-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SeggD1FMC37PQmbLbEeDB2JgN7zPbY9NFDhgCz/lwydB1qz2aniy64oDg8aUjCXb /L4f0kzNHDA0mNxaLcFGGw== 0000891554-99-000086.txt : 19990128 0000891554-99-000086.hdr.sgml : 19990128 ACCESSION NUMBER: 0000891554-99-000086 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOTOTE CORP CENTRAL INDEX KEY: 0000750004 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 810422894 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11693 FILM NUMBER: 99514301 BUSINESS ADDRESS: STREET 1: 100 BELLEVUE CITY: NEWARK STATE: DE ZIP: 19714 BUSINESS PHONE: 3027374300 MAIL ADDRESS: STREET 1: 100 BELLEVUE ROAD CITY: NEWARK STATE: DE ZIP: 19714 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TOTE INC DATE OF NAME CHANGE: 19920317 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: October 31, 1998, 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: Title of each class Name of each exchange on which registered Class A Common Stock, $.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of 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 22, 1999, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $76,555,494. Common shares outstanding as of January 22, 1999 were 36,026,115. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated herein by reference: Document Parts Into Which Incorporated Proxy Statement for the Company's 1999 Annual Part III Meeting of Stockholders EXHIBIT INDEX APPEARS ON PAGE 71 ================================================================================ PART I When used herein, the words "believe," "anticipate," "think," "intend," "will be" and similar expressions identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not guarantees of future performance and involve certain risks and uncertainties discussed herein, which could cause actual results to differ materially from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements which speak only as of the date hereof. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." All references to a fiscal year are to the Company's fiscal year, which ends October 31. References to "Autotote" or the "Company" include Autotote Corporation and its subsidiaries. ITEM 1. BUSINESS Overview Autotote Corporation is a leading technology supplier and operator of wagering systems, related equipment and gaming venues in North America and worldwide. The Company provides technology, services and operations management primarily to two major segments of the industry: i) pari-mutuel wagering (whereby wagers are placed in a pool and winnings are calculated and paid as a percentage of that pool), consisting primarily of wagering conducted on horse racing, greyhound racing and jai-alai and ii) government sponsored or licensed lotteries. Autotote is the leading provider of computerized pari-mutuel wagering systems to the North American Racing Industry and is also a leading provider of computerized pari-mutuel systems worldwide, with systems in racetracks and OTBs in Europe, Central and South America, and the Asia-Pacific region. The Company is the exclusive licensed operator of substantially all off-track betting ("OTB") in the State of Connecticut and is the exclusive licensed operator of all pari-mutuel wagering in The Netherlands. In addition, the Company is the leading provider of Racing Industry simulcasting services in the United States through its broadcasting of live racing events via satellite to other racetracks and OTBs and also provides these services in Europe. The Company designs, sells and services video gaming machines ("VGMs") for use at racetracks and in lottery operations in North America. Also in 1998, the Company designed, implemented and began providing a national voice/data network, known as the North American Simulcast Racing Information Network ("NASRIN(TM)"). Autotote is also a major provider of lottery systems, equipment and services to government-sponsored and privately operated lotteries. The Company currently supports such lotteries in North America, Latin America and Europe. The Company's proprietary pari-mutuel wagering systems process the sale and cashing of wagers through ticket-issuing terminals, accumulate wagering data, calculate pari-mutuel odds, distribute information to display systems and provide management information and marketing services for its customers. The wagering 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 Company generally receives revenues based on a percentage of the gross monies wagered ("Handle"), a daily or monthly fee or through outright product sales. The growth in OTB, telephone and inter-track wagering, together with the Company's extensive penetration of the North American pari-mutuel wagering market, have enabled the Company to generate increased revenues. The Company has achieved this because it (i) is the leading provider of pari-mutuel wagering systems to the leading racetracks whose live racing events are in the greatest demand for off-track wagering, (ii) is a leading provider of computerized pari-mutuel wagering systems and automated telephone betting equipment to OTBs and racetracks accepting wagers on simulcasted racing events, (iii) is the leading simulcaster of live horse and greyhound racing and jai alai events to racing facilities, OTBs and casinos in North America, and (iv) owns the Connecticut OTB 2 system. The Company believes that it will realize additional benefits to the extent that states and foreign jurisdictions enact further legislation that facilitates growth in simulcasting and OTB, inter-track, telephone and other remote wagering. The Company's lottery operations utilize proprietary technology that is similar to that used for pari-mutuel wagering, but specialized for lottery operations. The Company (i) provides wagering equipment and services to operate the Connecticut State Lottery, a nationwide lottery in Barbados and a nationwide lottery in the Dominican Republic, (ii) provides support and maintenance services for other on-line lotteries, and (iii) sells lottery equipment to various markets, including Italy. On December 15, 1997, the Company signed an agreement with the Connecticut Lottery Corporation to service the Connecticut State Lottery through May 2003, and provides the lottery five one-year options to extend the contract through May 2008. Under the terms of the agreement, in the third quarter of fiscal 1998, the Company manufactured and installed approximately 3,200 new PROBE(*)L lottery terminals. The Company partially financed its obligations under this agreement by entering into a term loan arrangement in May 1998 (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources). In fiscal 1998, the Company also signed a seven-year contract with the Montana State Lottery for an on-line lottery system to be installed in 1999. Additionally, in 1998, the Company began shipping to an Italian distributor the first of up to 20,000 Extrema(TM) lottery terminals for use in Italy in the SISAL Sport Italia SpA lottery operations. For information concerning the Company's business and geographic segments, see Note 18 to Consolidated Financial Statements. Pari-Mutuel Operations Pari-mutuel Operations accounted for 89%, 85% and 73% of the Company's total revenues for the fiscal years 1998, 1997 and 1996, respectively. Pari-mutuel wagering is currently authorized in 43 states in the United States, all provinces in Canada, and approximately 100 other countries around the world. North American Wagering Systems Autotote is the leading supplier of pari-mutuel wagering systems to the North American market. The Company believes its pari-mutuel wagering systems processed approximately 65% of the estimated $20 billion of gross monies wagered ("Handle") in North America. The Company owns and operates over 22,000 pari-mutuel wagering terminals in use throughout North America. The Company's wagering systems and/or related equipment process wagers at approximately 100 racetracks in North America, including 10 of the top 15 largest thoroughbred racetracks and at over 800 OTB facilities. In North America, the Company typically enters into long-term (five-years or longer) service contracts with its customers pursuant to which the Company provides the pari-mutuel wagering system, as well as the operations, maintenance and supervisory personnel necessary to operate the pari-mutuel wagering system. The Company maintains ownership of the pari-mutuel wagering systems, which enables it to employ such equipment in more than one racetrack at different times during the year. The pari-mutuel wagering systems provided by the Company 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. The 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 the amount of wagering at, and physical layout of, the facility. The Company generally does not, however, employ the clerks who issue wagering tickets using the Company's teller-operated terminals. The Company also provides additional software and other support functions. 3 The Company typically receives revenue for its services in North America as a percentage of Handle, which generally ranges up to approximately 0.55% of the Handle on a particular event (with a weighted average of approximately 0.35% of the Handle), subject, in many instances, to minimum fees which are usually exceeded under normal operating conditions. Minimum fees under the Company's 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 payments received for wagering which takes place at a location where the Company operates a wagering system, the Company also typically receives an "Interface Fee" of 0.125% for wagers that are made from remote sites. This Interface Fee is charged and typically collected from the remote site where the wager is placed whether or not such site is a customer of the Company. As inter-track and off-track wagering has increased, the percentage of total North American Racing Industry Handle on which Interface Fees are charged has grown. In recent years, the Company has 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 the Company to achieve economies of scale by centralizing its service operations and more efficiently utilizing its installed base of computer hardware. Additionally, when linked to the Company's other regional and national pari-mutuel wagering networks, these networks provide the Company's customers with access to new markets and revenue sources by increasing the number and variety of wagering opportunities that customers can offer to their patrons. The Company believes its established wagering networks will give the Company a competitive advantage in renewing existing contracts and winning new contracts in regions where such networks exist because of the Company's ability to offer customers greater services more efficiently than its competitors. The Company currently operates its regional pari-mutuel wagering networks in California, Connecticut, Florida, Illinois, Louisiana, Michigan, New York, Oregon, Pennsylvania, Washington, Puerto Rico, Alberta, British Columbia and Ontario. An additional outlet for the Company's pari-mutuel wagering systems is the casino market. The Company operates pari-mutuel wagering systems for all of the casinos in Atlantic City that offer wagering on racing events and provides wagering systems for use at the Mohegan Sun Casino in Connecticut. Services provided to these casinos are similar to those provided directly to OTBs. In its service contracts, the Company makes certain warranties regarding the operation, performance, implementation and reliability of its wagering systems relating to, among other things, data accuracy, repairs and validation procedures. The Company's warranties in its wagering systems contracts are negotiated and, accordingly, vary on a case-by-case basis. Connecticut OTB In 1993, the Company purchased from the State of Connecticut the exclusive right to operate substantially all off-track betting within that state. Since the Company commenced operating the Connecticut OTB, it has implemented several important product and service enhancements, including expanded simulcasting from over 60 thoroughbred, harness and greyhound racetracks and jai alai frontons across the country, common-pool wagering, seven day per week operations at nine locations and expanded telephone betting. These improvements have helped increase the Connecticut OTB Handle from approximately $133 million in fiscal 1993, the last year that the State operated the Connecticut OTB, to approximately $210 million in fiscal 1998. The Company believes its expertise developed in operating the Connecticut OTB provides it with a competitive advantage in obtaining future OTB operations through privatization, a strategy which recently resulted in the Company's acquisition of all pari-mutuel wagering operations in the Netherlands. The Company currently operates thirteen OTB locations statewide, including two simulcasting teletheaters in New Haven and Windsor Locks, three simulcasting race view centers as well as a telephone account betting operation in New Haven. The Company's approximately 39,000 square feet Bradley Teletheater in Windsor Locks and approximately 55,000 square feet facility in New Haven, Sports Haven(R), feature pari-mutuel wagering on thoroughbred, harness, greyhound and jai alai events shown live on large screens and televisions throughout the facility. Since the opening of the Sports Haven(R), facility in 1995, wagering in New Haven has increased from approximately $35.0 million to $55.0 million annually. 4 The exclusive right to operate the Connecticut OTB is subject to state regulations with respect to such matters as the location of OTBs, hours of operation and certain financial and operational standards. The Company must pay liquidated damages to the state if these standards are not met. The Company is also subject to a pari-mutuel tax of 3.5% of all monies wagered. The percentage of the total Handle which the Company may receive as the operating revenues from the Connecticut OTB is determined by the track where the event is held and ranges from 15% to 25%, depending on the racetrack and type of wagers. The Company believes operation of the Connecticut OTB further strengthens its competitive position in attracting certain new racetrack customers to the extent that the Connecticut OTB does not already accept wagers for such racetrack's racing events. The Company can enhance a proposal for its services by offering the racetrack the opportunity to have its racing events wagered upon at the Connecticut OTB. In return, racetracks generally receive a fee from Connecticut OTB, of between 3% and 6% of the pari-mutuel wagers made at the Connecticut OTB. In 1996, the Company received legislative approval to expand its operations to seven days a week subject to local approval. Currently nine Connecticut OTB locations operate seven days a week. In June 1997, the State of Connecticut passed legislation authorizing the Company to simulcast live racing events in up to six locations. The Company currently simulcasts at five locations: its Bradley Teletheater and Sports Haven(R) locations as well as at its race view centers in New Britain, Bristol and Hartford, and is pursuing development of an additional teletheater location in western Connecticut. Such legislation also authorized racetracks and jai alai frontons within Connecticut to retain a larger portion of the Handle from pari-mutuel pools. The Connecticut OTB typically retains the same amount as the racetrack or fronton where the event is held. Due to the legislation, the amount the Connecticut jai alai fronton and racetracks retained increased during fiscal 1998, and as a result, the Company's gross profit improved by $0.9 million on the approximately $56 million wagered at the Connecticut OTB on events which took place within Connecticut. In fiscal 1998, the Company entered into a seven year agreement with the Mohegan Tribal Gaming Authority to provide wagering and simulcasting services for a new Race Book to be located at the Mohegan Sun Casino located in Uncasville, CT. The Race Book, which commenced operations on September 3, 1998, is a state-of-the-art facility which incorporates the latest wagering technology and the most advanced audio and video signals for simulcasting from over 60 thoroughbred, harness and greyhound racetracks and jai alai frontons throughout North America. Simulcasting Systems & Communication Services The Company is the leading simulcast provider of live horse and greyhound racing and jai alai events to racing facilities, OTBs and casinos in North America. The Company simulcasts racing events from over 60 racetracks and jai alai frontons to over 150 racetracks and over 750 OTBs throughout North America. Simulcasting is the process of transmitting the audio and video signal of a live racing event from a live facility for reception by wagering facilities in other locations, usually by satellite. Simulcasting provides racetracks the opportunity to increase revenues by sending their signals to as many wagering locations as possible, such as other racetracks, OTBs and casinos. Sending live audio and video broadcasts of remote racing events generates increased revenues for the Company and its customers by (i) increasing the consumer base for the remote events and (ii) maximizing the number of events available to a patron for wagering by utilizing idle time between races at racetracks to broadcast remote events. In its simulcasting operations, the Company leases satellite transponders and uses digital compression technology to increase the number of events that may be simulcasted at one time. The Company owns mobile earth stations which uplink the video and audio signals of racetrack and jai alai events to Company controlled satellite transponders and owns integrated receiver/decoders which are used by racetracks and OTBs to receive and decode the transmission signals. In general, the Company receives fees for simulcasting as follows: (i) a daily fee charged to racetracks for the broadcast transmission services, including the earth station, operator and the use of satellite time controlled by the Company; and (ii) a fee charged to receiving sites for the use of the Company's decoders to unscramble the 5 transmission. In addition, the Company often sells excess satellite transponder capacity to other users of satellite communications outside the Racing Industry. From time to time, the Company has sold such excess capacity under long-term contracts. The Company, in partnership with AT&T, the Company's primary service provider, was selected by the Thoroughbred Racing Association to implement and manage NASRIN(TM). This 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. In December 1998, the Company and Churchill Downs Incorporated ("Churchill Downs") announced the signing of a letter of intent to merge Autotote's NASRIN(TM) and Churchill Downs' Tracknet telecommunications business units. The new company, which will continue to be called NASRIN(TM), will be owned 70% by the Company and 30% by Churchill Downs and will provide the equipment and management to administer and maintain the nationwide network, and handle all subscriber billings. International Pari-Mutuel Operations In Europe, the Company owns the license to and operates all pari-mutuel wagering in the Netherlands and provides and operates pari-mutuel wagering systems at racetracks in France, Germany and Austria. The Company also provides simulcast services to customers in Germany and the Netherlands and sells pari-mutuel wagering equipment to customers in other countries in Europe. In other foreign jurisdictions, the Company generally sells systems and equipment. The Company maintains a significant presence in Europe. In July 1998, the Company acquired the rights and began operating all pari-mutuel wagering in the Netherlands. In Germany, the Company is operating under a 10-year contract to provide comprehensive wagering services to the majority of the racetracks in the country. Also in Germany, the Company has the right to develop a limited number of OTB locations and phone wagering and is pursuing these opportunities. In France and Austria, the Company provides and operates wagering systems pursuant to long-term contracts. In fiscal 1998, the Company also signed a 10-year contract, which is to begin in April 1999, to sell a pari-mutuel wagering system and to provide ongoing maintenance and operating services to Tote Ireland Ltd., a wholly-owned subsidiary of the Irish Horseracing Authority. In fiscal 1998, the Company derived approximately $9.9 million in service and sales revenues from its French pari-mutuel wagering operations and $4.0 million in service and sales revenues from its German and Austrian pari-mutuel wagering operations. During the four months following acquisition of the Netherlands business, the Company recognized $4.8 million in service revenues from its operations in the Netherlands. In its other international markets, the Company generally sells, delivers and installs pari-mutuel wagering systems in racetracks and OTBs rather than operating them pursuant to service contracts. The Company generally designs a customized system to meet the needs of each customer, including game designs, language preferences, network communication standards and other key elements. The sale of a pari-mutuel wagering system includes a license for use of the Company's proprietary system software, as well as technical assistance, support, accessories and spare parts. The Company's personnel participate in the system installation and then the training of customer's personnel. The Company has sold its systems in approximately 25 countries. Video Gaming Machines ('VGMs') The Company has developed a proprietary line of VGMs, which combine full gaming functionality, such as video poker, blackjack, simulated spinning reels and keno, with full race betting functionality and picture-in-picture capabilities, providing multiple opportunities for revenue generation at racetracks where VGM wagering is permitted. The Company's latest VGM terminal, the PROBE(R) XLC, allows patrons to play card games, wager on horse races and watch simulcasted races or other televised programs on a picture-in-picture video window, while continuing to wager on the selected video game. The Company has contracts to supply terminals to all the pari-mutuel operators in West Virginia with the Company's progressive terminals added in Mountaineer and soon to be installed in Charlestown. Currently the Company has installed approximately 1,300 PROBE(R) XLC terminals, for 6 which it receives a percentage of income generated by the terminals. The Company believes its penetration of the pari-mutuel wagering business positions it to become a significant provider of VGMs if video gaming is approved in more racetracks across the country. The Company has also sold VGMs to the Manitoba Lottery Commission. Casino/Race and Sports Wagering In October 1996, the Company sold the casino/race and sports wagering service business ("CBS") which provided sports wagering systems to 107 of the 113 casinos in Nevada and to the leading operator of sports wagering facilities in Mexico. Through a distributor affiliated with the purchaser of CBS, the Company expects to continue to provide pari-mutuel wagering terminals and parts to the casinos and sports wagering facilities that generally use systems manufactured by the Company. In connection with the sale of CBS, the Company entered into an agreement not to compete anywhere in the world with respect to the purchaser's race and sports book business for a minimum of five years. In addition, the contract for the sale of CBS provides that the Company and CBS will offer each other certain rights of first refusal with respect to business opportunities in the race and sports book business internationally. At October 31, 1998, the Company and the purchaser of CBS have a proposed agreement to settle litigation resulting from the sale of CBS. This proposed agreement, in part, is expected to substantially reduce the scope of, or eliminate in their entirety, the non-compete and first right of refusal provisions described above. The Company does not believe that the original agreements or the proposed agreement will have a material impact on its ability to conduct its business. Lottery Operations Lottery Operations accounted for 11%, 15%, and 27% of the Company's total revenues for the fiscal years 1998, 1997 and 1996, respectively. The Company designs, installs, operates and maintains on-line computer-based lottery systems and provides equipment for lottery systems both in the United States and internationally. Lottery systems are required to process very large transaction volumes. Such high performance requirements dictate the need for sophisticated software applications that necessitate expertise in software engineering and development. In the United States, the Company operates the Connecticut Lottery and has a contract to install and operate a lottery system and terminals for the Montana State Lottery. Internationally, the Company has provided central processing systems and/or terminals which are currently being used in lotteries operating in Barbados, the Dominican Republic and Italy. In the fourth quarter of 1998, the Company also began shipping terminals to SISAL Sport Italia SpA. pursuant to a contract to deliver up to 20,000 of the Company's Extrema(TM) terminals. In connection with the Connecticut State Lottery, the Company provides all equipment, personnel and services necessary to operate the lottery network of approximately 3,200 terminals while retaining title to the equipment. On December 15, 1997, the Company signed an agreement with the Connecticut Lottery Corporation to service the Connecticut State Lottery through May 2003, with five one-year options to extend the contract through May 2008. Under the terms of the agreement, the Company manufactured and installed approximately 3,200 new PROBE(*)L lottery terminals. Revenues received by the Company from its operation of the Connecticut State Lottery are based on a percentage of amounts wagered in the lottery. The Company's lottery products consist primarily of central processing systems, including data communication networks, and on-line and on-line/off-line computer-based lottery terminals. The lottery management system portion of the product includes a lottery administration client-server network and relational database. Lottery terminals are generally on-line to the central system via telephone lines connected to the system's communication front-end processors. 7 Sale of European Lottery Business On April 15, 1997, the Company completed the sale of its European lottery business for cash consideration of approximately $26.6 million, including contingent consideration of approximately $1.6 million based upon a balance sheet of the European lottery business, prepared as of such date. At closing, the Company provided the purchaser with a letter of credit to secure certain obligations under the sales agreement. The letter of credit, which had an outstanding balance of $1.5 million at October 31, 1997, expired in October 1998. The Company recorded additional gains on the sale of its European lottery business in the amount of approximately $1.2 million in fiscal 1998 and approximately $1.8 in fiscal 1997. Under the terms of the sale, the purchaser has the right to license and purchase certain of the Company's terminals for use in lottery applications. Currently neither the European lottery business nor the purchaser manufactures on-line lottery wagering terminals. Also under the agreement, the purchaser has a right of first refusal to purchase the Company's remaining lottery business until April 1999. The Company, however, currently has no plans to sell this business and remains committed to serving the North American lottery market and its existing customers worldwide. In connection with the sale of the European lottery business, the Company agreed not to compete for three years in the on-line lottery business outside of the United States and Canada except with respect to (a) existing customers not served by the European lottery business and (b) certain identified proposed customers and jurisdictions. The non-competition covenants do not apply to the Company's right to sell certain terminals for lottery applications anywhere, except to existing customers of the European lottery business. Contract Procurement Contract awards by horse and greyhound racetracks, OTBs and casino/sports wagering facilities and from state and foreign governments often involve a lengthy competitive bid process, spanning from specification development to contract negotiation and award. Contracts have a high dollar value and are technically and commercially complex and may require substantial initial cash outlays. Start up costs associated with contract awards typically involve expenditures for items such as software development/customization, assembly of wagering systems, and installation costs including electrical and carpentry work, transportation and placement of equipment, and system implementation. Such costs are primarily comprised of labor related expenses due to the relative magnitude of software development and customization in the start up phase. In the United States, lottery authorities generally commence the contract award process by issuing a request for proposals inviting bids and proposals from various lottery vendors. Internationally, lottery authorities do not typically utilize such a formal bidding process, but rather negotiate proposals with one or more potential vendors. The Company's contracts for the provision of pari-mutuel services are typically for terms of five years. Contracts representing 5%, 9%, 15% and 10% of the Company's annual North American pari-mutuel service revenues are scheduled to expire in fiscal years 1999, 2000, 2001 and 2002, respectively. The Company's contract to operate the Connecticut State Lottery was renewed in December 1997 for five years and provides the lottery five one-year renewal options. The Company historically has been successful in renewing its largest contracts as they have come due for renewal. However, there can be no assurance that the Company will continue to be able to renew pari-mutuel systems operating contracts with its largest customers or to further renew the lottery contract with the State of Connecticut, and, if it is unable to do so, there would be a material adverse effect on the Company. Service and Support The Company employs approximately 595 persons, including regional and national managers and trained maintenance and field service personnel, to support the operation of the Company's systems and communications networks. The Company's personnel support its systems by performing routine system maintenance and repairs of systems and equipment when needed. 8 Research and Product Development The Company believes that its ability to attract new wagering system customers and retain existing customers depends in part on its ability to continue to incorporate technological advances into, and to improve, its product lines. The Company maintains a development program directed toward systems development as well as toward the improvement and refinement of its present products and the expansion of their uses and applications. The Company employs approximately 50 people in connection with software, engineering and product development. Intellectual Property The Company maintains patent protection on certain of its pari-mutuel wagering and lottery products and has a number of registered trademarks and other common law trademark rights for certain of its products. The software and control systems for the Company's wagering systems are also protected by copyright and/or trade secret laws. Production Processes; Sources and Availability of Components Production of the Company's wagering systems and component products primarily involves the assembly of electronic components into more complex systems and products. The Company primarily produces its terminal products at the Company's manufacturing facility in Ballymahon, Ireland. In 1997, the Company began limited terminal assembly at its Newark, Delaware administration and development facility. Other manufacturing is contracted out to third party vendors, as needed. The Company normally has sufficient lead time between reaching an agreement to serve a wagering facility and commencing actual operations at such facility. In the event the current suppliers of central processing units were no longer available, the Company believes that it would be able to adapt its application software to hardware available from other sources within a time frame sufficient to allow it to meet new contractual obligations, although the price competitiveness of the Company's products might diminish. The lead-time for obtaining most of the electronic components used by the Company is approximately 90 days. The Company believes that this is consistent with its competitors' lead times and is also consistent with the needs of its customers. Backlog The backlog of the Company's orders for sales of its products was approximately $31 million as of October 31, 1998. The majority of the backlog is associated with the agreement with SISAL Sport Italia SpA to manufacture and deliver Extrema(TM) terminals to upgrade SISAL's network of terminals used in their Italian lottery operations. Approximately 73% of the backlog as of October 31, 1998 is expected to be filled in fiscal 1999. Backlog as of October 31, 1998 does not include revenues attributable to multi-year wagering systems contracts, multi-year lottery service contracts, revenue attributable to the operation of the Connecticut OTB, or maintenance contracts. Competition A significant portion of the Company's revenue is generated from providing pari-mutuel wagering systems to racetracks and OTBs. The market for pari-mutuel wagering systems is competitive, and certain of the Company's competitors may have substantially greater financial and other resources than the Company. The Company competes primarily on the basis of design, performance, reliability and pricing of its products as well as customer service. To effectively compete, the Company expects to make continued investments in product development and/or acquisitions of technology. As a major portion of the Company's revenue is based on a percentage of wagering Handle, including its Connecticut OTB revenues, the Company's revenue may be affected by competition for the wagering dollar. Any new non-racing wagering 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. 9 The Company's two principal competitors in the North American pari-mutuel wagering systems business are AmTote International, Inc and Powerhouse Technologies Inc. ("Powerhouse"), which operates its pari-mutuel wagering systems business through its subsidiary United Tote. Video Gaming industry terminal suppliers include Powerhouse, International Game Technology, WMS Industries Inc., Alliance Gaming, Inc. and several smaller companies. The Company's competition outside of North America is more fragmented, with competition being provided by several international and regional companies. No single company maintains the leading market position internationally, although certain companies possess regional strengths. Competition in the simulcasting business in North America currently is fragmented. Other than the Company, only Roberts Television International, Inc. has achieved a significant share of the market. The on-line lottery business is also highly competitive. State and foreign governments normally award contracts based on competitive bidding procedures. Significant factors which influence the award of lottery contracts include price, the ability to optimize lottery revenues through marketing capability and applications knowledge, the quality, dependability and upgrade capability of the network, the experience, financial condition and reputation of the vendor, and the satisfaction of other requirements and qualifications which the lottery authority may impose. The Company's principal competitors in the on-line lottery business are Gtech Holdings Corp. and Powerhouse, through its subsidiary Automated Wagering, Inc. The market for the Company's products is affected by changing technology, new legislation and evolving industry standards. The Company's ability to anticipate such changes and to develop and introduce new and enhanced products on a timely basis will be a significant factor in the Company's ability to expand, remain competitive, attract new customers and retain existing contracts. There can be no assurance that the Company will have the financial or other resources to respond to such changes or to develop and introduce new products on a timely basis. In connection with the sales of CBS and the European lottery business, the Company entered into certain agreements not to compete , which the Company believes will not have a material impact on the Company's ability to conduct its business. Regulation General Pari-mutuel wagering, sports wagering, video gaming and on-line lotteries may be conducted in jurisdictions that have enacted enabling legislation. In jurisdictions that currently permit various wagering activities, regulation is extensive and evolving. Regulators in such jurisdictions review many facets of an applicant/holder of a license including, among other items, financial stability, integrity and business experience. The Company believes that it is currently in substantial compliance with all regulatory requirements in the jurisdictions where it operates. Any failure to receive a material license or the loss of a material license that the Company currently holds could have a material adverse effect on the overall operations and financial condition of the Company. In 1996, the United States Congress passed legislation authorizing a comprehensive study of gaming, including segments of the gaming industry served by the Company. The Company is unable to predict whether this study will result in legislation that would impose regulations on gaming industry operators, including the Company, or whether such legislation, if any, would have a material adverse effect on the Company. The Company has developed and implemented an extensive internal compliance program in an effort to assure the Company's compliance with legal requirements imposed in connection with its 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 of the Company's Board of Directors. While the Company is 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 10 violation by the Company or an employee of the Company will not result in the imposition of a monetary fine or suspension or revocation of one or more of the Company's licenses. 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 19 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 the 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 insure 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. A subsidiary of the Company that provides pari-mutuel wagering equipment and/or services to certain casinos located in Atlantic City, New Jersey is licensed by the New Jersey Casino Control Commission ("New Jersey Commission") as a gaming related casino service industry in accordance with the New Jersey Casino Control Act ("Casino Control Act") for an initial period of two years and then for renewable periods of four years thereafter. 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. The Company must also qualify under the standards of the Casino Control Act. The Company and its licensed subsidiary may also be required to produce such information, documentation and assurances as required by the regulators to establish the integrity of all financial backers, who may be required to seek qualification or waiver of qualification. For casino holding companies, the New Jersey Commission traditionally has granted informal waivers at the staff level 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 Commission may require that persons holding five percent or more of the Class A Common Stock of the Company 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 such 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 the Company's license. In addition, the New Jersey Racing Commission also licenses this subsidiary and retains concurrent regulatory oversight over this subsidiary with the New Jersey Commission. The Company's rights to operate the Connecticut OTB system shall continue as long as the Company holds all licenses required for the operation of the system. In addition, the officers and directors and certain other employees of the Company 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. While in the past and at present the Company has been the subject of enforcement proceedings instituted by one or more regulatory bodies, the Company has been able to consensually resolve any such proceedings upon its 11 implementation of remedial measures and/or the payment of settlements or monetary fines to such bodies. The Company does not believe that any of these proceedings, past or pending, will have a materially adverse effect on the Company. 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 the Company's 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. The Company or its 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, several Canadian provinces and various foreign countries have authorized their use. Government officials in other states are considering proposals to legalize or expand video gaming, or video lottery in their states. 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. 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 insure the responsibility, financial stability and character of equipment manufacturers and their key personnel and stockholders through licensing requirements, (ii) to insure 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 the Company or its subsidiaries to modify its 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. West Virginia has licensed the Company or its subsidiaries to supply VLTs to authorized locations in that state. The Manitoba Gaming Control Commission of Manitoba, Canada has granted an interim registration to one of the subsidiaries of the Company as a gaming related supplier to the Manitoba Lotteries Corporation. The Company is in compliance with the terms and conditions of the Interim registration. The Company may apply for all necessary licenses in other jurisdictions that may now or in the future authorize video gaming or video lottery operations. The Company cannot predict the nature of the regulatory schemes or the terminal requirements that will be adopted in any of these jurisdictions, nor whether the Company or any subsidiaries can obtain any required licenses and equipment certifications or will be found suitable. Federal law also affects the Company's 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 12 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 the Company's products, such as the PROBE(R) 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 the Company's pari-mutuel wagering terminals. The Company has registered under the Devices Act, and believes that it is substantially in compliance with all of the Devices Act's record-keeping and equipment identification requirements. 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. Once authorized, the award of lottery contracts and ongoing operation of lotteries in the United States is highly regulated. 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 established by legislation, the lottery authorities generally exercise significant authority, 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. 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 the Company's securities. The failure of such beneficial owners to submit to such background checks and provide such disclosure could result in the imposition of penalties upon such beneficial owners and could jeopardize the award of a lottery contract to the Company or provide grounds for termination of an existing lottery contract. The international jurisdictions in which the Company markets its lottery systems also usually have legislation and regulations governing lottery operations. The regulation of lotteries in these international jurisdictions typically varies from the regulation of lotteries in the United States. In addition, restrictions are often imposed on foreign corporations seeking to do business in such jurisdictions. United States and international regulations affecting lotteries are subject to change. The Company cannot predict with certainty the impact on its business of changes in regulations. Simulcasting The Federal Communications Commission (the "FCC") regulates the use and transfer of earth station licenses used to operate the Company's simulcasting operations. At present, 43 states, Puerto Rico, all of the Canadian provinces, Mexico and many other foreign countries authorize inter-state and/or intra-state pari-mutuel wagering, which may involve the simulcasting of such races. 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 the Company or its subsidiaries 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. The Company believes that it and/or its subsidiaries are in substantial compliance with applicable regulations and that the Company, its subsidiaries, and/or the appropriate third parties have entered into contracts and obtained the necessary regulatory approvals to lawfully conduct current simulcast operations. 13 Nevada Regulatory Matters The Company and certain of its 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 of the Company and the 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 the Company's 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. The Company is an applicant for registration by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and is 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 (the "Nevada Operating Subsidiaries"). As a Registered Corporation, the Company 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, the Nevada Operating Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and the 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 the Company and its Nevada Operating Subsidiaries if they are approved and licensed. All gaming devices and cashless wagering systems that are manufactured, sold or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming devices manufactured for use or play in Nevada must be approved by the Nevada Commission before distribution or exposure for play. The approval process for gaming devices includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming device meets strict technical standards that are set forth in the regulations of the Nevada Commission. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada. 14 The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the 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 the 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. Officers, directors and key employees of the Company who are actively and directly involved in the licensed activities of the 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 applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company, the Nevada Operating Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company and the Nevada Operating Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determination of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and the Nevada 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 the Nevada Operating Subsidiaries will be required to be reported to or approved by the Nevada Commission. If it were determined that the Nevada Act was violated by the Company or any of the Nevada Operating Subsidiaries, the licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, any of the Nevada Operating Subsidiaries, the Company and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Limitation, conditioning or suspension of the licenses held by the Company and the Nevada Operating Subsidiaries could (and revocation of any license would) materially adversely affect the Company's manufacturing, distribution and system operations in Nevada. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability determined as a beneficial holder of the Company's voting securities if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities 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 15 be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company will be subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company, the Nevada Operating Subsidiaries or the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation if the Nevada Commission has reason to believe that his acquisition of such debt security would otherwise be inconsistent with the declared policy of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company and the 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. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the stock certificates of the Company to bear a legend indicating that the securities are subject to the Nevada Act. After becoming a Registered Corporation, the Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. Changes in control of a Registered Corporation through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these 16 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, the Company intends to seek the necessary licenses, approvals and findings of suitability for the Company, its 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 the Company will be able to obtain the necessary approvals for its future products as they are developed. If a license, approval or a finding of suitability is required by a regulatory authority and the Company fails to obtain the necessary license, the Company may be prohibited from selling its products for use in the respective jurisdiction or may be required to sell its products through other licensed entities at a reduced profit to the Company. Employees As of October 31, 1998, the Company employed approximately 980 persons. Of this total, approximately 595 persons were engaged in full-time field operations, 205 in part-time tellering/cashiering, approximately 50 in engineering and software product development, approximately 30 in marketing and approximately 100 in financial, administration and other positions. Most of the North American pari-mutuel employees of the Company involved in field operations and repairs are represented by the International Brotherhood of Electrical Workers under two separate contracts which have been renewed through May 2000 and October 2001. The Company considers its employee relations to be satisfactory. 17 Executive Officers of the Company Certain information concerning the executive officers of the Company as of January 22, 1999 is set forth below:
Name Age Position A. Lorne Weil...................... 52 Chairman of the Board, President and Chief Executive Officer DeWayne E. Laird................... 50 Vice President and Chief Financial Officer Gerald Lawrence.................... 59 Executive Vice President Martin E. Schloss.................. 52 Vice President, General Counsel and Secretary
Executive Officers of the Company hold office for an indefinite term, subject to the discretion of the Board of Directors of the Company. Mr. A. Lorne Weil has been a director of the Company since December 1989, Chairman of the Board since October 31, 1991, Chief Executive Officer of the Company since April 1992 and President of the Company since August 1997. Mr. Weil held various senior management positions with the Company and its subsidiaries from October 1990 to April 1992 and was a director and consultant to Autotote Systems, Incorporated from 1982 until it was acquired by the Company in 1989. Mr. Weil was the President of Lorne Weil, Inc., a firm providing strategic planning and corporate development services to high technology industries, from November 1979 to November 1992. Mr. Weil is currently a director of Fruit of the Loom, Inc. and General Growth Properties, Inc. Mr. DeWayne E. Laird has been Vice President and Chief Financial Officer of the Company since November 1998 and Corporate Controller of the Company 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 the water utility industry. 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 Executive Vice President of the Company and interim President of Autotote Enterprises, Inc., a division of the Company, since June 1998. Mr. Lawrence served as President of the Company's pari-mutuel division, Autotote Systems, Inc., from March 1996 to June 1998 and as Vice President of the Company from November 1994 to June 1998. From January 1991 to August 1994, he 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. Martin E. Schloss has been Vice President and General Counsel of the Company since December 1992 and Secretary since May 1995. Mr. Schloss provided consulting services to the Company from July 1992 until he became employed by the Company in September 1992. 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. William Luke served as Vice President and Chief Financial Officer of the Company from February 1996 through fiscal 1998, and resigned the aforesaid positions in November 1998. Mr. DeWayne E. Laid assumed the positions of Vice President and Chief Financial Officer of the Company coincident with Mr. Luke's resignation (see above). 18 ITEM 2. PROPERTIES The Company conducts its business principally from the following leased and owned facilities:
Leased Facilities: Location Segment Purpose Square feet - -------- ------- ------- ----------- New York, NY corporate headquarters 12,000 Ballymahon, Ireland manufacturing 10,000 Newark, DE pari-mutuel administration and R&D 40,000 Gelsenkirchen, Germany pari-mutuel operations 2,000 Englewood, NJ pari-mutuel operations and warehousing 3,000 various cities, CT pari-mutuel OTB facilities 44,000 New Haven, CT pari-mutuel OTB administration 2,000 Valencia, CA pari-mutuel administration and operations 6,688 Rocky Hill, CT lottery administration and operations 16,000 The Company also leases a total of 28,500 of warehouse space in Newark, DE and New Haven, CT. Owned Facilities: Location Segment Purpose Square feet - -------- ------- ------- ----------- Cedex, France pari-mutuel administration and operations 10,000 Windsor Locks, CT pari-mutuel OTB wagering facility 39,000 New Haven, CT pari-mutuel OTB administration, operations and wagering facility 55,000
The Company believes that its present facilities are adequate for its reasonably foreseeable needs. 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 financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's 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 the Company's Class A Common Stock. Fiscal 1997 Fiscal 1998 ------------------ ----------------- High Low High Low ------------------ ----------------- First Quarter ................. $1.75 1.06 3.00 1.88 Second Quarter ................ 1.50 1.00 2.81 2.25 Third Quarter ................. 2.06 1.06 2.94 2.38 Fourth Quarter ................ 3.13 1.63 2.56 1.25 On January 22, 1999, the last reported sales price for the Class A Common Stock on the American Stock Exchange was $2.13 per share. The approximate number of holders of record of the Class A Common Stock as of January 22, 1999 was 2,121. The Company has never paid any cash dividends on its Class A Common Stock. The Board presently intends to retain all earnings, if any, for use in the Company's business. Any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board. Further, under the terms of the Indenture governing the Company's 10 7/8% Senior Notes due 2004, the Company and its Restricted Subsidiaries are not permitted to pay any cash dividends or make certain other restricted payments (other than stock dividends) on its Class A Common Stock. Recent Sales of Unregistered Securities; Uses of Proceeds From Registered Securities During fiscal 1998, warrants to purchase an aggregate of 466,667 unregistered shares (the "Shares") of the Company's Class A Common Stock were exercised at the aggregate price of $0.6 million. The warrants, which were scheduled to expire in April 1998, were issued by the Company in January 1996 to various banks that were party to the Company's prior senior bank credit facility, in connection with the Company entering into an amendment to such facility as of January 26, 1996. The Shares were issued by the Company in reliance upon the exemption from registration provided for under Section 4(2) of the Securities Act of 1933, as amended. In addition, in fiscal 1998, the Company repurchased warrants to purchase an aggregate of 58,338 Shares at a cost of approximately $0.1 million (see Note 11 to Consolidated Financial Statements). 20 ITEM 6. SELECTED FINANCIAL DATA Selected historical financial data presented below as of and for the five years ended October 31, 1998 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 1994 through 1998 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. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (in thousands, except per share amounts)
Year Ended October 31, ----------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ------- ------- ------- ------ Selected Statement of Operations Data: Operating Revenues: Services ................................................ $ 135,790 132,989 137,794 132,260 98,592 Sales ................................................... 23,523 24,343 38,441 20,924 50,458 --------- ------- ------- ------- ------ 159,313 157,332 176,235 153,184 149,050 --------- ------- ------- ------- ------ Costs and Expenses:` Cost of services ........................................ 88,916 80,496 86,674 78,569 61,158 Cost adjustments and strike expenses .................... -- -- -- -- 6,781 Cost of sales ........................................... 15,739 15,396 25,864 15,661 35,753 Selling, general & administrative ....................... 26,205 28,444 31,921 36,540 25,298 Restructuring and write-off of assets ................... -- -- (649) 18,241 8,576 Depreciation and amortization ........................... 29,489 36,728 40,853 35,463 25,418 Interest expense ........................................ 15,521 14,367 14,837 16,362 6,408 Other (income) expense .................................. (1,064) 79 560 (436) (952) Litigation settlement ................................... -- -- 6,800 -- -- (Gain) loss on sale of businesses ....................... 66 (1,823) 1,127 -- -- --------- ------- ------- ------- ------ Total costs and expenses .................................. 174,872 173,687 207,987 200,400 168,440 --------- ------- ------- ------- ------ Loss before income tax expense (benefit) and extraordinary item .......................... (15,559) (16,355) (31,752) (47,216) (19,390) Income tax expense (benefit) ................................. 321 906 2,443 2,673 (1,462) --------- ------- ------- ------- ------ Loss before extraordinary item ............................... (15,880) (17,261) (34,195) (49,889) (17,928) Extraordinary item ........................................... -- (426) -- -- (4,222) --------- ------- ------- ------- ------ Net loss ..................................................... $ (15,880) (17,687) (34,195) (49,889) (22,150) ========= ======= ======= ======= ======= Net loss per basic share and diluted share ................... $ (0.44) (0.51) (1.09) (1.72) (0.79) ========= ======= ======= ======= ======= Selected Balance Sheet Data (End of Period): Total assets ................................................. $ 156,500 153,541 196,793 241,021 241,597 Total long-term debt, including current installments ......... $ 158,870 149,857 169,024 177,264 143,955 Stockholders' equity (deficit) ............................... $ (48,638) (33,240) (20,196) 11,857 55,721 Weighted average number of shares used in per share calculation .................................................. 35,696 34,469 31,305 28,965 28,174
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background The Company operates in two business segments, Pari-mutuel Operations and Lottery Operations. Pari-mutuel Operations include the North American and international on-track and OTB pari-mutuel operations, simulcasting services, Connecticut OTB operations, video gaming and CBS (the Company's sports wagering service business which was sold in October 1996). Lottery Operations include both domestic and international lottery operations (including Tele Control, the Company's European lottery business, which was sold in April 1997), as well as systems and equipment sales. The Company is the leading provider of computerized pari-mutuel wagering systems to the North American Racing Industry and is also a leading provider of such systems worldwide. The Company also owns and operates the Connecticut OTB, is the exclusive licensed operator of Pari-mutuel wagering in the Netherlands and is the leading provider of Racing Industry simulcasting services in the United States. Additionally, the Company provides technologically advanced VGMs to the North American Racing Industry for use at racetracks. The Company also provides lottery systems and equipment in the United States and internationally. Historically, the Company's revenues have been derived from two principal sources: service revenues and sales revenues. Service revenues are earned pursuant to multi-year contracts to provide wagering systems and other services, which are typically based on a percentage of Handle and/or daily or monthly fees; or are derived from wagering by customers at facilities owned by the Company. Sales revenues are derived from sales contracts for wagering equipment, services and software. The first quarter of the fiscal year and a portion of the second fiscal quarter traditionally comprise the weakest season for wagering service revenue. Wagering equipment sales revenues usually reflect a limited number of large transactions which do not recur on an annual basis, but which historically have given rise to additional terminal and systems software sales to existing customers. 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. The Company's business strategy over the past several years has been to refocus its activities on its core businesses, which generate recurring revenues rather than one-time equipment sales, and to reduce its operating expenses. Consistent with this strategy, the Company (i) in October 1996, sold its casino/sports wagering business for approximately $3.0 million and (ii) in April 1997, sold its European lottery business for approximately $26.6 million. The proceeds from the sales of these businesses were used to reduce the Company's outstanding indebtedness. The sales of the casino/sports wagering business and the European lottery business described above, as well as the acquisitions of simulcasting operations and the French pari-mutuel business in fiscal 1995 and the acquisitions of the Dutch pari-mutuel business in fiscal 1998, which were accounted for as purchases, affect the comparability of operations from period to period (see Note 2 to Consolidated Financial Statements). In addition, one-time equipment sales that can vary significantly from period to period can also significantly affect the comparability of operations from year to year. 22 Results of Operations:
Years ended October 31, ---------------------------------------------- 1998 1997 1996 -------- -------- -------- (in thousands) Pari-mutuel Operations Operating Revenues: Service revenue ....................................................... $126,573 119,360 118,267 Sales revenue ......................................................... 14,693 14,866 10,172 -------- -------- -------- Total Revenue ...................................................... $141,266 134,226 128,439 ======== ======== ======== Gross Profit (excluding depreciation and amortization) ................... $ 49,345 51,709 48,688 ======== ======== ======== Lottery Operations Operating Revenues: Service revenue ....................................................... $ 9,217 13,629 19,527 Sales revenue ......................................................... 8,830 9,477 28,269 -------- -------- -------- Total Revenue ...................................................... $ 18,047 23,106 47,796 ======== ======== ======== Gross Profit (excluding depreciation and amortization) ................... $ 5,313 9,731 15,009 ======== ======== ======== Company Total Operating Revenues: Service revenue ....................................................... $135,790 132,989 137,794 Sales revenue ......................................................... 23,523 24,343 38,441 -------- -------- -------- Total Revenue ...................................................... $159,313 157,332 176,235 ======== ======== ======== Gross Profit (excluding depreciation and amortization) ................... $ 54,658 61,440 63,697 ======== ======== ========
Fiscal 1998 Compared to Fiscal 1997 Revenue Analysis Revenues increased 1.3% or $2.0 million to $159.3 million in the fiscal year ended October 31, 1998 ("fiscal 1998") from $157.3 million in the fiscal year ended October 31, 1997 ("fiscal 1997"). Pari-mutuel Operations service revenues of $126.6 million for fiscal 1998 improved $7.2 million or 6.0% from $119.4 million in the prior year. This improvement includes $4.8 million from the Company's Netherlands operations, which were acquired in July 1998, and revenue increases of $3.8 million as a result of growth in Handle in the Company's North American pari-mutuel and Connecticut OTB operations and the start-up of the NASRIN(TM) business in October 1998. The growth in Handle during fiscal 1998 compared to fiscal 1997 is attributable to the addition of six new North American racetracks and OTB sites, full card simulcasting at three North American racetrack customers, the increase in the number of VGM machines, the expansion of OTB operations in Connecticut to seven days a week in the first quarter of fiscal 1998, and the addition of the new German simulcasting business. These increases were partially offset by lower revenues in the North American simulcasting operations due to lower ad hoc sales of satellite time following the reduction in number and realignment of leased transponders due to the failure of the Galaxy IV satellite, and by the loss of a service contract in the Company's French operations. Sales revenue, primarily consisting of export sales, were $14.7 million in fiscal 1998, a decrease of $0.2 million from $14.9 million in the prior year. Lottery Operations service revenues decreased $4.4 million from $13.6 million in fiscal 1997 to $9.2 million in fiscal 1998, primarily because of the sale of the European lottery business in April 1997. Sales revenues decreased $0.7 million from $9.5 million in fiscal 1997 to $8.8 million in fiscal 1998. This decrease is primarily attributable to the non-recurring sale of terminals to the Israel lottery in fiscal 1997, partially offset by the sale in fiscal 1998 of terminals for use in Italy in the SISAL Sport Italia SpA lottery operations. 23 Gross Profit Analysis Total gross profits earned by the Company, exclusive of depreciation and amortization, decreased $6.7 million, or 11%, to $54.7 million in fiscal 1998 from $61.4 million in fiscal 1997. Gross profits earned by the Pari-mutuel Operations of $49.3 million in fiscal 1998 decreased $2.4 million from $51.7 million in fiscal 1997, principally due lower profit on the Company's French pari-mutuel operations, primarily as a result of the loss of a operations service contract and the resulting costs arising from the termination of 14 employees and the resizing of the business to better serve the reduced French market. Also contributing was the lost profits on sales of excess transponder time as a result of the decrease in leased and available transponders following the failure of the Galaxy IV satellite in May 1998. These decreases were partially offset by the improved profitability at the North American pari-mutuel and OTB business units. Gross profits earned by the Lottery Operations totaled $5.3 million for fiscal 1998, a decrease of $4.4 million from $9.7 million in fiscal 1997. This decline is attributable to a $3.3 million decline in European lottery gross profits due to the sale of the business unit in April 1997, coupled with lower domestic lottery margins as the result of the installation of the new Connecticut lottery terminals and lower margins on equipment sales, reflecting a change in the mix of products sold in each period. Total gross profits on equipment sales were 33% for fiscal 1998, compared to gross profits on such sales of 37% in fiscal 1997. The decrease is due to the sale of the European lottery business in 1997, coupled with the lower margins on fiscal 1998 equipment sales reflecting the change in mix of products sold in each period. Gross profits on services were approximately 35% for fiscal 1998, or 4% below margins earned in fiscal 1997, reflecting lower margins on the recently acquired business in the Netherlands, higher transponder lease costs in simulcasting, lower margins in the European pari-mutuel operations as a result of efforts to start-up and expand business opportunities, extra costs incurred in connection with the Connecticut lottery installation, and start-up costs for the NASRIN(TM) business. Expense Analysis Selling, general and administrative expenses decreased $2.2 million or 8% to $26.2 million in fiscal 1998 from $28.4 million in fiscal 1997, partially reflecting the absence of expenses for businesses sold in fiscal 1997. Excluding businesses sold, selling, general and administrative expenses decreased 6% or $1.8 million as a result of lower bad debt and legal expenses arising from the collection of receivables previously reserved as doubtful due to concerns about their recoverability, and cost savings programs in Europe. Partially offsetting these decreases are the added expenses of the recently acquired Netherlands operations and the expense of completing the test phase and initial rollout of the NASRIN(TM) communication network. Depreciation and amortization expenses decreased $7.2 million or 20% to $29.5 million in fiscal 1998 compared to $36.7 million in fiscal 1997. Approximately $3.0 million of the decrease is attributable to the absence of expenses related to the businesses sold in fiscal 1997. Excluding businesses sold, depreciation and amortization expenses decreased $4.2 million or 11% as a result of the full amortization of certain intangible assets and lower depreciation on North American pari-mutuel assets and lottery assets in fiscal 1998. These decreases were partially offset by the accelerated amortization of deferred transponder costs as a result of the Galaxy satellite failure and accelerated amortization of goodwill in the French operations resulting from the loss of a major service contract. Due to the large number of service contract renewals in fiscal 1998 and the realized durability of the equipment, the Company is lengthening the depreciable lives of its pari-mutuel terminals from seven to ten years in future reporting periods. Additionally, in fiscal 1998, the Company 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 the Company's historical relationship with the Connecticut State Lottery for the past ten years, the Company expects to depreciate the terminals and installation costs on a straight-line method over their estimated useful lives of 10 years. 24 Interest expense was $15.5 million in fiscal 1998, compared to $14.4 million in fiscal 1997. The $1.1 million increase reflects higher borrowing levels to finance the installation of the new Connecticut lottery terminals and higher interest rates. Income Taxes Income tax expense was $0.3 million in fisca1 1998 compared to $0.9 million in fiscal 1997. Income tax expense principally reflects foreign tax expense, since no U.S. Federal tax benefit has been recognized on domestic operating losses. The decrease in income tax expense principally reflects the sale of the European lottery business. Fiscal 1997 Compared to Fiscal 1996 Revenue Analysis Revenues decreased 10.7% or $18.9 million to $157.3 million in fiscal 1997 from $176.2 million in the fiscal year ended October 31, 1996 ("fiscal 1996"). Pari-mutuel Operations service revenues of $119.4 million for fiscal 1997 improved $1.1 million or 1% from $118.3 million in the prior year. This improvement reflects revenue increases of $4.6 million as a result of growth in Handle in the Company's North American pari-mutuel and Connecticut OTB operations, and the addition of new customers in the simulcasting business. These increases were partially offset by the absence of $2.4 million in revenue provided in fiscal 1996 by the casino/sports wagering business which was sold in October 1996 and a loss of $1.5 million in sales of excess transponder time due to the unanticipated shutdown of one of the satellites leased by the Company. The growth in Handle during fiscal 1997 compared to fiscal 1996 is attributable to the addition of six new North American racetrack and OTB sites, full card simulcasting at three North American racetrack customers, the increase in the number of VGM machines, and the expansion of OTB operations in Connecticut to seven days a week in the first quarter of fiscal 1997. Sales revenue in fiscal 1997 of $14.9 million increased $4.7 million from $10.2 million in the prior year, due to a $5.5 million export sale of a totalisator system to the Jockey Club of Peru. Lottery Operations service revenues decreased $5.9 million to $13.6 million in fiscal 1997 from $19.5 million in fiscal 1996 primarily because of the sale of the European lottery business in April 1997. Sales revenues decreased significantly in fiscal 1997 to $9.5 million from $28.3 million in fiscal 1996. This decrease is primarily attributable to the absence of fiscal 1996 sales of systems by the European lottery business to several German lottery contract sites and the absence of sales of terminals and parts for use in the SISAL Sport Italia SpA lottery operations, partially offset by the fiscal 1997 sales of approximately 450 terminals to the Israel lottery. Gross Profit Analysis Gross profits earned by the Pari-mutuel Operations of $51.7 million in fiscal 1997 increased $3.0 million from $48.7 million in fiscal 1996, principally due to increased North American pari-mutuel revenues and improved simulcasting margins resulting from lower equipment costs. These increases were partially offset by $0.4 million lower margins from the loss of sales of excess transponder time, the absence of margin provided in the prior year by the casino/sports wagering business which was sold in October 1996, and lower profit on the Company's European pari-mutuel operations as the result of the strengthening of the U.S. dollar early in the year. Gross profits earned by the Lottery Operations totaled $9.7 million for fiscal 1997, a decrease of $5.3 million from the fiscal 1996 level of $15.0 million. This decline is attributable to the non-recurring delivery of computer systems to the German Lottery in fiscal 1996, coupled with lower European lottery service revenues due to the sale of the business unit in April 1997 and a decrease in the number of terminals delivered to Italy's TOTIP pari-mutuel lottery. Partly offsetting these declines were margins earned on equipment delivered to the Company's customer in Israel. Total gross profits on equipment sales were 37% for fiscal 1997, compared to gross profits on such sales of 33% in fiscal 1996 as a result of a change in product mix. Gross profits on services were approximately 40% for 25 fiscal 1997, a 2% improvement over margins earned in fiscal 1996, reflecting higher revenues and improved operating efficiencies in the North American pari-mutuel, OTB and simulcasting operations. Expense Analysis Selling, general and administrative expenses decreased $3.5 million or 11% to $28.4 million in fiscal 1997 from $31.9 million in fiscal 1996, primarily reflecting the absence of expenses for businesses sold in fiscal years 1996 and 1997. Excluding businesses sold, selling general and administrative expenses increased $0.3 million, reflecting higher compensation costs, partially offset by lower litigation expenses. Depreciation and amortization expenses decreased $4.1 million or 10% to $36.7 million in fiscal 1997 from $40.9 million in fiscal 1996. The decrease resulted primarily from the absence of expenses related to the businesses sold in fiscal 1996 and fiscal 1997. Excluding businesses sold, depreciation and amortization expenses decreased $1.3 million or 4% as a result of the non-recurring effect of depreciation on certain assets in fiscal 1996, partially offset by higher depreciation on fiscal 1996 and fiscal 1997 capital additions for North America's pari-mutuel and video gaming operations. Interest expense was $14.4 million in fiscal 1997, compared to $14.8 million in fiscal 1996. The $0.4 million decrease reflects lower borrowing levels as a result of asset sales, partially offset by higher interest rates. Income Taxes Income tax expense was $0.9 million in fisca1 1997 compared to $2.4 million in fiscal 1996. Income tax expense principally reflects foreign tax expense, since no U.S. Federal tax benefit has been recognized on domestic operating losses. The decrease in income tax expense principally reflects the sale of the European lottery business. Liquidity and Capital Resources On May 22, 1998, Company and Autotote Lottery Corporation entered into a $12.0 million, three-year term loan arrangement (the "Term Loan") to finance the development and installation of the lottery system for the Connecticut State Lottery, including the manufacture of approximately three thousand new lottery terminals. The Term Loan bears interest at a fixed rate of 8.87% payable quarterly and at maturity on February 15, 2001, with principal payments of $0.6 million due quarterly through January 31, 2001 with a final principal payment of $6.0 million due at maturity. In addition to scheduled principal payments, the Term Loan requires mandatory principal prepayments upon the occurrence of certain events, including asset sales, the incurrence of certain indebtedness, Recovery Events (as defined), and Autotote Lottery Corporation Excess Cash Flow (as defined), in each case, in excess of specified thresholds. The Term Loan was extended in conjunction with the July 28, 1997 revolving credit facility (the "Facility") and is subject to certain restrictive and financial covenants contained in the Facility. Obligations under the Facility and Term Loan are jointly and severally guaranteed by substantially all of the Company's U.S. subsidiaries and are 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. In addition, the Term Loan is secured by a first priority security interest in substantially all of the Company's Connecticut lottery assets now owned or hereafter acquired. Also, under the terms of the Request for Proposal for the development and installation of the lottery system for the Connecticut State Lottery, the Company provided a Performance Bond in the initial amount $8 million, which was automatically increased to $10 million upon the effective date of the agreement, May 9, 1998. On July 28, 1997, the Company issued $110 million of 10 7/8% Senior Notes due August 1, 2004 (see Note 7 to Consolidated Financial Statements), which were exchanged for $110 million of 10 7/8% Series B Notes due 2004 (the "Notes") in connection with the Company's exchange offer in October 1997. The Notes bear interest at a rate of 10 7/8% per annum payable semi-annually on each February 1 and August 1. The Notes are senior, unsecured obligations of the Company, ranking senior in right and priority of payment to all indebtedness of the Company that by its terms is expressly subordinated to the Notes. The Notes are jointly and severally guaranteed by substantially 26 all of the Company's wholly owned U.S. subsidiaries. The Notes will be redeemable, in whole or in part, at the option of the Company, at any time on or after August 1, 2001, at redemption prices of 105.438% in fiscal year 2001, 102.719% in fiscal year 2002, and 100.000% in fiscal year 2003 and thereafter, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to August 1, 2000, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more public equity offerings, as defined, at a redemption price equal to 110.875% of the principal amount to be redeemed plus accrued and unpaid interest to the date of redemption, if any, provided, however, that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after any such redemption. The indenture governing the Notes contains certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries, as defined, to incur additional indebtedness, create certain liens, pay dividends, consummate certain asset sales, enter into certain transactions with affiliates and merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. The net proceeds from the offering, after deducting fees and expenses of approximately $4.9 million, were approximately $105.1 million, of which approximately $93.6 million was used to repay $91.4 million of indebtedness and $2.2 million of accrued interest under the Company's previously existing senior bank credit facility (the "Senior Facility"). In addition, approximately $4.1 million of the net proceeds was used to repurchase, at a discount, Subordinated Debentures totaling $5.0 million plus accrued interest and fees (see Note 7 to the Consolidated Financial Statements). The balance of the net proceeds was used for general corporate purposes. In connection with the issuance of the Notes, the Company also entered into a new revolving credit facility (the "Facility") with certain lenders which matures in February 2001. The Facility provides for borrowings of up to $25 million, with a $15 million sublimit for letters of credit, subject to compliance with certain covenants. The Facility requires mandatory commitment reductions upon the occurrence of certain events, including asset sales and the incurrence of certain indebtedness, in each case, in excess of specified thresholds. In addition, the Company may make optional prepayments and commitment reductions. Borrowings under the Facility are available for working capital and general corporate purposes and will bear 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 measured by the ratio of net debt (as defined) to EBITDA (as defined). Fees will be payable on outstanding letters of credit equal to the applicable Eurodollar Rate margin (2.75% as of October 31, 1998), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per annum is payable on the unused amount of the Facility. Obligations under the Facility are jointly and severally guaranteed by substantially all of the Company's U.S. subsidiaries. In addition, the Facility is 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. The Facility contains certain covenants which limit the ability of the Company to incur additional indebtedness; create liens; make restricted payments, including dividends; engage in mergers, consolidations and asset sales; make acquisitions, investments and capital expenditures; and engage in certain transactions with certain subsidiaries and affiliates, in each case beyond certain thresholds. The Facility also requires compliance with certain financial covenants, including maintenance of minimum EBITDA and interest coverage levels, and a maximum net debt to EBITDA ratio. In December 1998, the Company and its lenders amended certain covenants contained in the Notes and the Facility agreements to permit the Company to incur additional debt and to utilize working capital in order to complete business expansions in Europe. Although there were no borrowings outstanding under the Facility at October 31, 1998, approximately $1.9 million of letters of credit were guaranteed under the Facility. As of October 31, 1998, the Company had approximately $23.1 million available for borrowing under the Facility. At October 31, 1998, the Company's available cash and borrowing capacity totaled $29.9 million compared to $41.3 million at October 31, 1997. Net cash provided by operating activities was $8.2 million for the year ended October 31, 1998. Utilizing the $8.2 million of cash provided by operating activities, available cash of $11.4 million, $2.2 million of cash acquired in a business acquisition and $12.0 million of borrowings under the Term Loan, the Company invested principally in contract expenditures and software systems development and $3.0 million was used to reduce borrowings on other long-term loans. 27 At October 31, 1998, the Company's current liabilities exceeded current assets by $2.9 million, principally as a result of the fiscal 1998 investment of $24.1 million in contract expenditures, which included $12.0 million for the manufacture and installation of the lottery system for the Connecticut state lottery. These investments were financed in part with available cash resources which were not replenished by long-term borrowings as of October 31, 1998. The Company anticipates a significantly lower level of investment in contract expenditures in fiscal 1999. As described above, the Company had $23.1 million of cash borrowing availability under the Facility at October 31, 1998. The Company believes that, although it expects to incur a net loss in fiscal 1999, its cash resources, anticipated cash flows from operations and borrowing availability under the Facility should provide sufficient liquidity to meet scheduled interest payments and anticipated capital expenditures during the next twelve months. The Company believes that additional financing will be required to enable it to meet its debt service obligations, including scheduled principal payments under the Notes, the Subordinated Debentures, the Term Loan and the Facility, beginning in fiscal 2001. Extraordinary Items In connection with the issuance of the Notes in the third quarter of fiscal 1997, and the subsequent repayment of all amounts outstanding under the Senior Facility (see Notes 7 and 8 to the Consolidated Financial Statements), the Company wrote-off $1.4 million of deferred financing fees associated with the Senior Facility. The Company also used a portion of the net proceeds from the offering of the Notes to repurchase $5.0 million of its Subordinated Debentures for $4.1 million, resulting in a $0.9 million gain on the early retirement of this debt. There were no tax benefits recognized on the net extraordinary loss because the Company is currently in a tax loss carryforward position. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. SFAS 133 is effective beginning in the first quarter of the Company's fiscal year ending October 31, 2000. The Company has not determined the impact that SFAS 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans in order to standardize disclosure requirements to the extent possible and requires additional information on changes in the benefit obligations and fair values of plan assets that are intended to facilitate financial analysis. SFAS 132 does not change the measurement or recognition of those plans and is effective for the Company's fiscal year ending October 31, 1999. Adoption of this standard is expected to result in modification of and/or additional disclosures, but will not have an effect on the Company's financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and display of comprehensive income in the financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity. SFAS 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. SFAS 130 and 131 are effective for Company's fiscal year ending October 31, 1999. Adoption of these standards is expected to result in additional disclosures, but will not have an effect on the Company's consolidated financial position or results of operations. 28 Year 2000 The Company is dedicated to providing uninterrupted, high quality performance from its computer software systems, products and satellite communication network before, during and after year 2000. Since fiscal 1997, the Company has been assessing the impact that the Year 2000 will have on its computer software systems, products and satellite communication network. Computer programs that do not properly interpret two-digit date information could generate erroneous data or cause a complete system failure. The Company is in the process of testing its critical systems, surveying its principal suppliers and developing solutions for those systems that have been found to have date-related deficiencies. The Company believes that its solutions will be implemented and tested prior to any anticipated year 2000 impact on the Company's systems. Remediation efforts for the Company's computer systems are not expected to be substantial. When testing is completed by mid year 1999, the Company will upgrade its active systems throughout the remainder of fiscal 1999. The Company is also relying on Year 2000 compliance representations and warranties that its vendors, suppliers and other service providers are making with respect to their products and services. The total estimated cost of software modifications and conversions, upgrades and equipment replacements, if any, is not expected to exceed $3 million. Equipment replacement will be capitalized in accordance with Company policy. Similar Year 2000 readiness programs are in place in the Company's foreign operations. Costs to address these operations' Year 2000 issues not are expected to be material. The Company intends to monitor these processes, and has evaluated alternative solutions, which will be implemented, if necessary. Based on preliminary analyses, the Company expects that its critical systems and applications will be compliant by October 31, 1999, and the Year 2000 issue will not pose significant operational problems for the Company. There can be no assurance, however, that there will not be a delay in, or increased cost associated with, the implementation of such corrective action, and the Company's inability to implement such corrective action could have a material adverse effect on its financial condition or results of operations. The Company's belief and expectations are based on certain assumptions and expectations that may ultimately prove to be inaccurate. Euro Conversion In connection with the January 1, 1999 conversion by eleven member states of the European Union to a common currency, the "euro," the Company has evaluated the implications of the conversion and expects that it will not have a material impact on its consolidated financial statements. Financial Instruments and Risks and Uncertainties The Company considers the fair value of all financial instruments to be not materially different from their carrying value at year-end. See Note 10 to the Consolidated Financial Statements for information regarding fair value of financial instruments. The Company's 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 the Company's exposure to concentration of credit risks. The Company's products and services are sold to a diverse group of customers throughout the world. As such, the Company is 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 the Company's products and geographic operations mitigate the risk that adverse changes in any event would materially affect the Company's financial position. Additionally, as a result of the diversity of its customer base, the Company does not consider itself exposed to concentration of credit risks. These risks are further minimized by placing credit limits, ongoing monitoring of customers' account balances, and assessment of the customers' financial strengths. 29 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........................................................................... 31 Consolidated Financial Statements: Balance Sheets as of October 31, 1998 and 1997.................................................... 32 Statements of Operations for the years ended October 31, 1998, 1997 and 1996...................... 33 Statements of Stockholders' Equity (Deficit) for the years ended October 31, 1998, 1997 and 1996.. 34 Statements of Cash Flows for the years ended October 31, 1998, 1997 and 1996...................... 35 Notes to Consolidated Financial Statements............................................................. 37 Schedule: II. Valuation and Qualifying Accounts.................................................................. 64 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
30 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Autotote Corporation and subsidiaries as of October 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1998, in conformity with generally accepted accounting principles. 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 11, 1998 31 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS October 31, 1998 and 1997 (in thousands, except per share amounts)
1998 1997 --------- -------- ASSETS Current assets: Cash and cash equivalents ..................................................................... $ 6,809 18,207 Restricted cash ............................................................................... 638 512 Accounts receivable, net of allowance for doubtful accounts of $1,811 and $1,976 in 1998 and 1997, respectively ................................................................ 21,752 13,560 Inventories ................................................................................... 11,295 6,653 Prepaid expenses, deposits and other current assets ........................................... 1,932 2,276 --------- ------- Total current assets ..................................................................... 42,426 41,208 --------- ------- Property and equipment, at cost .................................................................... 196,748 180,170 Less accumulated depreciation ................................................................. 118,315 103,781 --------- ------- Net property and equipment ............................................................... 78,433 76,389 --------- ------- Goodwill, net of amortization ...................................................................... 3,614 5,916 Operating right, net of amortization ............................................................... 14,848 15,848 Other assets and investments ....................................................................... 17,179 14,180 --------- ------- $ 156,500 153,541 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of long-term debt ........................................................ $ 2,992 2,609 Accounts payable .............................................................................. 13,610 8,698 Accrued liabilities ........................................................................... 24,996 20,652 Interest payable .............................................................................. 3,706 3,759 --------- ------- Total current liabilities ................................................................ 45,304 35,718 --------- ------- Deferred income taxes .............................................................................. 1,832 2,551 Other long-term liabilities ........................................................................ 2,124 1,264 Long-term debt, excluding current installments ..................................................... 120,878 112,248 Long-term debt, convertible subordinated debentures ................................................ 35,000 35,000 --------- ------- Total liabilities ........................................................................ 205,138 186,781 Stockholders' equity (deficit): --------- ------- Preferred stock, par value $1.00 per share, 2,000 shares authorized, none outstanding ......... -- -- Class A common stock, par value $0.01 per share, 99,300 shares authorized, 35,943 and 35,335 shares outstanding at October 31, 1998 and 1997, respectively ................... 360 354 Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding ............................................................... -- -- Additional paid-in capital .................................................................... 149,119 148,238 Accumulated losses ............................................................................ (197,231) (181,351) Treasury stock, at cost ....................................................................... (102) (102) Minimum pension liability ..................................................................... (495) -- Currency translation adjustment ............................................................... (289) (379) --------- ------- Total stockholders' equity (deficit) ..................................................... (48,638) (33,240) --------- ------- Commitments and contingencies (Notes 7, 9, 12 and 13) .............................................. $ 156,500 153,541 ========= =======
See accompanying notes to consolidated financial statements. 32 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended October 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
1998 1997 1996 --------- --------- --------- Operating revenues: Services ...................................................................... $ 135,790 132,989 137,794 Sales ......................................................................... 23,523 24,343 38,441 --------- --------- --------- 159,313 157,332 176,235 --------- --------- --------- Operating expenses (exclusive of depreciation and amortization shown below): Services ...................................................................... 88,916 80,496 86,674 Sales ......................................................................... 15,739 15,396 25,864 --------- --------- --------- 104,655 95,892 112,538 --------- --------- --------- Total gross profit ....................................................... 54,658 61,440 63,697 Selling, general and administrative expenses ....................................... 26,205 28,444 31,921 (Gain) loss on sale of businesses .................................................. 66 (1,823) -- Restructuring and write-off of assets .............................................. -- -- (649) Depreciation and amortization ...................................................... 29,489 36,728 40,853 --------- --------- --------- Operating loss ........................................................... (1,102) (1,909) (8,428) Other deductions: Interest expense .............................................................. 15,521 14,367 14,837 Litigation settlement ......................................................... -- -- 6,800 Other (income) expense ........................................................ (1,064) 79 1,687 --------- --------- --------- 14,457 14,446 23,324 --------- --------- --------- Loss before income tax expense and extraordinary item ......................... (15,559) (16,355) (31,752) Income tax expense ................................................................. 321 906 2,443 --------- --------- --------- Loss before extraordinary item ................................................ (15,880) (17,261) (34,195) Extraordinary item--write-off of deferred financing fees and expenses, net of gain on early retirement of subordinated debt ............................. -- (426) -- --------- --------- --------- Net loss ...................................................................... $ (15,880) (17,687) (34,195) ========= ========= ========= Net loss per common share: Net loss per basic share and diluted share before extraordinary item .......... $ (0.44) (0.50) (1.09) Extraordinary loss per basic share and diluted share .......................... -- (0.01) -- --------- --------- --------- Net loss per basic share and diluted share .................................... $ (0.44) (0.51) (1.09) ========= ========= ========= Weighted average number of shares used in per share calculations ................... 35,696 34,469 31,305 ========= ========= =========
See accompanying notes to consolidated financial statements. 33 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended October 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 --------- --------- --------- Common stock: Beginning balance ..................................................................... $ 354 315 306 Issuance of Class A common stock, net of issuance expenses ....................... 6 9 9 Issuance of 2,964 shares of Class A common stock in litigation settlement ........ -- 30 -- --------- --------- --------- Ending balance ........................................................................ 360 354 315 --------- --------- --------- Additional paid-in capital: Beginning balance ..................................................................... 148,238 143,369 140,050 Issuance of Class A common stock, net of issuance expenses ....................... 511 952 1,961 Issuance of Class A common stock in litigation settlement ........................ -- 3,470 -- Issuance of warrants in lieu of cash ............................................. -- -- 1,012 Deferred compensation ............................................................ 370 447 346 --------- --------- --------- Ending balance ........................................................................ 149,119 148,238 143,369 --------- --------- --------- Accumulated losses: Beginning balance ..................................................................... (181,351) (163,664) (129,469) Net loss ......................................................................... (15,880) (17,687) (34,195) --------- --------- --------- Ending balance ........................................................................ (197,231) (181,351) (163,664) --------- --------- --------- Treasury stock: Beginning balance ..................................................................... (102) (102) (295) Issuance of Class A common stock, net of issuance expenses ....................... -- -- 193 --------- --------- --------- Ending balance ........................................................................ (102) (102) (102) --------- --------- --------- Minimum pension liability: ............................................................ (495) -- -- --------- --------- --------- Currency translation adjustment: Beginning balance ..................................................................... (379) (114) 1,265 Currency translation adjustment .................................................. 90 (265) (1,379) --------- --------- --------- Ending balance ........................................................................ (289) (379) (114) --------- --------- --------- Total stockholders' equity (deficit) .................................................. $ (48,638) (33,240) (20,196) ========= ========= =========
See accompanying notes to consolidated financial statements. 34 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended October 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss .................................................................. $(15,880) (17,687) (34,195) -------- -------- -------- Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization ........................................ 29,489 36,728 40,853 Restructuring charges and asset write-offs, net of cash payments ..... -- -- (649) Change in deferred income taxes, net of effects of businesses sold ... (592) (784) 1,868 Litigation settlement, net of cash payments .......................... -- -- 4,250 (Gain) loss on sales of assets ....................................... 66 (1,823) 1,401 Non-cash interest charges ............................................ -- -- 636 Non-cash extraordinary items ......................................... -- 426 -- Changes in operating assets and liabilities, net of effects of acquisitions/dispositions of subsidiaries: Restricted cash ................................................. 57 99 671 Accounts receivable ............................................. (7,841) 1,339 1,977 Inventories ..................................................... (4,600) (1,585) 5,920 Unbilled receivables ............................................ -- 2,553 (3,182) Accounts payable ................................................ 2,909 (3,314) (1,834) Accrued liabilities ............................................. 2,762 5,125 (3,110) Other ................................................................ 1,790 2,641 262 -------- -------- -------- Total adjustments ............................................... 24,040 41,405 49,063 -------- -------- -------- Net cash provided by operating activities ...................................... 8,160 23,718 14,868 -------- -------- -------- Cash flows from investing activities: Capital expenditures ...................................................... (2,773) (2,262) (2,103) Wagering systems expenditures ............................................. (21,287) (5,226) (7,138) Increase in other assets and investments .................................. (7,277) (2,336) (3,007) Cash acquired in business acquisition ..................................... 2,177 -- -- Proceeds from sale of business and assets, net of cash transferred ........ -- 21,056 4,684 Other ..................................................................... (63) (351) (325) -------- -------- -------- Net cash provided by (used in) investing activities ............................ (29,223) 10,881 (7,889) -------- -------- -------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit facility ............... -- (71,890) 2,610 Proceeds from issuance of long-term debt, net of financing fees ........... 12,059 106,334 2,550 Payments on long-term debt ................................................ (3,072) (57,395) (10,829) Net proceeds from issuance of common stock ................................ 516 961 -- -------- -------- -------- Net cash provided (used) by financing activities .............................. 9,503 (21,990) (5,669) -------- -------- -------- Effect of exchange rate changes on cash ........................................ 162 (390) (313) -------- -------- -------- Increase (decrease) in cash and cash equivalents ............................... (11,398) 12,219 997 Cash and cash equivalents, beginning of year ................................... 18,207 5,988 4,991 -------- -------- -------- Cash and cash equivalents, end of year ......................................... $ 6,809 18,207 5,988 ======== ======== ========
(Continued) 35 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) Years Ended October 31, 1998, 1997 and 1996 (in thousands) Non-cash investing and financing activities 1998, 1997 and 1996 See Notes 7 and 9 for a description of the write-off of deferred financing fees, and capital lease transactions; and also in 1997 see Notes 8 and 11 for a description of the gain on early retirement of subordinated debt and the issuance of common stock in settlement of a stockholder litigation; and also in 1996 see Notes 11 and 12 for a description of the issuance of shares of common stock in lieu of cash for interest payments. Supplemental cash flow information Cash paid during the year for: October 31, --------------------------------------- 1998 1997 1996 ------- ------- ------- Interest ....................... $14,786 10,199 14,318 Income taxes ................... $ 630 938 2,291 See accompanying notes to consolidated financial statements. 36 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 and 1997 (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") is the leading provider of computerized pari-mutuel wagering systems to the North American Racing Industry and is the exclusive licensed operator of substantially all OTBs in the State of Connecticut. The Company is also a leading provider of computerized pari-mutuel systems worldwide, with systems in racetracks and OTBs in Europe, Central and South America, and Asia-Pacific. In addition, the Company is the leading provider of Racing Industry simulcasting services in the United States through its broadcasting of live racing events via satellite to other racetracks and OTBs. The Company also provides technologically advanced VGMs to the North American Racing Industry for use at racetracks, as well as lottery systems and equipment both in the United States and internationally. (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 principally 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. (e) Inventories Inventories are stated at the lower of cost or market. Cost is determined as follows:
Item Cost method ---- ----------- Parts.................................. First-in, first-out or weighted moving average. Work-in-process & finished goods....... Specific identification or weighted moving average for direct material and labor; other fixed and variable production costs are allocated as a percentage of direct labor cost. Ticket paper........................... First-in, first-out
The Company adjusts inventory accounts on a periodic basis to reflect the impact of potential obsolescence. 37 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) (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: Estimated Life Item in Years --------------- Machinery and equipment.................. 3-10 Buildings................................ 15-40 Transportation........................... 3-7 Furniture and fixtures................... 5-10 Building and leasehold improvements...... 5-30 Depreciation expense includes the amortization of capital leased assets. Due to the large number of service contract renewals in fiscal 1998 and the realized durability of the equipment, the Company is lengthening the depreciable lives of its pari-mutuel terminals from seven to ten years commencing November 1, 1998. Additionally, in fiscal 1998, the Company 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 the Company's historical relationship with the Connecticut State Lottery for the past ten years, the Company is depreciating the terminals and installation costs on a straight-line method over their estimated useful lives of ten years. (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 $5,517 and $4,904 at October 31, 1998 and 1997, respectively. (h) Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. The excess of costs over net assets acquired arising from the Company's acquisition of primarily its North American lottery business, and simulcasting business is being amortized on a straight-line basis over five years. The excess of costs over net assets acquired for its German pari-mutuel wagering business is being amortized on a straight-line basis over 10 years. The excess of costs over net assets acquired for its French pari-mutuel wagering business was fully amortized in fiscal 1998 due to the loss of a major service contract. Total goodwill amounted to $3,614 and $5,916 net of accumulated amortization of $10,648 and $7,904 as of October 31, 1998 and 1997, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill 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, if any, is measured based on projected discounted future cash flows. 38 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Description of the Business and Summary of Significant Accounting Policies--(Continued) (i) Operating Right 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 twenty years and amounted to $14,848 and $15,848 net of accumulated amortization of $5,357 and $4,357 at October 31, 1998 and 1997, respectively. (j) 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. (k) Revenue Recognition Revenues from wagering system, simulcast and lottery service 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 major contracts for the sale of 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 the total estimated costs. 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. Revenue arising from the sale of component equipment and supplies is recognized when shipped. (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. 39 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) Description of the Business and Summary of Significant Accounting Policies--(Continued) (m) Basic Net Loss Per Common Share and Diluted Net Loss Per Common Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which the Company adopted in fiscal 1998. Under SFAS 128, the Company is required to present two earnings per share amounts for each period presented, and all prior period earnings per share amounts are required to be restated to conform with the provisions of SFAS 128. Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per 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 net loss per share in the years presented, since their inclusion would be anti-dilutive. Basic and diluted net loss per common share for the years presented, therefore, are the same. At October 31, 1998 and 1997, the Company had outstanding stock options, warrants, convertible subordinated debentures, Performance Accelerated Restricted Stock Units and deferred shares which could potentially dilute basic earnings per share in the future. (n) 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 stockholders' equity (deficit). Gains or losses resulting from foreign currency transactions are included in other income (deductions) in the consolidated statements of operations. (o ) Stock-Based Compensation Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes (see note 12), pro forma net loss and 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. (p) Financial Statement Preparation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates being made involve percentage of completion for contracted 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. (q) Reclassification Certain reclassifications have been made to the prior years consolidated financial statements to conform to the current presentation. 40 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (2) Acquisitions and Dispositions 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. Intent to Merge NASRIN(TM) On December 1, 1998, the Company and Churchill Downs Incorporated announced the signing of a letter of intent to merge their NASRIN(TM) and Tracknet telecommunications business units. The completion of the merger is subject to due diligence, the execution of a definitive agreements, and the approval of the respective boards of directors for the companies involved, and there can be no assurance that the merger will be consummated. Disposition of Businesses On April 15, 1997, the Company completed the sale of its European lottery business through the sale of its stock ownership of Tele Control Kommunikations und Computersysteme Aktien Gesellschaft ("Tele Control") for cash consideration of approximately $26,600, including contingent consideration of approximately $1,600. At closing, the Company provided the purchaser with a letter of credit to secure certain obligations under the sales agreement. The letter of credit, which had an outstanding balance of $1,500 at October 31, 1997, expired in October 1998. The Company recorded gains on the sale of its European lottery business in the amount of $1,184 in fiscal 1998 and $1,823 in fiscal 1997. Under the terms of the sale, the purchaser has the right to license and purchase the Company's terminals for use in lottery applications. Also under the agreement, the purchaser has the right of first refusal, through April 1999, to purchase the Company's remaining lottery business. The Company, however, has no plans to sell this business at the present time and remains committed to serving the North American lottery market and its existing customers. The following unaudited information shows the revenues, expenses and operating income of the European lottery business that were included in the Company's consolidated statements of operations for the fiscal years ended October 31, 1997 and 1996. Interest and income tax expenses have not been included in the table below.
1997 1996 ------- ------- Operating revenue ............................................... $ 6,119 27,126 Operating expenses, including selling, general and administrative expenses, and depreciation and amortization expenses ........ 6,181 25,877 ------- ------- Operating (loss) income ......................................... $ (62) 1,249 ======= =======
In fiscal 1996, the Company sold Autotote CBS, Inc ("CBS"), the casino/sports wagering service business for approximately $3,000. In fiscal 1998, the Company recorded an additional loss of $1,250 on a proposed settlement of litigation related to the fiscal 1996 sale of CBS. 41 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (3) Inventories Inventories consist of the following: October 31, ---------------------- 1998 1997 ------- ------- Parts and work-in-process .............. $10,082 5,762 Finished goods ......................... 448 244 Ticket paper ........................... 765 647 ------- ------- $11,295 6,653 ======= ======= 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 4). (4) Property and Equipment Property and equipment, including assets under capital leases, consist of the following: October 31, -------------------- 1998 1997 -------- -------- Machinery, equipment and deferred installation costs $167,914 153,852 Land and buildings ................................. 14,455 14,379 Transportation equipment ........................... 509 355 Furniture and fixtures ............................. 3,629 3,083 Leasehold improvements ............................. 4,941 4,523 Construction in progress ........................... 5,300 3,978 -------- -------- $196,748 180,170 ======== ======== Depreciation expense for the years ended October 31, 1998, 1997, and 1996 amounted to $19,310, $21,790, and $23,632, respectively. For financial reporting purposes, at October 31, 1998 and 1997, 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. 42 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (5) Other Assets and Investments Other assets and investments (net) consist of the following: October 31, ----------------- 1998 1997 ------- ------- Software systems development costs $ 5,978 4,596 Deferred financing costs ......... 4,293 4,823 Deferred transponder costs ....... -- 1,406 Other intangible assets .......... 911 885 Other assets ..................... 5,997 2,470 ------- ------- $17,179 14,180 ======= ======= In fiscal 1998 and fiscal 1997, excluding costs related to the Company's European lottery business which was sold in fiscal 1997, the Company capitalized $3,700 and $1,513, respectively, of software systems development costs related primarily to video gaming, pari-mutuel wagering and domestic lottery applications. Capitalized costs are amortized on a straight-line basis over a period of five years. Amortization of capitalized software systems development costs was $2,318, $4,962 and $5,417 for the years ended October 31, 1998, 1997 and 1996, respectively. Deferred financing costs relate to those costs associated with the procurement of long term financing by the Company. Such costs are amortized over the life of the financing agreements. In fiscal 1998 and fiscal 1997, the Company capitalized $363 and $5,411, respectively, in deferred financing fees, including $4,160 in deferred financing fees and expenses related to the sale of the Notes in fiscal 1997. In fiscal 1997, the Company also wrote-off, as an extraordinary charge, $1,376 of previously deferred financing costs in connection with the Company's repayment of its prior Senior Facility. Amortization of deferred financing costs amounted to $893, $1,268 and $1,654 for the fiscal years ended October 31, 1998, 1997 and 1996, respectively. Other assets in 1998 includes $750 loaned by the Company to Atlantic City Racing Association ("ARCA"). The loan is secured by a mortgage on certain real estate owned by ACRA. In consideration for this loan, the Company has the right to acquire ACRA for an additional $6,250 subject to certain other adjustments. The Company's decision to acquire ACRA will depend on whether or not several State of New Jersey legislative and regulatory approvals, and actions by ACRA have a favorable outcome. The Company expects to recover the loan, however, under certain conditions, should the Company decide not to purchase ACRA, the loan will be forgiven. Deferred transponder costs arose in connection with the acquisition of the Company's simulcasting business and were being amortized over a four-year period. In fiscal 1998, as the result of the Galaxy satellite failure, the remaining balance of deferred transponders was fully amortized. Amortization expense amounted to $1,406, $1,125 and $1,125, for the years ended October 31, 1998, 1997 and 1996, respectively. 43 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (6) Accrued Liabilities Accrued liabilities consist of the following:
October 31, ---------------------- 1998 1997 --------- --------- Compensation and benefits ......................................... $ 8,825 7,325 Customer advances ................................................. 2,402 266 Taxes, other than income .......................................... 1,861 1,778 Income taxes payable .............................................. 861 319 Other ............................................................. 11,047 10,964 --------- --------- $ 24,996 20,652 ========= ========= (7) Long-Term Debt Long-term debt consists of the following: October 31, ---------------------- 1998 1997 --------- --------- 10 7/8% Series B Senior Notes Due 2004 ................................. $ 110,000 110,000 5.5% convertible subordinated debentures due August 2001 ............... 35,000 35,000 8.87% Term Loan Due February 2001 ...................................... 11,400 -- Term Loan due in November 1999, interest at 8% ......................... 1,250 1,250 Capital lease obligations, payable monthly through January 2000, interest from 8.6% to 13.0% ....................................... 362 893 Secured term loans repaid April 1998, interest at 8% ................... -- 1,590 Various loans and bank facilities, interest from 4.3% to 11% ........... 858 1,124 --------- --------- Total long-term debt ............................................. 158,870 149,857 Less current installments ........................................ 2,992 2,609 --------- --------- Long-term debt, excluding current installments.................... $ 155,878 147,248 ========= =========
On May 22, 1998, the Company and Autotote Lottery Corporation entered into a $12 million, three-year term loan arrangement (the "Term Loan") 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. The Term Loan bears 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. In addition to scheduled principal payments, the Term Loan requires mandatory principal prepayments upon the occurrence of certain events, including asset sales, the incurrence of certain indebtedness, Recovery Events (as defined), and Autotote Lottery Corporation Excess Cash Flow (as defined), in each case, in excess of specified thresholds. The Term Loan was extended in conjunction with the July 28, 1997 revolving credit facility (the "Facility") and is subject to certain restrictive and financial covenants contained in the Facility. Obligations under the Facility and Term Loan are jointly and severally guaranteed by substantially all of the Company's U.S. subsidiaries and are 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. In addition, the Term Loan is secured by a first priority security interest in substantially all of the Company's Connecticut lottery assets now owned or hereafter acquired. Also, under the terms of the Request for Proposal for the development and installation of the lottery system for the Connecticut State Lottery, the Company provided a Performance Bond in the initial 44 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (7) Long-Term Debt--(Continued) amount of $8 million, which was automatically increased to $10 million upon the effective date of the agreement, May 9, 1998. On July 28, 1997, the Company issued $110 million of 10 7/8% Series A Senior Notes due August 1, 2004, which were exchanged for $110 million of 10 7/8% Series B Notes due August 1, 2004 (the "Notes") in connection with the Company's exchange offer in October 1997. The Notes bear interest at a rate of 10 7/8% per annum payable semi-annually on each February 1 and August 1. The Notes are senior, unsecured obligations of the Company, ranking senior in right and priority of payment to all indebtedness of the Company that by its terms is expressly subordinated to the Notes. The Notes are jointly and severally guaranteed by substantially all of the Company's wholly-owned U.S. subsidiaries (see Note 22). The Notes will be redeemable, in whole or in part, at the option of the Company, at any time on or after August 1, 2001, at redemption prices of 105.438% in fiscal year 2001, 102.719% in fiscal year 2002, and 100.000% in fiscal year 2003 and thereafter, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to August 1, 2000, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more public equity offerings, as defined, at a redemption price equal to 110.875% of the principal amount to be redeemed plus accrued and unpaid interest to the date of redemption, if any, provided, however, that at least 65% of the original aggregate principal amount of the Notes remains outstanding immediately after any such redemption. The indenture governing the Notes contains certain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries, as defined, to incur additional indebtedness, create certain liens, pay dividends, consummate certain asset sales, enter into certain transactions with affiliates and merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. The net proceeds from the offering, after deducting fees and expenses of approximately $4,900 were approximately $105,100, of which approximately $93,590 was used to repay $91,390 of indebtedness and approximately $2,200 of accrued interest under the Company's previously existing senior bank credit facility (the "Senior Facility"). In addition, approximately $4,050 of the net proceeds was used to repurchase, at a discount, Subordinated Debentures plus accrued interest and fees. The balance of the net proceeds was used for general corporate purposes. In connection with the issuance of the Notes, the Company also entered into a new revolving credit facility (the "Facility") with certain lenders which matures in February 2001. The Facility provides, subject to certain terms and conditions, for borrowings of up to $25,000 with a $15,000 sublimit for letters of credit. The Facility requires mandatory commitment reductions upon the occurrence of certain events, including asset sales and the incurrence of certain indebtedness, in each case, in excess of specified thresholds. In addition, the Company may make optional prepayments and commitment reductions. Borrowings under the Facility are available for working capital and general corporate purposes and will bear 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 measured by the ratio of net debt (as defined) to EBITDA (as defined). Fees will be payable on outstanding letters of credit equal to the applicable Eurodollar Rate margin (2.75% as of October 31, 1998), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per annum is payable on the unused amount of the Facility. Obligations under the Facility are jointly and severally guaranteed by substantially all of the Company's U.S. subsidiaries. In addition, the Facility is 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. 45 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (7) Long-Term Debt--(Continued) The Facility contains certain covenants which limit the ability of the Company to incur additional indebtedness; create liens; make restricted payments, including dividends; engage in mergers, consolidations and asset sales; make acquisitions, investments and capital expenditures; and engage in certain transactions with certain subsidiaries and affiliates, in each case beyond certain thresholds. The Facility also requires compliance with certain financial covenants, including maintenance of minimum EBITDA and interest coverage levels, and a maximum net debt to EBITDA ratio. In December 1998, the Company and its lenders amended certain covenants contained in the Notes and the Facility agreements to permit the Company to incur additional debt, and to utilize working capital in order to complete business expansions in Europe. Although there were no borrowings outstanding under the Facility at October 31, 1998, approximately $1,900 of letters of credit were guaranteed under the Facility. As of October 31, 1998, the Company had approximately $23,100 available for borrowing under the Facility. The Company's prior senior bank credit facility (the "Senior Facility") at October 31, 1996, after giving effect to a January 29, 1997 amendment and the April 15, 1997 sale of the European lottery business, provided for: 1) a $55,000 term loan (the "A Term Loan"), of which $51,000 was outstanding at October 31, 1996, which required principal repayments of $7,000 in fiscal 1997 with the balance of $44,000 due in fiscal 1998; 2) a $5,000 term loan (the "B Term Loan"), of which $1,000 was outstanding at October 31, 1996, which matured April 30, 1997, and 3) a $75,000 revolving credit facility (the "Revolver") which was to mature July 31, 1998. The outstanding balance under the Revolver was $71,890 at October 31, 1996. Interest on borrowings under the Senior Facility was calculated at the Prime lending rate plus a margin of 0.75%. A commitment fee of 0.5% per year was payable on the unused amount under the Revolver. A letter of credit fee equal to 2.75% plus a facing fee of 1/8 of 1% per year was payable on each letter of credit issued. In fiscal 1997, prior to the issuance of the Notes and entering into the Facility, utilizing the net proceeds from operations and the April 15, 1997 sale of the European lottery business, the Company made the required $1,000 payment under the B Term Loan, a $21,000 payment under the A Term Loan, and net repayments of $10,500 under the Revolver. Upon consummation of the issuance of the Notes, the Company used a portion of the proceeds to repurchase $5,000 aggregate principal amount of the Debentures for $4,050 plus accrued interest, resulting in a $950 gain on early retirement (see Note 8). The 5.5% convertible subordinated debentures due 2001 (the "Debentures") are convertible into 1,750 shares of Class A Common Stock at a conversion price of $20.00 per share. On November 6, 1995, the Company entered into a Letter Agreement (the "1995 Letter Agreement") with holders of the Debentures whereby the holders agreed to accept 936 unregistered shares of the Company's Class A Common Stock in lieu of cash for the August 1995 and February 1996 interest payments totaling $2,200, plus demand and piggy-back registration rights with respect to the unregistered shares. (8) Extraordinary Items In connection with the fiscal 1997 issuance of the Notes and the subsequent repayment of all amounts outstanding under the Senior Facility (see Note 7), the Company wrote-off $1,376 of deferred financing fees associated with the Senior Facility. Also in fiscal 1997, the Company used a portion of the net proceeds from the offering of the Notes to repurchase $5,000 of its Subordinated Debt for $4,050, resulting in a $950 gain on the early retirement of this debt. There were no tax benefits recognized on the net extraordinary loss because the Company is currently in a tax loss carryforward position. 46 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (9) Leases At October 31, 1998, the Company was obligated under operating leases covering office equipment, office space, transponders and transportation equipment expiring at various dates through 2006. Future minimum lease payments required under these leasing arrangements at October 31, 1998 are as follows: 1998, $9,109, 1999, $7,817; 2000, $7,923; 2001, $7,328; 2002, $7,225; 2003, $7,189 and thereafter $8,670. The Company also leases equipment as needed under various month-to-month lease agreements. Total rental expense under these operating leases was $9,109, $8,890 and $10,183 in the years ended October 31, 1998, 1997 and 1996, respectively. The Company acquired $59 of capitalized leases with the acquisition of the Netherlands operations in the year ended October 31, 1998 and entered into capital leases obligations of $141 in the year ended October 31, 1997. There were no new capital leases in fiscal 1996. (10) 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 Notes approximated $106,000 at October 31, 1998 based on reference to dealer markets and quoted market prices, and the Notes approximated the carrying amount of $110,000 at October 31, 1997 based on their then recent issuance price. The Company was, however, unable to determine the fair value of the Debentures in fiscal years 1998 and 1997. (11) Capital 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. During fiscal 1998, warrants to purchase an aggregate of 467 unregistered shares (the "Shares") of the Company's Class A Common Stock were exercised at the aggregate price of $583. The warrants, which were scheduled to expire in April 1998, were issued by the Company in January 1996 to various banks that were party to the Company's prior senior bank credit facility, in connection with the Company entering into an amendment to such facility as of January 26, 1996. In addition, in fiscal 1998, the Company repurchased warrants to purchase an aggregate of 58 Shares at a cost of approximately $79. During fiscal 1997, the Company issued 2,964 shares of Class A Common Stock in settlement of its stockholder litigation and issued 798 shares of Class A Common Stock under an employee stock purchase offer. During fiscal 1996, the Company issued 17 shares of Class A Common Stock in settlement of a PARS obligation (see Note 12). In November 1995, the Company entered into an Agreement with holders of its 5.5% Convertible Subordinated Debentures whereby the holders received unregistered shares of Class A Common Stock in lieu of cash for interest payments due in August 1995 and February 1996 in the amount of $1,100 each. Accordingly, the Company issued 936 shares in fiscal 1996 (see Note 7). 47 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (11) Capital Stock--(Continued) Warrants At October 31, 1998, the Company had the following warrants outstanding, after giving effect to adjustments made in accordance with certain anti-dilution provisions:
Exercise Shares Price Expiration --------- --------- --------------- Warrants to purchase Class A Common Stock: 1991 Warrants............................... 2,308 $ 1.64 October 31,1999 1995 Warrants............................... 387 $ 2.98 April 30, 2000 ------- Total Class A Common Stock Warrants......... 2,695 ------- Warrants to purchase Class B Common Stock......... 147 $ 3.83 October 30, 2003 =======
(12) Stock Options The Company has four stock option plans under which shares of Class A Common Stock have been authorized and are reserved 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 (the "1997 Plan")--1,600 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 40 restricted shares at a fair market value of $2.4375 per share were granted in fiscal 1998, a total of 135 deferred shares at a fair market value of $1.3125 per share were granted in fiscal 1997, a total of 50 deferred shares at a fair market value of $3.1875 per share were granted in fiscal 1996 and 110 deferred shares at a fair market value of $4.1250 per share were granted in fiscal 1995. Accordingly, the Company has recorded compensation expense of $371, $449 and $346 in fiscal 1998, 1997 and 1996, respectively. Additional compensation expense aggregating $1,164 will be charged to expense through fiscal 2001 as the deferred shares become fully vested. 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. 48 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (12) Stock Options--(Continued) Information with respect to the Company's stock options is as follows: Average Stock Options Shares Price (1) ------ --------- Outstanding at October 31, 1995 ............. 2,631 $ 5.32 Granted ................................ 2,319 2.87 Canceled ............................... 1,143 6.20 Exchanged .............................. 89 15.51 ----- --------- Outstanding at October 31, 1996 ............. 3,718 3.60 Granted ................................ 2,508 1.20 Canceled ............................... 457 2.59 ----- --------- 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 ===== ========= (1) Weighted average exercise price. Summarized information about stock options outstanding and exercisable at October 31, 1998 is as follows:
Outstanding Exercisable --------------------------------------------- --------------------- Exercisable Average Average Average Price Range Shares Life(1) Price(2) Shares Price(2) ------------------- ------ ------- ------- ------ ------- $ 1.00 to 2.00 ..................... 2,152 7.59 $ 1.13 740 $1.24 $ 2.01 to 3.00 ..................... 2,528 7.15 2.70 1,185 2.65 $ 3.01 to 4.00 ..................... 1,049 5.13 3.39 896 3.43 over $4.00 ....................... 365 4.50 9.80 364 9.80 ----- ----- 6,094 3,185 ===== =====
(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, 1997, and 1996 were 3,185 shares at $3.36, 2,301 shares at $3.90, and 1,950 shares at $4.10, respectively. At October 31, 1998, 1997 and 1996, 3,302 shares, 3,677 shares, and 2,228 shares, respectively, were available for future grants under the terms of these plans. Outstanding options expire prior to October 31, 2008, and are exercisable at prices ranging from $1.06 to $17.00 per share. Effective November 1, 1996, the Company adopted 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. 49 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (12) Stock Options--(Continued) 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 loss and net loss per share would have increased to the pro forma amounts indicated in the table below. Pro forma net loss and loss per common share for the years ended: October 31, -------------------------------------- 1998 1997 1996 ---------- --------- --------- Net Loss: As reported ....... $ (15,880) (17,687) (34,195) Pro forma ......... (17,605) (19,182) (35,133) Loss per common share: As reported ....... (0.44) (0.51) (1.09) Pro forma ......... (0.49) (0.56) (1.12) Pro forma net loss reflects only options granted in fiscal years 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net loss amounts presented above because compensation cost for options granted prior to November 1, 1995 is not considered. 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, $1.20 in fiscal 1997 and $2.87 in fiscal 1996 and the following weighted average assumptions: risk-free interest rate of 4.5% for fiscal 1998, 6.1% for fiscal 1997 and 6.7% for fiscal 1996; expected option life of 7.0 years for fiscal 1998, 1997 and 1996; volatility of 75% for fiscal 1998 and 81% fiscal 1997 and 1996; and no dividend yield in any year. The average fair values of options granted during fiscal years 1998, 1997 and 1996 were $1.93, $0.93 and $2.23, respectively. (13) Service Contract Arrangements Service contracts for 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, 1998 with specified minimums are as follows: 1999, $18,783; 2000, $20,001; 2001, $7,704; 2002, $5,850; 2003, $3,786 and thereafter $2,710. (14) Export Sales and Major Customers Sales to foreign customers amounted to $9,717, $14,230 and $11,119 in fiscal years 1998, 1997 and 1996, respectively. No single customer represented more than 10% of revenues in any of these periods. 50 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (15) Pension Plans The Company has a defined benefit plan for 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's policy is to fund the minimum contribution permissible by the Internal Revenue Service. The following are the components of pension expense related to the defined benefit plan: 1998 1997 1996 ----- ----- ----- Service cost ................................ $ 64 67 62 Interest cost on projected benefit obligation 108 97 89 Actual return on plan assets ................ (108) (85) (19) Net amortization and deferral ............... 16 (8) (66) ----- ----- ----- $ 80 71 66 ===== ===== ===== The assets and obligations of the defined benefit plan at October 31, 1998 and 1997 are as follows:
1998 1997 ------- ------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,609 and $1,331 at October 31, 1998 and 1997, respectively ................ $ 1,802 1,498 ------- ------- Projected benefit obligation for services rendered to date .............. 1,802 1,498 Plan assets at fair value (invested in insurance company general accounts guaranteed as to principal) .......................................... 1,600 1,419 ------- ------- Projected benefit obligation in excess of plan assets ................... 202 79 ------- ------- Funded status ........................................................... (202) (79) Unrecognized net obligation ............................................. 41 46 Unrecognized prior service cost ......................................... 88 73 Unrecognized net loss ................................................... 454 295 ------- ------- Prepaid pension cost .................................................... 381 335 Additional minimum liability ............................................ 583 -- ------- ------- (Pension liability) prepaid pension cost ................................ $ (202) 335 ======= =======
The accumulated benefit obligation represents the actuarial present value of benefits based upon the benefit multiplied by the participants' historical years of service. The accumulated and projected benefit obligation for fiscal 1998 and fiscal 1997 were calculated using the unit credit method and reflect the following assumptions: discount rate of 6.75% in 1998 and 7.25% in 1997, with a long-term rate of return on assets of 8% in 1998 and 1997. 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 October 31, 1998 consolidated balance sheet the additional minimum liability of the unfunded accumulated benefit obligation of $583 as a long-term liability, with a partially offsetting intangible asset and equity adjustment. In connection with its 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, $403 and $204 during the years ended October 31, 1998, 1997 and 1996, respectively. 51 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (15) Pension Plans--(Continued) The Company has a 401K plan covering all 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, 1997 and 1996 amounted to approximately $926, $760 and $814, respectively. The Company has a 401K plan for all union employees which does not provide for Company contributions. (16) 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, $1,707 and $439 in fiscal years 1998, 1997 and 1996, respectively. (17) Income Tax Expense (Benefit) The consolidated loss before income tax expense (benefit) and extraordinary item, by domestic and foreign source, is as follows:
Year Ended October 31, -------------------------------- 1998 1997 1996 -------- -------- ------- Domestic .................................................................... $(14,371) (14,367) (28,714) Foreign ..................................................................... (1,188) (1,988) (3,038) Consolidated loss before income tax expense (benefit) and -------- -------- ------- extraordinary item ........................................................ $(15,559) (16,355) (31,752) ======== ======== ======= Income tax expense (benefit) consists of: Current Deferred Total -------- -------- ------- 1998 - Foreign ............................................................ $ 1,040 (719) 321 ======== ======== ======= 1997 - Foreign ............................................................ $ 938 (32) 906 ======== ======== ======= 1996 - Foreign ............................................................ $ 575 1,868 2,443 ======== ======== =======
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: October 31, -------------------- Net Deferred Tax Liability ................. 1998 1997 ------- ------- Accrued downsizing costs .............. $ (761) -- Accrued vacation ...................... (815) (654) Inventory reserve ..................... (575) (653) Other accrued liabilities ............. (323) (847) Reserve for doubtful accounts ......... (569) (533) ------- ------- Current deferred tax asset ....... (3,043) (2,687) ------- ------- 52 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (17) Income Tax Expense (Benefit)--(Continued)
October 31, -------------------- Net Deferred Tax Liability--(Continued) ....................... 1998 1997 -------- -------- Intangible assets-difference in amortization periods ..... $ 1,159 1,020 Property and equipment differences in depreciation methods 5,493 7,094 Other, net ............................................... 54 (490) Interest charge, Domestic International Sales Corp. ...... 5,290 4,989 -------- -------- Noncurrent deferred tax liability, net .............. 11,996 12,613 -------- -------- Net operating loss carryforward .......................... (52,476) (48,193) Deferred compensation .................................... (615) (466) Partnership investments .................................. (343) (291) Alternative minimum tax credits .......................... (184) (184) Research and experimentation credits ..................... (51) (135) Foreign tax credit carryforward .......................... -- (279) -------- -------- Noncurrent deferred tax asset ....................... (53,669) (49,548) Valuation allowance ...................................... 46,548 42,173 -------- -------- Noncurrent deferred tax asset, net .................. (7,121) (7,375) -------- -------- Noncurrent deferred tax liability ................... 4,875 5,238 -------- -------- Net deferred tax liability on balance sheet ......... $ 1,832 2,551 ======== ========
The aggregate deferred tax assets before valuation allowance at October 31, 1998, and 1997 were $56,712 and $52,725, respectively. The aggregate deferred tax liabilities at October 31, 1998 and 1997 were $11,996 and $13,103, respectively. The actual tax expense differs from the "expected" tax benefit (computed by applying the U.S. Federal corporate rate of 34% to loss before income taxes (benefit) and extraordinary item) as follows:
October 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Computed "expected" tax benefit .................... $(5,290) (5,561) (10,796) Increase (reduction) in income taxes resulting from: Unused net operating loss ..................... 4,788 4,155 9,661 Foreign tax differential ...................... 725 1,782 3,276 Other, net .................................... 98 530 302 ------- ------- ------- $ 321 906 2,443 ======= ======= =======
The Company has regular tax net operating loss carryforwards of approximately $1,794 that expire in 2005, $1,222 that expire in 2006, $954 that expire in 2008, $38,810 that expire in 2009, $40,777 that expire in 2010, $25,406 that expire in 2011, $11,074 that expire in 2012 and $11,852 that expire in 2013. The Company has minimum tax credit carryforwards (which can be carried forward indefinitely) of approximately $184 and research and experimentation credit carryforwards of approximately $51. The research and experimentation credits expire from 1999 to 2003. 53 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (17) Income Tax Expense (Benefit)--(Continued) The net changes in the valuation allowance for deferred tax assets for the years ended October 31, 1998 and 1997 were increases of $4,375 and $3,992, respectively. 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, 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, 1998 will be allocated as follows:
Income tax benefit that would be reported in the consolidated statements of operations...... $ 43,698 Additional capital (benefit from exercise of stock options)................................. 2,850 ------------- $ 46,548 =============
(18) Business and Geographic Segments The following tables represent revenues, profits, depreciation and assets by business and geographic segments for the years ended October 31, 1998, 1997 and 1996. Corporate expenses are allocated among industry and geographic segments.
Year Ended October 31, ------------------------------------------------- Business Segments ............................................ 1998 1997 1996 --------- --------- --------- Service revenue and product sales Pari-mutuel operations .................................. $ 141,266 134,226 128,439 Lottery operations ...................................... 18,047 23,106 47,796 --------- --------- --------- $ 159,313 157,332 176,235 ========= ========= ========= Operating income (loss) Pari-mutuel operations .................................. $ (2,358) (1,866) (10,293) Lottery operations ...................................... 1,256 (43) 1,865 --------- --------- --------- $ (1,102) (1,909) (8,428) ========= ========= ========= Depreciation and amortization Pari-mutuel operations .................................. $ 27,389 28,413 31,068 Lottery operations ...................................... 2,100 8,315 9,785 --------- --------- --------- $ 29,489 36,728 40,853 ========= ========= ========= Assets Pari-mutuel operations .................................. $ 138,901 148,154 152,868 Lottery operations ...................................... 17,599 5,387 43,925 --------- --------- --------- $ 156,500 153,541 196,793 ========= ========= ========= Capital and wagering systems expenditures Pari-mutuel operations .................................. $ 10,748 7,359 8,135 Lottery operations ...................................... 13,312 129 1,106 --------- --------- --------- $ 24,060 7,488 9,241 ========= ========= =========
54 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (18) Business and Geographic Segments--(Continued)
Year Ended October 31, ------------------------------------------------- Geographic Segments ................................. 1998 1997 1996 --------- --------- --------- Service revenue and product sales North America .................................. $ 126,726 125,402 120,589 Europe ......................................... 31,607 28,780 49,656 Asia ........................................... 980 3,150 5,990 --------- --------- --------- $ 159,313 157,332 176,235 ========= ========= ========= Operating income (loss) North America .................................. $ (1,196) (4,744) (6,373) Europe ......................................... (90) 2,102 (1,573) Asia ........................................... 184 733 (482) --------- --------- --------- $ (1,102) (1,909) (8,428) ========= ========= ========= Depreciation and amortization North America .................................. $ 26,489 31,180 32,195 Europe ......................................... 2,963 5,468 8,658 Asia ........................................... 37 80 -- --------- --------- --------- $ 29,489 36,728 40,853 ========= ========= ========= Assets North America .................................. $ 129,152 139,262 146,929 Europe ......................................... 26,437 13,463 49,864 Asia ........................................... 911 816 -- --------- --------- --------- $ 156,500 153,541 196,793 ========= ========= ========= Capital and wagering systems expenditures North America .................................. $ 22,082 7,199 8,518 Europe ......................................... 1,978 289 723 Asia ........................................... -- -- -- --------- --------- --------- $ 24,060 7,488 9,241 ========= ========= =========
55 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (19) Selected Quarterly Financial Data--(Unaudited) Selected quarterly financial data for the years ended October 31, 1998 and 1997 is as follows:
Year Ended October 31, 1998 -------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------- ------- ------- ------- Total operating revenues ................................................ $ 34,431 36,215 38,795 49,872 Gross profit ............................................................ 12,933 13,946 13,170 14,609 Net loss ................................................................ (5,194) (2,066) (4,413) (4,207) Net loss per basic share and diluted share .............................. $ (0.15) (0.06) (0.12) (0.12) ======== ======== ======== ======== Weighted average number of shares used in per share calculation ......... 35,389 35,504 35,916 35,941 ======== ======== ======== ======== Year Ended October 31, 1997 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------- ------- ------- ------- Total operating revenues ................................................ $ 35,515 41,921 35,818 44,078 Gross profit ............................................................ 13,729 16,436 14,356 16,919 Loss before extraordinary item .......................................... (7,423) (4,691) (1,712) (3,435) Extraordinary item ...................................................... -- -- (426) -- Net loss ................................................................ (7,423) (4,691) (2,138) (3,435) Net loss per basic share and diluted share before extraordinary item .... (0.23) (0.14) (0.05) (0.09) Extraordinary item per basic share and diluted share .................... -- -- (0.01) -- Net loss per basic share and diluted share .............................. $ (0.23) (0.14) (0.06) (0.09) ======== ======== ======== ======== Weighted average number of shares used in per share calculation ......... 32,734 34,498 35,312 35,335 ======== ======== ======== ========
Certain reclassifications have been made to the previously reported quarterly data to conform to the current presentation. (20) Unusual Items In fiscal 1998, the Company recognized unusual charges of $1.5 million 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 $1.3 million 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 the third quarter of fiscal 1996, the Company recorded charges in other deductions of $647 for costs incurred in connection with the Company's proposed but uncompleted third quarter 1996 debt offering, and charges in selling, general and administrative expense of $569 for contractual payments related to the departure of the President of the Company. Partially offsetting these costs was the reversal of $649 of fiscal 1995 restructuring cost accruals because of the Company's decision to continue limited manufacturing of wagering terminals at its plant in Ireland. 56 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (in thousands, except per share amounts) (21) Litigation In addition to routine legal proceedings incidental to the conduct of its business, the Company and certain of its officers and directors were named as defendants in a number of lawsuits commenced in February 1995 as class actions in the United States District Court for the District of Delaware. These lawsuits were consolidated into one class action in June 1995. The parties entered into a definitive Stipulation and Agreement of Settlement dated July 19, 1996 (the "Settlement Agreement") related to these claims. The Settlement Agreement was finalized on December 24, 1996, at which time the Company paid $7,500 in cash plus 2,964 shares of Class A Common Stock which had an aggregate value of $3,500 based on the average price of the Company's Class A Common Stock for 10 trading days preceding the final hearing in the District Court. Insurance companies providing directors and officers insurance contributed approximately $6,500 of the cash portion of the settlement, with $1,250 of that amount in the form of a loan to the Company, with the payment terms subject to negotiation. The Company accrued a charge of $6,800 against operations in fiscal 1996 to reflect the settlement and anticipated legal fees. (22) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries The Company conducts substantially all of its business through its domestic and foreign subsidiaries. On July 28, 1997, the Company issued $110,000 aggregate principal amount of Notes bearing interest at a rate of 10 7/8%. The proceeds from the issuance of the Notes were used to repay all amounts outstanding under the Senior Facility (see Note 7). The Notes 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 Autotote Corporation (the "Parent Company") which includes the activities of Autotote Management Corporation, the Guarantor Subsidiaries and the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1998 and October 31, 1997 and for the fiscal years ended October 31, 1998, 1997 and 1996. 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. 57 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET October 31, 1998 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ---------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents ................. $ 2,054 260 4,495 -- 6,809 Accounts receivable, net .................. -- 18,559 3,193 -- 21,752 Other current assets ...................... 39 10,245 4,058 (477) 13,865 Property and equipment, net ............... 389 70,897 7,437 (290) 78,433 Investment in subsidiaries ................ 62,826 -- -- (62,826) -- Goodwill .................................. 204 1,686 1,724 -- 3,614 Other assets .............................. 6,090 26,748 692 (1,503) 32,027 --------- --------- --------- -------- ------- Total assets .......................... $ 71,602 128,395 21,599 (65,096) 156,500 ========= ========= ========= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities ....................... $ 12,463 21,668 8,103 78 42,312 Current installments of long-term debt .... -- 2,679 326 (13) 2,992 Long-term debt, excluding current installments ............................ 146,250 9,056 572 -- 155,878 Other non-current liabilities ............. 1,535 1,192 1,229 -- 3,956 Intercompany balances ..................... (40,008) 42,900 (2,892) -- -- Stockholders' equity (deficit) ............ (48,638) 50,900 14,261 (65,161) (48,638) --------- --------- --------- -------- ------- Total liabilities and stockholders' equity (deficit) ........................ $ 71,602 128,395 21,599 (65,096) 156,500 ========= ========= ========= ======== =======
AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET October 31, 1997 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents ..................... $ 15,582 328 2,297 -- 18,207 Accounts receivable, net ...................... -- 10,547 3,013 -- 13,560 Other current assets .......................... 711 6,223 2,791 (284) 9,441 Property and equipment, net ................... 161 67,071 9,302 (145) 76,389 Investment in subsidiaries .................... 54,760 -- -- (54,760) -- Goodwill ...................................... 211 2,635 3,070 -- 5,916 Other assets .................................. 5,937 24,895 528 (1,332) 30,028 --------- ------- ------ ------ --------- Total assets ............................... $ 77,362 111,699 21,001 (56,521) 153,541 ========= ======= ====== ====== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities ........................... $ 14,812 14,515 3,921 (139) 33,109 Current installments of long-term debt ........ 1,250 474 910 (25) 2,609 Long-term debt, excluding current installments ................................ 145,000 323 1,925 -- 147,248 Other non-current liabilities ................. 1,111 538 2,166 -- 3,815 Intercompany balances ......................... (51,571) 54,467 (3,112) 216 -- Stockholders' equity (deficit) ................ (33,240) 41,382 15,191 (56,573) (33,240) --------- ------- ------ ------ --------- Total liabilities and stockholders' equity (deficit) ............................ $ 77,362 111,699 21,001 (56,521) 153,541 ========= ======= ====== ====== =========
58 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1998 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ -------------- ----------- ------------ 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 Loss on sale of businesses ...................... 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) expense .......................... (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) ======== ======== ======== ======== ========
AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1997 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------- ----------- ------------ Operating revenues .................................. $ -- 129,130 30,614 (2,412) 157,332 Operating expenses .................................. -- 80,303 17,915 (2,326) 95,892 -------- -------- -------- -------- -------- Gross profit ..................................... -- 48,827 12,699 (86) 61,440 -------- -------- -------- -------- -------- Selling, general and administrative expenses ........ 10,963 12,696 4,686 99 28,444 Gain on sale of business ............................ (1,823) -- -- -- (1,823) Depreciation and amortization ....................... 69 28,423 8,578 (342) 36,728 -------- -------- -------- -------- -------- Operating income (loss) .......................... (9,209) 7,708 (565) 157 (1,909) Interest expense .................................... 14,269 (228) 497 (171) 14,367 Other (income) expense .............................. (326) (413) 746 72 79 -------- -------- -------- -------- -------- Income (loss) before equity in income of subsidiaries, income taxes, and extraordinary items .............................. (23,152) 8,349 (1,808) 256 (16,355) Equity in income of subsidiaries ................... 4,716 -- -- (4,716) -- Income tax expense .................................. 201 113 592 -- 906 -------- -------- -------- -------- -------- Net income (loss) before extraordinary items ........ (18,637) 8,236 (2,400) (4,460) (17,261) Extraordinary items: (Write-off) of deferred financing fees and expenses, net of gain on early retirement of debt ............................. 950 (1,376) -- -- (426) -------- -------- -------- -------- -------- Net income (loss) ................................... $(17,687) 6,860 (2,400) (4,460) (17,687) ======== ======== ======== ======== ========
59 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended October 31, 1996 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ------------ ------------ Operating revenues ................................ $ -- 121,294 57,197 (2,256) 176,235 Operating expenses ................................ -- 78,466 36,159 (2,087) 112,538 -------- -------- -------- -------- -------- Gross profit ................................... -- 42,828 21,038 (169) 63,697 Selling, general and administrative expenses ...... 9,771 13,443 8,834 (127) 31,921 Restructuring and write-off of assets ............. 233 -- (882) -- (649) Depreciation and amortization ..................... 40 29,674 11,456 (317) 40,853 -------- -------- -------- -------- -------- Operating income (loss) ........................ (10,044) (289) 1,630 275 (8,428) Interest expense .................................. 14,499 288 391 (341) 14,837 Other (income) expense ............................ 8,581 (184) (335) 425 8,487 -------- -------- -------- -------- -------- Income (loss) before equity in loss of subsidiaries and income taxes ................... (33,124) (393) 1,574 191 (31,752) Equity in loss of subsidiaries .................... (671) -- -- 671 -- Income tax expense ................................ 400 200 1,843 -- 2,443 -------- -------- -------- -------- -------- Net income (loss) ................................. $(34,195) (593) (269) 862 (34,195) ======== ======== ======== ======== ========
60 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1998 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------- ------------ ------------ 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 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) (27,678) (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 ======== ======== ======== ======== ========
61 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1997 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------- -------------- ----------- ------------- Net income (loss) ................................ $ (17,687) 6,860 (2,400) (4,460) (17,687) Depreciation and amortization ................. 69 28,423 8,578 (342) 36,728 Equity in income of subsidiaries .............. (4,716) -- -- 4,716 -- Gain on sale of business ...................... (1,823) -- -- -- (1,823) Non-cash extraordinary items .................. (950) 1,376 -- -- 426 Other non-cash adjustments .................... 3,264 40 (658) -- 2,646 Changes in working capital .................... 5,004 (4,531) 2,942 13 3,428 --------- --------- --------- --------- --------- Net cash provided by (used in ) operating activities .................................... (16,839) 32,168 8,462 (73) 23,718 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital and wagering systems expenditures ..... (49) (5,415) (2,062) 38 (7,488) Proceeds from sale of business and assets disposals ................................... 23,216 260 (2,420) -- 21,056 Other assets and investments .................. (442) (1,463) (642) (140) (2,687) --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities .................................... 22,725 (6,618) (5,124) (102) 10,881 --------- --------- --------- --------- --------- Cash flows from financing activities: Net repayments under revolving credit facility .................................... -- (71,890) -- -- (71,890) Net proceeds from issuance of long term-debt ................................... 105,100 -- 1,234 -- 106,334 Payments on long-term debt .................... (4,350) (52,224) (846) 25 (57,395) Other, principally intercompany balances ...... (94,432) 98,631 (3,401) 163 961 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities .................................... 6,318 (25,483) (3,013) 188 (21,990) --------- --------- --------- --------- --------- Effect of exchange rate changes on cash .......... 2 -- (379) (13) (390) --------- --------- --------- --------- --------- Increase/(decrease) in cash and cash equivalents .................................... 12,206 67 (54) -- 12,219 Cash and cash equivalents, beginning of year ..... 3,376 261 2,351 -- 5,988 --------- --------- --------- --------- --------- Cash and cash equivalents, end of year ........... $ 15,582 328 2,297 -- 18,207 ========= ========= ========= ========= =========
62 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS Year Ended October 31, 1996 (in thousands)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------- ----------- ------------ Net income (loss) ................................... $(34,195) (593) (269) 862 (34,195) Depreciation and amortization .................... 40 29,674 11,456 (317) 40,853 Equity in loss of subsidiaries ................... 671 -- -- (671) -- Other non-cash adjustments ....................... 7,188 441 (13) 152 7,768 Changes in working capital ....................... 373 (2,274) 2,431 (88) 442 -------- -------- -------- -------- -------- Net cash provided by (used in ) operating activities ....................................... (25,923) 27,248 13,605 (62) 14,868 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital and wagering systems expenditures ........ (114) (7,863) (1,262) (2) (9,241) Proceeds from asset sales ........................ 3,000 1,024 660 -- 4,684 Other assets and investments ..................... (1,470) 144 (2,673) 667 (3,332) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities.. 1,416 (6,695) (3,275) 665 (7,889) -------- -------- -------- -------- -------- Cash flows from financing activities: Net borrowings under lines of credit ............. -- 2,610 -- -- 2,610 Net proceeds from issuance of long term-debt ...................................... -- 1,626 924 -- 2,550 Payments on long-term debt ....................... -- (8,930) (1,926) 27 (10,829) Other, principally intercompany balances ......... 24,112 (15,947) (7,391) (774) -- -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities . 24,112 (20,641) (8,393) (747) (5,669) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash ............. 386 (1) (842) 144 (313) -------- -------- -------- -------- -------- Increase/(decrease) in cash and cash equivalents ....................................... (9) (89) 1,095 -- 997 Cash and cash equivalents, beginning of year ........ 3,385 350 1,256 -- 4,991 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year .............. $ 3,376 261 2,351 -- 5,988 ======== ======== ======== ======== ========
63 SCHEDULE II AUTOTOTE CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Three years ended October 31, 1998 (in thousands)
Additions ----------------------- Charged Balance at to Charged Balance at beginning costs and to other end of of period expenses accounts Deductions(1) period --------- --------- --------- ------------ ---------- Year ended October 31, 1996 Allowance for doubtful accounts................ $ 1,679 1,392 -- 1,018 2,053 Reserve for inventory obsolesce................ $ 2,923 26 (7) 614 2,328 Year ended October 31, 1997 Allowance for doubtful accounts................ $ 2,053 1,070 -- 1,147 1,976 Reserve for inventory obsolesce................ $ 2,328 185 187 462 2,238 Year ended October 31, 1998 Allowance for doubtful accounts................ $ 1,976 888 -- 1,053 1,811 Reserve for inventory obsolesce................ $ 2,238 296 50 247 2,337 (1) Amounts written off or collected.
64 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders is incorporated herein by reference. 65 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 30. 2. Financial Statements Schedule--See Index to Consolidated Financial Statements attached hereto, page 30. 3. Exhibits--The following is a list of exhibits:
Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation of the Company, as amended through June 29, 1995.(1) 3.2 Bylaws of the Company.(2) 4.1 Indenture, dated as of July 28, 1997, among the Company, the Guarantors and IBJ Schroder Bank & Trust Company, as Trustee.(3) 4.2 Form of 10 7/8% Series A and Series B Senior Notes Due 2004, dated as of July 28, 1997 (incorporated by reference to Exhibit 4.1). 4.3 Registration Rights Agreement, dated as of July 28, 1997, among the Company, the Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation.(4) 4.4 Certificate representing share of Class A Common Stock of the Company.(2) 10.1 Credit Agreement, dated as of July 28, 1997, between the Company, the financial institutions party thereto and DLJ Capital Funding, Inc. as agent (the "Credit Agreement").(5) 10.2 1984 Stock Option Plan, as amended.(6)* 10.3 Form of Option dated March 3, 1992 issued to A. Lorne Weil.(7)* 10.4 Form of Option dated December 13, 1991 issued to Marshall Bartlett.(8)* 10.5 Employment Agreement dated November 1, 1992, of A. Lorne Weil and Autotote Corporation.(9)* 10.6 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin H. Sugarman, Robert Melican, Racing Technology, Inc. and Marvin H. Sugarman Productions, Inc.(10) 10.7 Asset Purchase Agreement dated January 12, 1995 between Autotote Communication Services, Inc. and IDB Communications Group Inc.(11) 10.8 Purchase Agreement dated October 14, 1994 between Autotote Corporation, Yves Alexandre, Marie A. Alexandre and Frederic Alexandre. (English summary attached to French original).(12) 10.9 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the State of Connecticut, Division of Special Revenue, dated June 30, 1993.(13) 10.10 Stock Purchase Agreement between the Company and General Instrument Corporation dated May 18, 1993.(14) 10.11 Purchase and Sale Agreement between the Company and Sven Eriksson dated May 27, 1993.(15)
66
Exhibit Number Description ------- ----------- 10.12 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik, Peter Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27, 1993.(16) 10.13 Purchase Agreement among certain purchasers and Autotote Corporation dated August 13, 1993 with respect to the 5 1/2% Convertible Subordinated Debentures due 2001.(17) 10.14 1992 Equity Incentive Plan, as amended and restated.*(+) 10.15 Registration Rights Agreement, dated as of November 6, 1995, between the Company and Hartford Stock Fund and Hartford Advisers Fund (collectively, the "Funds")(18) 10.16 Interest Agreement, dated as of November 6, 1995, between the Company and the Funds.(19) 10.17 Letter Agreement, dated as of January 3, 1995, between the Company and Martin E. Schloss.(20)* 10.18 Agreement of Purchase and Sale, dated January 19, 1996, between Autotote Systems, Inc. and Fusco Properties, L.P. ("Fusco").(21) 10.19 Lease Agreement, dated as of January 19, 1996, between Fusco and Autotote Systems, Inc.(22) 10.20 Employment Agreement, dated February 22, 1996, between the Company and William Luke.(23)* 10.21 Promissory Note dated May 13, 1996 between the Company and A. Lorne Weil.(24) 10.22 Stock Transfer Agreement among the Company and American Wagering, Inc., dated October 25, 1996, with respect to all outstanding stock of Autotote CBS, Inc.(25) 10.23 Stock Purchase Agreement among the Company and Scientific Games Holding Corp., Tele Control Kommunikations und Computersysteme Aktien Gesellschaft.(26) 10.24 1997 Incentive Compensation Plan.(27)* 10.25 1995 Equity Incentive Plan.*(28) 10.26 Employment Agreement effective November 1, 1997 between A. Lorne Weil and Autotote Corporation (the "Weil Employment Agreement").(29)* 10.27 Amendment dated September 10, 1998, to the Weil Employment Agreement *(+) 10.28 Form of Change in Control Agreement effective November 1, 1997 between the Company and its executive officers and certain non-executive officers.(30)* 10.29 Agreement between the Company and Elettronica Ingegneria Sistemi dated February 19, 1998.(31) 10.30 General Agreement between the Company and Sisal Sport Italia SpA dated February 19, 1998.(32) 10.31 Term Loan Agreement dated May 22, 1998 by and among Autotote Corporation, Autotote Lottery Corporation, various financial institutions and Heller Financial, Inc., as agent.(33) 10.32 Purchase Agreement between Autotote Corporation and Stichting Hippo Toto dated June 29, 1998.(34)
67
Exhibit Number Description ------- ----------- 10.33 1992 Equity Incentive Plan, as amended and restated, effective September 10, 1998. *(+) 10.34 The Autotote Corporation Key Executive Deferred Compensation Plan, and Plan Adoption Agreement *(+) 10.35 First Amendment dated December 31, 1997 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as successor agent. (+) 10.36 Second Amendment and waiver dated May 22, 1988 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as agent. (+) 10.37 Waiver and Third Amendment dated December 31, 1998 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as agent. (+) 21.1 List of Subsidiaries. (+) 23 Consent of KPMG LLP. (+) 99.7 Warrant to Purchase Class B Nonvoting Common Stock of Autotote Corporation dated October 30, 1992 issued to various lenders.(35) 99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant Agreement").(36) 99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant Agreement").(37) 99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant Agreement and the 1996 Warrant Agreement. (38) 99.11 Order and Final Judgment of the United States District Court for the District of Delaware dated October 22, 1996, Amendment to Amended Stipulation and Agreement of Settlement, dated November 7, 1996, and Amended Stipulation and Agreement of Settlement dated July 19, 1996.(39)
(1) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1995. (2) Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-46594) which became effective March 20, 1992 (the "1992 S-8"). (3) Incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated August 11, 1997 (the "1997 8-K") (4) Incorporated by reference to Exhibit 2 to the Company's 1997 8-K. (5) Incorporated by reference to Exhibit 3 to the Company's 1997 8-K. (6) Incorporated by reference to Exhibit 4.1 to the Company's 1992 S-8. (7) 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"). (8) Incorporated by reference to Exhibit 10.46 to the Company's 1992 10-K. (9) Incorporated by reference to Exhibit 10.39 to the Company's 1992 10-K. (10) Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 10-K"). (11) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K. (12) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K. (13) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 1, 1993. (14) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 22, 1993. 68 (15) Incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 22, 1993. (16) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated September 8, 1993. (17) Incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K dated September 8, 1993. (18) Incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 (the "1995 10-K"). (19) Incorporated by reference to Exhibit 10.37 to the Company's 1995 10-K. (20) Incorporated by reference to Exhibit 10.40 to the Company's 1995 10-K. (21) 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, dated February 20, 1996 (the "1995 10-K/A"). (22) Incorporated by reference to Exhibit 10.43 to the Company's 1995 10-K/A. (23) Incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996. (24) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1996. (25) Incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-4/A (Registration No. 333-34465) which became effective September 12, 1997 (the "1997 S-4/A"). (26) Incorporated by reference to Exhibit 10.27 to the Company's Current Report on Form 8-K dated April 15, 1997. (27) Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-44979) which became effective January 27, 1998. (28) 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. (29) Incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998. (30) Incorporated by reference to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998 (31) Incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998. (32) Incorporated by reference to Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998. (33) Incorporated by reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1998. (34) Incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1998. (35) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K. (36) Incorporated by reference to Exhibit 99.8 to the Company's 1997 S-4/A. (37) Incorporated by reference to Exhibit 99.9 to the Company's 1997 S-4/A. (38) Incorporated by reference to Exhibit 99.10 to the Company's 1997 S-4/A. (39) Incorporated by reference to Exhibit 28.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996. - ---------- * Includes management contracts and compensation plans and arrangements. (+) Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report was filed. 69 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 27, 1999 By: /s/A. Lorne Weil --------------------------------- A. Lorne Weil, Chairman of the 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 27, 1999.
Signature Title Date - ------------------------------ ------------------------------------------ ---------------- /S/ A. LORNE WEIL Chairman of the Board, President and Chief January 27, 1999 ------------------------ Executive Officer, and Director A. Lorne Weil (principal executive officer) /S/ DEWAYNE E. LAIRD Vice President and Chief January 27, 1999 ------------------------ Financial Officer DeWayne E. Laird (principal financial and accounting officer) /S/ LARRY J. LAWRENCE Director January 27, 1999 ------------------------ Larry J. Lawrence /S/ SIR BRIAN G. WOLFSON Director January 27, 1999 ------------------------ Sir Brian G. Wolfson /S/ ALAN J. ZAKON Director January 27, 1999 ------------------------ Alan J. Zakon /S/ MARSHALL BARTLETT Director January 27, 1999 --------------------- Marshall Bartlett
70 EXHIBIT INDEX
Exhibit No. Description Page - ----------- ----------- ---- 21.1 List of Subsidiaries. 23 Consent of KPMG LLP. 10.27 Amendment, dated September 10, 1998, to the Weil Employment Agreement. 10.33 1992 Equity Incentive Plan, as amended and restated, effective September 10, 1998. 10.34 The Autotote Corporation Key Executive Deferred Compensation Plan, and Plan Adoption Agreement. 10.35 First Amendment dated December 31, 1997 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as successor agent. 10.36 Second Amendment and waiver dated May 22, 1988 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as agent. 10.37 Waiver and Third Amendment dated December 31, 1998 to the Credit Agreement, between the Company, the financial institutions party thereto and Heller Financial, Inc. as agent. 27 Financial Data Schedule.
71 EX-21.1 2 LIST OF SUBSIDIARIES Exhibit 21.1 AUTOTOTE CORPORATION SUBSIDIARIES Autotote Management Corporation (Delaware) (100%) Newark Holdings, Inc. (Delaware) (100%) Autotote Systems, Inc. (Delaware) (100%) Autotote International, Inc. (Delaware) (100%) Autotote Canada Inc. (Ontario) (100%) Autotote Worldwide, Limited (Non-Resident Ireland (Bermuda)) (99%,1% NHI) Autotote Worldwide Services, Limited (Ireland) (100%) Autotote Enterprises, Inc. (Connecticut) (100%) Autotote Keno Corporation (Nebraska) (100%) Big Red Lottery Services, Ltd. (Nebraska) (20%) Lincoln's Big Red Lottery Services, Ltd. (Nebraska) (20%) Gretna's Big Red Lottery Services, Ltd. (Nebraska) (20%) Autotote Lottery Corporation (Delaware) (100%) Autotote Lottery Canada Inc. (Ottawa) (100%) Autotote Israel Ltd. (Israel) (80%) Autotote Europe GmbH (Germany) 100% TEK Turfelektronik GmbH (Germany) (100%) DATEK Toto Dienstielstung GmbH (Germany) (50%) TEK Totalisatorservice GmbH (Germany) (50%) ETAG Electronic Totalisator GesMBH (Austria) (100%) Autotote Europe Communications Services GmbH (Germany) 100% Autotote Communication Services, Inc. (Delaware) (100%) Marvin H. Sugarman Productions, Inc. (New York) (100%) SJC Video Corporation (Delaware) (100%) Racing Technology, Inc. (New York) (100%) ACRA Acquisition Corp. (New Jersey) 100% SOFINAX (France) (100%) SEPMO (France) (100%) SASO (France) (100%) Autotote Mexico, Ltd. (Delaware) (100%) Autotote Panama, Inc. (Panama) (100%) Autotote Nederland B.V. (Netherlands) (100%) Autotote Banen B.V. (Netherlands) (100%) Autotote Gaming, Inc. (Nevada) (100%) EX-23 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Autotote Corporation: We consent to the incorporation by reference in the registration statements (No's 33-82612, 33-46594, 33-27737, 333-05811, 333-44983 and 333-44979) on Form S-8 of Autotote Corporation of our report dated December 11, 1998, relating to the consolidated balance sheets of Autotote Corporation and subsidiaries as of October 31, 1998, and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), cash flows, and financial statement schedule for each of the years in the three-year period ended October 31, 1998, which report appears in the Form 10-K of Autotote Corporation for the year ended October 31, 1998. KPMG LLP Short Hills New Jersey January 27, 1999 EX-10.27 4 AMENDMENT TO EMPOLYMENT AGREEMENT Exhibit 10.27 September 10, 1998 Mr. A. Lorne Weil Autotote Corporation 750 Lexington Avenue New York, NY 10022 Re: Your Employment Agreement dated as of November 1, 1997 Dear Lorne: This will confirm our understanding regarding certain provisions of your Employment Agreement with Autotote Corporation dated as of November 1, 1997 (the "Agreement"). We have agreed that the definition of "change in control" in your Agreement should mirror the definition used in other similar Company documents, including the "Change in Control Agreements," which the Company entered into with various of its executives as of November 1, 1997. In order to accomplish this, Section 8(b)(ii) of your Agreement is hereby amended to read in its entirety as follows: "A Change in Control shall be deemed to have occurred if: the stockholders of the Company approve a merger, consolidation, recapitalization, or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, or the consummation of any such transaction 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 after such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the voting securities of the Company outstanding immediately prior to such transaction; provided that, for purposes of this paragraph (ii), such continuity of ownership (and preservation of relative 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 or of any subsidiary of the Company or such surviving entity;" The term Change in Control used hereinafter will have the meaning ascribed to it in the Agreement, as amended by the foregoing. We have also agreed that, in the event the Company terminates your employment without Cause (as defined in the Agreement) or you terminate your employment for Good Reason (as defined in the Agreement) prior to or more than two years after a Change in Control, you will be entitled to receive, among other forms of compensation, an amount equal to two times the sum of (x) your then current annual base salary and (y) the annual incentive compensation payable upon achievement of target level of performance, for the year in which the termination occurs. Accordingly, assuming the annual incentive compensation payable to you upon achievement of target level of performance is equal to 100% of your annual base salary (as is currently the case), for the purpose of illustration, and not by way of limitation, if your base salary were $475,000 per annum at the date of your termination, your severance would be equal to two times the sum of (x) $475,000 plus (y) $475,000, or $1.9 million. In order to accomplish the aforesaid compensation arrangements, the first two sentences of Section 7(b)(i)(A) of the Agreement are hereby amended to read as follows: "Cash in an aggregate amount equal to two times the sum of (x) Executive's then-current annual base salary at the rate payable under Section 4(a) immediately prior to termination plus (y) the Severance Annual Incentive Amount (as defined below), which amount shall be reduced pro rata to the extent the number of full months remaining until Executive attains age 65 is less than 24 months, shall be paid to Executive. For purposes of this Section 7(b)(i)(A) and Section 7(b)(i)(D), the `Severance Annual Incentive Amount' shall be the annual incentive compensation payable to Executive upon achievement of the target level of performance for the year of termination." Further, I refer to Section 7(b)(ii)(A) of the Agreement, which relates to compensation payable to you in the event your employment is terminated simultaneous with or within two years after a Change in Control. This Section provides that in such an event you will receive a lump sum cash payment equal to three times the sum of (x) your then current annual base salary plus (y) the "Severance Annual Incentive Amount" which is defined in this Section as the greater of (i) the average annual incentive compensation paid to you for the three years immediately preceding the year of termination or (ii) the annual incentive compensation payable to you upon achievement of the target level of performance for the year of termination. Therefore, assuming your Severance Annual Incentive Amount for the year in question is 100% of your then current base salary, and if such amount exceeds the average annual incentive compensation paid to you during the immediately preceding three years, you would receive an amount equal to three times (x) $475,000 plus (y) $475,000, or $2.85 million. In the event of any conflict between the terms of this letter and the terms of the Agreement, the terms of this letter shall be controlling. This letter shall be effective immediately. 2 Please indicate your agreement to the foregoing by countersigning and returning the copy of this letter furnished to you. Very truly yours, Alan Zakon Chairman of the Executive Committee Accepted and Agreed to: By: ---------------------------------- A. Lorne Weil 3 EX-10.33 5 1992 EQUITY INCENTIVE PLAN Exhibit 10.33 AUTOTOTE CORPORATION 1992 EQUITY INCENTIVE PLAN As Amended and Restated Effective as of September 10, 1998 1. PURPOSE The purpose of this Equity Incentive Plan (the "Plan") is to advance the interests of Autotote Corporation (the "Company") by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's Class A Common Stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant awards ("Awards") in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Performance Awards, Loans or Supplement Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award is canceled, grant another Award in its place on such terms as the Board shall specify), except that the Board may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would materially adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Determinations and actions of the Board under the preceding sentence and all other determinations and actions of the Board made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Board to make adjustments under Section 7.3, Section 7.4 or Section 9.6. The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan became effective on February 18, 1993. No Award may be granted under the Plan after December 17, 2002 (the "Term of the Plan"), but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to the adjustment as provided in Section 9.6 below, the aggregate number of shares of Stock, that may be delivered under the Plan will be 3,000,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable 2 in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be employees of the Company and its subsidiaries ("Employees") and such other persons included in the term "employee", as defined in General Instruction A(1)(a) to Form S-8, including persons who are serving as directors of the Company ("Non-Employee Directors"), if such person (other than Non-Employee Directors) is determined, in the opinion of the Board, to be in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TYPES OF AWARDS 6.1. Options. (a) Nature of Options. An Option is an Award entitling the recipient on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (any Option intended to qualify as an incentive stock option being, hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) Exercise Price. The exercise price of an Option will be determined by the Board subject to the following: 3 (i) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent shareholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (ii) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (iii) The Board may reduce the exercise price of an Option (other than a Non-Employee Director Option) at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) Duration of Options. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent shareholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Board at the time the Option was granted. (d) Exercise of Options. An Option will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of such an Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Board and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) Payment for Stock. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with Guidelines 4 established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing such Option, (i) through the delivery of shares of Stock which, if acquired pursuant to exercise of an Option, have been outstanding for at least six months and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Board, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the possible forms of payment; provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note. (f) Discretionary Payments. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Board may cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is cancelled) and the aggregate exercise price which would have been paid. 6.2. Stock Appreciation Rights. (a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive, an amount, in cash or Stock or a combination thereof (such form to be determined by the Board), determined in whole or in part by reference to appreciation in Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value 5 on the date the Right was granted. However, the Board may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Board to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Board may also grant Stock Appreciation Rights that provide, that following a Change in Control of the Company, as defined below, the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such Change in Control over the fair market value of a share of Stock on the date the Right was granted. "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 1934 Act and as used in Sections 13(d) and 14(d) thereof including a "group" as defined in Section 13(d) of the 1934 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 1934 Act) of securities of the Company representing at least 40 percent (or such greater percentage as the Board may specify in any grant of Stock Appreciation Rights) 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. (b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: 6 (i) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (ii) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (iii) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (iv) The Stock Appreciation Right will be transferable only with the related Option. (v) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) Exercise of Independent Stock Appreciation Rights. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Board. 6.3. Restricted and Unrestricted Stock. 7 (a) Nature of Restricted Stock Award. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, if required under applicable law, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Board. (c) Rights as a Stockholder. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of Restricted Stock may be kept in the possession of the Participant prior to the lapse of restrictions on such shares. (d) Restrictions. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) Notice of election. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) Other Awards Settled with Restricted Stock. The Board may, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. 8 (g) Unrestricted Stock. The Board may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value, if required by applicable law, of the Stock. (h) Notwithstanding the foregoing, the terms of Restricted Stock granted to Non-Employee Directors under Section 8 ("Non-Employee Director Restricted Stock") shall be as set forth in that Section. 6.4. Performance Awards; Performance Goals. (a) Nature of Performance Awards. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Board) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Board to be important to the success of the Company. The Board will determine the Performance Goals, the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award. (b) Other Awards Subject to Performance Condition. The Board may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 6.5. Loans and Supplemental Grants. (a) Loans. The Company may make a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in connection with the purchase of Stock under the Award or with the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Board will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or 9 with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) Supplemental Grants. In connection with any Award, the Board may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs Federal income tax liability with respect to the Award. 6.6. Other Stock-Based Awards. The Board may authorize other types of stock-based awards which the Board may grant to such Participants, and in such amounts and subject to such terms and conditions, as the Board shall in its discretion determine, subject to the provisions of the Plan. Such awards may entail the transfer of actual shares of Stock to Participants, or payment in cash or otherwise of amounts based on the value of shares of Stock. 7. EVENTS AFFECTING CERTAIN OUTSTANDING AWARDS 7.1. Death. If a Participant dies, the following will apply to Awards other than Non-Employee Director Restricted Stock: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or 10 administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Board may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Performance Award or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined by the Board. 7.2. Termination of Service (Other Than By Death). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply to Awards other than Non-Employee Director Restricted Stock: (a) Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Board may determine), and shall thereupon terminate, unless 11 the Award provides by its terms for immediate termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Board casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Board, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Performance Award or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award cancelled as of the date of such Status Change unless otherwise determined by the Board. 7.3. Acquisition Transactions. Notwithstanding any other provision of the Plan or of any Award to the contrary (other than Section 9.10), in the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert or in the event of the sale 12 or transfer of substantially all the Company's assets (an "acquisition transaction"), all outstanding Awards will terminate as of the effective date of the acquisition transaction, and the following will apply: (a) Each outstanding Option and Stock Appreciation Right will become exercisable in full 10 days prior to the anticipated effective date of the proposed acquisition transaction unless otherwise expressly provided at the time of grant. (b) Each outstanding share of Restricted Stock (including Non-Employee Director Restricted Stock) will become free of all restrictions and conditions 10 days prior to the anticipated effective date of the proposed acquisition transaction. (c) Conditions on Performance Awards and Supplemental Grants which relate only to the passage of time and continued employment will be removed 10 days prior to the anticipated effective date of the proposed acquisition transaction. Performance or other conditions (other than conditions relating only to the passage of time and continued employment) will continue to apply unless otherwise provided in the instrument evidencing the Awards or in any other agreement between the Participant and the Company or unless otherwise agreed to by the Board. (d) The Board may, in its sole discretion, prior to the effective date of the acquisition transaction, forgive all or any portion of the principal of or interest on a Loan. 7.4. Dissolution or Liquidation Transactions. In the event of a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards (including Non-Employee Director Restricted Stock) will terminate as of the effective date of the covered transaction, and the following rules shall apply: (a) Subject to paragraph (b) below, the Board may in its sole discretion, prior to the effective date of the covered transaction, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock (including Non-Employee Director Restricted Stock), (3) cause the Company to 13 make any payment and provide any benefit under each outstanding Performance Award and Supplemental Grant and (4) forgive all or any portion of the principal of or interest on a Loan. (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of the covered transaction, the Board may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of the covered transaction notwithstanding paragraph (a) above. 8. CERTAIN AWARDS TO NON-EMPLOYEE DIRECTORS 8.1. Automatic Grants of Non-Employee Director Restricted Stock. (a) Grants of Non-Employee Director Restricted Stock. The grants of Awards of Non-Employee Director Restricted Stock under this Section 8 shall be as follows: (i) On November 1, 1998 and on each anniversary of November 1, 1998 through and including November 1, 2000, in addition to shares of Non-Employee Director Restricted Stock granted pursuant to Sections 8.1(a)(ii) or (iii), each Non-Employee Director shall be granted an Award equal to the lesser of (x) 10,000 shares of Non-Employee Director Restricted Stock and (y) that number of shares of Non-Employee Director Restricted Stock having an aggregate value of $30,000 based on the fair market value of the shares on the date of grant, upon the terms and subject to the conditions set forth in the Plan including this Section 8. With respect to any individual who becomes a Non-Employee Director after November 1, 1998 (provided such individual has not previously received a grant pursuant to the first sentence of this Section 8.1(a)(i)), such individual shall be granted as of the date of his election or appointment as a Non-Employee Director an Award equal to the lesser of (x) 10,000 shares of Non-Employee Director Restricted Stock and (y) that number of shares of Non-Employee Director Restricted Stock having an aggregate value of $30,000 based on the fair market value of 14 the shares on the date of grant, upon the terms and subject to the conditions set forth in the Plan including this Section 8. (ii) With respect to any Non-Employee Director who becomes a Vice Chairman of the Board after September 10, 1998 (provided such individual has not previously received a grant pursuant to Section 8.1(a)(ii) under the Plan, as in effect since its May 29, 1996 amendment), such individual shall be granted as of the date of his election or appointment as Vice Chairman an Award of 15,000 shares of Non-Employee Director Restricted Stock upon the terms and subject to the conditions set forth in the Plan including this Section 8. (iii) With respect to any Non-Employee Director who becomes the Chairman of the Executive Committee after September 10, 1998 (provided such individual has not previously received a grant pursuant to Section 8.1(a)(iii) under the Plan, as in effect since its May 29, 1996 amendment), such individual shall be granted as of the date of his election or appointment as the Chairman an Award of 55,000 shares of Non-Employee Director Restricted Stock upon the terms and subject to the conditions set forth in the Plan including this Section 8. (iv) If on any date when Non-Employee Director Restricted Stock is to be granted pursuant to Section 8.1(a)(i), (ii) or (iii), the total number of shares of Stock as to which Non-Employee Director Restricted Stock is to be granted exceeds the number of shares of Stock remaining available under the Plan, there shall be a pro rata reduction in the number of shares of Stock as to which each Non-Employee Director is granted on such day. 8.2. Certain Terms of Non-Employee Director Restricted Stock. (a) Nature of Restricted Stock Award. A Non-Employee Director Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, if required by 15 applicable law, shares of Stock subject to the restrictions described in paragraph (d) below ("Non-Employee Director Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Non-Employee Director Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Board. (c) Rights as a Stockholder. A Participant who receives Non-Employee Director Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of Non-Employee Director Restricted Stock may be kept in the possession of the Participant prior to the lapse of restrictions on such shares. (d) Restrictions. Except as otherwise specifically provided herein, Non-Employee Director Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to serve as a director of the Company for any reason other than death, Disability, retirement at or after age 65, or upon failure to be renominated or reelected to the Board of Directors, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions shall lapse on one-third of the shares of Non-Employee Director Restricted Stock granted under the Plan (rounded to the nearest whole number of shares) (i.e., Non-Employee Director Restricted Stock will "vest") at the close of business on the day before each of the first, second and third anniversaries of the date of grant, provided that such restrictions shall lapse on an accelerated basis as to all shares of Non-Employee Director Restricted Stock at the time the Participant ceases to serve as a director due to death, Disability (as defined below), retirement at or after age 65, upon the failure to be renominated or reelected to the Board of Directors, or in the circumstances specified in Sections 7.3 and 7.4 of the Plan. For purposes of the Plan, a Disability shall mean a 16 physical or mental incapacity of long duration which, in the reasonable determination of the Board, renders the Participant unable to perform the duties of a director of the Company. (e) Notice of election. Any Participant making an election under Section 83(b) of the Code with respect to Non-Employee Director Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. 8.3. Prior Awards of Non-Employee Director Deferred Stock. Notwithstanding any other provisions of the Plan, any outstanding Awards of deferred stock made to Non-Employee Directors under the Plan as in effect prior to its March 1, 1997 amendment and restatement shall remain in effect subject to the terms and conditions applicable to such Awards at the time such Awards were granted. 9. GENERAL PROVISIONS 9.1. Documentation of Awards. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Board from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 9.2. Rights as a Stockholder, Dividend Equivalents. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Board may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such 17 Stock been outstanding. Without limitation, the Board may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 9.3. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 9.4. Tax Withholding. As a condition to the receipt of any shares of Stock pursuant to any Award or the lifting of restrictions on any Award, or in connection with any other event that gives rise to a federal or other governmental tax withholding obligation on the part of the Company relating to an award (including, without limitation, FICA tax), the Company may require that the Participant remit to the Company or the Company may withhold from any cash payment made to the Participant an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). 18 In the case of an Award pursuant to which Stock may be delivered, the Board will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Board may permit the Participant or such other person to elect at such time and in such manner as the Board provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. If at the time an ISO is exercised the Board determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security. 9.5. Nontransferability of Awards. No Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during a Participant's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). 9.6. Adjustments in the Event of Certain Transactions. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Board will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. 19 (b) In any event referred to in paragraph (a), the Board will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, including the number and kind to be automatically granted as Non-Employee Director Deferred Stock under Section 8.1, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Board may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Board that adjustments are appropriate to avoid distortion in the operation of the Plan. Adjustments relating to Non-Employee Director Deferred Stock shall be made solely to preserve, without increasing, the value of such Awards, to prevent dilution or enlargement of Participants rights, and shall in any case be subject to Section 9.10. 9.7. Employment Rights, Etc. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 9.8. Deferral of Payments. The Board may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 9.9. Past Services as Consideration. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock, the Board may determine that such price has been satisfied by past services rendered by the Participant. 20 9.10. Compliance with Certain 1934 Act Rules. It is the intent of the Company that any grant of Awards to and other transactions by a Participant who is subject to Section 16 of the 1934 Act comply in all respects with applicable provisions of Rule 16b-3 under the 1934 Act. Accordingly, if any action pursuant to this Plan or any Award agreement may not comply with the requirements of Rule 16b-3 as then applicable to any such transaction, such action will be taken so as to conform to the applicable requirements of Rule 16b-3 so that such Participant shall avoid liability under Section 16(b). 10. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock will be issued to Employees or other persons eligible to participate in the Plan. The Board may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code and to continue to qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act. 11. GOVERNING LAW. All rights and obligations under the Plan shall be construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of laws. 21 EX-10.34 6 KEY EXEC DEFERRED COMP PLAN Exhibit 10.34 THE AUTOTOTE CORPORATION KEY EXECUTIVE DEFERRED COMPENSATION PLAN AND PLAN ADOPTION AGREEMENT 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 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; 1 (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 and (iii) with respect to Elective Deferrals made in respect of Compensation payable for the Company's 2000 and later Fiscal Years, the date determined by the Plan Administrator prior to the beginning of the Fiscal Year to which the election relates; 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. 2.12 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 Year means the 12-month period beginning each November 1 and ending October 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 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 chosen in the Adoption Agreement. 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) 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 3 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 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 4 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 an additional two-year period beginning on the date the Participant's Distribution Date otherwise would have occurred or 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 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 sum. 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 5 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, 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. 6 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 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 7 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 Autotote Corporation Key Executive Deferred Compensation Plan Plan Adoption Agreement Please complete the information requested in the Adoption Agreement to establish the specific provisions of your plan. You do not have to provide a copy to your Financial Consultant. (Only the Merrill Lynch account opening agreements and an original executed copy of the associated Trust Agreement need to be returned to Merrill Lynch at the address printed on those forms.) This document and the Merrill Lynch Special Nonqualified Deferred Compensation Plan for Select Employees govern the rights of the plan participants and should, therefore, be disclosed to participants and retained as part of your permanent records. 1. EMPLOYER INFORMATION A. Name of Plan: The Autotote Corporation Key Executive Deferred Compensation Plan B. Name and address of employer sponsoring the Plan. Please provide employer's Business name. Autotote Corporation 750 Lexington Avenue New York, New York 10022 C. Provide employer's primary contact for the Plan and telephone and FAX numbers. Also include the employer's Tax Identification Number. DeWayne Laird Vice President & Chief Financial Officer Telephone: (302) 452-5336 Fax: (302) 452-5382 Employer Tax Identification Number: 81-0422894 D. Give the first day of the 12-month period for which the employer pays taxes: November 1 2. PLAN INFORMATION A. What is the effective date of the Plan? October 8, 1998 B. Plan Year Ends. Your "Plan Year" is the 12-consecutive-month period for which you credit elective and matching deferrals and keep Plan records. Enter the last day of your Plan Year. For example, if you use the calendar year as your plan year, enter "December 31." If you use a different 12-month period - for instance if your business is on a fiscal year - enter the last day of your fiscal year, e.g., "July 31." October 31 3. ELIGIBLE EMPLOYEES The following persons or classes of persons shall be Participants (enter the names or positions of individuals eligible to participate or the criteria used to identify Participants, e.g., "Those key employees of the Company selected by the Compensation Committee of the Board of Directors"): Those key employees selected by the Company each year and all of the non-employee directors of the Board. 9 4. COMPENSATION Compensation is used to determine the amount of Elective Deferrals a Participant can elect. Compensation under the Plan is defined as: o For employees: the cash bonuses payable to the individual by the Employer or an Affiliate. o For non-employee directors: the director fees and other compensation payable in respect of services performed as a director. For purposes of the Plan, Compensation will be determined before giving effect to Elective Deferrals and other salary reduction amounts that are not included in the Participant's gross income under Code section 125, 401(k), 402(h) or 403(b). 5. CONTRIBUTIONS A. Elective Deferrals. Participants may elect to reduce their Compensation and to have Elective Deferrals credited to their Accounts by making an election under the Plan (which may be changed each year for later Plan Years as described in the Plan), but no Participant may defer more than 100% (1% - 100%) of his or her Compensation for a Plan Year. B. Matching Deferrals. If the Employer elects to match Elective Deferrals, specify the matching rate and indicate the amount of the Participant's Elective Deferrals that will be matched. You may also elect to decide each year whether Matching Deferrals will be made and, if so, what that year's matching rate will be. Not applicable. No matching Deferrals will be credited. A. Discretionary Incentive Contributions. The Employer may make Discretionary Incentive Contributions in any amounts the Employer selects. These contributions will be subject to the vesting schedule selected in Item 6C. Not applicable. 6. VESTING OF MATCHING DEFERRALS AND DISCRETIONARY INCENTIVE CONTRIBUTIONS Not applicable. 7. ACCOUNTS The Trustee can either invest each Participant's Account balance as a separate account (in which case the Trustee could, but would not be required to, take into consideration the investment preferences of the Participants) or invest the Account balances of all Participants as a single fund (in which case the Trustee could, but would not be required to, take into consideration the investment preference of the Employer): Account balances are to be invested separately. 8. RETIREMENT AGE Not applicable. 9. WITHDRAWALS WHILE WORKING Withdrawals for Unforeseen Emergency. NOTE: Withdrawals are strictly limited as described in Plan Section 7.5. It is the Plan Administrator's responsibility to ensure that the limits are being followed. Excess withdrawals may result in loss of the tax deferral on all amounts credited under the Plan for the benefit of all Participants. 10 Withdrawals are permitted to the full extent allowable under the Plan. 10. ADMINISTRATION Plan Administrator. The Plan Administrator is legally responsible for the operation of the Plan, including: o Keeping track of which employees are eligible to participate in the Plan and the date each employee becomes eligible to participate. o Maintaining Participants' Accounts, including all sub-accounts required for different contribution types and payment elections, and keeping track of all elections made by Participants under the Plan and any other relevant information. o Transmitting important communications to the Participants, and obtaining relevant information from Participants such as changes in investment selections. o Filing important reports required to be submitted to governmental agencies. The Plan Administrator will be the person or persons identified below: DeWayne Laird Name Vice President and Chief Financial Officer Title Martin E. Schloss Name Vice President, General Counsel and Secretary Title 11. SIGNATURES After reviewing the Adoption Agreement, enter the current date and the name of the Employer. The signature of the Employer or the person signing for the Employer must be witnessed. Note that the person signing for the Employer must be authorized to do so, such as by a resolution of the Employer's board of directors or governing by-laws. While the Merrill Lynch Special Nonqualified Deferred Compensation Plan for Select Employees, including this Adoption Agreement, has been designed in a manner to permit Participants to defer federal income tax on amounts credited to their accounts until the amounts are actually paid, neither Merrill Lynch, Pierce, Fenner & Smith Incorporated, the sponsor of this document, nor any of its affiliates ("Merrill Lynch") provide any assurances of that result in the Employer's particular situation or assume any responsibility in this regard. Please consult your tax advisor regarding the tax consequences of this Plan to you and your employees and the advisability of submitting this document to the Internal Revenue Service to obtain a ruling concerning those consequences. In addition, please consult your independent legal counsel with respect to securities law issues. By signing this Adoption Agreement the Employer acknowledges that no representations or warranties as to the tax consequences to the Employer and Participants of the operation of this Plan have been made by Merrill Lynch. Autotote Corporation Name of Employer (Print or Type) By: /s/ /DeWayne Laird Authorized Signature 11 DeWayne Laird Vice President and Chief Financial Officer Print Name and Title Date: Witness: /s/ Martin E. Schloss Signature 12 EX-10.35 7 AMEND NO. 1 TO CREDIT FACILITY Exhibit 10.35 AGREEMENT This Agreement is dated as of December 31, 1997 and is made by and among Autotote Corporation, a Delaware corporation ("Autotote"), the subsidiaries of Autotote signatories hereto, DLJ Capital Funding, Inc., a Delaware corporation ("DLJ"), and Heller Financial, Inc., a Delaware corporation ("Heller"). WITNESSETH: WHEREAS, pursuant to that certain Credit Agreement dated as of July 28, 1997 among Autotote, the Banks from time to time party thereto and DLJ, as agent (the "Credit Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement), the Banks from time to time party thereto agreed to make certain loans and extend certain other financial accommodations to Autotote; WHEREAS, pursuant to that certain Assignment and Assumption Agreement of even date herewith among DLJ, as assignor and Heller, as assignee (the "Assignment and Assumption Agreement"), DLJ assigned to Heller and Heller assumed from DLJ, an 80% portion of the Revolving Loan Commitment; WHEREAS, DLJ wishes to relinquish its agency capacities under the Credit Agreement and the Security Documents and Heller wishes to assume such agency capacities subject to the terms, conditions and agreements set forth herein; NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: Agency. Pursuant to the provisions of Section 12.09 of the Credit Agreement, DLJ hereby resigns from the performance of all of its functions and duties as the Agent under the Credit Agreement and the other Credit Documents. Pursuant to the provisions of Section 10.9 of the Security Agreement, DLJ hereby resigns from the performance of all of its functions and duties as the Collateral Agent under the Security Agreement and the other Security Documents. DLJ and Heller hereby appoint Heller as successor Agent under the Credit Agreement and the other Credit Documents, and successor Collateral Agent under the Security Agreement and the other Security Documents. The foregoing resignations and appointments shall be effective concurrently with the execution and delivery of this Agreement by the parties hereto. The parties hereto hereby waive all notice requirements set forth in Section 12.09 of the Credit Agreement and in Section 10.9 of the Security Agreement. Each of Autotote and DLJ shall, and Autotote shall cause each of its Subsidiaries to, execute and deliver and take such other actions as Heller may reasonably request from time to time to facilitate its becoming the successor Agent and the successor Collateral Agent. Autotote and each of its Subsidiaries party hereto acknowledge the change of agents set forth above. Credit Agreement Schedule. Autotote hereby represents and warrants to Heller that attached hereto as Exhibit A is a true, correct and complete copy of Schedule XI to the Credit Agreement. Agency Fees. On the date hereof, and on each anniversary hereof, Autotote will pay to Heller, for its own account, an agency fee of $50,000. For all purposes of the Credit Agreement and the other Credit Documents, such fee will be deemed to be an Obligation. Delivery of Collateral. DLJ hereby agrees, concurrently with its execution and delivery of this Agreement, to deliver to Heller any and all Collateral in the physical custody of DLJ or any of its agents. DLJ hereby agrees that any such Collateral not delivered to Heller pursuant to the preceding sentence, and any other Collateral, if any, received by DLJ or any of its affiliates after the date hereof shall be held by such Persons in trust for the benefit of Heller, in its capacity as Collateral Agent, and shall be delivered to Heller as soon as reasonably practicable in the form so received, together with any endorsements or assignments necessary to effectively transfer all of rights of DLJ therein to Heller. Credit Agreement and Credit Document Amendments. The parties hereto hereby agree that the Credit Agreement and the other Credit Documents shall each be amended and otherwise modified as follows, effective immediately: The definition of the term "Swingline Bank" set forth in Section 11.01 of the Credit Agreement shall be amended by substituting the phrase "Heller Financial, Inc." for "DLJ". The address for the Notice Office, the Payment Office and the address for purposes of all notices and other communications to the Agent and/or the Collateral Agent (including without limitation notices delivered pursuant to Section 13.03 of the Credit Agreement, Notices of Borrowing and Letters of Credit Requests) shall be as follows: Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 1 Facsimile No.: 312-441-7367 Attention: Corporate Finance Group or such other office as the Agent or the Collateral Agent, as applicable, may hereafter designate in writing pursuant to the terms of the applicable Credit Documents. Heller and DLJ shall, in good faith, negotiate to determine an equitable shareing of responsibility to pay the out-of-pocket costs and expenses of Heller (including, without limitation, the reasonable fees and disbursements of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. and local counsel) in connection with the preparation, execution and delivery of this Agreement and all other agreements, instruments and documents executed in connection herewith. The term "Business Day" which is set forth in Section 11.01 of the Credit Agreement is hereby amended and restated as follows: "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day except Saturday, Sunday and any day which shall be in Chicago, Illinois or the State of Pennsylvania a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close and (ii) with respect to all notice and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) above and which is also a day for trading by and between banks in the New York Interbank Eurodollar market. The provisions of Section 13.08(a) of the Credit Agreement, and comparable provisions of each of the other Security Documents, are hereby amended to provide that the governing law thereof, except as otherwise provided in certain of the Mortgages, shall be the law of the State of Illinois. To the extent that items of Collateral described in any Security Documents are defined, in part or in whole, by reference to applicable law of the State of New York (including without limitation, the New York UCC), such Security Documents are hereby amended to substitute comparable laws of the State of Illinois for such laws of the State of New York. SUCH PROVISIONS ARE FURTHER AMENDED TO PROVIDE THAT LEGAL ACTIONS OR PROCEEDINGS WITH RESPECT TO THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS (IN LIEU OF THE STATE OF NEW YORK) OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS (IN LIEU OF THE SOUTHERN DISTRICT OF NEW YORK). EACH OF AUTOTOTE AND ITS SUBSIDIARIES PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY ACTION DESCRIBED IN THE CREDIT AGREEMENT OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THE CREDIT AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS BROUGHT IN THE COURTS OF THE UNITED STATES OR ILLINOIS REFERRED TO ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEDGE OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. The clause reading "the Agent, upon the written request of the Required Banks, shall" set forth in the carryover paragraph immediately following subsection 10.10 of the Credit Agreement is hereby amended to read: "the Agent may, and upon the written request of the Required Banks, shall". The clause reading "after publication of notice of such auction not less than 10 days' prior thereto in two newspapers in general circulation in the City of New York" set forth in Section 7.2 of the Security Agreement is hereby amended to read: " after publication of notice of such auction not less than 10 days' prior thereto in two newspapers in general circulation in the City of New York, to the extent required by applicable law, or such other city, to the extent required by applicable law." Heller, as a Bank and as the successor Agent shall be entitled to rely upon the Officer's Solvency Certificate dated July 28, 1997, which was delivered by Autotote. The first sentence of Section 3.3 of the Pledge Agreement is hereby amended to read as follow: "Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2 hereof, each Pledgor will take any and all actions required or requested by Pledgee, from time to time, to (a) cause Pledgee to obtain exclusive "Control" (as defined in the Illinois UCC) of any "Securities" (as defined in the Illinois UCC) owned by such Pledgor in a manner acceptable to Pledgee and (b) obtain from any issuers of such Securities and such other Persons, for the benefit of Pledgee, written confirmation of Pledgee's Control over such Securities. For purposes of this Section 3.3, Pledgee shall have exclusive Control of Securities if (i) such Securities are certificated Securities and the applicable Pledgor "Delivers" (as defined in the Illinois UCC) such certificated Securities to Pledgee (with appropriate endorsements if such certificated securities are in registered form); and (ii) such Securities are uncertificated Securities and either (x) the applicable Pledgor Delivers such uncertificated Securities to Pledgee or (y) the issuer thereof agrees, pursuant to documentation in form and substance satisfactory to Pledgee, that it will comply with instructions originated by Pledgee without further consent by the applicable Pledgor." 2 On or before May 31, 1998, Autotote and each of its Subsidiaries party hereto will execute and deliver such bank agency agreements and other agreements, instruments and documents, and cause each of the principal banks with which it maintains banking relationships to execute and deliver a bank agency agreement and such other agreements, instruments and documents as the Collateral Agent may reasonably request, to permit the Collateral Agent, following the occurrence of an Event of Default, to obtain control of all bank accounts maintained by such banks for the benefit of Autotote and each of its Subsidiaries party hereto. The failure of Autotote or any of its Subsidiaries party hereto to comply with the provisions of the preceding sentence shall constitute an Event of Default. Autotote and each of its Subsidiaries acknowledge and agree with the following disclosures mandated by Illinois law: "Unless Autotote and its Subsidiaries provide Collateral Agent with evidence of the insurance coverage required by the Credit Documents, Collateral Agent may purchase insurance at the expense of Autotote and its Subsidiaries to protect Collateral Agent's interests in the Collateral. This insurance may, but need not, protect the interests of Autotote and its Subsidiaries. The coverage that Collateral Agent purchases may not pay any claim that Autotote or any of its Subsidiaries may make or any claim that is made against Autotote or any of its Subsidiaries in connection with the Collateral. Autotote and its Subsidiaries may later cancel any insurance purchased by Collateral Agent, but only after providing Collateral Agent with evidence that Autotote and its Subsidiaries have obtained insurance as required by the Credit Documents. If Collateral Agent purchases insurance for the Collateral, Autotote and its Subsidiaries will be responsible for the costs of that insurance, including interest and any other charges that may be imposed in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the Loans. The costs of the insurance may be more than the cost of insurance Autotote and its Subsidiaries may be able to obtain on their own." Heller hereby acknowledges that the insurance coverage maintained by Autotote and each of its Subsidiaries, as of the date hereof, is adequate, as of the date hereof, to satisfy the requirements set forth in the Credit Agreement. EACH OF AUTOTOTE AND EACH SUBSIDIARY OF AUTOTOTE A SIGNATORY HERETO HEREBY DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY AUTOTOTE OR ANY SUCH SUBSIDIARY WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY PROCEEDINGS ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENTS IN ANY COURT LOCATED IN CHICAGO, ILLINOIS, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY AUTOTOTE AND EACH SUCH SUBSIDIARY TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO AUTOTOTE AND/OR ANY APPLICABLE SUBSIDIARIES OF AUTOTOTE AT THE ADDRESSES PROVIDED IN THE CREDIT DOCUMENTS, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY AUTOTOTE AND ITS SUBSIDIARIES REFUSES TO ACCEPT SERVICE, EACH OF AUTOTOTE AND EACH OF ITS SUBSIDIARIES HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANOTHER MANNER PERMITTED BY LAW. The definitions of the terms "Guaranteed Obligations", "Maturity Date" and "Signing Bank" are deleted from Section 11.01 of the Credit Agreement, as such defined terms are not used anywhere else within the Credit Agreement. Post-Closing Items. To induce Heller to execute and deliver this Agreement, Heller has requested a variety of information and documentation which it has not yet received. Heller is willing to execute and deliver this Agreement with the understanding that each of the following materials shall be delivered to Heller on or before February 13, 1998: With respect to each of the Intercompany Notes pledged to Collateral Agent, Autotote or its applicable Subsidiary will endorse, in form and substance satsifactory to Heller, each such Intercompany Note to Heller, in its capacity as Collateral Agent. Autotote shall deliver an opinion of the law firm of Tobin, Carberry, et al., or another Connecticut law firm reasonably satisfactory to Heller, regarding such matters of Connecticut law as Heller may reasonably request. Heller's requests can be found in a letter of December 2, 1997 from Joel F. Brown of the law firm of Goldberg, Kohn, et al. to Elizabeth O'Connor of the law firm of Kramer, Levin, et al. Autotote shall demonstrate, to the satisfaction of Heller that each Intercompany Note executed in favor of a Foreign Subsidiary properly incorporates the subordination provisions which appear as Exhibit M to the Credit Agreement. Autotote shall provide Heller with evidence that the federal tax lien filed against Marvin H. Sugarman Productions, Inc. in April of 1996 has been released. 3 Autotote shall demonstrate, to the reasonable satisfaction of Heller, that each stock certificate of Autotote's Subsidiaries was properly issued to the appropriate shareholder. Specifically, Autotote shall address the concerns raised in the letter of November 21, 1997 from David M. Mason of the law firm of Goldberg, Kohn et al. to Elizabeth O'Connor of the law firm of Kramer, Levin, et al. The failure by Autotote to deliver any of the foregoing on a timely basis will constitute an Event of Default. Further Assurances. Each of DLJ, Autotote and the subsidiaries of Autotote signatories hereto hereby agrees that it will execute and deliver such agreements, instruments and documents, and take such actions, as Heller may reasonably request to carry out the provisions of this Agreement, including without limitation, the relinquishment by DLJ of its agency capacities under the Credit Agreement and the Security Documents and the assumption by Heller of such agency capacities. Miscellaneous. Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. Governing Law. This Agreement shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Successors and Assigns. This Agreement shall be binding upon Agent, Autotote and Lenders and their respective successors and assigns, and shall inure to the sole benefit of Agent, Autotote and Lenders and the successors and assigns of Agent, Autotote and Lenders. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Agreement shall be deemed to include this Agreement unless the context shall otherwise require. Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Agreement are not intended to and do not serve to effect a novation as to the Credit Agreement. The parties hereto expressly do not intend to extinguish the Credit Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Credit Agreement which is evidenced by certain promissory notes and secured by the Collateral. The Credit Agreement and other Credit Documents as amended hereby remain in full force and effect. 4 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the day and date first written above. HELLER FINANCIAL, INC. By:________________________________ Its:_______________________________ DLJ CAPITAL FUNDING, INC. By:________________________________ Its:_______________________________ AUTOTOTE CORPORATION By:________________________________ Its:_______________________________ AUTOTOTE SYSTEMS, INC. AUTOTOTE LOTTERY CORPORATION AUTOTOTE ENTERPRISES, INC. AUTOTOTE KENO CORPORATION NEWARK HOLDINGS, INC. AUTOTOTE INTERNATIONAL, INC. AUTOTOTE MANAGEMENT CORPORATION AUTOTOTE MEXICO, LTD. AUTOTOTE COMMUNICATION SERVICES, INC. RACING TECHNOLOGY, INC. MARVIN H. SUGARMAN PRODUCTIONS, INC. Each By:_____________________________ Its:_________________________________ 5 EX-10.36 8 AMEND NO. 2 TO CREDIT FACILITY Exhibit 10.36 SECOND AMENDMENT AND WAIVER SECOND AMENDMENT AND WAIVER (this "Amendment"), dated as of May 22, 1998, by and among Autotote Corporation (the "Borrower"), the lenders listed on the signature pages hereto (the "Banks") and Heller Financial, Inc., as successor agent to DLJ Capital Funding, Inc. ("DLJ") (the "Agent") and as Issuing Bank. Capitalized terms that are used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement referred to below. W I T N E S S E T H: WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit Agreement, dated as of July 28, 1997 (as amended by that certain Agreement, dated as of December 19, 1997, among the Borrower, the Subsidiaries of the Borrower signatories thereto, DLJ and the Agent, the "Credit Agreement"), pursuant to which certain loans were made to, and certain letters of credit were issued for the account of, the Borrower; WHEREAS, the Borrower and Autotote Lottery Corporation ("Autotote"), as borrowers, certain lenders (the "Term Loan Banks") and the Agent are parties to that certain Term Loan Agreement dated as of May 22, 1998 (as amended and supplemented from time to time, the "Term Loan Agreement") pursuant to which the Term Loan Banks have agreed, subject to the terms and conditions of the Term Loan Agreement, to make a term loan to the Borrower and Autotote (jointly and severally) of up to $12,000,000 (the "Term Loan"); WHEREAS, the Borrower has requested that the Banks consent to certain modifications and amendments to the Credit Agreement resulting from the incurrence by the Borrower and Autotote of the Term Loan and waive certain requirements set forth in Section 8.11 of the Credit Agreement, in each case as provided herein; and WHEREAS, subject to the terms and conditions herein, the Banks are willing to grant such consent and agree to such modifications, amendments and waiver; NOW, THEREFORE, in consideration of the mutual agreements contained herein and other valuable consideration the receipt and sufficiency of which are hereby acknowledged, each of the parties hereto hereby agrees as follows: 1 I. Waiver 1. Waiver. The Banks hereby waive until June 30, 1998 compliance by the Borrower with the requirements of Section 8.11 of the Credit Agreement that its new Subsidiaries, SJC Video Corporation and Autotote Panama Corporation, execute and deliver certain Security Documents. II. Amendments and Modifications to the Credit Agreement 1. On and after the Amendment Effective Date (as hereinafter defined), Section 4.02(e) of the Credit Agreement is hereby amended to provide in its entirety as follows: "(e) Mandatory prepayments to be applied pursuant to this Section 4.02(e) shall be applied as follows: (i) first, to prepay Swingline Loans; (ii) second, to prepay Revolving Loans and to permanently reduce the Revolving Loan Commitment in the amount prepaid; (iii) third, to cash collateralize Letters of Credit in a manner reasonably satisfactory to the Agent; (iv) fourth, to prepay any outstanding Indebtedness under the Term Loan Agreement as provided in Section 2.2 thereof; and thereafter, the Revolving Loan Commitment will be permanently reduced in an amount equal to the amount remaining, if any, after application of amounts required to be prepaid pursuant to clauses (i), (ii), (iii) and (iv) above. Amounts applied pursuant to this Section 4.02(e) may not be reborrowed. Notwithstanding the provisions of Sections 4.02(b), (c) and (d), proceeds from the incurrence of Indebtedness for borrowed money by Autotote or any of its Subsidiaries, the sale of assets or the capital stock or newly issued shares of Autotote or any of its Subsidiaries or any Recovery Event with respect to the assets of Autotote or its Subsidiaries, shall be applied in accordance with Sections 2.2(b), (c) and (d) of the Term Loan Agreement." 2. On and after the Amendment Effective Date, clause (x) of the proviso set forth in Section 9.01(viii) of the Credit Agreement is hereby amended to provide in its entirety as follows: "(x) such Liens only secure payment of such purchase Indebtedness and". 3. On and after the Amendment Effective Date, Section 9.01(xv) of the Credit Agreement is hereby amended by inserting the following immediately after the word "outstanding" appearing therein: "; and" and inserting the following new clause (xvi): "(xvi) Liens created pursuant to the Term Loan Agreement and the Security Documents (as defined in the Term Loan Agreement) related thereto." 4. On and after the Amendment Effective Date, Section 9.02(i) of the Credit Agreement is hereby amended by inserting the following immediately after "such Person's business" in the parenthetical contained therein: "but excluding any sale of the Caliente System permitted under Section 9.02(viii)". 5. On and after the Amendment Effective Date, Sections 9.05(vi) and 9.05(vii) of the Credit Agreement are hereby amended to provide in their entirety as follows: "(vi) Indebtedness evidenced by Capital Lease Obligations or subject to Liens permitted under Section 9.01(viii) so long as the aggregate outstanding principal amount thereof at any time does not exceed $25,000,000; (vii) [Intentionally Deleted]" 2 6. On and after the Amendment Effective Date, Section 9.05(xi) of the Credit Agreement is hereby amended by inserting the following immediately after the word "therefrom" appearing therein: "; and" and inserting the following new clause (xii): "(xii) Indebtedness under the Term Loan Agreement and the Security Documents (as defined in the Term Loan Agreement) related thereto." 7. On and after the Amendment Effective Date, Section 10.04 of the Credit Agreement is hereby amended by inserting the following immediately after "at least $1,000,000" appearing therein: "and provided further, that a default under Section 9.5 of the Term Loan Agreement shall not be a Default or an Event of Default under this Section 10.04 if the principal of and any accrued interest under the Term Loan (as defined in the Term Loan Agreement) and the Term Notes (as defined in the Term Loan Agreement) and all other Obligations (as defined in the Term Loan Agreement) under the Term Loan Agreement are repaid within ten (10) business days following the occurrence of such default". III. Miscellaneous 1. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrower and the Required Banks shall have signed a counterpart hereof (whether the same or different counterparts). 2. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Credit Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as modified by this Amendment. 3. The Credit Agreement, the Notes and each of the other Credit Documents, as modified by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. 4. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a modification, acceptance or waiver of any right, power or remedy of the Banks under any of the Credit Documents, nor constitute a modification, acceptance or waiver of any provision of any of the Credit Documents. 5. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. 6. This Amendment and the rights and obligations of the parties hereunder shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely in such State. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. AUTOTOTE CORPORATION By ___________________________ Name: Title: 3 HELLER FINANCIAL, INC., as Agent and a Bank By_______________________________________ Name: Title: DLJ CAPITAL FUNDING, INC., as a Bank By_______________________________________ Name: Title: 4 EX-10.37 9 AMEND NO. 3 TO CREDIT FACILITY Exhibit 10.37 WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT This Waiver and Third Amendment is dated as of December 31, 1998 (this "Amendment") and is made by and among Autotote Corporation, a Delaware corporation ("Autotote"), Heller Financial, Inc., a Delaware corporation as agent and as a "Bank" party to the Credit Agreement referred to below, and DLJ Capital Funding, Inc., a Delaware corporation, as a Bank party to the Credit Agreement referred to below. WHEREAS, the parties hereto are parties to that certain Credit Agreement, dated as of July 28, 1997, as subsequently amended (the "Credit Agreement"; capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement); WHEREAS, Autotote violated the provisions of Section 9.10 of the Credit Agreement as of the end of the fourth quarter of 1998, and at the request of Autotote, the Banks are willing to waive all rights and remedies available to them as a result of such violation; WHEREAS, the parties hereto desire to amend the Credit Agreement to facilitate (i) the acquisition by Marvin H. Sugarman Productions, Inc., a New York corporation ("Marvin H. Sugarman"), of all of the stock of SJC Video Corporation, a Delaware corporation ("SJC"), not previously wholly-owned by Marvin H. Sugarman (the "SJC Stock Acquisition"), (ii) the formation by Autotote of a new Wholly-Owned Subsidiary by the name of Autotote Panama, Inc., which has been organized under the laws of Panama (the "Autotote Panama Formation"), and (iii) the acquisition by Autotote of a new Wholly-Owned Subsidiary by the name of Autotote Nederland B.V., which has been organized under the laws of The Netherlands (the "Autotote Nederland Acquisition"); WHEREAS, the parties hereto desire to further amend the Credit Agreement to revise the ratio levels contained in Section 9.10 of the Credit Agreement; NOW, THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Waiver. The Banks hereby waive all rights and remedies available to them as a result of Autotote's violation of the provisions of Section 9.10 of the Credit Agreement for the period ending on the last day of the fourth quarter of 1998. The waiver granted herein shall not obligate the Banks to grant further waivers of the provision of Section 9.10 or any other provision of the Credit Agreement hereafter. 2. Absence of Need for Consent. Autotote hereby represents and warrants to Agent and each Bank that each of the SJC Stock Acquisition, the Autotote Panama Formation and the Autotote Nederland Acquisition was each consummated in accordance with the provisions of the Credit Agreement, including without limitation, the provisions of Sections 9.02 and 9.06, and that consummation of the SJC Stock Acquisition, the Autotote Panama Formation and the Autotote Nederland Acquisition did not require the prior written consent of the Agent or any Bank. 3. Amendments to Credit Agreement. (A) The Credit Agreement is amended by supplementing each of Schedule VI, Schedule VIII, Schedule IX, Schedule X, Schedule XI and Schedule XII thereto as set forth on the corresponding schedules attached to this Amendment. (B) The table set forth within Section 9.10 of the Credit Agreement is hereby amended and restated in its entirety as follows: Period Ratio ------ ----- First Quarter, 1999 5.50:1.00 Second Quarter, 1999 5.50:1.00 Third Quarter, 1999 5.10:1.00 Fourth Quarter, 1999 4.90:1.00 First Quarter, 2000 4.80:1.00 Second Quarter, 2000 4.25:1.00 Third Quarter, 2000 4.25:1.00 Fourth Quarter, 2000 4.00:1.00 First Quarter, 2001 3.75:1.00 Second Quarter, 2001 3.75:1.00 4. Miscellaneous. (a) Captions. Section captions used in this Amendment are for convenience only, and shall not affect the construction of this Amendment. (b) Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of Illinois, without regard to conflict of laws principles. Whenever possible each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. (c) Successors and Assigns. This Amendment shall be binding upon Agent, Autotote and Banks and their respective permitted successors and assigns, and shall inure to the sole benefit of Agent, Autotote and Banks and the permitted successors and assigns of Agent, Autotote and Banks. (d) Counterparts. This Amendment may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. (e) References. Any reference to the Credit Agreement contained in any notice, request, certificate, or other document executed concurrently with or after the execution and delivery of this Amendment shall be deemed to include this Amendment unless the context shall otherwise require. (f) Continued Effectiveness. Notwithstanding anything contained herein, the terms of this Amendment are not intended to and do not serve to effect a novation as to the Credit Agreement. The parties hereto expressly do not intend to extinguish the Credit Agreement. Instead, it is the express intention of the parties hereto to reaffirm the indebtedness created under the Credit Agreement which is evidenced by certain promissory notes and secured by the Collateral. The Credit Agreement, as amended hereby, and other Credit Documents remain in full force and effect. 2 IN WITNESS WHEREOF, this Amendment has been executed and delivered by the parties hereto as of the day and date first written above. HELLER FINANCIAL, INC. By:____________________________________ Its:___________________________________ DLJ CAPITAL FUNDING, INC. By:____________________________________ Its:___________________________________ AUTOTOTE CORPORATION By:____________________________________ Its:___________________________________ 7 EX-27 10 FDS --
5 (Replace this text with the legend) 1,000 12-MOS OCT-31-1998 NOV-01-1997 OCT-31-1998 6,809 0 23,563 1,811 11,295 42,426 196,748 118,315 156,500 45,304 35,000 360 0 0 (48,638) 156,500 159,313 159,313 104,655 104,655 54,696 0 15,521 (15,559) 321 (15,880) 0 0 0 (15,880) (0.44) (0.44)
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