
--------- --------- ---------
COMPREHENSIVE LOSS ......................................................... $ (16,285) (88) (32,952)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $(15,880) 379 (30,987)
-------- -------- --------
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization .......................... 29,489 22,189 27,826
Change in deferred income taxes,
net of effects of businesses acquired ............. (592) 54 120
Loss on sale of businesses ............................. 66 1,600 --
Non-cash interest expense .............................. -- -- 7,511
Extraordinary items .................................... -- -- 12,567
Changes in operating assets and liabilities, net of
effects of acquisitions/dispositions of businesses:
Restricted cash ................................... 57 (150) (19)
Accounts receivable ............................... (7,841) (4,826) 8,605
Inventories ....................................... (4,600) (3,314) 4,681
Accounts payable .................................. 2,909 7,494 (4,351)
Accrued liabilities ............................... 2,762 2,034 764
Other .................................................. 1,790 1,089 (1,390)
-------- -------- --------
Total adjustments ................................. 24,040 26,170 56,395
-------- -------- --------
Net cash provided by operating activities ........................ 8,160 26,549 25,408
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ........................................ (2,773) (2,069) (6,131)
Wagering systems expenditures ............................... (21,287) (12,865) (28,915)
Increase in other assets and investments .................... (7,277) (9,035) (7,304)
Business acquisitions, net of cash acquired ................. 2,177 (2,333) (316,242)
Other ....................................................... (63) 759 1,109
-------- -------- --------
Net cash used in investing activities ............................ (29,223) (25,543) (357,483)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility .............. -- -- 11,250
Proceeds from issuance of long-term debt .................... 12,059 -- 442,522
Payments on long-term debt .................................. (3,072) (3,154) (201,362)
Payment of financing fees ................................... -- -- (16,792)
Net proceeds from issuance of common stock .................. 516 237 1,114
Net proceeds from issuance of convertible preferred stock ... -- -- 106,378
-------- -------- --------
Net cash provided by (used in) financing activities .............. 9,503 (2,917) 343,110
-------- -------- --------
Effect of exchange rate changes on cash .......................... 162 169 (794)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................. (11,398) (1,742) 10,241
Cash and cash equivalents, beginning of year ..................... 18,207 6,809 5,067
-------- -------- --------
Cash and cash equivalents, end of year ........................... $ 6,809 5,067 15,308
======== ======== ========
</TABLE>
(Continued)
43
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES
1998, 1999 AND 2000
See Notes 10, 11 and 13 for a description of the write-off of deferred
financing fees, capital lease transactions and the issuance of common stock
warrants to the Company's financial advisors in connection with their services
and convertible preferred stock dividends paid-in-kind.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1998 1999 2000
----------- --------- --------
<S> <C> <C> <C>
Interest.................................. $ 14,786 15,077 22,177
Income taxes.............................. $ 630 710 2,413
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE BUSINESS
Autotote Corporation (the "Company") operates primarily in four business
segments: Lottery Group, Pari-mutuel Group, Venue Management Group and
Telecommunications Products Group.
Lottery Group-- encompasses the full range of lottery game consulting and
production services, including the manufacturing, warehousing and
distribution of instant lottery tickets and related instant-ticket
services such as game design, sales and marketing support, retailer
telemarketing and field services. The Company also provides on-line
lottery systems and systems-related services, including transaction
processing software that accommodates instant ticket game accounting and
validation and on-line games, point-of-sale terminal hardware which
connect to these systems, central site computer and communications
hardware which runs these systems and ongoing maintenance for each of
these items. Our lottery products and services are provided primarily to
domestic and international governmentally sanctioned lotteries worldwide.
Pari-mutuel Group-- includes all aspects of our pari-mutuel service
business, which encompass our North American and international on-track,
off-track and inter-track pari-mutuel services, simulcasting and
communications services, video gaming, and sales of pari-mutuel systems
and equipment. We are the leading provider of computerized pari-mutuel
wagering worldwide. We are one of the leading providers of simulcasting
services to the racing industry in the United States and Europe.
Venue Management Group-- we own and operate the Connecticut off-track
betting operations ("OTBs") and we are the exclusive licensed operator of
all on-track and off-track pari-mutuel wagering operations in the
Netherlands.
Telecommunication Products Group-- through our United Kingdom based
operations, we manufacture prepaid scratch-off phone cards incorporating
our superior lottery based proprietary technology to create highly
secure, paper-based, prepaid phone cards for the rapidly growing
international cellular telephone markets.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and subsidiaries in which the Company's ownership is
greater than 50%. Investments in other entities where the Company has the
ability to exercise significant influence over the investee are accounted
for on the equity basis. Under the equity method, investments are stated
at cost plus the Company's equity in undistributed earnings after
acquisition. All significant inter-company balances and transactions have
been eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity at the date of purchase of three months or less to be cash
equivalents.
(d) RESTRICTED CASH
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such balances
until deposited amounts are wagered or returned to the customer.
AUTOTOTE CORPORATION AND SUBSIDIARIES
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(e) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
as follows:
<TABLE>
<CAPTION>
ITEM COST METHOD
---- -----------
<S> <C>
Parts First-in, first-out or weighted moving average.
Work-in-process First-in, first-out or weighted moving average for direct material and
& finished goods labor; other fixed and variable production costs are
allocated as a percentage of direct labor cost.
</TABLE>
The Company adjusts inventory accounts on a periodic basis to reflect the
impact of potential obsolescence.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED LIFE
ITEM IN YEARS
---- --------------
<S> <C>
Machinery and equipment................ 3-10
Transportation equipment............... 3-7
Furniture and fixtures................. 5-10
Buildings and leasehold improvements... 5-40
</TABLE>
Depreciation expense includes the amortization of capital leased assets.
The Company typically depreciates the equipment and installation costs
for new customers on a straight-line method over the life of the initial
term of their contracts.
(g) DEFERRED INSTALLATION COSTS
Certain installation costs consisting of installation materials, customer
contracted software and installation labor associated with leased systems
are deferred and amortized over the lives of the leases unless such costs
are reimbursed by the lessee, in which case such amounts are included in
revenue and cost of sales. Deferred installation costs, net of
accumulated depreciation, included in property and equipment were
approximately $5,807 and $9,831 at October 31, 1999 and 2000,
respectively.
46
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(h) GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of the net assets of acquired companies. Goodwill acquired in connection
with the acquisition of Scientific Games (Note 3) and its operating
business units is being amortized on a straight-line basis over 20 years,
and for the German pari-mutuel wagering business acquired in 1999,
goodwill is being amortized on a straight-line basis over 10 to 15 years.
Total goodwill amounted to $5,237 and $156,557, net of accumulated
amortization of $12,503 and $13,725 as of October 31, 1999 and 2000,
respectively.
(i) OTHER ASSETS AND INVESTMENTS
The Company capitalizes costs associated with internally developed and/or
purchased software systems for new products and enhancements to existing
products that meet technological feasibility and recoverability tests.
The Company also capitalizes costs associated with the procurement of
long-term financing, and costs attributable to transponder leases,
patents, trademarks, marketing rights, and non-competition and employment
agreements arising primarily from business acquisitions. These
capitalized costs are amortized on the straight-line basis over their
useful lives.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
The Company assesses the recoverability of long-lived assets and
intangibles, including goodwill, whenever events or changes in
circumstances indicate that the carrying value of such an asset may not
be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the asset to the expected net
future cash flows to be generated by that asset, or, for goodwill and
intangibles, by determining whether the amortization of the goodwill
and intangible asset balance over its remaining life can be recovered
through undiscounted future cash flows of the acquired operation and
other considerations. The amount of impairment of goodwill and
intangible assets, if any, is measured based on projected discounted
future cash flows. The amount of impairment of other long-lived assets
is measured by the amount by which the carrying value of the asset
exceeds the fair market value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair market value, less
costs to sell.
(k) REVENUE RECOGNITION
Revenues from pari-mutuel wagering services, simulcast and communication
services and lottery service support contracts are recognized over the
contract period pursuant to the terms of the contracts. Costs of
providing operating services under contracts are charged to operations in
the period incurred. Revenue from the operation of off-track betting
concerns is recognized based on a percentage of amounts wagered. Revenues
from the sales of products and supplies are recognized when shipped.
Revenues from major contracts for the sale of lottery development
projects, pari-mutuel wagering systems and revenues for contracted
software development are recognized on the percentage of completion
method of accounting based on the ratio of costs incurred to estimated
costs to complete, or other comparable measures of progress toward
completion. Any anticipated losses on fixed price contracts are charged
to operations when such losses can be estimated. The Company recognizes
revenue from software licenses upon shipment if post-delivery obligations
are insignificant and if the terms of the agreement are such that the
payment obligation is non-cancelable and non-refundable.
47
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
(l) INCOME TAXES
Income taxes are calculated using the asset and liability method under
Statement of Financial Accounting Standard (SFAS) No. 109. Under this
method, deferred income taxes are calculated by applying enacted
statutory tax rates to cumulative temporary differences between financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(m) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at year-end
rates of exchange and operations are translated at the average rates of
exchange for the year. Gains or losses resulting from translating the
foreign currency financial statements are accumulated as a separate
component of accumulated other comprehensive loss in stockholders' equity
(deficit). Gains or losses resulting from foreign currency transactions
are included in other income (expense) in the consolidated statements of
operations.
(n) STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method.
For disclosure purposes (see Note 14), pro forma net income (loss) and
income (loss) per share data are provided in accordance with Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
as if the fair value method had been applied.
(o) FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Some of the
more significant estimates being made involve percentage of completion
for contracted lottery development projects and pari-mutuel systems
software development projects, capitalization of software development
costs, evaluation of the recoverability of assets and assessment of
litigation and contingencies, including income and other taxes. Actual
results could differ from those estimates.
(p) COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for the reporting
and display of comprehensive income (loss) and its components in a full
set of financial statements. SFAS 130 requires that unrealized losses from
the Company's foreign currency translation adjustments, unrecognized
minimum pension liability and unrealized gains (losses) on investments be
included in other comprehensive income (loss).
(q) RECLASSIFICATION
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
48
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) BASIC INCOME (LOSS) PER COMMON SHARE AND DILUTED INCOME (LOSS) PER COMMON
SHARE
Basic income (loss) per common share is computed by dividing income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted income per common share gives effect to all dilutive potential common
shares that were outstanding during the period. Potential common shares are not
included in the calculation of the dilutive loss per share in the applicable
years presented, since their inclusion would be anti-dilutive. At October 31,
2000, the Company had outstanding common stock options, warrants, Performance
Accelerated Restricted Stock Units, convertible preferred stock and deferred
shares which could potentially dilute basic earnings per share in the future
(see Notes 13 and 14).
The following represents a reconciliation of the numerator and denominator
used in computing basic and diluted income (loss) per common share for the years
ended October 31, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
INCOME (NUMERATOR)
Income (loss) before extraordinary items ............. $(15,880) 379 (18,420)
Extraordinary items .................................. -- -- (12,567)
-------- -------- --------
Net income (loss) .................................... (15,880) 379 (30,987)
Convertible preferred stock dividend ................. -- -- 1,014
-------- -------- --------
Net income (loss) available to common stockholders ... $(15,880) 379 (32,001)
======== ======== ========
SHARES (DENOMINATOR)
Basic weighted average common shares outstanding ..... 35,696 36,118 36,928
Effect of dilutive securities-stock options, warrants,
and deferred shares ............................. -- 2,225 --
-------- -------- --------
Diluted weighted average common shares outstanding ... 35,696 38,343 36,928
======== ======== ========
BASIC AND DILUTED PER SHARE AMOUNT
Income (loss) before extraordinary items ............. $ (0.44) 0.01 (0.50)
Extraordinary items .................................. -- -- (0.34)
-------- -------- --------
Net income (loss) .................................... $ (0.44) 0.01 (0.84)
======== ======== ========
Net income (loss) available to common stockholders ... $ (0.44) 0.01 (0.87)
======== ======== ========
</TABLE>
(3) ACQUISITIONS AND DISPOSITIONS
ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP.
On September 6, 2000, the Company completed the acquisition of Scientific
Games Holdings Corp. ("Scientific Games"), a world leading supplier of lottery
products, integrated lottery systems and support services, and pre-paid
telephone cards. The acquisition was completed through a merger in which
Scientific Games became a wholly-owned subsidiary of the Company, at a cost of
approximately $308,000 in aggregate merger consideration to Scientific Games
stockholders, plus related fees and expenses. The acquisition was recorded using
the purchase method of accounting. The acquired assets and liabilities were
recorded at their estimated fair value at the date of acquisition. The excess of
the purchase price over the fair values of the net assets acquired was
approximately $154,300 and has been recorded as goodwill which is being
amortized over 20 years. The operating results of Scientific Games' businesses
have been included in the accompanying consolidated statements of operations
from the date of the acquisition.
49
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
The Scientific Games acquisition and the refinancing of substantially all
existing debt of both the Company and Scientific Games, along with the payment
of certain related fees and expenses, was completed with funds provided by: (1)
proceeds from the issuance of $150,000 principal amount of the Company's 12 1/2%
Senior Subordinated Notes due August 15, 2010; (2) $280,000 of term loan
borrowings under the terms of a new senior credit facility; (3) $2,987 of
borrowings under the new revolving credit facility of the senior credit
facility; (4) $4,805 of cash on hand; and (5) $110,000 of gross proceeds from
the sale of new convertible preferred stock, principally to an affiliated entity
of Olivetti S.p.A. (see notes 9 and 13).
The following table presents unaudited pro forma results of
operations as if the Scientific Games acquisition and related financing
transactions had occurred at the beginning of the periods presented after giving
effect to certain adjustments, including amortization of goodwill and other
identifiable intangible assets, additional depreciation expense, increased
interest expense, convertible preferred stock dividends and related income tax
effects. These pro forma results have been prepared for comparative purposes and
do not purport to be indicative of what would have occurred had the acquisition
been made at the beginning of fiscal year 1999 or the results which may occur in
the future.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------
1999 2000
--------- ---------
(unaudited)
<S> <C> <C>
Operating revenues ................................... $ 439,811 437,073
Operating income ..................................... 40,158 29,847
Loss before income tax expense and extraordinary items $ (10,084) (19,993)
Net loss ............................................. $ (13,738) (24,006)
Convertible preferred stock dividend ................. (6,765) (6,765)
--------- ---------
Net loss available to common stockholders ............ $ (20,503) (30,771)
Basic and diluted net loss per share ................. $ (0.57) (0.83)
========= =========
Basic and diluted net loss per common share .......... $ (0.57) (0.83)
========= =========
</TABLE>
ACQUISITION OF DATASPORT ASSETS AND INTEREST IN DATEK
On September 1, 1999, the Company completed the purchase of selected assets
and the assumption of certain liabilities, from Datasport Toto Dienstleistung
GmbH & Co KG ("Datasport"). As a result of this purchase, the Company is the
sole provider of totalisator and simulcasting services to the 14 thoroughbred
racetracks in Germany. The transaction also increased the Company's ownership
and control of Datek GmbH ("Datek"), the primary provider of pari-mutuel
wagering to OTBs and bookmakers in Germany. The purchase, which included
approximately $2,333 in cash and the assumption of certain liabilities, was
recorded using the purchase method of accounting, and the acquired assets and
liabilities have been recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $3,200 and has been recorded as goodwill which
is being amortized over 15 years. The operating results of the Datasport and
Datek businesses have been included in the consolidated statements of operations
since the date of acquisition. Had the operating results of the Datasport and
Datek businesses been included as if the transaction had been consummated on
November 1, 1998, the pro forma operating results of the Company would not have
been materially different.
50
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
ACQUISITION OF NETHERLANDS SUBSIDIARY
On July 1, 1998, the Company completed the purchase of Hippo Toto B.V.,
which was renamed Autotote Nederland B.V. This wholly owned subsidiary holds an
exclusive five-year license to operate all on-track and off-track pari-mutuel
wagering in The Netherlands. The initial license, granted by the Dutch Ministry
of Agriculture, extends through June 30, 2003. The purchase was for nominal
consideration and the acquisition was recorded using the purchase method of
accounting and, accordingly, the assets and liabilities of the acquired entities
have been recorded at their estimated fair value at the date of acquisition. The
operating results of Autotote Nederland B.V. have been included in the
consolidated statements of operations since the date of acquisition.
DISPOSITION OF BUSINESSES
In the fourth quarter of fiscal 1999, the Company commenced negotiations to
sell its SJC Video business and recorded an anticipated loss on the sale of
approximately $1,600 in fiscal 1999. The sale of the business was completed
in the first quarter of fiscal 2000 for its then approximate net book value.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 2000
--------- --------
<S> <C> <C>
Parts and work-in-process.......................... $ 13,735 12,545
Finished goods..................................... 901 12,133
--------- --------
$ 14,636 24,678
========= ========
</TABLE>
Terminals manufactured by the Company may be sold to customers or included
as part of a long-term wagering system contract. Parts and work-in-process
includes costs for equipment expected to be sold. Costs incurred for equipment
associated with specific wagering system contracts not yet placed in service are
classified as construction in progress in property and equipment (see Note 5).
(5) PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital leases, consist of
the following:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1999 2000
-------- --------
<S> <C> <C>
Machinery, equipment and deferred installation costs... $169,334 245,504
Land and buildings .................................... 14,251 39,154
Transportation equipment .............................. 722 3,097
Furniture and fixtures ................................ 3,971 6,699
Leasehold improvements ................................ 5,886 9,376
Construction in progress .............................. 5,603 13,719
-------- --------
$199,767 317,549
======== ========
</TABLE>
Depreciation expense for the years ended October 31, 1998, 1999, and 2000
amounted to $19,310, $14,158 and $16,528, respectively.
51
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) PROPERTY AND EQUIPMENT -- (CONTINUED)
Costs for equipment associated with specific wagering systems contracts not
yet placed in service are recorded as construction in progress. When the
equipment is placed in service at wagering facilities, the related costs are
transferred from construction in progress to machinery and equipment, and the
Company commences depreciation of the costs.
(6) OPERATING RIGHT AND OTHER INTANGIBLE ASSETS
Operating right and other intangible assets (net) consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1999 2000
-------- --------
<S> <C> <C>
Operating Right ... $ 13,848 12,848
======== ========
Employee work force $ -- 6,980
Patents ........... -- 15,441
Customer lists .... -- 65,496
Trade name ........ -- 31,954
-------- --------
$ -- 119,871
======== ========
</TABLE>
In connection with the acquisition of Scientific Games (Note 3) identifiable
intangible assets were recorded at their estimated fair value at the date of
acquisition in the amount of $121,000. These identifiable assets are being
amortized on a straight line basis over their estimated useful lives as follows:
employee work force- 5 years; patents- 15 years; customer lists- 20 years and
trade name- 20 years. Amortization of these intangible assets totaled $1,129 for
the year ended October 31, 2000.
On July 1, 1993, the Company acquired the exclusive right to operate the
Connecticut off-track betting system. This operating asset is being amortized on
a straight-line basis over 20 years and amounted to $13,848 and $12,848, net of
accumulated amortization of $6,357 and $7,357 at October 31, 1999 and 2000,
respectively.
(7) OTHER ASSETS AND INVESTMENTS
Other assets and investments (net) consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1999 2000
---------- ---------
<S> <C> <C>
Software systems development costs........... $ 8,718 29,252
Deferred financing costs..................... 3,351 16,153
Customer notes............................... 3,031 3,154
Other assets................................. 6,098 10,299
---------- ---------
$ 21,198 58,858
========== =========
</TABLE>
In fiscal 1999 and 2000, the Company capitalized $5,246 and $5,695,
respectively, of software systems development costs related primarily to video
gaming, pari-mutuel wagering and lottery applications, plus $16,800 for the fair
value of internally developed software acquired in connection with the
acquisition of Scientific Games. Capitalized costs are amortized on a
straight-line basis over a period of five to ten years. Amortization of
capitalized software systems development costs was $2,318, $2,506 and $2,454 for
the years ended October 31, 1998, 1999 and 2000, respectively.
52
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) OTHER ASSETS AND INVESTMENTS--(CONTINUED)
Deferred financing costs arose in connection with the procurement of long
term financing by the Company, and are amortized over the life of the financing
agreements. In fiscal 2000, the Company capitalized $16,517 of financing fees
incurred in connection with the Transactions. Accordingly, the Company
wrote-off, as an extraordinary charge, $2,865 of previously deferred financing
costs in connection with its repayment of the Old Facility and 1998 and 2000
Term Loans. Amortization of deferred financing costs amounted to $893, $942 and
$1,224 for the fiscal years ended October 31, 1998, 1999 and 2000, respectively.
Other assets in fiscal 1999 included $750 loaned by the Company to Atlantic
City Racing Association ("ACRA"). The loan was secured by a mortgage on certain
real estate owned by ACRA. In consideration for this loan, the Company had the
right to acquire ACRA for an additional $6,250 subject to certain other
adjustments. Several anticipated legislative and regulatory actions by the State
of New Jersey did not occur, and the Company decided not to purchase ACRA at
this time. The loan and approximately $385 in deferred acquisition costs were
written off in the fourth quarter of fiscal 2000.
(8) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 2000
--------- --------
<S> <C> <C>
Compensation and benefits............................ $ 8,830 12,393
Customer advances.................................... 3,760 1,447
Taxes, other than income............................. 2,043 3,717
Accrued acquisition costs............................ -- 10,571
Accrued contract costs............................... -- 11,746
Other................................................ 13,382 27,001
--------- --------
$ 28,015 66,875
========= ========
</TABLE>
(9) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1999 2000
-------- --------
<S> <C> <C>
12 1/2% Series B Senior Subordinated Notes due 2010 ......... $ -- 150,000
Term A loan with varying interest rate due 2006 ............. -- 60,000
Term B loan with varying interest rate due 2007 ............. -- 220,000
Revolving credit facility with varying interest rate due 2006 -- 11,250
10 7/8% Series B Senior Notes due 2004 ...................... 110,000 --
8.87% Term Loan Due February 2001 ........................... 9,000 --
Term Loan due in November 1999 .............................. 1,250 --
5.5% convertible subordinated debentures due August 2001 .... 35,000 --
Capital lease obligations, payable monthly through May 2003
Interest from 5.9% to 13.0% ............................ 1,453 1,939
Various loans and bank facilities, interest from 4.3% to 13% 441 645
-------- --------
Total long-term debt .................................. 157,144 443,834
Less current installments ............................. 4,253 5,823
-------- --------
Long-term debt, excluding current installments ........ $152,891 438,011
======== ========
</TABLE>
53
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
On September 6, 2000, in addition to the payment of the acquisition
consideration to the shareholders of Scientific Games, the Company refinanced
substantially all existing debt of both the Company and Scientific Games and
paid certain related fees and expenses (collectively, the "Transactions"). In
addition to cash on hand and proceeds from the sale of convertible preferred
stock, the Company incurred the following debt to fund the Transactions: (i)
$150,000 principal amount of 12 1/2% Senior Subordinated Notes due August 15,
2010 (the "Notes"); (ii) $280,000 of term loan borrowings under the terms of a
new senior credit facility (the "Facility"); and (iii) $2,987 of borrowings
under the revolving credit portion of the Facility.
The Notes bear interest at the rate of 12 1/2% per annum payable
semi-annually on each February 15 and August 15, commencing February 15, 2001.
The Notes are senior subordinated, unsecured obligations of the Company, ranking
junior to all existing and future senior debt including obligations under the
Facility. The Notes are fully and unconditionally guaranteed on a senior
subordinated basis by all of the Company's wholly-owned U.S. subsidiaries(Note
24). The Notes will be redeemable, at the option of the Company, at any time on
or after August 15, 2005, in whole or in part, at redemption prices equal to
106.250%, 104.167%, 102.083% and 100.000% of the principal amount thereof if
redeemed during the 12-month periods commencing on August 15 of years 2005,
2006, 2007, and 2008 and thereafter, respectively. In addition, on or before
August 15, 2003, the Company may, at its option, redeem up to 35% of the Notes
at 112.5% of the principal amount thereof, plus accrued and unpaid interest,
with the net proceeds of equity offerings, provided at least 65% of the original
aggregate principal amount of the Notes remain outstanding immediately after
such redemption.
In addition to the issuance of the Notes, the Company also entered into the
Facility with certain lenders, providing for borrowings of up to $345,000. The
Facility consists of: (a) a $65,000 revolving credit facility, available for
working capital and general corporate purposes (the "Revolver"), which matures
in September 2006 with interest at the Base Rate (as defined) plus a margin of
2.25% per annum, or at the rate of LIBOR plus a margin of 3.50% per annum, plus
a commitment fee on the unused portion of 0.05% per annum, for the first six
months and thereafter as determined by reference to a leverage-based pricing
grid; (b) a $60,000 term loan (the "Term A Loan") which matures in September
2006 with interest at the Base Rate plus a margin of 2.25% per annum, or at the
rate of LIBOR plus 3.50% per annum for the first six months and thereafter as
determined by reference to a leverage-based pricing grid; and (c) a $220,000
term loan (the "Term B Loan") which matures in September 2007 with interest at
the Base Rate plus a margin of 3.00% per annum, or at the rate of LIBOR plus
4.25% per annum. The Facility is secured by a first priority, perfected lien on:
(i) substantially all the property and assets (real and personal, tangible and
intangible) of the Company and its domestic subsidiaries, (ii) 100% of the
capital stock of all of the direct and indirect domestic subsidiaries and 65% of
the capital stock of the foreign subsidiaries of the Company and (iii) all
inter-company indebtedness owing to the Company and its material subsidiaries.
The Facility is supported by guarantees provided by all of the Company's
direct and indirect, wholly-owned domestic subsidiaries. Average interest
rates at October 31, 2000 were 10.45% per annum on Revolver borrowings,
10.13% per annum on Term A Loan borrowings and 10.96% per annum on Term B Loan
borrowings. At October 31, 2000, availability under the Revolver was $52,091.
Under the terms of the Facility, the Company is required to maintain interest
rate hedges for a notional amount of not less than $140,000 for a period of not
less than two years. In satisfaction of this requirement, the Company entered
into three interest rate swap agreements in November 2000 which obligate the
Company to pay a fixed LIBOR rate and entitle the Company to receive a variable
LIBOR rate on an aggregate $140,000 notional amount of debt.
54
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
Term A Loan requires quarterly principal payments $750 in the first year of
borrowing, $1,500 in the second year after the borrowing, $2,250 in the third
year after the borrowing, $3,000 in the fourth year after the borrowing, and
$3,750 in the fifth and sixth years after the borrowing. Term B Loan requires
quarterly principal payments of $550 during the first through the sixth years
after the borrowing, and $51,700 in the seventh year after the borrowing. The
aggregate scheduled maturities under the Facility are $5,200, $8,200, $11,200,
$14,200, and $17,200 for fiscal years 2001, 2002, 2003, 2004 and 2005,
respectively. In addition, the Facility will be subject to the following
mandatory prepayments, with certain customary exceptions: (i) 100% of the net
cash proceeds from the sale or issuance of debt securities; (ii) 100% of the net
proceeds from the sale of assets and casualty insurance proceeds; (iii) 50% of
the Company's excess cash flow (as defined), or if the leverage ratio is less
than 3.00 to 1.00, 25% of the Company's excess cash flow; and (iv) 50% of the
net cash proceeds from the sale or issuance of equity (except for the issuance
of the Company's new convertible preferred stock).
The indenture governing the Notes and the agreement governing the Facility
contain certain covenants that, among other things, limit the Company's ability,
and the ability of certain of the Company's restricted subsidiaries, to incur
additional indebtedness, pay dividends or distributions or make certain other
restricted payments, purchase or redeem capital stock, make investments or
extend credit, engage in certain transactions with affiliates, engage in
sale-leaseback transactions, consummate certain asset sales, effect a
consolidation or merger or sell, transfer, lease or otherwise dispose of all or
substantially all assets, and create certain liens and other encumbrances on new
assets. Additionally, the agreement governing the Facility contains the
following financial covenants which will be computed quarterly on a rolling
four-quarter basis as applicable: (i) minimum Interest Coverage ratio, (ii)
minimum Fixed Charge Coverage ratio; (iii) maximum Leverage ratio; and (iv)
minimum Net Worth.
Prior to the September 6, 2000 Transactions, the Company's debt consisted
primarily of: (a) $110,000 of 10 7/8% Series B Senior Notes due August 1, 2004
(the "Old Notes"), (b) $35,000 of 5.5% convertible subordinated debentures due
2001 (the "Debentures"), (c) $18,634 of borrowings under a revolving credit
facility (the "Old Facility"), (d) a $7,200 term loan (the "1998 Term Loan"),
and (e) a $9,900 term loan (the "2000 Term Loan"). The Old Notes, the
Debentures, borrowings under the Old Facility, the 1998 Term Loan, and the 2000
Term Loan were all repaid in full with cash on hand and with proceeds from the
debt and equity financing in the Transactions. The Debentures were convertible
into 1,750 shares of Class A Common Stock at a conversion price of $20.00 per
share.
The Old Notes were issued by the Company in July 1997. The Old Notes bore
interest at a rate of 10 7/8% per annum payable semi-annually on each February 1
and August 1. The Old Notes were senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all indebtedness of the
Company that by its terms was expressly subordinated to the Old Notes. The Old
Notes were jointly and severally guaranteed by substantially all of the
Company's wholly-owned U.S. subsidiaries. The Old Notes were redeemable, in
whole or in part, at the option of the Company, at any time on or after August
1, 2001, at varying redemption prices plus accrued and unpaid interest, if any,
to the date of redemption. In connection with the redemption of the Old Notes on
September 6, 2000, the Company paid a call premium to the Old Note holders in
the amount of $9,702. This call premium was recorded as an extraordinary item in
the Company's consolidated statements of operations in fiscal 2000.
In connection with the issuance of the Old Notes, the Company also entered
into the Old Facility with certain lenders which had an original maturity date
of February 2001, and which provided, subject to certain terms and conditions,
for borrowings of up to $25,000 with a $15,000 sublimit for letters of credit.
Borrowings under the Old Facility were available for working capital and general
corporate purposes and bore interest at the Base Rate (as defined) plus a margin
ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as defined) plus
a margin ranging from 2.00% to 2.75% per annum, in each case depending on the
Company's performance as
55
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) LONG-TERM DEBT--(CONTINUED)
measured by the ratio of net debt (as defined) to EBITDA (as defined). Fees were
payable on outstanding letters of credit equal to the applicable Eurodollar Rate
margin (2.25% as of October 31, 1999), plus a facing fee of 1/8% per annum. A
commitment fee of 1/2% per annum was payable on the unused amount of the Old
Facility. Obligations under the Old Facility were jointly and severally
guaranteed by substantially all of the Company's U.S. subsidiaries. In addition,
the Old Facility was secured by (i) first priority security interests in
substantially all tangible and intangible assets of the Company and its U.S.
subsidiaries, and (ii) a first priority lien on all of the capital stock of the
Company's U.S subsidiaries and on 65% of the capital stock of the Company's
non-U.S. subsidiaries. At October 31, 1999, there were no borrowings outstanding
under the Old Facility. Therefore, the Company had approximately $23,960
available for borrowing, after deducting approximately $1,040 for letters of
credit which were guaranteed under the Old Facility.
The 1998 Term Loan was arranged to partially finance the development and
installation of a lottery system for the Connecticut State Lottery, including
the manufacture of approximately three thousand new lottery terminals, entered
into by the Company and Autotote Lottery Corporation on May 22, 1998. The 1998
Term Loan bore interest at a fixed rate of 8.87% payable quarterly and at
maturity on February 15, 2001, with principal payments of $600 due quarterly
through January 31, 2001 with a final principal payment of $6,000 due at
maturity. The Term Loan was secured by a first priority security interest in
substantially all of the Company's Connecticut lottery assets.
The 2000 Term Loan was arranged in June 2000 with an original maturity of
February 15, 2001. The 2000 Term Loan bore interest at a rate of prime plus
2.50% per annum or LIBOR plus 3.50% per annum, with such interest to be paid
quarterly beginning August 15, 2000. Principal payments of $100 were due on
August 15 and November 15, 2000, with a final principal payment of $9,800 due at
maturity.
(10) EXTRAORDINARY ITEMS
In connection with the acquisition of Scientific Games and the related
financing transactions and the subsequent repayment of all amounts outstanding
under the Company's previous credit facilities (see Note 9), the Company
wrote-off $2,865 of deferred financing fees and expensed $9,702 in call premium
on the Old Notes. There were no tax benefits recognized on the net extraordinary
loss because the Company is currently in a tax loss carryforward position.
56
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) COMMITMENTS
LEASES
At October 31, 2000, the Company was obligated under operating leases
covering office equipment, office and warehouse space, transponders and
transportation equipment expiring at various dates through 2006. Future minimum
lease payments required under these leasing arrangements at October 31, 2000 are
as follows: 2001, $10,313; 2002, $9,680; 2003, $8,511; 2004, $8,100; 2005 $7,861
and thereafter $5,186. The Company also leases equipment as needed under various
month-to-month lease agreements. Total rental expense under these operating
leases was $9,109, $8,155, and $9,051 in the years ended October 31, 1998, 1999
and 2000, respectively.
The Company acquired $59 of capitalized leases with the acquisition of the
Netherlands operations in the year ended October 31, 1998 and acquired $1,426 of
capitalized leases with the acquisition of the Datasport and Datek businesses in
the year ended October 31, 1999. During the year ended October 31, 2000, the
Company entered into capital lease obligations of $62 and acquired capitalized
leases of $40 in connection with the Scientific Games acquisition.
PERFORMANCE OBLIGATIONS
The Company is required to provide performance bonds under many of its
lottery contracts and pursuant to various other contracts and regulatory
requirements. At October 31, 2000, performance bonds totaling $93,582
were outstanding.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to market
data and other valuation techniques as appropriate. The Company believes the
fair value of its financial instruments, principally cash and cash equivalents,
restricted cash, accounts receivable, other current assets, accounts payable,
and accrued liabilities approximates their recorded values.
The Company believes that the fair value of the Old Notes approximated
$112,200 at October 31, 1999, based on reference to dealer markets and quoted
market prices. The Company was, however, unable to determine the fair value of
the Debentures in fiscal year 1999. The Company believes that the fair value of
the Notes approximated $147,750 at October 31, 2000 based on reference to dealer
markets and global market prices. The fair value of the outstanding Term A Loan
and Term B Loan and revolving credit facility borrowings approximate their
recorded values, respectively, based on the variable rates of these facilities
and currently available terms and conditions for similar debt at October 31,
2000.
(13) CAPITAL STOCK
CONVERTIBLE PREFERRED STOCK
The Company has 2,000 shares of preferred stock, $1.00 par value,
authorized for issuance.
On September 6, 2000, the Company issued, for gross proceeds of $110,000,
1,100 shares of new Series A Convertible Preferred Stock (the "Preferred
Stock"), including $100,000 to Cirmatica Gaming, S.A., an affiliate of
Lottomatica S.p.A. (the state concessionaire for the Italian Lotto game and an
affiliate of Olivetti S.p.A. and Telecom Italia S.p.A.), and $10,000 to other
investors through Ramius Securities, LLC (together with its affiliates,
"Ramius"), which acted as placement agent.
57
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) CAPITAL STOCK--(CONTINUED)
The Preferred Stock is presently convertible, after adjustment, into the
Company's common stock at a price of $5.56 per share (subject to potential reset
to no less than $5.00 per share based on possible future market price minimums),
will mature and become mandatorily convertible into common stock after five
years and will pay dividends at the rate of 6% per annum (payable in kind in
additional shares or, at the Company's option beginning with the ninth quarterly
dividend date, in cash). The holders of Preferred Stock also have the right to
participate on an as-converted basis in any dividends with respect to the common
stock. The holders of Preferred Stock have the right to vote along with the
holders of common stock on all matters on which the holders of common stock are
entitled to vote, are entitled to vote separately as a class with respect to
certain matters, and are also entitled to certain rights of first refusal with
respect to future financings. The Preferred Stock is also subject to certain
customary anti-dilution provisions. In addition, the holders of Preferred Stock
have the right to designate, initially, four members of the Company's Board of
Directors (and to elect three additional Directors in the event of certain
defaults by the Company). The Preferred Stock has preference over common stock
with regard to the distribution of assets upon a liquidation, dissolution or
other winding up of the Company.
For the period from the date of issue through October 31, 2000, the Company
issued approximately 32 shares of Series A Convertible Preferred Stock in
connection with payment of the paid-in-kind dividends on such stock and as
partial payment of a placement agent fee. For fiscal 2000, the Company recorded
preferred stock dividends of $1,014, of which $575 was accrued and unpaid at
October 31, 2000. Preferred stock dividends have been deducted in determining
the amount of the net loss available to common stockholders in the consolidated
statements of operations.
COMMON STOCK
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of
Class A Common Stock and Class B Common Stock entitle holders to the same rights
and privileges except that the Class B Common Stock is non-voting. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock.
On September 6, 2000, the Company issued warrants (the "September 2000
Warrants") to purchase up to 2,900 shares of the Company's common stock with a
nominal exercise price to its financial advisors, Donaldson, Lufkin & Jenrette
Securities Corporation and LBI Group, Inc. (an affiliate of Lehman Brothers),
which received 80% and 20%, respectively, of the September 2000 Warrants, in
connection with their services to the Company in obtaining certain financing
commitments. The Company has recorded the estimated fair value of the September
2000 Warrants at the date of issue of approximately $7,511 as interest expense,
with a corresponding increase to additional paid in capital. On October 5, 2000,
2,900 shares of the Company's common stock were issued upon retirement of the
September 2000 Warrants.
On October 2, 2000, in connection with the acquisition of Scientific
Games, the Company issued warrants (the "October 2000 Warrants") to purchase
up to 250 shares of the Company's common stock to a financial advisor in
connection with their services to the Company in obtaining certain financing
commitments. The October 2000 Warrants are exercisable until October 1, 2004
at a price of $3.58 per share, equal to the fair market value of the
Company's common stock on the date of issue. The estimated fair market value
of the October 2000 Warrants on the date of issue was $305, which was
recorded as an increase to goodwill with a corresponding increase in
additional paid in capital.
58
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) CAPITAL STOCK--(CONTINUED)
WARRANTS
At October 31, 2000, the Company had the following warrants outstanding,
after giving effect to adjustments made in accordance with certain anti-dilution
provisions:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE EXPIRATION
---------- --------- -----------------
<S> <C> <C> <C>
Warrants to purchase Class A Common Stock:
1998 Warrants....................... 2,298 $ 1.69 October 31, 2002
2000 Class A Warrants............... 43 $ 3.32 April 30, 2003
October 2000 Warrants............... 250 $ 3.58 October 1, 2004
----------
Total Class A Common Stock Warrants. 2,591
==========
Warrants to purchase Class B Common Stock 147 $ 3.83 October 30, 2003
==========
</TABLE>
(14) STOCK OPTIONS
The Company has four stock option plans under which shares of Class A Common
Stock have been authorized for issuance to employees, officers and directors:
the 1984 Stock Option Plan (the "1984 Plan") - 1,350 shares; the 1992 Equity
Incentive Plan (the "1992 Plan") - 3,000 shares; the 1995 Equity Incentive Plan
(the "1995 Plan") - 4,000 shares: and the 1997 Incentive Compensation Plan, as
amended in April 2000 (the "1997 Plan") - 3,400 shares.
In May 1995, the Company offered holders of stock options with exercise
prices above market value as of May 26, 1995 the right to cancel such options in
exchange for Performance Accelerated Restricted Stock Units (the "PARS"). The
PARS represent deferred shares of Class A Common Stock which vest in 20%
increments on the sixth, seventh, eighth, ninth and tenth anniversaries of the
date of grant, or, in certain circumstances, on an accelerated basis based on
the Company's stock trading at certain per share prices, or at the discretion of
the Board of Directors. Options to purchase 1,976 shares were exchanged for 504
PARS. Additionally, restricted shares and deferred shares with a three year
vesting schedule were granted to certain non-employee directors under the 1992
Plan as follows: a total of 110 deferred shares at a fair market value of
$4.1250 per share were granted in fiscal 1995, a total of 50 deferred shares at
a fair market value of $3.1875 per share were granted in fiscal 1996, a total of
135 deferred shares at a fair market value of $1.3125 per share were granted in
fiscal 1997, a total of 40 restricted shares at a fair market value of $2.4375
per share were granted in fiscal 1998, a total of 40 restricted shares at a fair
market value of $2.000 per share were granted in fiscal 1999 and a total of 40
restricted shares at a fair market value of $2.5625 per share were granted in
fiscal 2000. Accordingly, the Company has recorded compensation expense of $371,
$272 and $264 in fiscal 1998, 1999 and 2000, respectively. Additional
compensation expense aggregating $450 will be charged to expense through fiscal
2002 as the restricted shares become fully vested.
59
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) STOCK OPTIONS--(CONTINUED)
Stock options granted under the Company's equity incentive plans are
exercisable at not less than the fair market value of the stock at the date of
grant, and none may be exercised more than 10 years from the date of grant.
Options are generally exercisable in four equal installments on the first,
second, third and fourth anniversaries of the date of grant. The Board of
Directors may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting period of any award under
the plans. From time to time, the Company grants additional stock options to
individuals outside of the 1992, 1995 and 1997 Plans in recognition of
contributions made to the Company.
Information with respect to the Company's stock options is as follows:
<TABLE>
<CAPTION>
AVERAGE
STOCK OPTIONS SHARES PRICE (1)
------------- ---------- ---------
<S> <C> <C>
Outstanding at October 31, 1997...................... 5,769 2.63
Granted........................................... 732 2.65
Canceled.......................................... 397 1.83
Exercised......................................... 10 1.26
---------- ---------
Outstanding at October 31, 1998...................... 6,094 2.69
Granted........................................... 1,860 2.24
Canceled.......................................... 365 2.40
Exercised......................................... 216 1.09
---------- ---------
Outstanding at October 31, 1999...................... 7,373 2.63
---------- ---------
Granted........................................... 1,892 3.44
Canceled.......................................... 237 3.40
Exercised......................................... 377 2.41
---------- ---------
Outstanding at October 31, 2000...................... 8,651 2.80
========== =========
</TABLE>
(1) WEIGHTED AVERAGE EXERCISE PRICE.
Summarized information about stock options outstanding and exercisable at
October 31, 2000 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------- -----------------------
EXERCISABLE AVERAGE AVERAGE AVERAGE
PRICE RANGE SHARES LIFE(1) PRICE(2) SHARES PRICE(2)
------------- --------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to 2.00 2,466 6.26 $ 1.33 1,520 $ 1.23
$ 2.01 to 3.00 3,334 6.24 2.65 2,137 2.68
$ 3.01 to 4.00 2,452 7.23 3.49 838 3.46
over $4.00 399 3.65 8.84 337 9.69
--------- ---------
8,651 4,832
========= =========
</TABLE>
(1) WEIGHTED AVERAGE CONTRACTUAL LIFE REMAINING IN YEARS.
(2) WEIGHTED AVERAGE EXERCISE PRICE.
The number of shares and weighted average exercise price per share of
options exercisable at October 31, 1998, 1999, and 2000 were 3,185 shares at
$3.36, 3,859 shares at $3.13, and 4,832 shares at $2.85, respectively. At
October 31, 1998, 1999 and 2000, 3,302 shares, 1,797 shares, and 1,909 shares,
respectively, were available for future grants under the terms of these plans.
Outstanding options expire prior to October 3, 2010 and are exercisable at
prices ranging from $1.06 to $17.00 per share.
60
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) STOCK OPTIONS--(CONTINUED)
The Company applies the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This
statement defines a fair value method of accounting for an employee stock option
or similar equity instrument. However, it allows an entity to continue to
measure compensation cost for those instruments using the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", provided it discloses the effect of
SFAS 123 in footnotes to the financial statements. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method. Accordingly, no stock option related compensation expense has been
recognized for its stock-based compensation plans.
Had the Company, however, elected to recognize compensation cost based on
fair value of the stock options at the date of grant under SFAS 123, such costs
would have been recognized ratably over the vesting period of the underlying
instruments and the Company's net income (loss) and net income (loss) per share
would have changed to the pro forma amounts indicated in the table below.
Pro forma net income (loss) and income (loss) per basic and diluted share
for the years ended:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported.................. $ (15,880) 379 (30,987)
Pro forma.................... (17,605) (1,597) (33,250)
Net income (loss) available to
common stockholders :
As reported.................. $ (15,880) 379 (32,001)
Pro forma.................... (17,605) (1,597) (34,264)
Net income (loss) per basic and diluted share:
As reported.................. (0.44) 0.01 (0.84)
Pro forma.................... (0.49) (0.04) (0.90)
Net income (loss) available to common
stockholders per basic and diluted share:
As reported.................. (0.44) 0.01 (0.87)
Pro forma.................... (0.49) (0.04) (0.93)
</TABLE>
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model based on the weighted average market price at date of grant
of $2.65 in fiscal 1998, $2.24 in fiscal 1999 and $3.44 in fiscal 2000 and the
following weighted average assumptions: risk-free interest rate of 4.5% for
fiscal 1998, 5.8% for fiscal 1999 and 6.3% for fiscal 2000; expected option life
of 7.0 years for fiscal 1998, 1999 and 2000; volatility of 75% fiscal 1998, 59%
for 1999 and 55% for fiscal 2000; and no dividend yield in any year. The average
fair values of options granted during fiscal years 1998, 1999 and 2000 were
$1.93, $1.45 and $2.15, respectively.
61
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) SERVICE CONTRACT ARRANGEMENTS
Service contracts for pari-mutuel wagering systems in North America
generally cover a five-year period and provide for substantial related services
such as software, maintenance personnel, computer operators and certain
operating supplies. Under such contracts, the Company retains ownership of all
equipment located at the wagering facilities. The service contracts also provide
for certain warranties covering operation of the equipment, machines, display
equipment and central computing equipment. The breach of such warranties could
result in significant liquidated damages. The equipment is placed at customer
facilities under contracts generally providing for revenue based on the greater
of a percentage of total amounts wagered or, if appropriate, a specified
minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 2000 with specified minimums are as follows: 2001,
$15,594; 2002, $15,811; 2003, $13,306; 2004, $11,715; 2005, $10,134 and
thereafter $2,993.
(16) EXPORT SALES AND MAJOR CUSTOMERS
Sales to foreign customers amounted to, $9,717, $49,939 and $41,389 in
fiscal years 1998, 1999 and 2000, respectively. No single customer represented
more than 10% of revenues in fiscal 1998. In fiscal 1999 and 2000. One customer
in the Lottery Group segment represented $35,969 or 17% and $29,830 or 13% of
revenues, respectively.
(17) PENSION PLANS
The Company has a defined benefit plan for U.S. based union employees.
Retirement benefits under the plan are based upon the number of years of
credited service up to a maximum of thirty years for the majority of the
employees. The Company also has a defined benefit plan for U.K. based employees.
The deined benefit plan for U.K. employees was assumed in connection with the
acquisition of Scientific Games. Retirement benefits under the plan are based on
an average of the employee's compensation over two years preceding retirement or
leave of service. The Company's policy is to fund the minimum contribution
permissible by the respective tax authorities.
In September 2000, the Board of Directors approved the adoption of a
Supplemental Executive Retirement Plan, or "SERP," intended to provide
supplemental retirement benefits for certain senior officers of the Company. The
SERP will provide for retirement benefits according to a formula based on each
participant's years of service with the Company and average rate of
compensation. The SERP had no activity through October 31, 2000.
62
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) PENSION PLANS--(CONTINUED)
The net cost for the Company's defined benefit plans consisted of the
following components:
<TABLE>
<CAPTION>
PENSION BENEFITS
---------------------------------
U.S. U.K.
PLAN PLAN
-------------------- -------
1999 2000 2000
------- ------- -------
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ............................. $ 1,802 1,828 13,772
Service cost ........................................................ 88 104 145
Amendments .......................................................... -- 52 --
Interest cost ....................................................... 116 121 145
Actuarial gain ...................................................... (49) (141) (435)
Benefits paid ....................................................... (129) (56) --
Revaluation loss .................................................... -- -- --
------- ------- -------
Benefit obligation at end of year ................................... 1,828 1,908 13,627
------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year ...................... 1,600 1,555 14,207
Actual return on plan assets ........................................ (45) (43) (435)
Employer contribution ............................................... 129 178 --
Benefits paid ....................................................... (129) (56) --
------- ------- -------
Fair value of plan assets at end of year ............................ 1,555 1,634 13,772
------- ------- -------
Funded status ....................................................... (273) (274) 145
Unrecognized actuarial loss ......................................... 567 577 275
Unrecognized prior service cost ..................................... 79 118 --
Unrecognized net transition obligation .............................. 35 30 --
------- ------- -------
Net amount recognized ............................................... $ 408 451 420
======= ======= =======
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability ........................................... $ (681) (725) --
Intangible asset .................................................... 79 118 --
Accumulated other comprehensive income .............................. 602 607 --
Prepaid pension cost ................................................ 408 408 420
------- ------- -------
Net amount recognized ............................................... $ 408 408 420
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS
---------------------------------------------
U.S. U.K.
PLAN PLAN
------------------------------ ----------
1999 2000 2000
-------------- ------------ ----------
<S> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF OCTOBER 31:
Discount rate...................................................... 6.750% 7.000% 6.500%
Expected return on plan assets..................................... 8.000% 8.000% 7.500%
Rate of compensation............................................... None None 4.500%
</TABLE>
63
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) PENSION PLANS--(CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS
----------------------------------------------
U.S. U.K.
PLAN PLAN
---------------------------------- ---------
1998 1999 2000 2000
----------- ---------- ------- ---------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................... $ 63 88 104 145
Interest cost.................. 108 116 121 145
Expected return on plan assets. (114) (129) (127) (435)
Net amortization and deferral.. 23 27 37 --
----------- ---------- ------- ---------
Net periodic cost.............. $ 80 102 135 (145)
=========== ========== ======= =========
</TABLE>
The accumulated benefit obligation represents the actuarial present value of
benefits based upon the benefit multiplied by the participants' historical years
of service.
The plan assets for the U.S. based plan are invested in insurance company
general accounts guaranteed as to principal. The plan assets for the U.K. based
plan are primarily invested in equity securities.
As required by Financial Accounting Standards Board Statement No. 87 ("SFAS
87"), "Employers' Accounting for Pensions" for pension plans where the
accumulated benefit obligation exceeds the fair value of plan assets, the
Company has recognized in the consolidated balance sheet at October 31, 1999 and
2000 the additional minimum liability of the unfunded accumulated benefit
obligation of $681 and $725, respectively, as a long-term liability, with a
partially offsetting intangible asset and equity adjustment.
In connection with its U.S. based collective bargaining agreements, the
Company participates with other companies in a defined benefit pension plan
covering union employees. Payments made to the multi-employer plan were
approximately, $280, $469 and $479 during the years ended October 31, 1998, 1999
and 2000, respectively.
The Company has a 401K plan covering all U.S. based employees who are not
covered by a collective bargaining agreement. Company contributions to the plan
are at the discretion of the Board of Directors. Pension expense for the years
ended October 31, 1998, 1999 and 2000 amounted to approximately $926, $1,015 and
$1,004, respectively. The Company has a 401K plan for all union employees which
does not provide for Company contributions.
(18) MANAGEMENT INCENTIVE COMPENSATION
The Company has an incentive compensation plan for key management personnel
based on business unit performance, overall performance of the Company and
individual performance. Management incentive compensation expense amounted to
$1,686, $2,000 and $2,532 in fiscal years 1998, 1999 and 2000, respectively.
64
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE
The consolidated income (loss) before income tax expense and extraordinary
item, by domestic and foreign source, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Domestic ............................ $(14,371) 128 (14,488)
Foreign ............................. (1,188) 428 (2,329)
-------- -------- --------
Consolidated income (loss) before
income tax expense and extraordinary item $(15,559) 556 (16,817)
======== ======== ========
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL
-------- -------- --------
1998- Foreign ...................... $ 1,040 (719) 321
======== ======== ========
1999- Federal ...................... $ (33) (15) (48)
- Foreign ...................... 137 (161) (24)
- State ........................ 249 -- 249
-------- -------- --------
- Total ........................ $ 353 (176) 177
======== ======== ========
2000- Federal ...................... -- -- --
- Foreign ...................... 1,079 143 1,222
- State ........................ 381 -- 381
-------- -------- --------
- Total ........................ $ 1,460 143 1,603
======== ======== ========
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to significant portions of
the deferred tax liability (asset) relate to the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
NET DEFERRED TAX LIABILITY 1999 2000
---------- ---------
<S> <C> <C>
Accrued vacation.................................. $ (767) (608)
Inventory......................................... (532) (4,367)
Accrued litigation expenses....................... (612) (602)
Accrued loss on disposition of business........... (600) --
Other accrued liabilities......................... (942) (754)
Reserve for doubtful accounts..................... (959) (773)
---------- ---------
Current deferred tax asset..................... (4,412) (7,104)
---------- ---------
Intangible assets-difference in basis and
amortization periods........................... 1,298 55,937
Property and equipment-differences in basis and
depreciation methods........................... 4,747 12,684
Other, net........................................ 58 --
Interest charge, Domestic International Sales Corp 5,927 6,301
---------- ---------
Noncurrent deferred tax liability, net......... 12,030 74,922
---------- ---------
</TABLE>
65
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE --(CONTINUED)
<TABLE>
<S> <C> <C>
Net operating loss carryforward................... (48,746) (59,163)
Deferred compensation............................. (627) (572)
Partnership investments........................... (354) (978)
Alternative minimum tax credits................... (335) (335)
Research and experimentation credits.............. (34) (9)
---------- ---------
Noncurrent deferred tax asset.................. (50,096) (61,057)
Valuation allowance............................... 44,134 54,073
---------- ---------
Noncurrent deferred tax asset, net............. (5,962) (6,984)
---------- ---------
Noncurrent deferred tax liability.............. 6,068 67,938
---------- ---------
Net deferred tax liability on balance sheet.... 1,656 60,834
========== =========
</TABLE>
The aggregate deferred tax assets before valuation allowance at October 31,
1999 and 2000 were $54,508 and $68,161, respectively. The aggregate deferred tax
liabilities at October 31, 1999 and 2000 were $12,030 and $74,922, respectively.
The actual tax expense differs from the "expected" tax expense (computed by
applying the U.S. Federal corporate rate of 34% to income (loss) before income
tax expense and extraordinary item) as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1998 1999 2000
--------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............... $ (5,290) 189 (5,718)
Increase (reduction) in income taxes resulting from:
Unused net operating loss............................ 4,788 -- 4,924
Foreign tax differential............................. 725 (201) 2,014
Other, net........................................... 98 189 383
--------- ------- -------
$ 321 177 1,603
========= ======= =======
</TABLE>
The Company has regular tax net operating loss carryforwards of
approximately $34,149 that expire in 2009, $40,777 that expire in 2010, $25,406
that expire in 2011, $11,074 that expire in 2012, $10,150 that expire in 2018
and $27,051 that expire in 2020. In connection with the acquisition of
Scientific Games and the concurrent sale of convertible preferred stock, the
Company incurred an ownership change pursuant to Section 382 of the Internal
Revenue Code of 1986. As a result, the availability of tax net operating loss
carryforwards realized by the Company prior to the change in ownership, totaling
approximately $120,000, to offset post acquisition taxable income will be
limited to approximately $7,500 annually, except with respect to any taxable
income, if any, attributable to sales of pre-acquisition assets.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $335 and research and experimentation
credit carryforwards of approximately $9. The research and experimentation
credits expire from 2002 to 2003.
The net changes in the valuation allowance for deferred tax assets for the
years ended October 31, 1999 and 2000 were an increase of $2,414 and a decrease
of $9,939, respectively.
66
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) INCOME TAX EXPENSE --(CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
limitations on the utilization of tax net operating loss carryforwards and tax
planning strategies in making this assessment. Because of tax losses in recent
years, no deferred tax assets have been recorded.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of October 31, 2000 will be allocated as follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the
consolidated statements of operations......................... $ 51,223
Additional capital (benefit from exercise of stock options)... 2,850
-----------
54,073
===========
</TABLE>
(20) BUSINESS AND GEOGRAPHIC SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in fiscal 1999. Business segments are defined by SFAS 131 as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker assessing performance
and making operating and capital decisions.
The following tables represent revenues, profits, depreciation and assets by
business and geographic segments for the years ended October 31, 1998, 1999 and
2000. Operating revenues are allocated among geographic segments based on where
the customer is located. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies in Note 1.
Corporate expenses are allocated among business and geographic segments.
Interest expense and other (income) deductions are not allocated to business
segments. Prior year's segment information has been restated to conform to the
requirements of SFAS 131.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------
BUSINESS SEGMENTS 1998 1999 2000
--------- ------- -------
<S> <C> <C> <C>
Service and Sales Revenue
Lottery Group............................ 18,047 49,340 64,380
Pari-mutuel Group........................ $ 88,864 99,174 101,241
Venue Management Group................... 50,525 61,562 61,411
Telecommunications Group................. -- -- 5,989
SJC Video Group.......................... 1,877 1,072 327
--------- ------- -------
$ 159,313 211,148 233,348
========= ======= =======
Gross profit
Lottery Group............................ 5,313 12,672 17,136
Pari-mutuel Group........................ $ 35,317 39,612 40,885
Venue Management Group................... 13,569 15,121 16,785
Telecommunications Group................. -- -- 2,642
SJC Video Group.......................... 459 310 --
--------- ------- -------
$ 54,658 67,715 77,448
========= ======= =======
</TABLE>
67
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
BUSINESS SEGMENTS 1998 1999 2000
--------- ------- -------
<S> <C> <C> <C>
Operating income (loss)
Lottery Group............................ 321 7,999 1,186
Pari-mutuel Group........................ $ (6,410) 5,383 5,344
Venue Management Group................... 5,570 5,839 6,859
Telecommunications Group................. -- -- 569
SJC Video Group.......................... (583) (2,473) --
--------- ------- -------
$ (1,102) 16,748 13,958
========= ======= =======
Included in operating income (loss)
Depreciation and amortization
Lottery Group............................ 2,100 2,297 7,746
Pari-mutuel Group........................ $ 23,912 16,386 17,034
Venue Management Group................... 2,633 2,778 2,830
Telecommunications Group................. -- -- 216
SJC Video Group.......................... 844 728 --
--------- ------- -------
$ 29,489 22,189 27,826
========= ======= =======
(Gain) loss on sale/disposition of businesses
Lottery Group............................ (1,184) -- --
SJC Video Group.......................... 1,250 1,600 --
--------- ------- -------
$ 66 1,600 --
========= ======= =======
A reconciliation of total segment operating
income to consolidated income (loss) before
income tax expense and extraordinary item
is as follows:
Total reported segments.................... $ (1,102) 16,748 13,958
Interest expense........................... 15,521 15,941 31,231
Other (income) expense..................... (1,064) 251 (456)
--------- ------- -------
$ (15,559) 556 (16,817)
========= ======= =======
Assets
Lottery Group............................ 17,380 20,348 350,367
Pari-mutuel Group........................ $ 99,946 110,598 227,049
Venue Management Group................... 36,537 34,613 34,207
Telecommunications Group................. -- -- 35,592
SJC Video Group.......................... 2,637 -- --
--------- ------- -------
$ 156,500 165,559 647,215
========= ======= =======
Capital and wagering systems expenditures
Lottery Group............................ 13,312 2,615 11,306
Pari-mutuel Group........................ $ 9,217 10,714 20,851
Venue Management Group................... 1,368 1,492 2,373
Telecommunications Group................. -- -- 516
SJC Video Group.......................... 163 113 --
--------- ------- -------
$ 24,060 14,934 35,046
========= ======= =======
</TABLE>
68
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------
GEOGRAPHIC SEGMENTS 1998 1999 2000
--------- -------- --------
<S> <C> <C> <C>
Service and Sales Revenue
North America............................ $ 126,726 135,299 150,899
Italy.................................... 11,298 36,331 29,828
Other ................................... 21,289 39,518 52,621
--------- -------- --------
$ 159,313 211,148 233,348
========= ======== ========
Long-lived assets (excluding identifable
intangibles)
North America............................ $ 73,270 70,576 156,460
Europe................................... 4,252 5,629 8,224
Other.................................... 911 523 21,970
--------- -------- --------
$ 78,433 76,728 186,654
========= ======== ========
</TABLE>
(21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)
Selected quarterly financial data for the years ended October 31, 1999 and
2000 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Total operating revenues...................... $ 45,652 53,079 53,170 59,247
Gross profit.................................. 14,333 16,631 17,631 19,120
Net income (loss)............................. (2,434) 572 1,895 346
Net income (loss) per basic share and diluted
share......................................... $ (0.07) 0.02 0.05 0.01
======== ======= ======= ========
Weighted average number of shares used in
per share calculations:
Basic shares............................. 35,998 36,032 36,169 36,246
Diluted shares........................... 35,998 37,371 38,699 39,465
======== ======= ======= ========
</TABLE>
69
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 2000
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total operating revenues...................... $ 49,565 51,061 49,979 82,743
Gross profit.................................. 17,089 18,257 18,252 23,850
Income (loss) before extraordinary items...... 464 2,306 1,661 (22,851)
Extraordinary items- write-off of deferred
finance fees and debt call premium .......... -- -- -- 12,567
-------- -------- -------- --------
Net income (loss)............................. 464 2,306 1,661 (35,418)
Convertible preferred stock dividend.......... -- -- -- 1,014
-------- -------- -------- --------
Net income (loss) available to common
stockholders.................................. $ 464 2,306 1,661 (36,432)
======== ======== ======== ========
Basic and diluted earnings per share:
Basic income (loss) before extraordinary items $ 0.01 0.06 0.05 (0.60)
======== ======== ======== ========
Diluted income (loss) before extraordinary
items......................................... $ 0.01 0.06 0.04 (0.60)
======== ======== ======== ========
Extraordinary items per basic and diluted share $ -- -- -- (0.34)
======== ======== ======== ========
Basic net income (loss)....................... $ 0.01 0.06 0.05 (0.94)
======== ======== ======== ========
Diluted net income (loss)..................... $ 0.01 0.06 0.04 (0.94)
======== ======== ======== ========
Basic income (loss) available to common
stockholders.................................. $ 0.01 0.06 0.05 (0.96)
======== ======== ======== ========
Diluted income (loss) available to common
stockholders.................................. $ 0.01 0.06 0.04 (0.96)
======== ======== ======== ========
Weighted average number of shares used in
per share calculations:
Basic shares............................. 36,388 36,622 36,886 37,809
Diluted shares........................... 40,353 41,878 41,430 37,809
======== ======== ======== ========
</TABLE>
(22) UNUSUAL ITEMS AND FOURTH QUARTER RESULTS
In fiscal 1998, the Company recognized unusual charges of $1,500 for
severance and downsizing costs, primarily in the Company's French pari-mutuel
operations, and accelerated the amortization of related goodwill due to the loss
of a major service contract. In addition, in fiscal 1998, the Company reversed
reserves of $1,300 in connection with the collection of receivables previously
reserved due to concerns about their recoverability and for cost savings related
to the refurbishment of certain terminals.
In fiscal 2000, the Company recognized unusual interest expense charges
in the amount of $7,511 attributable to payments, in the form of warrants, to
purchase 2,900 shares of Autotote common stock, to certain financial advisors
in connection with their services in obtaining certain financial commitments
to acquire Scientific Games, $1,200 of additional interest expense as a
result of the required pre-funding of the Notes, and approximately $2,300 of
incremental business integration costs as a result of the Scientific Games
acquisition. The Company also recorded a $1,135 write-off of its option to
purchase the Atlantic City Raceway as a result of the New Jersey
legislature's failure to pass the necessary legislation to allow OTB
expansion in the state and recorded an extraordinary charge of $12,567 in
connection with the payment of the call premium on the Old Notes and the
write-off of deferred financing fees.
70
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(23) LITIGATION
Although the Company is a party to various claims and legal actions
arising in the ordinary course of business, management believes, on the basis
of information presently available to it, that the ultimate disposition of
these matters will not likely have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority
interest in Wintech de Colombia S.A. ("Wintech"), which formerly 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 a penalty against Wintech, SGI and the other shareholders of
Wintech of up to $5,000 if such performance 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 bond issued by a Colombian
surety, Seguros del Estado ("Seguros"). Wintech started the instant lottery in
Colombia, but, due to difficulties beyond its control, including, among other
factors, social and political unrest in Colombia, frequently interrupted
telephone service and power outages, and competition from another lottery being
operated in a province of Colombia in violation of Wintech's exclusive license
from Ecosalud, the projected sales level was not met for the year ended June
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 other shareholders of
Wintech. Litigation is pending in Colombia concerning various claims among
Ecosalud, Wintech and SGI, relating to the termination of the contracts with
Ecosalud (the "Colombian Litigation"). Ecosalud's claims in the Colombian
Litigation were for, among other things, realization on the full amount of the
penalty, plus interest and costs of the bond.
The Colombian surety, Seguros, paid $2,400 to Ecosalud under its $4,000
bond, and made demand upon SGI for that amount under the indemnity agreement
between 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 was at the surety's risk. On April 2, 1998, Seguros brought suit against
SGI in the District Court for the Northern District of Georgia, Atlanta Division
seeking $2,400 for sums paid by Seguros to Ecosalud under the surety bond on
November 1, 1994, plus interest at the Colombian bank rate of interest.
On September 29, 1999, the District Court denied various motions of SGI,
including a motion to dismiss, based on the Colombian statute of limitations of
two years, and granted Seguros' motion for summary judgment, which was filed on
May 6, 1998, and entered judgment for Seguros in the amount of $2,400 or the
equivalent in Colombian pesos as of the judgment date, plus pre-judgment
interest at a rate of 38.76% per annum, equivalent to approximately $4,600. SGI
has appealed the District Court's order and judgment and posted a $7,000 appeal
bond. SGI continues to believe that it has meritorious defenses, including that
the amount paid by Seguros was improperly paid because of the default by
Ecosalud of its obligations to SGI, which claims remain the subject of separate
litigation in Colombia.
SGI has been advised by Colombian counsel that SGI has various legal
defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has
certain cross indemnities and undertakings from the two other privately held
shareholders of Wintech for their respective shares of any liability to
Ecosalud. That obligation is secured in part by a $1,500 confirmed letter of
credit in favor of SGI. 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 finally resolved,
in the event such claims result in any final liability.
Although it is not possible to determine the ultimate outcome of the
appeal of the order and judgment granted to Seguros or the outcome of any
litigation in Colombia, management, believes that any potential losses will
not have a material adverse effect on the consolidated financial position or
results of operations.
71
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(24) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. The Notes and Facility issued on September 6, 2000 in
connection with the acquisition of Scientific Games are jointly and severally
guaranteed by substantially all of the Company's wholly owned domestic
subsidiaries (the "Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for (i)
Autotote Corporation (the "Parent Company") which includes the activities of
Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the
wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1999 and
October 31, 2000 and for the fiscal years ended October 31, 1998, 1999 and 2000.
The condensed consolidating financial information has been presented to show the
nature of assets held, results of operations and cash flows of the Parent
Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the
guarantee structure of the Notes was in effect at the beginning of the periods
presented. Separate financial statements for Guarantor Subsidiaries are not
presented based on management's determination that they would not provide
additional information that is material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest and administrative
expenses have not been allocated to the subsidiaries.
72
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................... $ 1,598 506 2,963 -- 5,067
Accounts receivable, net ..................... -- 21,083 4,672 -- 25,755
Other current assets ......................... 30 14,143 4,017 (464) 17,726
Property and equipment, net .................. 298 66,973 9,708 (251) 76,728
Investment in subsidiaries ................... 58,214 -- -- (58,214) --
Goodwill ..................................... 198 353 4,686 -- 5,237
Other assets ................................. 6,199 30,385 659 (2,197) 35,046
--------- --------- --------- --------- ---------
Total assets ............................. $ 66,537 133,443 26,705 (61,126) 165,559
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities .......................... $ 12,219 29,546 10,922 (672) 52,015
Current installments of long-term debt ....... 1,250 2,429 574 -- 4,253
Long-term debt, excluding current
installments .............................. 145,000 6,627 1,264 -- 152,891
Other non-current liabilities ................ 2,193 1,233 1,766 (573) 4,619
Intercompany balances ........................ (45,906) 43,214 1,942 750 --
Stockholders' equity (deficit) ............... (48,219) 50,394 10,237 (60,631) (48,219)
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ........................ $ 66,537 133,443 26,705 (61,126) 165,559
========= ========= ========= ========= =========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................... $ 379 7,791 7,137 1 15,308
Accounts receivable, net ..................... -- 40,699 18,180 (4,616) 54,263
Other current assets ......................... 531 33,352 9,407 (434) 42,856
Property and equipment, net .................. 2,020 151,536 33,937 (839) 186,654
Investment in subsidiaries ................... 193,740 -- -- (193,740) --
Goodwill ..................................... 191 145,549 10,817 -- 156,557
Intangible assets ............................ -- 110,432 22,287 -- 132,719
Other assets ................................. 20,516 79,756 997 (42,411) 58,858
--------- --------- --------- --------- ---------
Total assets ............................. $ 217,377 569,115 102,762 (242,039) 647,215
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities .......................... $ 20,503 60,097 24,195 (4,048) 100,747
Current installments of long-term debt ....... 5,256 7 560 -- 5,823
Long-term debt, excluding current installments 437,490 (212) 4,997 (4,264) 438,011
Other non-current liabilities ................ 3,222 59,682 22,237 (16,826) 68,315
Intercompany balances ........................ (283,857) 258,203 26,138 (484) --
Stockholders' equity (deficit) ............... 34,763 191,338 24,635 (216,417) 34,319
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) ....................... $ 217,377 569,115 102,762 (242,039) 647,215
========= ========= ========= ========= =========
</TABLE>
73
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ......................... $ -- 140,327 30,247 (11,261) 159,313
Operating expenses ......................... -- 92,086 23,191 (10,622) 104,655
-------- -------- -------- -------- --------
Gross profit ............................ -- 48,241 7,056 (639) 54,658
-------- -------- -------- -------- --------
Selling, general and administrative expenses 9,179 13,247 3,779 -- 26,205
Gain on sale/disposition of business ....... 66 -- -- -- 66
Depreciation and amortization .............. 140 25,674 3,963 (288) 29,489
-------- -------- -------- -------- --------
Operating income (loss) ................. (9,385) 9,320 (686) (351) (1,102)
Interest expense ........................... 14,985 340 274 (78) 15,521
Other (income) deductions .................. (610) (110) (422) 78 (1,064)
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries and income taxes .......... (23,760) 9,090 (538) (351) (15,559)
Equity in income of subsidiaries ........... 8,055 -- -- (8,055) --
Income tax expense ......................... 175 53 93 -- 321
-------- -------- -------- -------- --------
Net income (loss) .......................... $(15,880) 9,037 (631) (8,406) (15,880)
======== ======== ======== ======== ========
</TABLE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ......................... $ -- 181,387 48,660 (18,899) 211,148
Operating expenses ......................... -- 119,324 42,994 (18,885) 143,433
-------- -------- -------- -------- --------
Gross profit ............................ -- 62,063 5,666 (14) 67,715
Selling, general and administrative expenses 9,170 13,515 4,511 (18) 27,178
Loss on sale/disposition of businesses .... -- 1,600 -- -- 1,600
Depreciation and amortization .............. 196 18,981 3,115 (103) 22,189
-------- -------- -------- -------- --------
Operating income (loss) ................. (9,366) 27,967 (1,960) 107 16,748
Interest expense ........................... 15,129 883 401 (236) 16,177
Other (income) deductions .................. (2,075) (690) 36 2,744 15
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, and income taxes ......... (22,420) 27,774 (2,397) (2,401) 556
Equity in income of subsidiaries ........... 23,031 -- -- (23,031) --
Income tax expense (benefit) ............... 232 252 (307) -- 177
-------- -------- -------- -------- --------
Net income (loss) .......................... $ 379 27,522 (2,090) (25,432) 379
======== ======== ======== ======== ========
</TABLE>
74
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................... $ -- 186,408 60,286 (13,346) 233,348
Operating expenses ........................... -- 122,400 46,766 (13,266) 155,900
-------- -------- -------- -------- --------
Gross profit .............................. -- 64,008 13,520 (80) 77,448
Selling, general and administrative expenses . 13,572 16,186 5,917 (11) 35,664
Loss on sale/disposition of businesses ....... -- -- -- -- --
Depreciation and amortization ................ 291 23,210 4,428 (103) 27,826
-------- -------- -------- -------- --------
Operating income (loss) ................... (13,863) 24,612 3,175 34 13,958
Interest expense ............................. 30,535 531 1,037 (872) 31,231
Other (income) deductions .................... (1,000) (275) (198) 1,017 (456)
-------- -------- -------- -------- --------
Income (loss) before equity in income of
subsidiaries, and income taxes ............ (43,398) 24,356 2,336 (111) (16,817)
-------- -------- -------- -------- --------
Equity in income of subsidiaries ............. 25,195 -- -- (25,195) --
Income tax expense (benefit) ................. -- 812 791 -- 1,603
-------- -------- -------- -------- --------
Net income (loss) before extraordinary items . (18,203) 23,544 1,545 (25,306) (18,420)
-------- -------- -------- -------- --------
Extraordinary items:
Write-off of deferred financing fees and
expenses, net of gain on early retirement
of debt ................................. 12,522 45 -- -- 12,567
-------- -------- -------- -------- --------
Net income (loss) ............................ $(30,725) 23,499 1,545 (25,306) (30,987)
======== ======== ======== ======== ========
</TABLE>
75
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) .......................... $(15,880) 9,037 (631) (8,406) (15,880)
Depreciation and amortization ........... 140 25,674 3,963 (288) 29,489
Equity in income of subsidiaries ........ (8,055) -- -- 8,055 --
Loss on sale/disposition of businesses .. 66 -- -- -- 66
Other non-cash adjustments .............. 1,234 (77) (414) -- 743
Changes in working capital .............. (1,957) (4,404) (51) 154 (6,258)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities ................................. (24,452) 30,230 2,867 (485) 8,160
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures (316) (21,620) (2,557) 433 (24,060)
Cash acquired with business acquisition . -- -- 2,177 -- 2,177
Other assets and investments ............ (973) (6,059) (479) 171 (7,340)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .............................. (1,289) (27,679) (859) 604 (29,223)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long
term-debt ............................. -- 12,084 (25) -- 12,059
Payments on long-term debt .............. -- (2,774) (310) 12 (3,072)
Other, principally intercompany balances 12,208 (11,930) 274 (36) 516
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ................................. 12,208 (2,620) (61) (24) 9,503
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash .... 5 1 251 (95) 162
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents ................................ (13,528) (68) 2,198 -- (11,398)
Cash and cash equivalents, beginning of year 15,582 328 2,297 -- 18,207
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year ..... $ 2,054 260 4,495 -- 6,809
======== ======== ======== ======== ========
</TABLE>
76
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) ........................... $ 379 27,522 (2,090) (25,432) 379
Depreciation and amortization ............ 196 18,981 3,115 (103) 22,189
Equity in income of subsidiaries ......... (23,031) -- -- 23,031 --
Loss on sale/disposition of businesses ... -- 1,600 -- -- 1,600
Other non-cash adjustments ............... 1,081 109 25 -- 1,215
Changes in working capital ............... (235) 924 568 (91) 1,166
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .................................. (21,610) 49,136 1,618 (2,595) 26,549
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems expenditures (41) (11,835) (3,054) (4) (14,934)
Business acquisition, net of cash acquired (512) -- (2,333) 512 (2,333)
Other assets and investments ............. (631) (6,559) (699) (387) (8,276)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .................................. (1,184) (18,394) (6,086) 121 (25,543)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of long
term-debt ............................. -- 60 26 (86) --
Payments on long-term debt ............... -- (2,739) (514) 99 (3,154)
Other, principally intercompany balances . 22,286 (27,450) 3,141 2,260 237
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities .................................. 22,286 (30,129) 2,653 2,273 (2,917)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ..... 52 (367) 283 201 169
-------- -------- -------- -------- --------
Increase/(decrease) in cash and cash
equivalents ................................. (456) 246 (1,532) -- (1,742)
Cash and cash equivalents, beginning of year 2,054 260 4,495 -- 6,809
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year ...... $ 1,598 506 2,963 -- 5,067
======== ======== ======== ======== ========
</TABLE>
77
<PAGE>
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor Non-Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) ............................ $ (30,725) 23,499 1,545 (25,306) (30,987)
Depreciation and amortization ............. 291 23,210 4,428 (103) 27,826
Equity in income of subsidiaries .......... (25,195) -- -- 25,195 --
Loss on sale/disposition of businesses .... -- 411 3 -- 414
Non-cash interest expense ................. 7,511 -- -- -- 7,511
Other non-cash adjustments ................ 15,553 (230) 211 -- 15,534
Changes in working capital ................ 7,208 3,323 (5,455) 34 5,110
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities ................................... (25,357) 50,213 732 (180) 25,408
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital and wagering systems expenditures . (1,863) (27,581) (5,715) 113 (35,046)
Business acquisition, net of cash acquired (111,305) (215,091) 73 10,081 (316,242)
Proceeds from sale of business and assets
disposals ............................... -- 100 245 -- 345
Other assets and investments .............. (240,221) 230,282 4,945 (1,546) (6,540)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ................................... (353,389) (12,290) (452) 8,648 (357,483)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net borrowing under lines of credit ....... 11,250 -- -- -- 11,250
proceeds from issuance of long term-debt .. 441,501 -- 1,043 (22) 442,522
Payments on long-term debt ................ (165,957) (34,301) (1,104) -- (201,362)
Net Proceeds from Stock Issue ............. 107,525 (547) 993 (479) 107,492
Payment of finance fees ................... (16,792) -- -- -- (16,792)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ................................... 377,527 34,848 932 (501) 343,110
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash ...... -- 370 (1,228) 64 (794)
--------- --------- --------- --------- ---------
Increase/(decrease) in cash and cash
equivalents .................................. (1,219) 3,445 (16) 8,031 10,241
Cash and cash equivalents, beginning of year . 1,598 4,346 7,153 (8,030) 5,067
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year ....... $ 379 7,791 7,137 1 15,308
========= ========= ========= ========= =========
</TABLE>
78
<PAGE>
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED OCTOBER 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
CHARGED
BALANCE TO BALANCE
AT COSTS AT
BEGINNING AND END OF
OF PERIOD EXPENSES OTHER DEDUCTIONS(1) PERIOD
--------- -------- ------ ------------- --------
YEAR ENDED OCTOBER 31, 1998
<S> <C> <C> <C> <C>
Allowance for doubtful accounts..... $ 1,976 888 -- 1,053 1,811
Reserve for inventory obsolescence.. $ 2,238 296 50 247 2,337
YEAR ENDED OCTOBER 31, 1999
Allowance for doubtful accounts..... $ 1,811 1,140 -- 162 2,789
Reserve for inventory obsolescence.. $ 2,337 221 -- 712 1,846
YEAR ENDED OCTOBER 31, 2000
Allowance for doubtful accounts..... $ 2,789 2,077 -- 558 4,308
Reserve for inventory obsolescence.. $ 1,846 31 -- 311 1,566
</TABLE>
(1) Amounts written off.
79
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company and information relating
to disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference to the Company's proxy statement in connection
with the year 2001 Annual Meeting of Stockholders under the caption "Election of
Directors." Information relating to executive officers of the Company is
included in Part I of this Form 10-K as permitted in General Instruction [G3].
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation under the caption
"Executive Compensation; Certain Arrangements," in the Company's proxy statement
in connection with the year 2001 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners
and management under the caption, "Security Ownership" in the Company's proxy
statement in connection with the year 2001 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the caption "Certain Arrangements Between the Company
and its Directors and Officers" in the Company's proxy statement in connection
with the year 2001 Annual Meeting of Stockholders is incorporated herein by
reference.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements--See Index to Consolidated Financial Statements
attached hereto, page 39.
2. Financial Statements Schedule--See Index to Consolidated Financial
Statements attached hereto, page 39.
3. Exhibits--The following is a list of exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of May 18, 2000, among
Autotote Corporation, ATX Enterprises, Inc. and Scientific Games
Holdings Corp. (Incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K filed on May 26, 2000.)
3.(i)(a) Certificate of Incorporation of the Company, as amended through
June 29, 1995. (Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1995.)
3.(i)(b) Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of
Series A Convertible Preferred Stock, filed with the Secretary of
State of Delaware on September 6, 2000. (Incorporated by reference
to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 31, 2000 (the "July 2000 10-Q").)
3.(ii) Amended and Restated Bylaws of the Company. (+)
4.1 Indenture, dated as of August 14, 2000, among the Company, the
Subsidiary Guarantors and The Bank of New York, as Trustee,
relating to the 12 1/2% senior subordinated notes due 2010 (the
"Series A 12 1/2% Senior Notes"). (Incorporated by reference to
Exhibit 4.6 to the Company's July 2000 10-Q.)
4.2 Form of Series A 12 1/2% Senior Notes. (Incorporated by reference
to Exhibit A to Exhibit 4.6 to the Company's July 2000 10-Q.)
4.3 First Supplemental Indenture, dated as of September 6, 2000, among
the Company, the Guarantors, the Additional Guarantors and The
Bank of New York, as trustee, supplementing the Indenture, dated
as of August 14, 2000, among the Company, the Guarantors and the
Trustee, relating to Series A 12 1/2% Senior Notes. (Incorporated
by reference to Exhibit 4.8 to the Company's July 2000 10-Q.)
4.4 Registration Rights Agreement by and among the Company, the
Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation
and Lehman Brothers Inc., dated as of August 14, 2000. (Incorporated
by reference as Exhibit 4.9 to the Company's July 2000 10-Q.)
10.2 Purchase Agreement among the Company, Autotote Enterprises, Inc.,
and the State of Connecticut, Division of Special Revenue, dated
June 30, 1993. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated July 1, 1993.)
10.3 Agreement between the Company and Elettronica Ingegneria Sistemi
dated February 19, 1998. (Incorporated by reference to Exhibit
10.28 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1998 (the "April 1998 10-Q").)
10.4 General Agreement between the Company and Sisal Sport Italia SpA
dated February 19, 1998. (Incorporated by reference to Exhibit
10.29 to the Company's April 1998 10-Q.)
10.5 Agreement between Autotote Corporation and Stichting Hippo Toto
dated June 29, 1998 relating to purchase of Autotote Nederland
B.V. (Incorporated by reference to Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1998.)
81
<PAGE>
10.6 Instant Ticket and Associated Products and Services Agreement dated
May 4, 1993 by and between Georgia Lottery Corporation and
Scientific Games Inc. (Incorporated by reference to Scientific Games
Holding Corp.'s Registration Statement (No. 33-75168) filed on
February 11, 1994.)
10.7 Instant Lottery Tickets Supply Agreement between Thomas De La Rue
Limited, Scientific Games Inc. and Camelot Group plc, dated June 15,
1995. (Incorporated by reference to Scientific Games Holding Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995. Portions of this Exhibit deemed confidential by Scientific
Games Holdings Corp. have been omitted.)
10.8 Supply Agreement for Instant Lottery Computer Management System
between La Francais Des Jeux and Scientific Games Inc.
(Incorporated by reference to Exhibit 10.53 to Scientific Games
Holding Corp.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999. Portions of this Exhibit deemed confidential
by Scientific Games Holdings Corp. have been omitted.)
10.9 Agreement of Purchase and Sale, dated January 19, 1996, between
Autotote Systems, Inc. and Fusco Properties, L.P. (Incorporated by
reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K/A for the fiscal year ended October 31, 1995 (the "1995
10-K/A").)
10.10 Lease Agreement, dated as of January 19, 1996, between Fusco
Properties, L.P. and Autotote Systems, Inc. (Incorporated by
reference to Exhibit 10.43 to the Company's 1995 10-K/A.)
10.11 Stockholders' Agreement by and among Cirmatica Gaming, S.A., The Oak
Fund, Peconic Fund Ltd., Ramius Securities, LLC, Olivetti
International S.A. and the Company, dated September 6, 2000,
relating to the Series A Convertible Preferred Stock. (Incorporated
by reference to Exhibit 10.38 to the Company's July 2000 10-Q.)
10.12 1984 Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-8
(Registration No. 33-46594) which became effective on March 20,
1992.) *
10.13 1992 Equity Incentive Plan, as amended and restated. (Incorporated
by reference to Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1998 (the "1998
10-K").)*
10.14 1995 Equity Incentive Plan, as amended. (Incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997.)*
10.15 1997 Incentive Compensation Plan as amended. (+)*
10.16 Form of Option dated March 3, 1992 issued to A. Lorne Weil.
(Incorporated by reference to Exhibit 10.45 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1992 (the
"1992 10-K").)*
10.17 Employment Agreement effective November 1, 1997 between A. Lorne
Weil and Autotote Corporation (the "Weil Employment Agreement").
(Incorporated by reference to Exhibit 10.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1998.)*
10.18 Amendment dated September 10, 1998 to the Weil Employment Agreement.
(Incorporated by reference to Exhibit 10.27 to the Company's 1998
10-K.)*
10.19 Amendment dated September 1, 2000 to the Weil employment Agreement. (+)*
10.20 Form of Change in Control Agreement effective November 1, 1997
between Autotote Corporation and certain officers. (Incorporated
by reference to Exhibit 10.27 to the Company's April 1998 10-Q.)*
10.21 Letter Agreement dated January 11, 2001 between Autotote Corporation
and DeWayne Laird. (+)*
10.22 Letter Agreement dated January 11, 2001 between Autotote Corporation
and Martin Schloss. (+)*
82
<PAGE>
10.23 The Autotote Corporation Key Executive Deferred Compensation Plan,
as amended. (+) *
10.24 Amended and Restated Credit Agreement among the Company, DLJ Capital
Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital Funding,
Inc., as Administrative Agent, Syndication Agent, Lead Arranger and
Sole Book Running Manager, Lehman Commercial Paper Inc., as
Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, dated
as of October 6, 2000. (+)
10.25 Amended and Restated Security Agreement among the Company, the
Subsidiary Guarantors and the Administrative Agent, dated as of
October 6, 2000. (+)
10.26 Warrant Registration Rights Agreement among the Company, Donaldson,
Lufkin & Jenrette Securities Corporation and LBI Group Inc. dated as
of September 6, 2000. (Incorporated by reference to Exhibit 10.41 to
the Company's July 2000 10-Q.)*
10.27 Form of Employment and Severance Benefit Agreement, entered into
between Scientific Games Inc. and certain employees effective
September 6, 2000. (Incorporated by reference to Exhibit 10.42 to
the Company's July 2000 10-Q.)*
10.28 Form of Consulting Agreement by and between the Company and
William G. Malloy, dated May 18, 2000 and effective September 6,
2000. (Incorporated by reference to Exhibit 10.43 to the Company's
July 2000 10-Q.)*
21.1 List of Subsidiaries. (+)
23 Consent of KPMG LLP. (+)
27 Financial Data Schedule
99.1 Warrant to Purchase Class B Nonvoting Common Stock of Autotote
Corporation dated October 30, 1992 issued to various lenders.
(Incorporated by reference to Exhibit 10.34 to the Company's 1992
10-K.)
99.2 Warrant Agreement dated as of September 14, 1995 (the "1995
Warrant Agreement"). (Incorporated by reference to Exhibit 99.8 to
the Company's Registration Statement on Form S-4/A (Registration
No. 333-34465) which became effective on September 12, 1997 (the
"1997 S-4/A").)
99.3 Amendment dated January 29, 1997 to the 1995 Warrant Agreement.
(Incorporated by reference to Exhibit 99.10 to the Company's 1997
S-4/A.)
99.4 Form of Amended and Restated Warrant issued November 2, 1998 to
Certain Members of Management and Several Employees. (Incorporated
by reference to Exhibit 10.36 to the Company's Form 10-K for the
fiscal year ended October 31, 1999.)
99.5 Form of Warrant issued to Donaldson, Lufkin & Jenrette Securities
Corporation and LBI Group Inc. (Incorporated by reference to
Exhibit 99.11 to the Company's July 2000 10-Q.)
</TABLE>
(+) Filed herewith.
* Includes management contracts and compensation plans and arrangements.
(b) Reports on Form 8-K
Current reports on Form 8-K were filed on September 21, 2000 regarding
the pro forma financials related to the acquisition of Scientific Games
Holding Corp. and certain related matters, and on December 29, 2000
regarding the determination by the Company to change its fiscal year
from the year ending October 31 to a calendar year, beginning with the
year ending December 31, 2001.
83
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AUTOTOTE CORPORATION
Dated: January 29, 2001
By: /s/ A. LORNE WEIL
-----------------------------------
A. Lorne Weil, Chairman of Board,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON JANUARY 28, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ -------------------------- ----------------
<S> <C> <C>
Chairman of the Board,
/s/ A. LORNE WEIL President and Chief January 29, 2001
--------------------------- Executive Officer, and
A. LORNE WEIL Director (principal
executive officer)
Vice President and Chief
/s/ DEWAYNE E. LAIRD Financial Officer January 29, 2001
--------------------------- (principal financial and
DEWAYNE E. LAIRD accounting officer)
/s/ LARRY J. LAWRENCE Director January 29, 2001
---------------------------
LARRY J. LAWRENCE
/s/ SIR BRIAN G. WOLFSON Director January 29, 2001
---------------------------
SIR BRIAN G. WOLFSON
/s/ ALAN J. ZAKON Director January 29, 2001
---------------------------
ALAN J. ZAKON
/s/ WILLIAM G. MALLOY Director January 29, 2001
---------------------------
WILLIAM G. MALLOY
/s/ PETER A. COHEN Director January 29, 2001
---------------------------
PETER A. COHEN
/s/ COLIN J. O'BRIEN Director January 29, 2001
---------------------------
COLIN J. O'BRIEN
/s/ LUCIANO LA NOCE Director January 29, 2001
---------------------------
LUCIANO LA NOCE
/s/ MICHAEL S. IMMORDINO Director January 29,2001
---------------------------
MICHAEL S. IMMORDINO
/s/ ROBERTO SGAMBATI Director January 29, 2001
---------------------------
ROBERTO SGAMBATI
</TABLE>
84
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------- ----------
<S> <C>
3.(ii) Amended and Restated Bylaws of the Company.
10.15 1997 Incentive Compensation Plan as amended.
10.19 Amendment dated September 1, 2000 to the Weil employment
Agreement.
10.21 Letter Agreement dated January 11, 2001 between Autotote
Corporation and DeWayne Laird.
10.22 Letter Agreement dated January 11, 2001 between Autotote
Corporation and Martin Schloss.
10.23 The Autotote Corporation Key Executive Deferred
Compensation Plan, as amended.
10.24 Amended and Restated Credit Agreement among the Company, DLJ
Capital Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital
Funding, Inc., as Administrative Agent, Syndication Agent, Lead
Arranger and Sole Book Running Manager, Lehman Commercial Paper
Inc., as Documentation Agent, and Lehman Brothers Inc., as
Co-Arranger, dated as of October 6, 2000.
10.25 Amended and Restated Security Agreement among the Company, the
Subsidiary Guarantors and the Administrative Agent, dated as of
October 6, 2000
21.1 List of Subsidiaries.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
</TABLE>
85
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(II)
<SEQUENCE>2
<FILENAME>a2036456zex-3_ii.txt
<DESCRIPTION>EXHIBIT 3.(II)
<TEXT>
<PAGE>
EXHIBIT 3.(II)
AMENDED AND RESTATED
BYLAWS
OF
AUTOTOTE CORPORATION
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. OFFICES. The Corporation shall have a registered office, a
principal office and such other offices as the Board of Directors may determine.
Section 1.02. CORPORATE SEAL. There shall be no corporate seal.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Meetings of the stockholders may
be held at such place and at such time as may be designated by the Board of
Directors.
Section 2.02. ANNUAL MEETINGS. The annual meeting of the stockholders of
the Corporation shall be held at such place and at such time as designated by
the Board of Directors. The purpose of this meeting shall be for the election of
directors and for the transaction of such other business as may properly come
before the meeting.
Section 2.03. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes shall be called by the Secretary at the written request
of a majority of the total number of directors, by the Chairman of the Board, by
the President or by the stockholders owning a majority of the shares outstanding
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting. Business transacted at any special meeting shall be limited to
the purposes stated in the notice.
Section 2.04. QUORUM. ADJOURNED MEETINGS. The holders of a majority of the
shares outstanding and entitled to vote shall constitute a quorum for the
transaction of business at any annual or special meeting. If a quorum is not
present at a meeting, those present shall adjourn to such day as they shall
agree upon by majority vote. Notice of any adjourned meeting need not be given
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At adjourned meetings at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If a quorum is present, the stockholders may continue to
transact business until adjournment notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 2.05. ORGANIZATION. At each meeting of the stockholders, the
Chairman of the Board or in his absence the President or in his absence the
chairman chosen by a majority in voting interest of the stockholders present in
person or proxy and entitled to vote shall act as chairman; and the Secretary of
the Corporation or in his absence an Assistant Secretary or in his absence any
person whom the chairman of the meeting shall appoint shall act as secretary of
the meeting.
2
<PAGE>
Section 2.06. ORDER OF BUSINESS. The order of business at all meetings of
the stockholders shall be determined by the Chairman of the meeting.
Section 2.07. VOTING. Each stockholder of the Corporation entitled to vote
at a meeting of stockholders should have one vote in person or by proxy for each
share of stock having voting rights held by him and registered in his name on
the books of the Corporation. Upon the request of any stockholder, the vote upon
any question before a meeting shall be by written ballot, and all elections of
directors shall be by written ballot. All questions at a meeting shall be
decided by a majority vote of the number of shares entitled to vote represented
at the meeting at the time of the vote except where otherwise required by
statute, the Certificate of Incorporation or these Bylaws. For the election of
directors, the persons receiving the largest number of votes (up to and
including the number of directors to be elected) shall be directors.
Section 2.08. INSPECTORS OF ELECTION. At each meeting of the stockholders,
the chairman of such meeting may appoint two inspectors of election. Each
inspector of election so appointed shall first subscribe an oath or affirmation
to execute the duties of an inspector of election at such meeting with strict
impartiality and according to the best of his ability. Such inspectors of
election, if any, shall take charge of the ballots at such meeting and after the
balloting thereat on any question shall count the ballots cast thereon and shall
make a report in writing to the Secretary of such meeting of the results
thereof. An inspector of election need not be a stockholder of the Corporation,
and any officer or employee of the Corporation may be an inspector of election
on any question other than a vote for or against his election to any position
with the corporation or on any other question in which he may be directly
interested.
Section 2.09. NOTICES OF MEETINGS AND CONSENTS. Except as otherwise
provided by the Certificate of Incorporation or by statute, a written notice of
each annual and special meeting of stockholders shall be given not less than 10
nor more than 60 days before the date of such meeting to each stockholder of
record of the Corporation entitled to vote at such meeting by delivering such
notice of meeting to him personally or depositing the same in the United States
mail, postage prepaid, directed to him at the post office address shown upon the
records of the Corporation. Service of notice is complete upon mailing. Every
notice of a meeting of stockholders shall state the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called.
Section 2.10. PROXIES. Each stockholder entitled to vote at a meeting of
stockholders may authorize a proxy to represent him at the meeting by an
instrument executed in writing. No such proxy shall be valid after three years
from the date of its execution unless the proxy provides for a longer period. A
proxy may be irrevocable if it states that it is irrevocable and, if, and only
as long as, it is coupled with an interest sufficient to support an irrevocable
power. Subject to the above, any proxy may be revoked if an instrument revoking
it or proxy bearing a later date is filed with the Secretary.
Section 2.11. WAIVER OF NOTICE. Notice of any annual or special meeting
may be waived either before, at or after such meeting in writing signed by the
person or persons entitled to the notice. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transacting of any business because the meeting is not lawfully
called or convened.
Section 2.12. WRITTEN ACTION. Any action that may be taken at a meeting of
the stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the actions so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be required to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
Section 2.13. STOCKHOLDER PROPOSALS. Except as otherwise provided by law,
no proposal or matter shall be considered or acted upon at any meeting of
stockholders which has not been submitted to and approved by the Board of
Directors.
3
<PAGE>
ARTICLE III.
BOARD OF DIRECTORS
Section 3.01. GENERAL POWERS. The business of the corporation shall be
managed by the Board of Directors.
Section 3.02. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of
directors, except to the extent, if any, otherwise provided in the Certificate
of Incorporation, shall be established from time to time by a resolution adopted
by a majority of the total number of directors, but shall in no case be less
than three. Directors need not be stockholders. Each director shall hold office
until the annual meeting of stockholders next held after his election or until
the stockholders have elected directors by consent in writing without a meeting
and until his successor is elected and qualified or until his earlier death,
resignation or removal.
Section 3.03. ANNUAL MEETING. As soon as practicable after each election
of directors, the Board of Directors shall meet at the registered office of the
corporation, or at such other place previously designated by the Board of
Directors, for the purpose of electing the officers of the corporation and for
the transaction of such other business as may come before the meeting.
Section 3.04. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held from time to time at such time and place as may be fixed by
resolution adopted by a majority of the total number of directors.
Section 3.05. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President, or by any two of the
directors and shall be held from time to time at such time and place as may be
designated in the notice of such meeting.
Section 3.06. NOTICE OF MEETINGS. No notice need be given of any annual or
regular meeting of the Board of Directors. Notice of each special meeting of the
Board of Directors shall be given by the secretary who shall give at least
twenty-four hours' notice thereof to each director by mail, telephone, telegram,
or in person. Notice shall be effective upon receipt.
Section 3.07. WAIVER OF NOTICE. Notice of any meeting of the Board of
Directors may be waived either before, at, or after such meeting in writing
signed by each director. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 3.08. QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. The vote of a majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors unless these Bylaws require a greater number.
Section 3.09. VACANCIES. Any vacancy among the directors or increase in
the authorized number of directors shall be filled for the unexpired term by a
majority of the directors then in office though less than a quorum or by the
sole remaining director. When one or more directors shall resign from the Board,
effective at a future date, a majority of the directors then in office may fill
such vacancy or vacancies to take effect when such resignation or resignations
shall become effective.
Section 3.10. REMOVAL. Any director may be removed from office at any
special meeting of the stockholders either with or without cause. If the entire
Board of Directors or any one or more directors be so removed, new directors may
be elected at the same meeting.
4
<PAGE>
Section 3.11. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution adopted by a majority of the total number of directors, designate one
or more committees, each to consist of two or more of the directors of the
Corporation, which, to the extent provided in the resolution, may exercise the
powers of the Board of Directors in the management of the business and affairs
of the corporation. The Board of Directors may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Such committee or
committees shall have such name or names as may be determined by the resolution
adopted by the directors. The committees shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
Section 3.12. WRITTEN ACTION. Any action required or permitted to be taken
at a meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all directors or committee members consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board of Directors or committee.
Section 3.13. COMPENSATION. Directors who are not salaried officers of the
Corporation may receive a fixed sum per meeting attended or a fixed annual sum,
or both, and such other forms of reasonable compensation as may be determined by
resolution of the Board of Directors. All directors shall receive their
expenses, if any, of attendance at meetings of the Board of Directors or any
committee thereof. Any director may serve the Corporation in any other capacity
and receive proper compensation therefor.
Section 3.14. CONFERENCE COMMUNICATIONS. Directors may participate in any
meeting of the Board of Directors, or of any duly constituted committee thereof,
by means of a conference telephone conversation or other comparable
communication technique whereby all persons participating in the meeting can
hear and communicate to each other. For the purposes of establishing a quorum
and taking any action at the meeting, such directors participating pursuant to
this Section 3.14 shall be deemed present in person at the meeting; and the
place of the meeting shall be the place of origination of the conference
telephone conversation or other comparable communication technique.
ARTICLE IV.
OFFICERS
Section 4.01. NUMBER. The officers of the Corporation shall consist of a
President, one or more Vice Presidents, a Secretary, a Treasurer, and any other
officers and agents as the Board of Directors by a majority vote of the total
number of directors may designate. Any person may hold two or more offices.
Section 4.02. ELECTION, TERM OF OFFICE, AND QUALIFICATIONS. At each annual
meeting of the Board of Directors all officers shall be elected. Such officers
shall hold office until the next annual meeting of the directors or until their
successors are elected and qualified, or until such office is eliminated by a
vote of the majority of all directors. Officers who may be directors shall hold
office until the election and qualification of their successors, notwithstanding
an earlier termination of their directorship.
Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from his
office by a majority vote of the total number of directors with or without
cause. A vacancy among the officers by death, resignation, removal, or otherwise
shall be filled for the unexpired term by the Board of Directors.
Section 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at all meetings of the stockholders and directors and
shall have such other duties as may be prescribed, from time to time, by the
Board of Directors.
Section 4.05. PRESIDENT. The President shall have general active
management of the business of the Corporation. In event of the absence or
disability of the Chairman of the Board, he shall preside at all meetings of the
stockholders and directors. He shall see that all orders and resolutions of the
directors are carried into effect. He
5
<PAGE>
may execute and deliver in the name of the Corporation any deeds, mortgages,
bonds, contracts or other instruments pertaining to the business of the
Corporation and in general shall perform all duties usually incident to the
office of the president. He shall have such other duties as may, from time to
time, be prescribed by the Board of Directors.
Section 4.06. VICE PRESIDENT. Each Vice President shall have such powers
and shall perform such duties as may be prescribed by the Board of Directors or
by the President. In the event of absence or disability of the President, Vice
Presidents shall succeed to his power and duties in the order designated by the
Board of Directors.
Section 4.07. SECRETARY. The Secretary shall be secretary of and shall
attend all meetings of the stockholders and Board of Directors and shall record
all proceedings of such meetings in the minute book of the Corporation. He shall
give proper notice of meetings of stockholders and the Board of Directors. He
shall perform such other duties as may from time to time be prescribed by the
Board of Directors or by the President.
Section 4.08. TREASURER. The Treasurer shall keep accurate accounts of all
moneys of the Corporation received or disbursed. He shall deposit all moneys,
drafts and checks in the name of and to the credit of the Corporation in such
banks and depositories as a majority of the whole Board of Directors shall from
time to time designate. He shall have power to endorse for deposit all notes,
checks and drafts received by the Corporation. He shall disburse the funds of
the Corporation as ordered by the directors, making proper vouchers therefor. He
shall render to the President and the Board of Directors whenever required an
account of all his transactions as Treasurer and of the financial condition of
the Corporation and shall perform such other duties as may from time to time be
prescribed by the Board of Directors or by the President.
Section 4.09. EXECUTION OF CONTRACTS AND DOCUMENTS. Except as otherwise
directed by the Board of Directors, all contracts, deeds, promissory notes,
checks, drafts, or other instruments calling for the payment of money shall be
signed by the President or a Vice President and, if a second signature is
required, the Secretary or Treasurer.
Section 4.10. DUTIES OF OTHER OFFICERS. The duties of such other officers
and agents as the Board of Directors may designate shall be set forth in the
resolution creating such office or by subsequent resolution.
Section 4.11. COMPENSATION. The officers of the Corporation shall receive
such compensation for their services as may be determined from time to time by
resolution of the Board of Directors or by one or more committees to the extent
so authorized from time to time by the Board of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. CERTIFICATES FOR STOCK. Every holder of stock in the
Corporation shall be entitled to a certificate, to be in such form as shall be
prescribed by the Board of Directors, certifying the number of shares in the
Corporation owned by him. The certificates for such shares shall be numbered in
the order in which they shall be issued and shall be signed in the name of the
Corporation by the Chairman of the Board, the President or a Vice President, and
by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary. Every certificate surrendered to the Corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such certificate shall
have been so cancelled, except in cases provided for in section 5.04.
Section 5.02. ISSUANCE OF STOCK. The Board of Directors is authorized to
cause to be issued stock of the Corporation up to the full amount authorized by
the Certificate of Incorporation is such amounts and for such consideration as
may be determined by the Board of Directors. No shares shall be allotted except
in consideration of cash, labor, personal property, or real property, or leases
thereof, or of an amount transferred from surplus to stated capital upon a share
dividend. At the time of such allotment of stock, the Board of Directors shall
state its
6
<PAGE>
determination of the fair value to the Corporation in monetary terms of any
consideration other than cash for which shares are allotted. Stock so issued
shall be fully paid and nonassessable. The amount of consideration to be
received in cash or otherwise shall not be less than the par value of the shares
so allotted. Treasury shares may be disposed of by the Corporation for such
consideration, expressed in dollars, as may be fixed by the Board of Directors.
Section 5.03. TRANSFER OF STOCK. Transfer of stock on the books of the
Corporation may be authorized only by the stockholder named in the certificate,
the stockholder's legal representative or the stockholder's duly authorized
attorney-in-fact and upon surrender of the certificate or the certificates for
such stock. The Corporation may treat as the absolute owner of stock of the
Corporation the person or persons in whose name stock is registered on the books
of the Corporation.
Section 5.04. LOSS OF CERTIFICATES. Any stockholder claiming a certificate
for stock to be lost, stolen or destroyed shall make an affidavit of that fact
in such form as the Board of Directors may require and shall, if the Board of
Directors so requires, give the Corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the Corporation against any claims which may be made against it on
account of the alleged loss, theft or destruction of the certificate or issuance
of such new certificate. A new certificate may then be issued in the same tenor
and for the same number of shares as the one claimed to have been lost, stolen
or destroyed.
Section 5.05. FACSIMILE SIGNATURES. Whenever any certificate is
countersigned by a transfer agent or by a registrar other than the Corporation
or its employee, then the signatures of the officers or agents of the
Corporation may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed on any such
certificate shall cease to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation as though the
person who signed such certificate or whose facsimile signature or signatures
had been placed thereon were such officer, transfer agent or registrar at the
date of issue.
ARTICLE VI.
BOOKS AND RECORDS, AUDIT, FISCAL YEAR
Section 6.01. BOOKS AND RECORDS. The Board of Directors of the Corporation
shall cause to be kept: (a) a share ledger which shall be a charge of an officer
designated by the Board of Directors; (b) records of all proceedings of
stockholders and directors; and (c) such other records and books of account as
shall be necessary and appropriate to the conduct of the corporate business.
Section 6.02. AUDIT. The Board of Directors shall cause the records and
books of account of the Corporation to be audited at least once in each fiscal
year and at such other times as it may deem necessary or appropriate.
Section 6.03. ANNUAL REPORT. The Board of Directors shall cause to be
filed with the Delaware Secretary of State in each year the annual report
required by law.
Section 6.04. FISCAL YEAR. The fiscal year of the Corporation shall end on
December 31 of each year.
ARTICLE VII.
INDEMNIFICATION
Section 7.01. INDEMNIFICATION. The Corporation shall indemnify, and the
Board of Directors may authorize the purchase and maintenance of insurance for
the purpose of such indemnification, such persons for such
7
<PAGE>
liabilities in such manner under such circumstances and to such extent as
permitted by Section 145 of the Delaware General Corporation Law, as now enacted
or hereafter amended.
ARTICLE VIII.
MISCELLANEOUS
Section 8.01. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjustment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action.
(b) If no record date is fixed:
(1) The record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at
the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
(2) The record date for determining stockholders
entitled to express consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is necessary,
shall be the day on which the first written consent is expressed.
(3) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 8.02. PERIODS OF TIME. During any period of time prescribed by
these Bylaws, the date from which the designated period of time begins to run
shall not be included, and the last day of the period so computed shall be
included.
Section 8.03. VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise
ordered by the Board of Directors, the President shall have full power and
authority on behalf of the Corporation (a) to attend and to vote at any meeting
of security holders of other corporations in which the Corporation may hold
securities; (b) to execute any proxy for such meeting on behalf of the
Corporation; or (c) to execute a written action in lieu of a meeting of such
other corporation on behalf of the Corporation. At such meeting, by such proxy
or by such writing in lieu of meeting, the President shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities that the Corporation might have possessed and exercised if it had
been present. The Board of Directors may, from time to time, confer like powers
upon any other person or persons.
Section 8.04. PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered by
the Board of Directors, the President shall have power and authority on behalf
of the Corporation to purchase, sell, transfer or encumber any and all
securities of any other corporation owned by the Corporation and may execute and
deliver such documents as may be necessary to effectuate such purchase, sale,
transfer or encumbrance. The Board of Directors may, from time to time, confer
like powers upon any other person or persons.
ARTICLE IX.
AMENDMENTS
8
<PAGE>
Section 9.01. These Bylaws may be amended, altered or repealed by a vote
of the majority of the total number of directors or of the stockholders at any
meeting upon proper notice.
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>3
<FILENAME>a2036456zex-10_15.txt
<DESCRIPTION>EXHIBIT 10.15
<TEXT>
<PAGE>
Exhibit 10.15
AUTOTOTE CORPORATION
-----------------------------------------------------
1997 INCENTIVE COMPENSATION PLAN, AS AMENDED
1
<PAGE>
PAGE
1. Purpose........................................................... 1
2. Definitions....................................................... 1
3. Administration.................................................... 3
(a) Authority of the Committee.................................... 3
(b) Manner of Exercise of Committee Authority..................... 3
(c) Limitation of Liability....................................... 4
4. Limitations on Plan Awards........................................ 4
(a) Overall Number of Shares Available for Delivery............... 4
(b) Application of Limitation to Grants of Awards................. 4
(c) Availability of Shares Not Delivered under Awards ............ 4
5. Eligibility; Per-Person Award Limitations......................... 5
6. Specific Terms of Awards.......................................... 5
(a) General....................................................... 5
(b) Options....................................................... 5
(c) Stock Appreciation Rights..................................... 6
(d) Restricted Stock.............................................. 6
(e) Deferred Stock................................................ 7
(f) Bonus Stock and Awards in Lieu of Obligations................. 8
(g) Dividend Equivalents.......................................... 8
(h) Other Stock-Based Awards...................................... 8
(i) Performance Goals Applicable to Designated Covered Employees.. 8
7. Certain Provisions Applicable to Awards........................... 10
(a) Stand-Alone, Additional, Tandem, and Substitute Awards ....... 10
(b) Term of Awards................................................ 10
(c) Form and Timing of Payment under Awards; Deferrals ........... 10
(d) Exemptions from Section 16(b) Liability....................... 11
8. Change in Control................................................. 11
(a) Effect of "Change in Control"................................. 11
(b) Definition of "Change in Control"............................. 11
(c) Definition of "Change in Control Price" ...................... 12
9. General Provisions................................................ 12
(a) Compliance with Legal and Other Requirements.................. 12
(b) Limits on Transferability; Beneficiaries...................... 12
(c) Adjustments................................................... 13
(d) Taxes......................................................... 13
(e) Changes to the Plan and Awards................................ 13
(f) Limitation on Rights Conferred under Plan..................... 14
(g) Unfunded Status of Awards; Creation of Trusts................. 14
(h) Nonexclusivity of the Plan.................................... 14
(i) Payments in the Event of Forfeitures; Fractional Shares ...... 15
(j) Governing Law................................................. 15
(k) Plan Effective Date........................................... 15
2
<PAGE>
AUTOTOTE CORPORATION
1997 INCENTIVE COMPENSATION PLAN, AS AMENDED
1. PURPOSE. The purpose of this 1997 Incentive Compensation Plan (the
"Plan") is to assist Autotote Corporation, a Delaware corporation (the
"Company"), and its subsidiaries in attracting, retaining, and rewarding
executives, directors, employees, and other persons who provide services to the
Company and/or its subsidiaries, enabling such persons to acquire or increase a
proprietary interest in the Company in order to strengthen the mutuality of
interests between such persons and the Company's stockholders, and providing
such persons with performance incentives to expend their maximum efforts in the
creation of stockholder value. The Plan is also intended to qualify certain
compensation awarded under the Plan for tax deductibility under Code Section
162(m) (as hereafter defined) to the extent deemed appropriate by the Committee
which administers the Plan.
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof:
(a) "Award" means any award of an Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
another award, Dividend Equivalent, or Other Stock-Based Award, together
with any other right or interest granted to a Participant under the Plan.
(b) "Beneficiary" means the person, persons, trust, or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards
or other rights are transferred if and to the extent permitted under
Section 9(b) hereof. If, upon a Participant's death, there is no designated
Beneficiary or surviving designated Beneficiary, then the term Beneficiary
means person, persons, trust, or trusts entitled by will or the laws of
descent and distribution to receive such benefits.
(c) "Beneficial Owner" shall have the meaning ascribed to such term in
Rule 13d-3 under the Exchange Act and any successor to such Rule.
(d) "Board" means the Company's Board of Directors.
(e) "Change in Control" means Change in Control as defined with
related terms in Section 8 of the Plan.
(f) "Change in Control Price" means the amount calculated in
accordance with Section 8(c) of the Plan.
(g) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(h) "Committee" means a committee of two or more directors designated
by
3
<PAGE>
the Board to administer the Plan; provided, however, that directors
appointed as members of the Committee shall not be employees of the
Company or any subsidiary. In appointing members of the Committee, the
Board will consider whether a member is or will be a Qualified Member, but
such members are not required to be Qualified Members at the time of
appointment or during their term of service on the Committee.
(i) "Covered Employee" means an Eligible Person who is a "covered
employee" within the meaning of Code Section 162(m).
(j) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, at the end of a specified deferral
period.
(k) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g), to receive cash, Stock, other Awards, or other property
equal in value to dividends paid with respect to a specified number of
shares of Stock, or other periodic payments.
(l) "Effective Date" means the date of approval of the Plan by
stockholders of the Company.
(m) "Eligible Person" means each executive officer and other officer
or employee of the Company or of any subsidiary, including each such person
who may also be a director of the Company, each non-employee director of
the Company, and each other person who provides substantial services to the
Company and/or its subsidiaries and who is designated as eligible by the
Committee. An employee on leave of absence may be considered as still in
the employ of the Company or a subsidiary for purposes of eligibility for
participation in the Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor
provisions and rules thereto.
(o) "Fair Market Value" means the fair market value of Stock, Awards,
or other property as determined by the Committee or under procedures
established by the Committee. Unless otherwise determined by the Committee,
the Fair Market Value of Stock shall be the average of the high and low
sales prices of Stock on a given date or, if there are no sales on that
date, on the latest previous date on which there were sales, reported for
composite transactions in securities listed on the principal trading market
on which Stock is then listed.
(p) "Incentive Stock Option" or "ISO" means any Option intended to be
and designated as an incentive stock option within the meaning of Code
Section 422 or any successor provision thereto.
(q) "Limited SAR" means a right granted to a Participant under Section
6(c) hereof.
(r) "Option" means a right, granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
4
<PAGE>
(s) "Other Stock-Based Awards" means Awards granted to a Participant
under Section 6(h) hereof.
(t) "Participant" means a person who has been granted an Award under
the Plan which remains outstanding, including a person who is no longer an
Eligible Person.
(u) "Qualified Member" means a member of the Committee who is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an
"outside director" within the meaning of Regulation 1.162-27 under Code
Section 162(m).
(v) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.
(w) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(x) "Stock" means the Company's Class A Common Stock, $.01 par value,
and such other securities as may be substituted (or resubstituted) for
Stock pursuant to Section 9(c) hereof.
(y) "Stock Appreciation Rights" or "SAR" means a right granted to a
Participant under Section 6(c) hereof.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. Except as otherwise provided below,
the Plan shall be administered by the Committee. The Committee shall have
full and final authority, in each case subject to and consistent with the
provisions of the Plan, to select Eligible Persons to become Participants,
grant Awards, determine the type, number, and other terms and conditions
of, and all other matters relating to, Awards, prescribe Award agreements
(which need not be identical for each Participant) and rules and
regulations for the administration of the Plan, construe and interpret the
Plan and Award agreements and correct defects, supply omissions, or
reconcile inconsistencies therein, and to make all other decisions and
determinations as the Committee may deem necessary or advisable for the
administration of the Plan. The foregoing notwithstanding, the Board shall
perform the functions of the Committee for purposes of granting Awards
under the Plan to non-employee directors, and may perform any function of
the Committee under the Plan for any other purpose, including for the
purpose of ensuring that transactions under the Plan by Participants who
are then subject to Section 16 of the Exchange Act in respect of the
Company are exempt under Rule 16b-3. In any case in which the Board is
performing a function of the Committee under the Plan, each reference to
the Committee herein shall be deemed to refer to the Board, except where
the context otherwise requires.
(b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. At any time that a
member of the Committee is not a Qualified Member, any action of the
Committee relating to an Award granted or to be granted to a Participant
who is then subject to Section 16
5
<PAGE>
of the Exchange Act in respect of the Company, or relating to an Award
intended by the Committee to qualify as "performance-based compensation"
within the meaning of Code Section 162(m) and regulations thereunder, may
be taken either (i) by a subcommittee, designated by the Committee,
composed solely of two or more Qualified Members, or (ii) by the Committee
but with each such member who is not a Qualified Member abstaining or
recusing himself or herself from such action; provided, however, that, upon
such abstention or recusal, the Committee remains composed of two or more
Qualified Members. Such action, authorized by such a subcommittee or by the
Committee upon the abstention or recusal of such non-Qualified Member(s),
shall be the action of the Committee for purposes of the Plan. Any action
of the Committee shall be final, conclusive and binding on all persons,
including the Company, its subsidiaries, Participants, Beneficiaries,
transferees under Section 9(b) hereof, or other persons claiming rights
from or through a Participant, and stockholders. The express grant of any
specific power to the Committee, and the taking of any action by the
Committee, shall not be construed as limiting any power or authority of the
Committee. The Committee may delegate to officers or managers of the
Company or any subsidiary, or committees thereof, the authority, subject to
such terms as the Committee shall determine, to perform such functions,
including administrative functions, as the Committee may determine, to the
extent that such delegation will not result in the loss of an exemption
under Rule 16b-3(d)(1) for Awards granted to Participants subject to
Section 16 of the Exchange Act in respect of the Company and will not cause
Awards intended to qualify as "performance-based compensation" under Code
Section 162(m) to fail to so qualify. The Committee may appoint agents to
assist it in administering the Plan.
(c) LIMITATION OF LIABILITY. The Committee and each member thereof
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any executive officer, other officer
or employee of the Company or a subsidiary, the Company's independent
auditors, consultants, or any other agents assisting in the administration
of the Plan. Members of the Committee and any officer or employee of the
Company or a subsidiary acting at the direction or on behalf of the
Committee shall not be personally liable for any action or determination
taken or made in good faith with respect to the Plan, and shall, to the
extent permitted by law, be fully indemnified and protected by the Company
with respect to any such action or determination.
4. LIMITATIONS ON PLAN AWARDS.
(a) OVERALL NUMBER OF SHARES AVAILABLE FOR DELIVERY. Subject to
adjustment as provided in Section 9(c) hereof, the total number of shares
of Stock reserved and available for delivery in connection with Awards
under the Plan shall be 3.4 million1. Any shares of Stock delivered under
the Plan shall consist of authorized and unissued shares or treasury
shares.
(b) APPLICATION OF LIMITATION TO GRANTS OF AWARDS. No Award may be
granted if the number of shares of Stock to which such Award relates, when
added to the number of shares of Stock to which other then-outstanding
Awards relate and the number of shares of Stock issued or delivered upon
settlement of previously granted Awards, exceeds the number of shares of
Stock reserved for issuance under this
- -----------------
1 Increased from 1.6 to 3.4 million effective March 23, 2000.
6
<PAGE>
Section 4. The Committee may adopt reasonable counting procedures to
ensure appropriate counting, avoid double counting (as, for example, in the
case of tandem or substitute awards) and make adjustments if the number of
shares of Stock actually delivered differs from the number of shares
previously counted in connection with an Award.
(c) AVAILABILITY OF SHARES NOT DELIVERED UNDER AWARDS. Shares of Stock
subject to an Award under the Plan that is canceled, expired, forfeited,
settled in cash, or otherwise terminated without a delivery of shares to
the Participant, including (i) the number of shares withheld in payment of
any exercise or purchase price of an Award or taxes relating to Awards, and
(ii) the number of shares surrendered in payment of any exercise or
purchase price of an Award or taxes relating to any Award, will again be
available for Awards under the Plan, except that if any such shares could
not again be available for Awards to a particular Participant under any
applicable law or regulation, such shares shall be available exclusively
for Awards to Participants who are not subject to such limitation.
5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted under
the Plan only to Eligible Persons. In each fiscal year during any part of which
the Plan is in effect, an Eligible Person who is an employee of the Company or
any of its subsidiaries may not be granted Awards relating to more than one
million shares of Stock, subject to adjustment as provided in Section 9(c),
under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), and 6(h).
6. SPECIFIC TERMS OF AWARDS.
(a) GENERAL. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award
or the exercise thereof, at the date of grant or thereafter (subject to
Section 9(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including
terms requiring forfeiture of Awards in the event of termination of
employment by the Participant and terms permitting a Participant to make
elections relating to his or her Award. The Committee shall retain full
power and discretion to accelerate, waive or modify, at any time, any term
or condition of an Award that is not mandatory under the Plan. Except as
expressly provided by the Committee (including for purposes of complying
with requirements of the Delaware General Corporation Law relating to
lawful consideration for issuance of shares), no consideration other than
services will be required for the grant (but not the exercise) of any
Award.
(b) OPTIONS. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) EXERCISE PRICE. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee,
provided that such exercise price shall be not less than the Fair
Market Value of a share of Stock on the date of grant of such Option
except as provided under Section 7(a) hereof.
(ii)TIME AND METHOD OF EXERCISE. The Committee shall determine
the time or times at which or the circumstances under which an Option
may be
7
<PAGE>
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the methods by
which such exercise price may be paid or deemed to be paid, the form
of such payment, including, without limitation, cash, Stock, other
Awards or awards granted under other plans of the Company or any
subsidiary, or other property (including notes or other contractual
obligations of Participants to make payment on a deferred basis), and
the methods by or forms in which Stock will be delivered or deemed to
be delivered to Participants.
(iii) ISOS. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Code Section 422.
Anything in the Plan to the contrary notwithstanding, no term of the
Plan relating to ISOs (including any SAR in tandem therewith) shall be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be exercised, so as to disqualify either the
Plan or any ISO under Code Section 422, unless the Participant has
first requested the change that will result in such disqualification.
ISOs may be granted only to employees of the Company or any of its
subsidiaries. To the extent that the aggregate Fair Market Value
(determined as of the time the Option is granted) of the Stock with
respect to which ISOs granted under this Plan and all other plans of
the Company and any subsidiary are first exercisable by any employee
during any calendar year shall exceed the maximum limit (currently,
$100,000), if any, imposed from time to time under Code Section 422,
such Options shall be treated as Options that are not ISOs.
(c) STOCK APPRECIATION RIGHTS. The Committee is authorized to grant
SARs to Participants on the following terms and conditions:
(i) RIGHT TO PAYMENT. A SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of Stock on the date
of exercise (or, in the case of a "Limited SAR," the Fair Market Value
determined by reference to the Change in Control Price, as defined
under Section 8(c) hereof) over (B) the grant price of the SAR as
determined by the Committee.
(ii)OTHER TERMS. The Committee shall determine at the date of
grant or thereafter, the time or times at which and the circumstances
under which a SAR may be exercised in whole or in part (including
based on achievement of performance goals and/or future service
requirements), the method of exercise, method of settlement, form of
consideration payable in settlement, method by or forms in which Stock
will be delivered or deemed to be delivered to Participants, whether
or not a SAR shall be in tandem or in combination with any other
Award, and any other terms and conditions of any SAR. Limited SARs
that may only be exercised in connection with a Change in Control or
other event as specified by the Committee may be granted on such
terms, not inconsistent with this Section 6(c), as the Committee may
determine. SARs and Limited SARs may be either freestanding or in
tandem with other Awards.
(d) RESTRICTED STOCK. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
8
<PAGE>
(i) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which restrictions
may lapse separately or in combination at such times, under such
circumstances (including based on achievement of performance goals
and/or future service requirements), in such installments or
otherwise, as the Committee may determine at the date of grant or
thereafter. Except to the extent restricted under the terms of the
Plan and any Award agreement relating to the Restricted Stock, a
Participant granted Restricted Stock shall have all of the rights of a
stockholder, including the right to vote the Restricted Stock and the
right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee). During
the restricted period applicable to the Restricted Stock, subject to
Section 9(b) below, the Restricted Stock may not be sold, transferred,
pledged, hypothecated, margined, or otherwise encumbered by the
Participant.
(ii) FORFEITURE. Except as otherwise determined by the Committee,
upon termination of employment during the applicable restriction
period, Restricted Stock that is at that time subject to restrictions
shall be forfeited and reacquired by the Company; provided that the
Committee may provide, by rule or regulation or in any Award
agreement, or may determine in any individual case, that restrictions
or forfeiture conditions relating to Restricted Stock shall be waived
in whole or in part in the event of terminations resulting from
specified causes, and the Committee may in other cases waive in whole
or in part the forfeiture of Restricted Stock.
(iii) CERTIFICATES FOR STOCK. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the
name of the Participant, the Committee may require that such
certificates bear an appropriate legend referring to the terms,
conditions and restrictions applicable to such Restricted Stock, that
the Company retain physical possession of the certificates, and that
the Participant deliver a stock power to the Company, endorsed in
blank, relating to the Restricted Stock.
(iv) DIVIDENDS AND SPLITS. As a condition to the grant of an
Award of Restricted Stock, the Committee may require that any cash
dividends paid on a share of Restricted Stock be automatically
reinvested in additional shares of Restricted Stock or applied to the
purchase of additional Awards under the Plan. Unless otherwise
determined by the Committee, Stock distributed in connection with a
Stock split or Stock dividend, and other property distributed as a
dividend, shall be subject to restrictions and a risk of forfeiture to
the same extent as the Restricted Stock with respect to which such
Stock or other property has been distributed.
(e) DEFERRED STOCK. The Committee is authorized to grant Deferred
Stock to Participants, which are rights to receive Stock at the end of a
specified deferral period, subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Settlement of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified for
such Deferred
9
<PAGE>
Stock by the Committee (or, if permitted by the Committee, as elected
by the Participant). In addition, Deferred Stock shall be subject to
such restrictions (which may include a risk of forfeiture) as the
Committee may impose, if any, which restrictions may lapse at the
expiration of the deferral period or at earlier specified times
(including based on achievement of performance goals and/or future
service requirements), separately or in combination, in installments
or otherwise, as the Committee may determine.
(ii) FORFEITURE. Except as otherwise determined by the Committee,
upon termination of employment during the applicable deferral period
or portion thereof to which forfeiture conditions apply (as provided
in the Award agreement evidencing the Deferred Stock), all Deferred
Stock that is at that time subject to deferral (other than a deferral
at the election of the Participant) shall be forfeited; provided that
the Committee may provide, by rule or regulation or in any Award
agreement, or may determine in any individual case, that restrictions
or forfeiture conditions relating to Deferred Stock shall be waived in
whole or in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or in part
the forfeiture of Deferred Stock.
(iii) DIVIDEND EQUIVALENTS. Unless otherwise determined by the
Committee at date of grant, Dividend Equivalents on the specified
number of shares of Stock covered by an Award of Deferred Stock shall
be either (A) paid with respect to such Deferred Stock at the dividend
payment date in cash or in shares of unrestricted Stock having a Fair
Market Value equal to the amount of such dividends, or (B) deferred
with respect to such Deferred Stock and the amount or value thereof
automatically deemed reinvested in additional Deferred Stock, other
Awards or other investment vehicles, as the Committee shall determine
or permit the Participant to elect.
(f) BONUS STOCK AND AWARDS IN LIEU OF OBLIGATIONS. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in
lieu of obligations to pay cash or deliver other property under the Plan or
under other plans or compensatory arrangements. Stock or Awards granted
hereunder shall be subject to such other terms as shall be determined by
the Committee.
(g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant
Dividend Equivalents to a Participant, entitling the Participant to receive
cash, Stock, other Awards, or other property equal in value to dividends
paid with respect to a specified number of shares of Stock, or other
periodic payments. Dividend Equivalents may be awarded on a free-standing
basis or in connection with another Award. The Committee may provide that
Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Stock, Awards, or other
investment vehicles, and subject to such restrictions on transferability
and risks of forfeiture, as the Committee may specify.
(h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Stock, as deemed by the
Committee to be consistent with the purposes of the Plan, including,
without limitation, convertible or
10
<PAGE>
exchangeable debt securities, other rights convertible or exchangeable into
Stock, purchase rights for Stock, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the book value of Stock or the
value of securities of or the performance of specified subsidiaries. The
Committee shall determine the terms and conditions of such Awards. Stock
delivered pursuant to an Award in the nature of a purchase right granted
under this Section 6(h) shall be purchased for such consideration, paid for
at such times, by such methods, and in such forms, including, without
limitation, cash, Stock, other Awards, or other property, as the Committee
shall determine.
(i) PERFORMANCE GOALS APPLICABLE TO DESIGNATED COVERED EMPLOYEES. If
the Committee determines that an Award described in Sections 6(d), 6(e) or
6(h) to be granted to an Eligible Person who is designated by the Committee
as likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise,
and/or settlement of such Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section
6(i).
(i) PERFORMANCE GOALS GENERALLY. The performance goals for such
Awards shall consist of one or more business criteria and a targeted
level or levels of performance with respect to each of such criteria,
as specified by the Committee consistent with this Section 6(i).
Performance goals shall be objective and shall otherwise meet the
requirements of Code Section 162(m) and regulations thereunder
(including Regulation 1.162-27 and successor regulations thereto),
including the requirement that the level or levels of performance
targeted by the Committee result in the achievement of performance
goals being "substantially uncertain." The Committee may determine
that such Awards shall be granted, exercised, and/or settled upon
achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise,
and/or settlement of such Awards. Performance goals may differ for
Awards granted to any one Participant or to different Participants.
(ii) BUSINESS CRITERIA. One or more of the following business
criteria for the Company, on a consolidated basis, and/or for
specified subsidiaries or business units of the Company (except with
respect to the total stockholder return and earnings per share
criteria), shall be used by the Committee in establishing performance
goals for such Awards: (1) earnings per share; (2) revenues; (3) cash
flow; (4) cash flow return on investment; (5) return on net assets,
return on assets, return on investment, return on capital, return on
equity; (6) economic value added; (7) operating margin; (8) net
income; pretax earnings; pretax earnings before interest, depreciation
and amortization; pretax operating earnings after interest expense and
before incentives, service fees, and extraordinary or special items;
operating earnings; (9) total stockholder return; and (10) any of the
above goals as compared to the performance of a published or special
index deemed applicable by the Committee including, but not limited
to, the Standard & Poor's 500 Stock Index or a group of comparator
companies.
(iii) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING PERFORMANCE
GOALS.
11
<PAGE>
Achievement of performance goals in respect of such Awards shall be
measured over a performance period of up to ten years, as specified by
the Committee. Performance goals shall be established not later than
90 days after the beginning of any performance period applicable to
such Awards, or at such other date as may be required or permitted for
"performance-based compensation" under Code Section 162(m).
(iv) OTHER TERMS. The Committee may, in its discretion, reduce
the amount of a settlement otherwise to be made in connection with
such Awards, but may not exercise discretion to increase any such
amount payable to a Covered Employee in respect of an Award subject to
this Section 6(i). All determinations by the Committee as to the
establishment of performance goals, and the achievement of performance
goals relating to Awards subject to this Section 6(i), shall be made
in writing in the case of any Award intended to qualify under Code
Section 162(m). The Committee may not delegate any responsibility
relating to such Awards, and the Board shall not perform such
functions at any time that the Committee is composed solely of
Qualified Members. Because the Committee cannot determine with
certainty whether a given Participant will be a Covered Employee with
respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by
the Committee, at the time of grant of an Award, as likely to be a
Covered Employee with respect to that fiscal year. If any provision of
the Plan as in effect on the date of adoption or any agreements
relating to Awards that are designated as intended to comply with Code
Section 162(m) does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such
provision shall be construed or deemed amended to the extent necessary
to conform to such requirements.
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS.
(a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of
the Company, any subsidiary, or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is
granted in substitution or exchange for another Award or award, the
Committee shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards may be
granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any subsidiary, in which the
value of Stock subject to the Award is equivalent in value to the cash
compensation (for example, Deferred Stock or Restricted Stock), or in which
the exercise price, grant price, or purchase price of the Award in the
nature of a right that may be exercised is equal to the Fair Market Value
of the underlying Stock minus the value of the cash compensation
surrendered (for example, Options granted with an exercise price
"discounted" by the amount of the cash compensation surrendered).
(b) TERM OF AWARDS. The term of each Award shall be for such period as
may
12
<PAGE>
be determined by the Committee; provided that in no event shall the term of
any Option or SAR exceed a period of ten years (or, in the case of an ISO,
such shorter term as may be required under Code Section 422).
(c) FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made
by the Company or a subsidiary upon the exercise of an Option or other
Award or settlement of an Award may be made in Stock, other Awards, or
other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated in the discretion of the Committee or upon occurrence of one or
more specified events (in addition to a Change in Control). Installment or
deferred payments may be required by the Committee (subject to Section 9(e)
of the Plan, including the consent provisions thereof in the case of any
deferral of an outstanding Award not provided for in the original Award
agreement) or permitted at the election of the Participant on terms and
conditions established by the Committee. Payments may include, without
limitation, provisions for the payment or crediting of reasonable interest
on installment or deferred payments or the grant or crediting of Dividend
Equivalents or other amounts in respect of installment or deferred payments
denominated in Stock.
(d) EXEMPTIONS FROM SECTION 16(B) LIABILITY. It is the intent of the
Company that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be
exempt under Rule 16b-3 (except for transactions which a Participant has
been advised in advance are non-exempt). Accordingly, if any provision of
this Plan or any Award agreement does not comply with the requirements of
Rule 16b-3 as then applicable to any such transaction, such provision shall
be construed or deemed amended to the extent necessary to conform to the
applicable requirements of Rule 16b-3 so that such Participant shall avoid
liability under Section 16(b).
8. CHANGE IN CONTROL.
(a) EFFECT OF "CHANGE IN CONTROL." In the event of a "Change in
Control," the following provisions shall apply unless otherwise provided in
the Award agreement:
(i) Any Award carrying a right to exercise that was not
previously exercisable and vested shall become fully exercisable and
vested as of the time of the Change in Control;
(ii) If any optionee holds an Option immediately prior to a
Change in Control that was not previously exercisable and vested in
full throughout the 60-day period preceding the Change in Control, he
shall be entitled to elect, during the 60-day period preceding the
Change in Control, in lieu of acquiring the shares of Stock covered by
the portion of the Option that was not vested and exercisable within
such 60-day period, to receive, and the Company shall be obligated to
pay, in cash the excess of the Change in Control Price over the
exercise price of such Option, multiplied by the number of shares of
Stock covered by such portion of the Option;
(iii) The restrictions, deferral of settlement, and forfeiture
conditions
13
<PAGE>
applicable to any other Award granted under the Plan shall lapse and
such Awards shall be deemed fully vested as of the time of the Change
in Control, except to the extent of any waiver by the Participant and
subject to applicable restrictions set forth in Section 9(a) hereof;
and
(iv) With respect to any outstanding Award subject to achievement
of performance goals and conditions under the Plan, such performance
goals and other conditions will be deemed to be met if and to the
extent so provided by the Committee in the Award agreement relating to
such Award.
(b) DEFINITION OF "CHANGE IN CONTROL." A "Change in Control" shall
mean the occurrence of any of the following:
(i) when any "person" as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act
but excluding the Company and any subsidiary and any employee benefit
plan sponsored or maintained by the Company or any subsidiary
(including any trustee of such plan acting as trustee), directly or
indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of securities of the Company representing at
least 40% percent (or such greater percentage as the Committee may
specify in connection with the grant of any Award) of the combined
voting power of the Company's then-outstanding securities; or
(ii) the occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than
the Company or a subsidiary through purchase of assets, or by merger,
or otherwise.
(c) DEFINITION OF "CHANGE IN CONTROL PRICE." The "Change in Control
Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share
paid (including extraordinary dividends) in any transaction triggering the
Change in Control, or (ii) the highest Fair Market Value per share at any
time during the 60-day period preceding the Change in Control.
9. GENERAL PROVISIONS.
(a) COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. The Company may, to
the extent deemed necessary or advisable by the Committee, postpone the
issuance or delivery of Stock or payment of other benefits under any Award
until completion of such registration or qualification of such Stock or
other required action under any federal or state law, rule, or regulation,
listing or other required action with respect to any stock exchange or
automated quotation system upon which the Stock or other securities of the
Company are listed or quoted, or compliance with any other obligation of
the Company, as the Committee may consider appropriate, and may require any
Participant to make such representations, furnish such information and
comply with or be subject to such other conditions as it may consider
appropriate in connection with the issuance or delivery of Stock or payment
of other benefits in compliance with applicable laws, rules, and
regulations, listing requirements, or other obligations. The foregoing
notwithstanding, in connection with a Change in Control, the Company shall
take or cause to be taken no action, and shall undertake or permit
14
<PAGE>
to arise no legal or contractual obligation, that results or would result
in any postponement of the issuance or delivery of Stock or payment of
benefits under any Award or the imposition of any other conditions on such
issuance, delivery or payment, to the extent that such postponement or
other condition would represent a greater burden on a Participant than
existed on the 90th day preceding the Change in Control.
(b) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or other right
or interest of a Participant under the Plan shall be pledged, hypothecated
or otherwise encumbered or subject to any lien, obligation or liability of
such Participant to any party, or assigned or transferred by such
Participant otherwise than by will or the laws of descent and distribution
or to a Beneficiary upon the death of a Participant, and such Awards or
rights that may be exercisable shall be exercised during the lifetime of
the Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than ISOs and
SARs in tandem therewith) may be transferred to one or more Beneficiaries
or other transferees during the lifetime of the Participant, and may be
exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent such transfers are permitted by the Committee
pursuant to the express terms of an Award agreement (subject to any terms
and conditions which the Committee may impose thereon). A Beneficiary,
transferee, or other person claiming any rights under the Plan from or
through any Participant shall be subject to all terms and conditions of the
Plan and any Award agreement applicable to such Participant, except as
otherwise determined by the Committee, and to any additional terms and
conditions deemed necessary or appropriate by the Committee.
(c) ADJUSTMENTS. In the event that any dividend or other distribution
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that an
adjustment is determined by the Committee to be appropriate under the Plan,
then the Committee shall, in such manner as it may deem equitable, adjust
any or all of (i) the number and kind of shares of Stock which may be
delivered in connection with Awards granted thereafter, (ii) the number and
kind of shares of Stock by which annual per-person Award limitations are
measured under Section 5 hereof, (iii) the number and kind of shares of
Stock subject to or deliverable in respect of outstanding Awards and (iv)
the exercise price, grant price or purchase price relating to any Award
and/or make provision for payment of cash or other property in respect of
any outstanding Award. In addition, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria included in,
Awards (including performance goals) in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence, as well as acquisitions and dispositions of businesses
and assets) affecting the Company, any subsidiary or any business unit, or
the financial statements of the Company or any subsidiary, or in response
to changes in applicable laws, regulations, accounting principles, tax
rates and regulations or business conditions or in view of the Committee's
assessment of the business strategy of the Company, any subsidiary or
business unit thereof, performance of comparable organizations, economic
and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall
be authorized or made if and to the extent that such authority
15
<PAGE>
or the making of such adjustment would cause Options, SARs, or Awards
granted under Section 6(i) hereof to Participants designated by the
Committee as Covered Employees and intended to qualify as
"performance-based compensation" under Code Section 162(m) and regulations
thereunder to otherwise fail to qualify as "performance-based compensation"
under Code Section 162(m) and regulations thereunder.
(d) TAXES. The Company and any subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially
payable in connection with any Award, and to take such other action as the
Committee may deem advisable to enable the Company and Participants to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to any Award. This authority shall include authority
to withhold or receive Stock or other property and to make cash payments in
respect thereof in satisfaction of a Participant's tax obligations, either
on a mandatory or elective basis in the discretion of the Committee.
(e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the
annual meeting next following such Board action if such stockholder
approval is required by any federal or state law or regulation or the rules
of any stock exchange or automated quotation system on which the Stock may
then be listed or quoted, and the Board may otherwise, in its discretion,
determine to submit other such changes to the Plan to stockholders for
approval; provided that, without the consent of an affected Participant, no
such Board action may materially and adversely affect the rights of such
Participant under any previously granted and outstanding Award. The
Committee may waive any conditions or rights under, or amend, alter,
suspend, discontinue, or terminate any Award theretofore granted and any
Award agreement relating thereto, except as otherwise provided in the Plan;
provided that, without the consent of an affected Participant, no such
Committee action may materially and adversely affect the rights of such
Participant under such Award. Notwithstanding anything in the Plan to the
contrary, if any right under this Plan would cause a transaction to be
ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee may
modify or adjust the right so that pooling of interest accounting shall be
available, including the substitution of Stock having a Fair Market Value
equal to the cash otherwise payable hereunder for the right which caused
the transaction to be ineligible for pooling of interest accounting.
(f) LIMITATION ON RIGHTS CONFERRED UNDER PLAN. Neither the Plan nor any
action taken hereunder shall be construed as (i) giving any Eligible Person
or Participant the right to continue as an Eligible Person or Participant
or in the employ or service of the Company or a subsidiary, (ii)
interfering in any way with the right of the Company or a subsidiary to
terminate any Eligible Person's or Participant's employment or service at
any time, (iii) giving an Eligible Person or Participant any claim to be
granted any Award under the Plan or to be treated uniformly with other
Participants and employees, or (iv) conferring on a Participant any of the
rights of a stockholder of the Company unless and until the Participant is
duly issued or
16
<PAGE>
transferred shares of Stock in accordance with the terms of an Award.
(g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation.
With respect to any payments not yet made to a Participant or obligation to
deliver Stock pursuant to an Award, nothing contained in the Plan or any
Award shall give any such Participant any rights that are greater than
those of a general creditor of the Company; provided that the Committee may
authorize the creation of trusts and deposit therein cash, Stock, other
Awards or other property, or make other arrangements to meet the Company's
obligations under the Plan. Such trusts or other arrangements shall be
consistent with the "unfunded" status of the Plan unless the Committee
otherwise determines with the consent of each affected Participant. The
trustee of such trusts may be authorized to dispose of trust assets and
reinvest the proceeds in alternative investments, subject to such terms and
conditions as the Committee may specify and in accordance with applicable
law.
(h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval
shall be construed as creating any limitations on the power of the Board or
a committee thereof to adopt such other incentive arrangements as it may
deem desirable including incentive arrangements and awards which do not
qualify under Code Section 162(m).
(i) PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES. Unless
otherwise determined by the Committee, in the event of a forfeiture of an
Award with respect to which a Participant paid cash or other consideration,
the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether
cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
(j) GOVERNING LAW. The validity, construction and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the Delaware General Corporation Law, without
giving effect to principles of conflicts of laws, and applicable federal
law.
(k) PLAN EFFECTIVE DATE. The Plan became Effective on August 13,
1997 and was amended Effective March 23, 2000.
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>4
<FILENAME>a2036456zex-10_19.txt
<DESCRIPTION>EXHIBIT 10.19
<TEXT>
<PAGE>
Exhibit 10.19
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is entered into as of the 1st
of September, 2000, by and between A. Lorne Weil ("Executive") and Autotote
Corporation, a Delaware corporation (the "Company").
WHEREAS, the Company and Executive have entered into an Employment
Agreement dated as of November 1, 1997, as amended by the letter agreement dated
September 10, 1998 (the "Existing Agreement"); and
WHEREAS, the Company and Executive wish to amend certain provisions
of the Existing Agreement concerning the term of Executive's employment;
Executive's base salary; and Executive's rights upon termination with respect to
any supplemental executive retirement plan or similar plan;
NOW, THEREFORE, in consideration of the premises and the mutual
benefits to be derived herefrom and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree that the Existing Agreement is hereby amended, effective as of September
1, 2000, as follows:
1. TERM: Section 2 of the Existing Agreement is hereby amended
and restated to provide in its entirety as follows:
The term of employment of Executive under this Agreement (the
"Term") shall be the period commencing on the Effective Date and
ending on October 31, 2004, together with any additional period or
periods for which such term may be extended from time to time in
accordance with this Section 2, subject to earlier termination in
accordance with Section 6 or 7. The Term shall be extended
1
<PAGE>
automatically, without further action by either party, by one
additional year beyond the then-scheduled end of the Term, on
October 31, 2004 (extending the Term to October 31, 2005) and on
each succeeding October 31 thereafter, unless either party, prior to
the April 30 preceding the date upon which such extension would
become effective, shall have served upon the other party written
notice in accordance with the provisions of Section 12(d) electing
not to so extend the Term, in which case the term of Executive's
employment shall terminate at the then-scheduled end of the Term,
subject to earlier termination in accordance with Section 6 or 7.
2. BASE SALARY: Section 4(a) the Existing Agreement is hereby
amended and restated to provide in its entirety as follows:
The Company will pay to Executive during the Term a base salary at
the initial annual rate of $475,000, payable in cash in
substantially equal monthly installments during each year, or
portion thereof, of the Term commencing at the beginning of the
Term, and otherwise in accordance with the Company's usual payroll
practices with respect to senior executives (except to the extent
deferred under Section 5(d)). Executive's annual base salary shall
be increased to $750,000 effective September 1, 2000, and shall be
increased annually on each succeeding September 1 thereafter by a
percentage of Executive's annual base salary then in effect equal to
the percentage increase, if any, during the preceding twelve months
in the Consumer Price Index for the Greater New York area; provided,
however, that if the independent consultants that the Company
retains to review the Company's compensation structure conclude that
Executive's base salary is insufficient, Executive's base salary
shall be increased in accordance with the recommendations of such
consultants. In no event shall Executive's base salary be reduced.
2
<PAGE>
3. PARTICIPATION IN ANY SERP ADOPTED BY THE COMPANY:
Section 5 of the Existing Agreement is hereby amended as
follows:
a. Subsection 5(c)(iii) of the Existing Agreement is
hereby renumbered as Subsection 5(c)(iv);
b. Subsection 5(c)(iv) of the Existing Agreement is
hereby renumbered as Subsection 5(c)(v); and
c. The following provision is hereby added in its
entirety as Subsection 5(c)(iii):
(iii) If the Company adopts any supplemental executive retirement
plan or substantially similar plan (a "SERP") during the Term,
Executive shall be entitled to participate in such SERP in
accordance with its terms, subject to the provisions of
Sections 6 and 7 of this Agreement.
4. ENTITLEMENT UNDER SERP UPON TERMINATION DUE TO NORMAL
RETIREMENT, APPROVED EARLY RETIREMENT, DEATH, OR DISABILITY:
Section 6 of the Existing Agreement is hereby amended as
follows:
a. Subsection 6(vi) of the Existing Agreement is hereby
renumbered as Subsection 6(vii);
b. Subsection 6(vii) of the Existing Agreement is hereby
renumbered as Subsection 6(viii); and
c. The following provision is hereby added in its entirety as
Subsection 6(vi):
(vi) If the Company adopts any supplemental executive retirement
plan or substantially similar plan (a "SERP") during the
Term, Executive shall be entitled to receive, in lieu of
any payments and benefits under the SERP, the greater of:
(a) an actuarially-adjusted lump sum cash payment equal to
the cash value of all payments and benefits to which
Executive would have been entitled under the SERP and (b)
an actuarially-adjusted lump
3
<PAGE>
sum cash payment equal to the cash value of all payments
and benefits to which Executive would have been entitled
under the SERP if Executive had 15 years of service with
the Company; provided, however, that if Executive receives
such payment under this Subsection 6(vi), Executive shall
forfeit all rights under the SERP, and the SERP shall have
no force and effect with respect to Executive.
5. ENTITLEMENT UNDER SERP UPON TERMINATION BY COMPANY WITHOUT
CAUSE OR BY EXECUTIVE FOR GOOD REASON, PRIOR TO OR MORE THAN TWO YEARS AFTER
A CHANGE IN CONTROL:
Section 7 of the Existing Agreement is hereby amended to add the
following provision as Subsection 7(b)(i)(J):
(J) If the Company adopts any SERP during the Term, Executive shall be
entitled to receive, in lieu of any payments and benefits under the
SERP, the greater of: (a) an actuarially-adjusted lump sum cash
payment equal to the cash value of all payments and benefits to
which Executive would have been entitled under the SERP and (b) an
actuarially-adjusted lump sum cash payment equal to the cash value
of all payments and benefits to which Executive would have been
entitled under the SERP if Executive had 15 years of service with
the Company; provided, however, that if Executive receives such
payment under this Subsection 7(b)(i)(J), Executive shall forfeit
all rights under the SERP, and the SERP shall have no force and
effect with respect to Executive.
6. ENTITLEMENT UNDER SERP UPON TERMINATION BY COMPANY WITHOUT CAUSE
OR BY EXECUTIVE FOR GOOD REASON, WITHIN TWO YEARS AFTER A CHANGE IN CONTROL:
Section 7 of the Existing Agreement is hereby amended to add the
following provision as Subsection 7(b)(ii)(J):
(J) If the Company adopts any SERP during the Term, Executive shall be
entitled to receive, in lieu of any payments and benefits under the
SERP, the greater of: (a) an actuarially-adjusted lump sum cash
payment equal to the cash value of all payments and benefits to
which Executive would have been entitled under the SERP and (b) an
actuarially-adjusted lump sum cash payment equal to the cash value
of all payments and benefits to which Executive would have been
entitled under the SERP if Executive had 15 years of service with
the Company; provided, however, that if Executive receives such
payment under this Subsection 7(b)(ii)(J),
4
<PAGE>
Executive shall forfeit all rights under the SERP, and the SERP
shall have no force and effect with respect to Executive.
7. RATIFICATION AS TO OTHER RESPECTS: The Existing Agreement is
hereby ratified and confirmed and remains in full force and effect in all
respects except as modified herein.
5
<PAGE>
IN WITNESS WHEREOF, Executive has signed his name and the Company,
by the signature of its duly authorized officer, has executed this Amendment to
Employment Agreement, as of the date and year first above written.
THE COMPANY:
AUTOTOTE CORPORATION, a Delaware corporation
By:______________________________
Alan J. Zakon
Chairman of the Executive Committee
of the Board of Directors
EXECUTIVE:
----------------------------------
A. Lorne Weil
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>5
<FILENAME>a2036456zex-10_21.txt
<DESCRIPTION>EXHIBIT 10.21
<TEXT>
<PAGE>
Exhibit 10.21
January 11, 2001
DeWayne Laird
565 Fox Meadow Lane
West Chester, PA 19382
Dear DeWayne:
This letter memorializes the resolutions approved by the Board of
Directors of Autotote Corporation (the "Company"), on August 30, 2000 and
September 7, 2000, concerning your continued employment. The Board approved the
following five terms:
1. TERM: Subject to earlier termination for cause, death, or disability,
the term of your employment shall be extended, effective September 1, 2000,
through and until August 31, 2003 (the "Term").
2. POSITION: During the Term, you will serve as Vice President and Chief
Financial Officer of the Company. You will report directly to the Chief
Executive Officer of the Company (the "CEO") and shall have such duties and
authority consistent with your title as shall be reasonably assigned to you from
time to time by the CEO or the Board of Directors.
3. SALARY: Effective September 1, 2000, your annual salary has been
increased to $250,000 and will be increased annually on each succeeding
September 1 thereafter by an amount not less than a percentage of your annual
salary then in effect equal to the percentage increase, if any, during the
preceding twelve months in the Consumer Price Index for Philadelphia,
Pennsylvania.
4. BENEFITS: During the term you will be entitled to participate in any
and all benefit plans and programs of the Company that are made available to its
senior executives, including the Company's Supplemental Executive Retirement
Plan.
5. COMPENSATION UPON CHANGE IN CONTROL: If your employment is terminated
without cause within two years of a Change in Control, as defined in the
agreement between you and the Company, dated as of November 1, 1997 (the "Change
in Control Agreement"), you will be entitled to receive, in lieu of any payment
under the Change in Control Agreement, a cash payment in an amount equal to
three times the sum of (i) your annual salary on the date of such termination
and (ii) the Severance Annual Incentive Amount, as defined in the Change of
Control Agreement.
1
<PAGE>
DeWayne Laird
January 11, 2001
Page 2
You and Autotote agree that the terms contained in this letter will be
memorialized in a formal employment agreement. Please indicate your acceptance
of these terms by countersigning this letter below and returning it to my
attention.
Very truly yours,
A. Lorne Weil
Chief Executive Officer and
Chairman of the Board
AGREED AND ACCEPTED:
- -------------------------- -------------------
DeWayne Laird Date
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>6
<FILENAME>a2036456zex-10_22.txt
<DESCRIPTION>EXHIBIT 10.22
<TEXT>
<PAGE>
Exhibit 10.22
January 11, 2001
Martin E. Schloss
869 President Street
Brooklyn, New York 11215
Dear Marty:
This letter memorializes the resolutions approved by the Board of
Directors of Autotote Corporation (the "Company"), on August 30, 2000 and
September 7, 2000, concerning your continued employment. The Board approved the
following five terms:
1. TERM: Subject to earlier termination for cause, death, or disability,
the term of your employment shall be extended, effective September 1, 2000,
through and until August 31, 2003 (the "Term").
2. POSITION: During the Term, you will serve as Vice President, General
Counsel and Secretary of the Company. You will report directly to the Chief
Executive Officer of the Company (the "CEO") and shall have such duties and
authority consistent with your title as shall be reasonably assigned to you from
time to time by the CEO or the Board of Directors.
3. SALARY: Effective September 1, 2000, your annual salary has been
increased to $300,000 and will be increased annually on each succeeding
September 1 thereafter by an amount not less than a percentage of your annual
salary then in effect equal to the percentage increase, if any, during the
preceding twelve months in the Consumer Price Index for New York, New York.
4. BENEFITS: During the term you will be entitled to participate in any
and all benefit plans and programs of the Company that are made available to its
senior executives, including the Company's Supplemental Executive Retirement
Plan.
5. COMPENSATION UPON CHANGE IN CONTROL: If your employment is terminated
without cause within two years of a Change in Control, as defined in the
agreement between you and the Company, dated as of November 1, 1997 (the "Change
in Control Agreement"), you will be entitled to receive, in lieu of any payment
under the Change in Control Agreement, a cash payment in an amount equal to
three times the sum of (i) your annual salary on the date of such termination
and (ii) the Severance Annual Incentive Amount, as defined in the Change of
Control Agreement.
<PAGE>
Martin E. Schloss
January 11, 2001
Page 2
You and Autotote agree that the terms contained in this letter will be
memorialized in a formal employment agreement. Please indicate your acceptance
of these terms by countersigning this letter below and returning it to my
attention.
Very truly yours,
A. Lorne Weil
Chief Executive Officer and
Chairman of the Board
AGREED AND ACCEPTED:
- -------------------------- -------------------
Martin E. Schloss Date
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>7
<FILENAME>a2036456zex-10_23.txt
<DESCRIPTION>EXHIBIT 10.23
<TEXT>
<PAGE>
Exhibit 10.23
THE AUTOTOTE CORPORATION
KEY EXECUTIVE
DEFERRED COMPENSATION PLAN, AS AMENDED
ARTICLE 1
INTRODUCTION
1.1 PURPOSE OF PLAN
The Company has adopted the Plan set forth herein to provide a means by which
certain Eligible Individuals may elect to defer receipt of designated
percentages or amounts of their Compensation.
1.2 STATUS OF PLAN
The Plan is intended to be an unfunded "bonus program" under 29 CFR Part
2510.3-2(c) and a plan that is "unfunded and is maintained by an employer
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees" within the meaning of sections
201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974
("ERISA"), and shall be interpreted and administered to the extent possible in a
manner consistent with that intent.
ARTICLE 2
DEFINITIONS
Wherever used herein, the following terms have the meanings set forth below,
unless a different meaning is clearly required by the context:
2.1 ACCOUNT means, for each Participant, an account maintained on the books
and records of the Company (and in the Trust) that is established for his or her
benefit under Section 5.1.
2.2 ADOPTION AGREEMENT means the Merrill Lynch Special Nonqualified Deferred
Compensation Plan for Select Employees Adoption Agreement signed by the Company
to establish the Plan and containing all the options selected by the Company, as
the same may be amended from time to time.
2.3 CHANGE OF CONTROL means the occurrence of any of the following:
(a) any "person" as defined in section 3(a)(9) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and as used in sections 13(d) and
14(d) thereof, including a "group" as defined in section 13(d) of the Exchange
Act but excluding the Company and any subsidiary and any employee benefit plan
sponsored or maintained by the Company or any subsidiary (including any trustee
of such plan acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the
Company representing at least 40% of the combined voting power of the Company's
then outstanding securities;
(b) the stockholders of the Company approve a merger, consolidation,
recapitalization or reorganization of the Company, or the consummation of any
such transactions if stockholder approval is not obtained, other than any such
transaction which would result in at least 60% of the total voting power
represented by the voting securities of the Company or the surviving entity
outstanding immediately prior to such transaction being beneficially owned by
persons who together beneficially owned at least 80% of the combined voting
power of the securities of the Company outstanding immediately prior to such
transaction; PROVIDED THAT, for purposes of this paragraph (b), such continuity
of ownership (and preservation of relative
1
<PAGE>
voting power) shall be deemed to be satisfied if the failure to meet such 60%
threshold is due solely to the acquisition of voting securities by an employee
benefit plan of the Company or such surviving entity;
(c) the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the its assets (or any transaction having a similar
effect); or
(d) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company (the
"Board"), together with any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in paragraph (a), (b), or (c) of this Section) whose
election by the Board or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election of nomination for election was previously so approved (the "Continuing
Directors"), cease for any reason to constitute a majority of the Board.
2.4 CODE means the Internal Revenue Code of 1986, as amended from time to
time. Reference to any section or subsection of the Code includes reference to
any comparable or succeeding provisions of any legislation that amends,
supplements or replaces such section or subsection.
2.5 COMPANY means the corporation referred to in the Adoption Agreement, any
successor to all or a major portion of the Company's assets or business that
assumes the obligations of the Company, and each other entity that is affiliated
with the Company, that adopts the Plan with the consent of the Company, provided
that the entity that signs the Adoption Agreement shall have the sole power to
amend this Plan and shall be the Plan Administrator if no other person or entity
is so serving at any time.
2.6 COMPENSATION has the meaning elected by the Company in the Adoption
Agreement. The definition of Compensation may differ for each Participant or
class of Participants.
2.7 DEFERRAL DATE means the date within 30 business days after the date the
Company pays end-of-year bonuses to Eligible Individuals for the Fiscal Year to
which an Elective Deferral relates (whether or not a particular Participant
receives or would be entitled to receive a bonus for such Fiscal Year) or such
other date selected by the Plan Administrator prior to the beginning of the
Fiscal Year to which an Elective Deferral relates.
2.8 DISTRIBUTION DATE means, with respect to each Elective Deferral (as
adjusted for earnings and losses) the later of: (a) (i) with respect to Elective
Deferrals made in respect of Compensation payable for the Company's 1998 Fiscal
Year, the date two years after the date as of which the Elective Deferral is
credited to the Participant's Account, (ii) with respect to Elective Deferrals
made in respect of Compensation payable for the Company's 1999 Fiscal Year, the
date one year after the date as of which the Elective Deferral is credited to
the Participant's Account, (iii) with respect to Elective Deferrals made in
respect of Compensation payable for the Company's 2000 Fiscal Year, the date two
years after the date as of which the Elective Deferral is credited to the
Participant's Account and (iv) with respect to the Company's 2001 and later
Fiscal Years, the date selected by the Participant prior to the beginning of the
Fiscal Year to which the election relates, provided such date is at least three
years after the date as of which the Elective Deferral is credited to the
Participant's Account; and (b) the date resulting from a Participant's Long Term
Deferral Election.
2.9 EFFECTIVE DATE means the date chosen in the Adoption Agreement as of which
the Plan first becomes effective.
2.10 ELECTION FORM means the participation election form as approved and
prescribed by the Plan Administrator.
2.11 ELECTIVE DEFERRAL means the portion of Compensation that is deferred by a
Participant under Section 4.1.
-2-
<PAGE>
2.12 ELIGIBLE INDIVIDUAL means, on the Effective Date or on any Entry Date
thereafter, each employee or non-employee director of the Company who satisfies
the criteria established in the Adoption Agreement.
2.13 ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time. Reference to any section or subsection of ERISA
includes reference to any comparable or succeeding provisions of any legislation
that amends, supplements or replaces such section or subsection.
2.14 FISCAL YEAR2 means the 12-month period beginning each January 1 and ending
December 31.
2.15 INSOLVENT means either (a) the Company is unable to pay its debts as they
become due or (b) the Company is subject to a pending proceeding as a debtor
under the United States Bankruptcy Code.
2.16 INVESTMENT VEHICLE means a theoretical investment made available under the
Plan by the Plan Administrator from time to time in which a Participant's
Account may be deemed to be invested in accordance with Section 5.2 hereof in
order to measure the value of the Account.
2.17 LONG TERM DEFERRAL ELECTION means, with respect to each Elective Deferral
(as adjusted to reflect earnings and losses as provided for hereunder), an
election on such form as may be required by the Plan Administrator and that is
filed with the Plan Administrator, all in accordance with Section 7.1(b) hereof.
2.18 PARTICIPANT means any Eligible Individual who participates in the Plan in
accordance with Article 3.
2.19 PLAN means this Autotote Corporation Key Executive Deferred Compensation
Plan together with the Adoption Agreement and all amendments thereto.
2.20 PLAN ADMINISTRATOR means the person, persons or entity designated by the
Company in the Adoption Agreement to administer the Plan and to serve as the
agent for the "Company" with respect to the Trust as contemplated by the
agreement establishing the Trust. If no such person or entity is so serving at
any time, the Company shall be the Plan Administrator.
2.21 PLAN YEAR means the 12-month period beginning each January 1 and ending
December 31.
2.22 TOTAL AND PERMANENT DISABILITY means the failure of a Participant to
render and perform the services required of the Participant for a total of 180
days or more during any consecutive 12-month period, because of any physical or
mental incapacity or disability as determined by a physician or physicians
selected by the Company and reasonably acceptable to the Participant unless,
within 30 days after the Participant has received written notice from the
Company of a proposed termination due to such status, the Participant shall have
returned to the full performance of his duties and shall have presented to the
Company a written certificate of the Participant's good health prepared by a
physician selected by he Company and reasonably acceptable to the Participant.
2.23 TRUST means a grantor trust within the meaning of section 671 of the Code
that is established by the Company to assist it in meeting its obligations under
the Plan and that identifies the Plan as a plan with respect to which assets are
to be held by the Trustee.
2.24 TRUSTEE means the trustee or trustees of the Trust.
2.25 UNFORESEEABLE EMERGENCY means a severe financial hardship resulting from a
sudden unexpected illness or accident of the Participant or of a dependent of
the Participant, loss of the Participant's property due to casualty, or other
similar circumstances as a result of events beyond the control of the
Participant and, in each case, would constitute an "unforeseeable emergency"
within the meaning of Treasury Regulation section 1.457-2(h)(4), and that may
not be relieved (a) through reimbursement or compensation by insurance or
otherwise, (b)
- ----------
2 Prior to the Fiscal Year beginning January 1, 2001 and ending December 31,
2001, the Fiscal Year was the period beginning each November 1 and ending
each October 31.
-3-
<PAGE>
by liquidation of the Participant's assets, to the extent the liquidation of
such assets would not itself cause severe financial hardship or (c) by cessation
of deferrals under the Plan. An Unforeseeable Emergency shall not include the
need to send a Participant's child to college or the desire to purchase a home.
ARTICLE 3
PARTICIPATION
3.1 COMMENCEMENT OF PARTICIPATION
Any Eligible Individual who elects to defer part of his or her Compensation in
accordance with Section 4.1 shall become a Participant in the Plan as of the
date such deferrals commence in accordance with Section 4.1.
3.2 CONTINUED PARTICIPATION
A Participant in the Plan shall continue to be a Participant so long as any
amount remains credited to his or her Account.
ARTICLE 4
ELECTIVE DEFERRALS
4.1 ELECTIVE DEFERRALS
(a) FISCAL YEAR 1998 COMPENSATION. An Eligible Individual may, by
completing an Election Form and filing it with the Plan Administrator no later
than October 21, 1998, elect to defer a percentage or dollar amount of the
Eligible Individual's Compensation attributable to the 1998 Fiscal Year of the
Company, on such terms as the Plan Administrator may permit.
(b) FISCAL YEAR 1999 AND LATER COMPENSATION. An Eligible Individual may,
by completing an Election Form and filing it with the Plan Administrator not
later than the last day of each Fiscal Year of the Company beginning with the
1998 Fiscal Year, elect to defer a percentage or dollar amount of the Eligible
Individual's Compensation attributable to the next succeeding Fiscal Year of the
Company (I.E., Compensation attributable to the 1999 Fiscal Year and later
fiscal years), on such terms as the Plan Administrator may permit.
(c) MECHANICS OF DEFERRAL. A Participant's Compensation shall be reduced
in accordance with the Participant's election hereunder and amounts deferred
hereunder shall be paid by the Company to the Trust as soon as administratively
feasible and credited to the Participant's Account as of the Deferral Date.
(d) REVOCATION OF DEFERRAL ELECTION. To the extent permitted by the Plan
Administrator, a Participant may change or revoke his or her Deferral Election
with respect to Compensation payable for a succeeding Fiscal Year of the Company
by giving written notice to the Plan Administrator in such form as may be
required by the Plan Administrator, before the first day of such Fiscal Year.
ARTICLE 5
ACCOUNTS
5.1 ACCOUNTS
The Plan Administrator shall establish an Account for each Participant
reflecting the Participant's Elective Deferrals, together with any adjustments
for income, gain or loss (determined in accordance with Section 5.2(a)) and any
payments from the Account. The Plan Administrator may cause the Trustee to
maintain and invest separate asset accounts corresponding to each Participant's
Account. The Plan Administrator shall (and may cause the Trustee to) establish
sub-accounts for each Participant that has more than one Deferral Election and
such other sub-accounts as are necessary for the proper administration of the
Plan. The Plan Administrator
-4-
<PAGE>
or the Trustee shall provide each Participant with a periodic statement of his
or her Account reflecting the income, gains and losses (realized and
unrealized), amounts of deferrals, and distributions of such Account since the
prior statement.
5.2 DEEMED INVESTMENT OF ACCOUNTS
(a) ADJUSTMENT OF ACCOUNTS. The amount of each Participant's Elective
Deferral for a Fiscal Year shall be credited to the Participant's Account as of
the Deferral Date for such Elective Deferral. The Account shall be adjusted from
time to time to reflect (i) subsequent years' deferrals, if any, and (ii) gains
(or losses) determined as if the Account were invested in one or more Investment
Vehicles selected by the Participant. The Plan Administrator may adopt such
rules and administrative practices as it shall deem necessary or appropriate in
connection with a Participant's ability to select Investment Vehicles hereunder
including restrictions on the timing or frequency of such elections; all such
Investment Vehicle selections shall be made in such form as may be required by
the Plan Administrator from time to time.
(b) INVESTMENT OF TRUST ASSETS. The assets of the Trust shall be invested
in such investments (which may, but are not required to be, the Investment
Vehicles) as the Trustee shall be directed by the Company or, to the extent
permitted by the Company with respect to each Participant's Account, as the
Trustee shall be directed by each Participant.
ARTICLE 6
VESTING
6.1 GENERAL
Without limitation on Section 10.1, each Participant shall be immediately vested
in, I.E., shall have a nonforfeitable right to, the balance in the Participant's
Account.
ARTICLE 7
PAYMENTS
7.1 TIME AND FORM OF PAYMENT
(a) TIMING OF DISTRIBUTIONS. Unless sooner distributed in accordance with
the terms hereof, each Participant shall receive a distribution in a single lump
sum of the portion of the Participant's Account attributable to each Elective
Deferral within 30 business days after the Distribution Date for such Elective
Deferral.
(b) LONG TERM DEFERRAL ELECTIONS. To the extent permitted by the Plan
Administrator, each Participant who is employed by the Company shall be entitled
to make a Long Term Deferral Election with respect to the amounts credited to
the Participant's Account with respect to a Deferral Election. Any such Long
Term Deferral Election shall be delivered to the Plan Administrator no later
than a date one year prior to any date a Participant's Distribution Date
otherwise would occur in accordance with Section 2.7 hereof. The effect of a
Long Term Deferral Election will be to defer the distribution of an amount in
respect of a Deferral Election until the earlier of the expiration of the period
designated in the Long Term Deferral Election and the date described in Section
7.2, 7.3 or 7.4. The Plan Administrator may, in its discretion, limit the
ability of any Participant to make a Long Term Deferral Election.
7.2 CHANGE OF CONTROL
As soon as possible following a Change of Control of the Company, each
Participant shall be paid his or her entire Account balance in a single lump
sum.
7.3 TERMINATION OF EMPLOYMENT
-5-
<PAGE>
Within 30 business days after the termination of a Participant's employment for
any reason, the Participant shall receive a distribution of his or her entire
Account balance in a single lump
7.4 DEATH
If a Participant dies prior to the complete distribution of his or her Account,
the balance of the Account shall be paid as soon as practicable to the
Participant's designated beneficiary or beneficiaries in effect on the date of
the Participant's death.
Any designation of a beneficiary shall be made by the Participant on an
appropriate Election Form filed with the Plan Administrator and may be changed
by the Participant at any time by filing another Election Form containing the
revised instructions. If no beneficiary is designated or no designated
beneficiary survives the Participant, payment shall be made to the Participant's
surviving spouse, or, if none, to his or her issue PER STIRPES, in a single
payment. If no spouse or issue survives the Participant, payment shall be made
in a single lump sum to the representative of the Participant's estate. No
payment shall be made to the representative of a Participant's estate until the
Plan Administrator shall have been furnished with such evidence as it shall deem
necessary or appropriate to establish the validity of the payment.
7.5 UNFORESEEABLE EMERGENCY
If a Participant suffers an Unforeseeable Emergency, the Plan Administrator, in
its sole discretion, may pay to the Participant only that portion, if any, of
the Participant's Account that the Plan Administrator determines is necessary to
satisfy the emergency need, including any amounts necessary to pay any Federal,
State or local income taxes reasonably anticipated to result from the
distribution. A Participant requesting an emergency payment shall apply for the
payment in writing in a form approved by the Plan Administrator and shall
provide such additional information as the Plan Administrator may require.
7.6 TAXES
All federal, state or local taxes that the Plan Administrator determines are
required to be withheld in respect of any Elective Deferrals hereunder or from
any payments made pursuant to this Article 7 shall be withheld from amounts
payable hereunder or from any other amounts payable to a Participant.
ARTICLE 8
PLAN ADMINISTRATOR
8.1 PLAN ADMINISTRATION AND INTERPRETATION
The Plan Administrator shall oversee the administration of the Plan. The Plan
Administrator shall have complete control and authority to determine the rights
and benefits and all claims, demands and actions arising out of the provisions
of the Plan of any Participant, beneficiary, deceased Participant, or other
person having or claiming to have any interest under the Plan. The Plan
Administrator shall have complete discretion to interpret the Plan and to decide
all matters under the Plan. Such interpretation and decision shall be final,
conclusive and binding on all Participants and any person claiming under or
through any Participant (in the absence of clear and convincing evidence that
the Plan Administrator acted arbitrarily and capriciously). Any individual(s)
serving as Plan Administrator who is a Participant will not vote or act on any
matter relating solely to himself or herself. When making a determination or
calculation, the Plan Administrator shall be entitled to rely on information
furnished by a Participant, a beneficiary, the Company or the Trustee. The Plan
Administrator shall have the responsibility for complying with any reporting and
disclosure requirements of ERISA.
8.2 POWERS, DUTIES, PROCEDURES, ETC.
The Plan Administrator shall have such powers and duties, may adopt such rules
and tables, may act in accordance with such procedures, may appoint such
officers or agents, may delegate such powers and duties,
-6-
<PAGE>
may receive such reimbursements and compensation, and shall follow such claims
and appeal procedures with respect to the Plan as it may establish.
8.3 INFORMATION
To enable the Plan Administrator to perform its functions, the Company shall
supply full and timely information to the Plan Administrator on all matters
relating to the compensation of Participants, their employment, retirement,
death, termination of employment, and such other pertinent facts as the Plan
Administrator may require.
8.4 INDEMNIFICATION OF PLAN ADMINISTRATOR
The Company agrees to indemnify and to defend to the fullest extent permitted by
law any officer(s) or employee(s) who serve as Plan Administrator (including any
such individual who formerly served as Plan Administrator) against all
liabilities, damages, costs and expenses (including attorneys' fees and amounts
paid in settlement of any claims approved by the Company) occasioned by any act
or omission to act in connection with the Plan, if such act or omission is in
good faith.
ARTICLE 9
AMENDMENT AND TERMINATION
9.1 AMENDMENTS
The Company shall have the right to amend the Plan from time to time, subject to
Section 9.3, by an instrument in writing that has been executed on the Company's
behalf by its duly authorized officer.
9.2 TERMINATION OF PLAN
This Plan is strictly a voluntary undertaking on the part of the Company and
shall not be deemed to constitute a contract between the Company and any
Eligible Individual (or any other person) or a consideration for, or an
inducement or condition of employment for, the performance of the services by
any Eligible Individual (or other person). The Company reserves the right to
terminate the Plan at any time with respect to any or all Participants, subject
to Section 9.3, by an instrument in writing that has been executed on the
Company's behalf by its duly authorized officer. Upon termination, the Company
may, with respect to each Participant affected by any termination (an "Affected
Participant") on a Participant-by-Participant basis, (a) elect to continue to
maintain the Participant's Account and pay benefits hereunder as they become due
as if the Plan had not terminated or (b) pay (or direct the Trustee to pay)
promptly to each Affected Participant (or such Affected Participant's
beneficiary or beneficiaries) the balance of the Affected Participant's Account.
9.3 EXISTING RIGHTS
No amendment or modification to, or termination of, the Plan shall be effective
to the extent that it would reduce the value of a Participant's Account
immediately prior to the amendment, modification or termination, without the
Participant's prior written consent.
ARTICLE 10
MISCELLANEOUS
10.1 NO FUNDING
The Plan constitutes a mere promise by the Company to make payments in
accordance with the terms of the Plan, and Participants and beneficiaries shall
have the status of general unsecured creditors of the Company. Nothing in the
Plan will be construed to give any employee or any other person rights to any
specific assets of
-7-
<PAGE>
the Company or of any other person. In all events, it is the intent of the
Company that the Plan be treated as unfunded for tax purposes and for purposes
of Title I of ERISA.
10.2 NON-ASSIGNABILITY
None of the benefits, payments, proceeds or claims of any Participant or
beneficiary shall be subject to any claim of any creditor of any Participant or
beneficiary and, in particular, the same shall not be subject to attachment or
garnishment or other legal process by any creditor of such Participant or
beneficiary, nor shall any Participant or beneficiary have any right to
alienate, participate, commute, pledge, encumber or assign any of the benefits
or payments or proceeds that he or she may expect to receive, contingently or
otherwise, under the Plan.
10.3 LIMITATION OF PARTICIPANTS' RIGHTS
Nothing contained in the Plan shall confer upon any person a right to be
employed or to continue in the employ of the Company, or interfere in any way
with the right of the Company to terminate the employment of a Participant at
any time, with or without cause. In addition, nothing shall confer on any
individual a right to participate in the Plan in any Fiscal Year. The fact that
an individual is an Eligible Individual in one year shall not give the
individual a right to participate in the Plan in any other year.
10.4 PARTICIPANTS BOUND
Any action with respect to the Plan taken by the Plan Administrator or the
Company or the Trustee or any action authorized by or taken at the direction of
the Plan Administrator, the Company or the Trustee shall be conclusive upon all
Participants and beneficiaries entitled to benefits under the Plan.
10.5 RECEIPT AND RELEASE
Any payment to any Participant or beneficiary in accordance with the provisions
of the Plan shall, to the extent thereof, be in full satisfaction of all claims
against the Company, the Plan Administrator and the Trustee under the Plan, and
the Plan Administrator may require such Participant or beneficiary, as a
condition precedent to such payment, to execute a receipt and release to such
effect. If any Participant or beneficiary is determined by the Plan
Administrator to be incompetent by reason of physical or mental disability
(including minority) to give a valid receipt and release, the Plan Administrator
may cause the payment or payments becoming due to such person to be made to
another person for his or her benefit without responsibility on the part of the
Plan Administrator, the Company or the Trustee to follow the application or use
of such funds.
10.6 GOVERNING LAW
The Plan shall be construed, administered, and governed in all respects under
and by the laws of the State of New York without reference to the principles of
conflicts of law, unless preempted by applicable federal law. If any provision
of the Plan shall be held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
10.7 HEADINGS AND SUBHEADINGS
Headings and subheadings in this Plan are inserted for convenience only and are
not to be considered in the construction of the provisions hereof.
-8-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>8
<FILENAME>a2036456zex-10_24.txt
<DESCRIPTION>EXHIBIT 10.24
<TEXT>
<PAGE>
Exhibit 10.24
EXECUTION
$345,000,000
AUTOTOTE CORPORATION
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of October 6,
2000, and entered into by and among AUTOTOTE CORPORATION, a Delaware corporation
("COMPANY"), THE LENDERS PARTIES HERETO (each individually referred to herein as
a "LENDER" and collectively as "LENDERS"), DLJ CAPITAL FUNDING, INC. ("DLJ"), as
administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"),
DLJ, as syndication agent for Lenders (in such capacity, "SYNDICATION AGENT"),
Lead Arranger and Sole Book Running Manager, LEHMAN COMMERCIAL PAPER INC.,
("LCPI"), as documentation agent for Lenders (in such capacity, "DOCUMENTATION
AGENT"), and LEHMAN BROTHERS INC. ("Lehman") as Co-Arranger. Capitalized terms
used herein without definition shall have the meanings set forth therefor in
subsection 1.1.
PRELIMINARY STATEMENTS
o Company, Lenders, Administrative Agent, Syndication Agent, and
Documentation Agent are parties to that certain Credit Agreement
dated as of September 6, 2000 (the "CLOSING DATE CREDIT
AGREEMENT").
o Company, Lenders, Administrative Agent, Syndication Agent and
Documentation Agent desire to amend and restate the Closing Date
Credit Agreement in its entirety in order to, among other things,
(i) complete the syndication of the Lenders and (ii) provide that
the terms and provisions of the Closing Date Credit Agreement
shall otherwise be modified as set forth herein.
o Company agrees that its existing pledge and grant of a security
interest in substantially all of its present and future real and
personal property pursuant to the Security Agreement dated as of
September 6, 2000 by and among Company, certain of Company's
Subsidiaries and Administrative Agent shall be continued without
interruption and shall be amended and restated in its entirety.
o Each Subsidiary Guarantor agrees that its existing guaranty of
the Obligations of Company under the Closing Date Credit
Agreement pursuant to the Subsidiary Guaranty dated as of
September 6, 2000 entered into by the Subsidiary Guarantors in
favor of the Administrative Agent for the benefit of
1
<PAGE>
Lenders shall be continued without interruption and shall be
amended and restated in its entirety.
o All modifications to the Closing Date Credit Agreement and the
other Loan Documents made hereby require the concurrence of all
Lenders and the Loan Parties. The Lenders identified on the
signature pages hereof have acquired all of the loans and
commitments under the Closing Date Credit Agreement as indicated
in Schedule 2.1.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Company, Lenders, Administrative
Agent, Syndication Agent and Documentation Agent agree that the Closing Date
Credit Agreement shall be amended and restated, without novation, as follows:
SECTION 1. DEFINITIONS
o DEFINED TERMS.
The following terms used in this Agreement shall have the following
meanings:
"ACQUIRED BUSINESS" has the meaning assigned to that term in the
definition of "Permitted Acquisition" in this subsection 1.1.
"ACQUISITION CO." means ATX Enterprises, Inc., a Delaware
corporation and wholly-owned Subsidiary of Company.
"ACQUISITION FINANCING REQUIREMENTS" means the aggregate of all
amounts necessary (i) to finance the purchase price for all of the outstanding
shares of Scientific Games Common Stock (and the retirement of all outstanding
stock options (including related withholding tax with respect to the exercise of
such options)) pursuant to the Merger in an aggregate amount of approximately
$307.7 million; (ii) to repay in full the Existing Company Bank Debt in an
aggregate principal amount of approximately $36.0 million; (iii) to repay
Existing Company Senior Notes in an aggregate principal amount of $110 million;
(iv) to repay the Existing Company Convertible Debt in an aggregate principal
amount of $35 million; (v) to pay the Tender Premiums in an amount not to exceed
$9.5 million; (vi) to repay in full the Existing Scientific Games Bank Debt in
an aggregate principal amount of approximately $25.0 million; (vii) to pay
accrued interest on existing Indebtedness in the approximate amount of $1.8
million; (viii) to cash collateralize the Existing Letters of Credit in an
aggregate amount not to exceed $1.4 million; and (ix) to pay Transaction Costs
in an amount not to exceed $30.1 million.
"ADDITIONAL MORTGAGED PROPERTY" has the meaning assigned to that
term in subsection 6.9B.
"ADDITIONAL MORTGAGE POLICY" has the meaning assigned to that term
in subsection 6.9B(iv).
"ADDITIONAL MORTGAGES" has the meaning assigned to that term in
subsection 6.9B(i).
2
<PAGE>
"ADJUSTED CONSOLIDATED NET INCOME" means, for any period, the net
income (or loss) of Company and its Subsidiaries on a consolidated basis for
such period taken as a single accounting period determined in conformity with
GAAP; PROVIDED that there shall be excluded therefrom (i) the income (or loss)
of any Person (other than a Subsidiary of Company) in which any other Person
(other than Company or any of its Subsidiaries) has a joint interest, except to
the extent of the amount of dividends or other distributions actually paid to
Company or any of its Subsidiaries by such Person during such period, (ii)
except as otherwise expressly permitted under this Agreement, the income (or
loss) of any Person accrued prior to the date it becomes a Subsidiary or is
merged into or consolidated with Company or any of its Subsidiaries or that
Person's assets are acquired by Company or any of its Subsidiaries and (iii) the
income of any Subsidiary of Company to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary of that income
is not at the time permitted by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary; provided that the foregoing clause
(iii) shall not apply with respect to the income of any Foreign Subsidiary to
the extent that the restriction on the declaration or payment of dividends or
similar distributions by that Foreign Subsidiary of that income is permitted by
subsection 7.2C(c) or 7.2D(d).
"ADJUSTED LIBO RATE" means, for any Interest Rate Determination Date
with respect to an Interest Period for a LIBO Rate Loan, the rate per annum
obtained by DIVIDING (i) the rate per annum (rounded upward to the nearest 1/16
of one percent) which appears on the British Bankers Association Telerate page
3750 (or such other comparable page as may, in the reasonable opinion of the
Administrative Agent with the consent of Company (which consent shall not be
unreasonably withheld or delayed), replace such page for the purpose of
displaying such rate), at which Dollar deposits with a maturity comparable to
such Interest Period as of approximately 11:00 a.m. (London time) on such
Interest Rate Determination Date BY (ii) a percentage equal to 100% MINUS the
stated maximum rate of all reserve requirements (including any marginal,
emergency, supplemental, special or other reserves) applicable on such Interest
Rate Determination Date to any member bank of the Federal Reserve System in
respect of "Eurocurrency liabilities" as defined in Regulation D (or any
successor category of liabilities under Regulation D).
"ADMINISTRATIVE AGENT" has the meaning assigned to that term in the
introduction to this Agreement and also means and includes any successor
Administrative Agent appointed pursuant to subsection 9.5A.
"AFFECTED CLASS" has the meaning assigned to that term in subsection
10.6.
"AFFECTED LENDER" has the meaning assigned to that term in
subsection 2.6C.
"AFFILIATE", as applied to any Person, means any other Person
directly or indirectly controlling, controlled by, or under common control with,
that Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities or
by contract or otherwise.
3
<PAGE>
"AGENTS" means, collectively, the Syndication Agent, the
Documentation Agent and the Administrative Agent and any Supplemental Collateral
Agents (as defined in subsection 9.1B).
"AGREEMENT" means this Amended and Restated Credit Agreement dated
as of October 6, 2000 and all the exhibits and schedules hereto, as it may be
amended, supplemented or otherwise modified from time to time.
"AGREEMENT OF JOINDER" means an Agreement of Joinder in
substantially the form of Exhibit XIV annexed hereto.
"ANNUALIZED" means (i) with respect to the Fiscal Quarter of Company
ending September 30, 2000, (x) the applicable amount for the period from and
including the Closing Date through and including September 30, 2000 MULTIPLIED
by (y) (i) 360 DIVIDED by (ii) the number of days from and including the Closing
Date through and including September 30, 2000, (ii) with respect to the Fiscal
Quarter of Company ending December 31, 2000, (x) the applicable amount for the
period from and including the Closing Date through and including December 31,
2000 MULTIPLIED by (y) (i) 360 DIVIDED by (ii) the number of days from and
including the Closing Date through and including December 31, 2000, and (iii)
with respect to the Fiscal Quarter of Company ending March 31, 2001, (x) the
applicable amount for the period from and including the Closing Date through and
including March 31, 2001 multiplied by (y) (i) 360 DIVIDED by (ii) the number of
days from and including the Closing Date through and including March 31, 2001.
"APPLICABLE BASE RATE MARGIN" means, as at any date of
determination, (i) with respect to Tranche B Term Loans, 3.00% per annum, and
(ii) with respect to Tranche A Term Loans and Revolving Loans, a percentage per
annum as set forth below opposite the applicable Consolidated Leverage Ratio
calculated on a Pro Forma Basis:
<TABLE>
<CAPTION>
CONSOLIDATED LEVERAGE RATIO APPLICABLE BASE RATE MARGIN
------------------------------------------------------------------
<S> <C>
greater than or equal to 2.50%
5.00:1.00
less than 5.00:1.00 but greater
than or equal to 4.50:1.00 2.25%
less than 4.50:1.00 but greater
than or equal to 4.00:1.00 2.00%
less than 4.00:1.00 but greater
than or equal to 3.50:1.00 1.75%
less than 3.50:1.00 but greater
than or equal to 3.00:1.00 1.50%
less than 3.00:1.00 1.25%
</TABLE>
; PROVIDED that until the delivery of the first Margin Determination Certificate
by Company to Administrative Agent pursuant to subsection 6.1 (xviii) after the
six-month anniversary of the Closing Date, the Applicable Base Rate Margin for
Tranche A Term Loans and Revolving Loans shall be 2.25% per annum.