-----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, OyysKI+5vMa3qeZsaNXmcA2Ruz9P1hAPqvvXsu0BrSKXmzKZqSi74sHy/31QzrFx 3mGR9An5eyel59oQjjr1mw== 0000912057-01-005988.txt : 20010223 0000912057-01-005988.hdr.sgml : 20010223 ACCESSION NUMBER: 0000912057-01-005988 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20010215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOTOTE CORP CENTRAL INDEX KEY: 0000750004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 810422894 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-51000 FILM NUMBER: 1547117 BUSINESS ADDRESS: STREET 1: 750 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 3027374300 MAIL ADDRESS: STREET 1: 750 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TOTE INC DATE OF NAME CHANGE: 19920317 424B3 1 a2038732z424b3.txt 424B3 Pursuant to Rule 424(b)(3) Under the Securities Act of 1933, as amended Prospectus Supplement No. 1 Dated: February 15, 2001 to Prospectus, Dated January 2, 2001 Registration Number 333-51000 ---------------------------------------- AUTOTOTE CORPORATION ---------------------------------------- 12 1/2% Senior Subordinated Notes Due 2010, Series B - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: OCTOBER 31, 2000, OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________TO___________________ COMMISSION FILE NUMBER: 0-13063 AUTOTOTE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 81-0422894 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 750 LEXINGTON AVENUE, 25TH FLOOR NEW YORK, NEW YORK 10022 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER: (212) 754-2233 Securities registered pursuant to Section 12(b) of the Act:
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 25, 2001, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $136,530,369. Common shares outstanding as of January 25, 2001 were 40,155,991. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated herein by reference:
DOCUMENT PARTS INTO WHICH INCORPORATED -------- ----------------------------- Proxy Statement for the Company's 2001 Annual Part III Meeting of Stockholders
EXHIBIT INDEX APPEARS ON PAGE 86 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FORWARD-LOOKING STATEMENTS Throughout this Annual Report on Form 10-K we make "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include the words "may," "will," "estimate," "intend," "continue," "believe," "except" or "anticipate" and other similar words. The forward-looking statements contained in this Annual Report are generally located in the material set forth under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," but may be found in other locations as well. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management's reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. Actual results may differ from projected results due, but not limited, to unforeseen developments, including developments relating to the following: o the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations and our need for additional funds required to support capital improvements and development; o economic, competitive, demographic, business and other conditions in our local and regional markets; o changes or developments in the laws, regulations or taxes in the gaming and lottery industries; o actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, members and shareholders, as well as legislative, regulatory, judicial and other governmental authorities; o changes in business strategy, capital improvements, development plans, including those due to environmental remediation concerns, or changes in personnel or their compensation, including federal, state and local minimum wage requirements; and o the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis. Actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future. ITEM 1. BUSINESS OVERVIEW As a result of Autotote's acquisition of Scientific Games Holdings Corp. ("Scientific Games") on September 6, 2000, we are the largest provider of services, systems and products to both the pari-mutuel gaming and instant ticket lottery industries, and we believe we are the only fully integrated lottery service provider in the world. We believe that we offer the broadest and most technologically advanced array of products and services in these industries and that we are the market leader in creating innovative pari-mutuel wagering and lottery products. Our lottery group is the leading provider of instant lottery tickets and related services, accounting for approximately 68% of all retail sales of instant lottery tickets in the United States in 1999. Our lottery group also supplies technologically advanced on-line lottery systems and instant ticket validation equipment to lotteries in the U.S. and internationally. Our pari-mutuel group is the leading provider of pari-mutuel wagering systems worldwide and has an approximate 65% share of the estimated $20.0 billion of North American racing industry wagers, or "Handle." Our venue management group, utilizing our pari-mutuel business expertise, owns or operates off-track betting venues or "OTBs" in Connecticut, The Netherlands and Germany, from which we earn a significantly higher percentage of the Handle than we earn by providing services to third-party operators. Finally, our telecommunications products group leverages our superior lottery technology to create highly secure, paper-based, prepaid phone cards for the rapidly growing international cellular telephone markets. On September 6, 2000, Autotote completed the acquisition of Scientific Games, a world leading supplier of lottery products, integrated lottery systems and support services, and prepaid telephone cards. This acquisition combines Autotote's pari-mutuel wagering, venue management and on-line lottery businesses with Scientific 2 Games' complementary instant lottery ticket and related services, on-line lottery and instant ticket validation, and rapidly growing prepaid phone card businesses. The acquisition was completed through a merger in which Scientific Games became a wholly-owned subsidiary of Autotote at a cost of approximately $308 million in aggregate merger consideration to Scientific Games stockholders, plus related fees and expenses. The acquisition has been recorded using the purchase method of accounting, and the acquired assets and liabilities have been recorded at their estimated fair value at the date of acquisition and the operating results of Scientific Games businesses have been included in the consolidated statements of operations from the date of the acquisition. The Scientific Games acquisition and the refinancing of substantially all existing debt of both Autotote and Scientific Games, along with the payment of related fees and expenses, was completed with funds provided by: (1) proceeds from the issuance of $150.0 million principal amount of our series A notes; (2) $280.0 million of term loan borrowings under our new senior credit facilities; (3) $2.98 million of borrowings under the revolving credit facility of our new senior credit facilities; (4) $4.805 million of cash on hand; and (5) $110.0 million of gross proceeds from the sale of new convertible preferred stock, principally to an affiliated entity of Olivetti S.p.A. We filed a registration statement on Form S-4 under the Securities Act of 1933, as amended, with the Securities Exchange Commission with respect to an offer to exchange up to $150.0 million of new 12 1/2% Senior Subordinated Notes due 2010, Seires B, for any and all of our outstanding 12 1/2% Senior Subordinated Notes due 2010, Series A. The terms of the Series B notes are substantially identical to the Series A notes, except for certain transfer restrictions and registration rights relating to the Series A notes. That registration statement was declared effective by the Securities Exchange Commission on January 2, 2001 and we subsequently commenced the exchange offer, which is scheduled to expire on February 7, 2001, unless extended. With the combined operations of Autotote and Scientific Games, we are engaged primarily in the following businesses: o LOTTERY GROUP (55% of Pro-forma Revenues). We believe that we are the world's only fully integrated service provider for both on-line and instant ticket lotteries, the two principal types of lottery games. Our instant ticket and related services business is the industry leader, with approximately 68% of all retail sales in the U.S. instant ticket market. Our instant ticket customers include 26 of the 39 U.S. jurisdictions where lotteries are authorized as well as lotteries in over 50 other countries. In addition to ticket design and manufacturing, we provide lotteries with related value-added services through our branded Cooperative Services Program, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. We have recently introduced our probability instant lottery tickets, which permit every ticket to have the potential to become a winner based on the choices made by the player, and probability ticket validation terminals based on our proprietary security technology. We believe that these innovative products will allow lotteries to increase retail sales of instant tickets while enabling us to generate higher revenues and margins from tickets, terminals and systems. Our instant ticket contracts generally run for one to five years and frequently include renewal options. We typically collect either a fixed fee per thousand instant tickets or a percentage of the instant ticket retail sales of the lottery customer, depending on the nature of the contract and the extent of the cooperative services we provide. Instant tickets and related services accounted for approximately 85% of the pro forma revenue of our Lottery Group. Our lottery systems business primarily provides sophisticated, customized computer software, equipment (including state-of-the-art lottery terminals) and data communication services to lotteries for on-line and instant ticket games. To U.S.-based lotteries, we typically provide the necessary equipment, software and maintenance services pursuant to five to seven year contracts, under which we are generally paid a percentage of retail sales. Our U.S. systems contracts frequently include renewal options that have generally been exercised by our customers. Internationally, we typically sell terminals and systems to lotteries outright and provide ongoing fee-based software support under long-term contracts. We have agreements to provide systems and services to 10 states in the United States and to lotteries in 24 countries internationally. We have recently been selected by the Iowa Lottery to provide a 7-year on-line lottery contract, beginning on July 1, 2001, with an estimated $40.0 million of potential revenue generated over the life of the contract. We also have been selected by the Maine State Lottery to provide instant tickets and an on-line lottery system, beginning July 2001, with an estimated $45.0 million of potential revenue generated over the six-year life of the contract. In January 2001, the British Columbia 3 Lottery Corporation announced that it had chosen us to upgrade its lottery central gaming system. The arrangement is expected to provide revenues of approximately $8.0 million. In addition, in January 2001, the Jamaica Lottery Company Limited announced that it has chosen us to supply terminals, central system and support services for five years. When finalized, the arrangement will have the potential to generate revenues of $10.9 million and may include three two-year renewals. o PARI-MUTUEL GROUP (23% of Pro-forma Revenues). We are the leading worldwide supplier of technologically advanced computerized wagering systems and related equipment. We provide technology, software, equipment and services for pari-mutuel wagering conducted at thoroughbred, harness and greyhound racetracks and OTBs worldwide. We have approximately 65% of the market for pari-mutuel services in North America based on total Handle, and have benefited from the growth in remote wagering over the past ten years in the markets we serve. We also provide simulcasting and telecommunications services, video gaming terminals, and telephone and Internet account wagering. Based on Handle, our customers include 10 of the 15 largest thoroughbred racetracks in North America and 10 of the 12 largest North American OTB networks, among the more than 800 OTBs we service. We typically provide, install and maintain the necessary pari-mutuel systems and equipment for these customers pursuant to five-year contracts under which we receive a weighted average of approximately 0.35% of the Handle wagered. o VENUE MANAGEMENT GROUP (14% of Pro-forma Revenues). We own and, subject to our compliance with certain licensing requirements, have the right to operate in perpetuity substantially all off-track pari-mutuel wagering in Connecticut. Our operations include 12 stand-alone OTBs state-wide, including two simulcasting teletheaters and three simulcasting raceview centers, and telephone account wagering to customers in 31 states. We are also the exclusive licensed operator for all pari-mutuel wagering in The Netherlands, with five racetracks and 39 OTBs under a contract with an initial term continuing through June 2003. In addition, we are a 50% participant in a joint venture to operate up to approximately 2,500 OTBs in Germany. Our revenues are based on a percentage of the Handle wagered at our OTB venues, which ranges from 20% to 32%. We also provide facilities management services to the Mohegan Sun Casino racebook. o TELECOMMUNICATIONS PRODUCTS GROUP (8% of Pro-forma Revenues). In Europe we are a leading manufacturer of prepaid scratch-off phone cards, which entitle cellular phone users to a defined value of airtime. In 1999, approximately 47% of all European cellular phone subscribers used prepaid calling services. While less common in the U.S., prepaid phone cards offer consumers worldwide a cost-effective way to purchase cellular airtime while avoiding credit checks, connection fees and contract commitments. We estimate that we have approximately 14% of the fragmented European market for prepaid cellular phone cards and are the largest supplier to Vodafone Limited and Orange Personal Communications, two of Europe's leading cellular companies. To prevent fraud, our phone cards incorporate proprietary security technology originally developed for our lottery ticket operations. We have invested approximately $22.0 million in the past two years in our U.K. operations, to modernize our facilities and increase our annual prepaid phone card manufacturing capacity from 120 million cards in early 1999 to an estimated one billion cards by early 2001. For information concerning the Company's business and geographic segments, see Note 20 to the Consolidated Financial Statements. On December 20, 2000, we determined to change our fiscal year from the year ending October 31 to a calendar year, beginning with the year ending December 31, 2001. This change will result in a two month transition period ending December 31, 2000, with the next fiscal year commencing on January 1, 2001. We expect to file with the SEC a transition report on Form 10-Q covering the transition period from November 1, 2000 to December 31, 2000. 4 INDUSTRY OVERVIEW LOTTERY MARKET. Lotteries are operated by domestic and foreign governmental authorities and their licensees in approximately 200 jurisdictions throughout the world. Currently, 39 jurisdictions in the United States sell instant and on-line lottery tickets. Governments typically authorize lotteries as a means of generating revenues without the imposition of additional taxes. Lottery revenues are frequently set aside for particular public purposes, such as education, aid to the elderly, conservation, transportation and economic development. As lottery ticket sales have become a significant source of funding for such programs, many jurisdictions have come to rely on the revenues generated by such sales. Although there are many types of lottery games worldwide, governmentally authorized lotteries may generally be categorized into three principal groups: instant lotteries, on-line lotteries and the traditional draw-type lotteries. An instant ticket lottery is typically played by removing a coating from a preprinted ticket to determine whether it is a winner. On-line lotteries, such as Powerball, are based on a random selection of a series of numbers selected by the player. On-line lotteries are generally pari-mutuel in nature in that the prize is based on Handle and the number of winners who share the prize pool, comprised of Handle less a predefined commission (although fixed prizes are also offered). On-line lotteries are conducted through a computerized lottery system in which lottery terminals are connected to a central computer, usually by dedicated telephone lines. On-line lottery systems may also be used to validate instant tickets to confirm large prize levels and prevent duplicate payments, or separate instant ticket validation systems may be installed. Internationally, the older form of traditional draw-type lottery games, in which players purchase tickets which are manually processed for a future drawing for prizes of a fixed amount, is a popular form of play. In addition, lotteries may offer keno, video lottery, sports and other lottery games. Quick draw keno is typically played every 5 minutes in restricted social settings such as bars and is usually offered as an extension of on-line lottery systems. There are video lotteries played on video lottery terminals ("VLTs") featuring "line-up" and card games, typically targeted to locations such as horse and dog racing tracks, athletic arenas, certain bars, clubs and similar establishments. Video lotteries generally use a system different from an on-line system for accounting, security and control of VLTs. In addition, in Oregon, several provinces in Canada and several countries outside the U.S., lotteries offer pari-mutuel or fixed odds wagers on various sports. Instant and on-line lottery retail sales comprise 92.7% of the U.S. market for lotteries. Based on industry information, it is estimated that 1999 U.S. and international on-line lottery retail sales totaled approximately $19.0 billion and $56.6 billion, respectively, and 1999 U.S. and international instant ticket lottery sales totaled approximately $14.8 billion and $27.5 billion, respectively. The U.S. instant ticket market grew at a compound annual growth rate of 8.2% from 1994 to 1999. Industry data indicates that instant ticket retail sales have been growing faster than on-line games because of "instant" rewards, marketing promotions and game interactivity compared to the delayed rewards of on-line games with periodic or weekly drawings. PARI-MUTUEL MARKET. Pari-mutuel wagering is currently authorized in 43 states in the United States, Puerto Rico, all provinces in Canada and approximately 100 other countries around the world. We estimate that total worldwide Handle in the pari-mutuel business was approximately $116.0 billion in 1999. According to the most recent industry statistics, pari-mutuel thoroughbred wagering Handle in the United States grew from $9.9 billion in 1994 to $13.7 billion in 1999, a compound annual growth rate of 6.7%. Similar to on-line lotteries, pari-mutuel wagering patrons place specific types of wagers (e.g., on a specified horse to win) and a patron's winnings are "pari-mutuelly" determined based on dividing the total Handle wagered, less a set commission, among the winners. Wagering is generally conducted at horse racetracks, greyhound dog races, jai alai frontons and OTBs. Licenses to conduct races and/or offer pari-mutuel wagering are granted by governments to private enterprises, non-profit racing associations and occasionally government organizations including lotteries. The increases in remote Handle (i.e. Handle generated where customers place wagers on location at one racetrack or OTB on races held at another racetrack) have more than offset declines in live Handle (i.e., Handle at the race or event itself). Remote wagering has increased its share of total Handle from 15% in 1986 to 83% of the U.S. thoroughbred pari-mutuel racing industry Handle in 1999. The dollar volume of remote wagering in North America on thoroughbred racing has grown from $5.4 billion in 1993 to $11.8 billion in 1999, a compound annual growth rate of nearly 13.5%. A number of factors have led to this increase, including simulcasting of live races on private satellite video networks, public broadcasting and Internet video streaming, changes in pari-mutuel wagering regulations enabling simulcasting and the expansion of distribution channels including wagering at OTBs and by 5 telephone and other interactive devices including personal computers. Remote wagering has resulted in increased Handle by facilitating virtually around the clock wagering availability, year-round racing events upon which to wager (previously impracticable because of the seasonal nature of regional racing activity) as well as the consolidation of "live" racing. PREPAID PHONE CARDS MARKET. Prepaid phone cards offer consumers convenient and less expensive cellular airtime purchases without credit checks, connection fees or contract commitments. While less common in the U.S., prepaid phone cards offer consumers worldwide a cost-effective way to purchase cellular airtime while avoiding credit checks, connection fees and contract commitments. OPERATIONAL OVERVIEW LOTTERY GROUP Our Lottery Group provides two product lines: Instant Tickets and Related Services ("ITRS") and Lottery Systems. Our Cooperative Services Program is the branded marketing name we have given to the combination of any of the products and services offered by both the Instant Ticket and Related Services and the Lottery Systems product lines when bundled under one customer contract. INSTANT TICKETS AND RELATED SERVICES. We are a leading provider of game design, instant ticket manufacturing and the associated logistics and marketing of instant tickets. We market instant tickets and related services to domestic lottery jurisdictions, foreign lottery jurisdictions and commercial customers. We presently have contracts with 26 of the 39 jurisdictions in the U.S. which currently sell instant lottery tickets. These U.S. Instant Ticket and Related Services contracts typically pay us a fixed price per thousand tickets or a percentage of lottery sales to the public and typically range from one to five years in duration, although they usually include one or more extension options which our customers generally exercise. Our U.S. based customers have typically exercised these extension options. In addition, we have instant lottery customers in over 50 countries internationally. In most international markets, lotteries typically purchase tickets and systems in an unbundled fashion. Of the approximately 8.4 billion instant tickets (12.3 billion 2x4 equivalent card size) we sold in 1999, approximately 20% were sold outside the United States. Some international customers purchase instant tickets as needed rather than through supply contracts. Central computer systems, terminals and associated software are typically purchased in the U.S. through facilities management contracts and internationally through outright sales, often from different vendors. In 1974, we introduced the first secure instant game ticket. Today, the instant tickets we manufacture are typically printed on recyclable ticket stock by a series of computer controlled presses and ink-jet imagers, which we believe incorporate the most advanced technology and security currently available in the industry. Instant tickets generally range in size from 2 inches by 3 inches to ticket sizes as large as some greeting cards; instant tickets are normally played by removing a coating to determine if they are winning tickets. The increased application of computer-based and communications technologies (including proprietary technologies) to the manufacturing and servicing of instant tickets continues to separate the instant ticket from conventional forms of printing. We are generally recognized within the lottery industry as the leader in applying these technologies to the manufacturing and sale of instant tickets. In order to maintain our position as a leading innovator within the lottery industry, we intend to continue to explore and develop new technologies and their application to instant lottery tickets and systems. However, we also expect continued price-based competition in the instant ticket segment. We also manufacture instant tickets for promotional games and sell pull-tab tickets to our lottery customers through a marketing agreement with International Gamco, Inc. In addition, we pioneered the idea of privatizing lottery functions, branded as the Cooperative Services Program, as a means of reducing the operating costs of lotteries while increasing lottery revenues and are the only instant ticket manufacturer which offers separate lottery ticket cooperative support services to supplement its manufacturing operations. Cooperative service contracts bundle instant tickets, systems facilities management and/or other cooperative services, including designing and installing game management software, telemarketing, field sales, accounting, instant ticket distribution, sales staff training, estimating ticket needs, managing staff, advising with respect to security, maintenance, communication network and sales agent hot-line service for lottery jurisdictions. While the majority of lottery jurisdictions to date have chosen to control the distribution and sales of tickets, we have been successful in demonstrating to a number of jurisdictions that we can perform these functions 6 effectively and at a low cost. We expect that more state or foreign governments will decide to privatize or outsource various lottery operations. We have significant experience in these services for lotteries and pari-mutuel operations and are well-positioned to offer this privatization or outsourcing option to lotteries. We now have contracts for expanded or cooperative services with the states of Delaware, Florida, Georgia, Kentucky, Maine, Nebraska, New York, and Pennsylvania. Under such contracts, we are paid a percentage of the lottery's total instant ticket revenues. Customers select those services which they desire to privatize from a menu of cooperative services offered. Replacement of these agreements may be associated with large conversion costs incurred by the lottery to hire and/or retrain staff and redesign and install a software system and other protocols to manage its instant ticket business. LOTTERY SYSTEMS. We are a leading provider of sophisticated, customized computer software, equipment and data communication services to government-sponsored and privately operated lotteries in the United States and internationally. This business includes the sale of on-line systems, instant ticket validation systems and terminals. Our lottery systems utilize proprietary technology that is similar to that used for pari-mutuel wagering, but is specialized for lottery operations. Our systems facilitate high speed processing of on-line wagers as well as validation of winning on-line and instant play tickets, including probability tickets. Our lottery business includes the supply of transaction processing software that accommodates instant ticket accounting and validation and on-line lottery games, point-of-sale terminal hardware which connects to these systems, central site computers and communication hardware which run these systems, and on-going operation support and maintenance services. We also provide software, hardware and support for sports betting and credit card processing systems for non-lottery customers. In the U.S., we currently provide on-line systems and services to the Connecticut, Montana, Vermont and New Hampshire state lotteries. We also provide instant ticket validation systems to Nebraska, Maine, New York, Missouri and Kentucky. Virginia leased our SciScan Technology(R) terminals, including ongoing technical support. Recent on-line lottery system procurements have requested the capability to support the secure validation of probability tickets and we have both bid our on-line systems with SciScan Technology's(R) terminals and bid SciScan Technology's(R) terminals through other on-line lottery system providers. Internationally, we have systems in France, The Netherlands, Switzerland, Spain, Greece, Australia, Canada, Mexico, nine states in Germany and other countries, and provide on-line system facilities management services to nationwide lotteries in Barbados and the Dominican Republic. We have recently been selected to provide on-line services to Iowa, Maine and Jamaica lotteries and to provide an on-line lottery central system to the British Columbia lottery. We also sell standalone terminals for lottery applications. This includes the EXTREMA(TM) on-line lottery terminals and our SciScan Technology(R) terminals. Our EXTREMA(TM) on-line terminals utilize a standard PC architecture, graphical interface touch screens for teller input without a keyboard and high speed thermal printers. Beginning in the fourth quarter of 1998 and throughout fiscal 1999, we shipped approximately 12,500 terminals to Sisal Sport Italia S.p.A. pursuant to a contract to deliver a total of 20,000 EXTREMA(TM) lottery terminals by August 2000. SciScan Technologys(R) is a keyless validation system for retailers which significantly reduces the time required for ticket validation while at the same time improving security of the game. SciScan Technologys(R) terminals can be operated standalone or attached to an on-line lottery terminal to validate traditional instant tickets utilizing optical bar code technology, or our proprietary Winner's Choice(TM) probability tickets. Through our joint venture agreement with La Francaise des Jeux, the operator of the French National Lottery, we are developing a new generation of integrated on-line terminals with SciScan Technologys(R). 7 UNITED STATES LOTTERY CONTRACTS The table below lists the United States lottery contracts for which we had executed agreements as of January 26, 2001 and certain information with respect thereto. We are the primary provider of systems and services unless otherwise noted. The table also includes 1999 instant ticket or on-line retail sales, as applicable, for each state or district.
1999 INSTANT TICKET/ ON-LINE RETAIL COMMENCEMENT EXPIRATION DATE SALES DATE OF OF (DOLLARS CURRENT CURRENT CURRENT RENEWAL TYPE OF STATE/DISTRICT IN MILLIONS) CONTRACT CONTRACT OPTIONS REMAINING CONTRACT - ------------------------------------------------------------------------------------------------------------- Arizona........ $125.0 January 1998 January 2001 2 one-year ITRS Colorado....... 240.4 July 2000 June 2004 1 one-year ITRS Connecticut.... 503.3 August 1998 August 2001 1 one-year ITRS Connecticut.... 326.9 May 1998 May 2003 5 one-year On-line Delaware....... 19.7 November 2000 November 2001 3 one-year ITRS District of Columbia..... 31.5 May 1996 May 2001 none ITRS Florida........ 664.6 April 1997 September 2002 none ITRS Georgia........ 900.7 May 1993 June 2003 none ITRS Idaho.......... 56.9 October 1999 October 2001 2 one-year ITRS (1) Iowa........... 93.1 January 2001 June 2008 3 one-year on-line Illinois....... 549.4 July 1996 June 2001 1 one-year ITRS Indiana........ 337.1 December 1997 December 2001 none ITRS Kentucky....... 252.4 October 1997 September 2002 none ITRS and Systems Maine (4)...... 39.0 July 2001 June 2007 2 two-year ITRS and On-line Maine.......... 107.7 July 1990 June 2001 none ITRS and Systems Massachusetts.. 2,305.4 August 1999 August 2001 3 one-year ITRS Minnesota...... 280.0 February 2000 January 2002 3 one-year ITRS (1) Missouri....... 259.6 July 1993 June 2001 none ITRS Montana........ 19.6 March 1999 May 2006 none On-line Nebraska....... 36.1 July 1993 June 2001 none ITRS and Systems New Hampshire.. 62.8 July 2000 June 2006 2 two-year On-line New Jersey..... 547.1 November 1996 October 2001 none ITRS New Mexico..... 58.2 March 1997 March 2001 2 one-year ITRS (1) New York(3).... 937.5 July 1996 July 2001 none ITRS New York(3).... 2,634.0 January 2000 March 2002 none ITRS and Systems Oregon......... 143.7 June 1998 June 2001 3 one-year ITRS (1) Pennsylvania... 457.0 April 1997 April 2002 5 one-year ITRS Rhode Island... 59.5 April 1998 April 2001 2 one-year ITRS (1) South Dakota... 13.1 June 2000 June 2003 2 one-year ITRS Texas.......... 1,426.0 September 1999 September 2002 none ITRS Vermont........ 13.7 July 2000 June 2006 2 two-year On-line Virginia....... 576.7 January 1997 July 2002 1 three- or five-year Systems(2) Washington..... 261.3 March 2000 March 2003 3 one-year ITRS W. Virginia.... 77.0 June 2000 June 2003 2 one-year ITRS
(1) Secondary supplier (2) Support of previously sold lottery system; fee not based on Handle (3) There are separate contracts for the supply of instant tickets and the supply of warehousing, distribution, telemarketing and systems. (4) Contract awarded but not executed. ITRS = Instant Ticket and Related Services Systems = Instant ticket validation systems 8 PARI-MUTUEL GROUP We are the leading worldwide supplier of technologically advanced computerized wagering systems and related equipment. We also provide simulcasting and telecommunications services, video gaming terminals and telephone and Internet account wagering. NORTH AMERICAN PARI-MUTUEL OPERATIONS. We processed approximately 65% of the estimated $20 billion of pari-mutuel wagering Handle in North America during 1999, and have benefited from the growth in remote wagering over the past ten years in the markets we serve. Based on Handle, our customers include 10 of the 15 largest thoroughbred racetracks in North America and 10 of the 12 largest North American OTB networks, among the more than 800 OTBs we service. We typically provide, install and maintain the necessary pari-mutuel systems and equipment for our customers. The pari-mutuel wagering systems we provide in North America typically include the terminals that issue the wagering tickets, the central processing unit which calculates the betting odds of a particular event and tabulates and accounts for the Handle, the display board which indicates the betting odds of a particular event and the communication equipment necessary for additional wagering from sources outside the wagering facility. These systems utilize high volume, real-time transaction and data processing networks managed by central computers, communications equipment, special purpose microcomputer-based terminals, peripheral and display equipment and operations and applications software. The type of central processing unit and the number of ticket-issuing terminals used in a system are generally determined by physical layout and amount of wagering at, each facility. We also provide additional software and other support functions. In recent years, we have focused on the creation of regional networks of large and medium sized racetracks and OTB networks, rather than single facilities at smaller racetracks. These networks allow achievement of economies of scale by centralizing our computer system operations into hubs. Additionally, when linked to our other regional and national pari-mutuel wagering networks, these networks provide our customers with access to new markets and revenue sources by increasing the number and variety of wagering opportunities that customers can offer to their patrons. We believe our established wagering networks will give us a competitive advantage in renewing existing contracts and winning new contracts in regions where such networks exist because of our ability to offer customers greater services more efficiently than our competitors. We currently operate regional pari-mutuel wagering networks in California, Connecticut, Florida, Illinois, New Jersey, New York, Oregon, Pennsylvania, Texas, Washington, West Virginia, Puerto Rico, British Columbia and Ontario. Our pari-mutuel wagering system contracts typically run five years and contain certain warranties regarding implementation, operation, performance, and reliability of our wagering systems relating to, among other things, data accuracy, repairs and validation procedures. The particulars of our warranties vary from contract to contract, depending on the outcome of negotiations. We also provide the operations, maintenance and supervisory personnel necessary to operate the pari-mutuel wagering system. We maintain ownership of the pari-mutuel wagering systems, which enables us to employ such equipment in more than one racetrack at different times during the year if a given customer does not operate wagering all year long. We typically receive revenue for our services in North America as a varying percentage of Handle, generally ranging up to approximately 0.55% of the Handle on a particular event (with a weighted average of approximately 0.31% of the Handle), subject, in many instances, to minimum fees which are usually exceeded under normal operating conditions. Minimum fees under our service contracts are generally based on the number of days the facility operates, as well as other factors, including the type of system and number of terminals installed at the facility. In addition to the Handle-based fees and minimums, fees for extra equipment and services may be charged, particularly for new terminal models and equipment levels which exceed those originally contracted. As part of our Handle-based fees, we may also receive an "interface fee" of 0.125% of Handle for combining these wagers into the "combined pools" of host tracks that we operate. This interface fee is collected from all tracks and OTBs that bet into host tracks, regardless whether we or another vendor provides wagering services for on-track wagering. We hold contracts with most of the U.S.'s premier thoroughbred venues which typically attract the greatest levels of simulcast and remote wagering, and therefore generate the highest interface revenues. INTERNATIONAL PARI-MUTUEL OPERATIONS. In Europe, we provide and operate pari-mutuel wagering systems at all of the racetracks in Germany, Ireland, The Netherlands, Turkey and Austria, as well as all of the OTBs in The 9 Netherlands and Germany. In France, we provide these systems and services to approximately 30% of the racetracks in the provinces. Our high volume, real-time data processing systems are comparable to those deployed in North America, and include computer software, ticket terminals, a central processing unit, display boards and communication equipment. Our European services are provided under long-term contracts of five to ten years. In Germany, we have been providing pari-mutuel wagering systems and services to the nine major harness racetracks since 1994, and simulcasting services since January 1998. In September 1999, we began providing both pari-mutuel and simulcasting services to the 16 major thoroughbred racetracks, approximately 50 OTBs and approximately 120 bookmaker shops as a result of our acquisition of selected pari-mutuel assets of Datasport Toto Dienstleistung GmbH & Co KG. In April 1999 we sold a pari-mutuel wagering system and began to provide ongoing maintenance and operating services for the next 10 years to Tote Ireland Ltd., a wholly-owned subsidiary of the Irish Horseracing Authority. In Turkey, we have been providing a pari-mutuel system and associated maintenance services since 1995 for five racetracks and approximately 1,250 OTBs. In other international markets, we generally sell, deliver and install pari-mutuel wagering systems in racetracks and OTBs rather than operating them pursuant to service contracts. We have sold systems in approximately 25 countries. Each of these systems is customized to meet the unique needs of each customer, including game designs, regulatory requirements, language preferences, network communication standards and other key elements. The sale of a pari-mutuel wagering system includes a license for use of our proprietary system software, as well as installation, training, technical assistance, support, accessories and limited spare parts. OTHER PARI-MUTUEL OPERATIONS: o SIMULCASTING. We are one of the leading providers of simulcasts of live horse and greyhound racing and jai alai events to racing facilities, OTBs and casinos in North America and Europe. We simulcast racing events from over 60 racetracks and jai alai frontons to more than 200 racetracks and more than 1,100 OTBs throughout North America. We provide similar services in Europe, particularly in The Netherlands and Germany, where we service all 29 racetracks and more than 250 OTBs and bookmaker shops. In general, we receive a daily event fee from the racetracks for up-linking the video and audio signals and a monthly fee from racetracks, OTBs and casinos for the use of our decoders which are needed to unscramble the simulcast transmission. In addition, we sell any excess satellite transponder capacity to other users of satellite communications outside the racing industry, generally for short periods, but, from time to time, under long-term contracts. o NASRIN(TM). In conjunction with our 70% interest in a joint venture with Churchill Downs, we operate a national voice/data telecommunications network, known as the North American Simulcast Racing Information Network ("NASRIN(TM)"), that serves more than 50 racetracks. In 1997, Autotote was selected by the Thoroughbred Racing Association to implement this telecommunication system in partnership with AT&T, our primary telecommunications service provider. The system is designed to link all racing and simulcasting locations in North America and to be a platform for future technology developments. Built around AT&T's international frame relay network, NASRIN(TM) securely transmits betting data at a fraction of the cost previously paid by the racetracks and other facilities, allowing racetracks and OTBs to expand their simulcast wagering opportunities. In exchange for our services, we are paid certain fees based on bandwidth and level of service. o VIDEO GAMING MACHINES. We have developed a proprietary line of progressive video gaming machines for use at racetracks in North America, which combine full gaming functionality, such as video poker, blackjack, simulated spinning reels and keno, with full race betting functionality, including picture-in-picture capabilities. As a result, our video gaming machines allow patrons to wager on horse races and watch simulcasted races or other televised programs on a picture-in-picture video window, while continuing to wager on selected video games. We typically collect a flat fee per terminal plus fees for software upgrades and maintenance. VENUE MANAGEMENT GROUP Subject to certain licensing and operational requirements, we own and have the right to operate in perpetuity substantially all off-track pari-mutuel wagering in Connecticut. Our operations include 12 stand-alone OTBs state- 10 wide, including two simulcasting teletheaters and three simulcasting raceview centers, and telephone account wagering to customers in 31 states. We are also the exclusive licensed operator for all pari-mutuel wagering in The Netherlands, with five racetracks and 39 OTBs under a contract whose initial term continues through June 2003. In addition, we are a 50% participant in a joint venture to operate up to 2,500 OTBs in Germany. Our revenues are based on a percentage of the Handle wagered at our OTB venues, which ranges from 20% to 32%. We also provide facilities management services to the Mohegan Sun Casino racebook. In Connecticut, approximately $214.0 million was wagered in fiscal 1999 on more than 60 U.S. based thoroughbred, harness and greyhound racetracks and jai alai frontons at or through our facilities. Since we commenced operations in 1993, we have implemented several important product and service enhancements, including expanded simulcasting from across the country, common-pool wagering, seven day per week operations at nine locations and expanded telephone betting. In addition, our teletheaters and raceview centers feature large screen televisions and numerous other televisions throughout the facility to enhance the customer's entertainment experience. In September 1998, we began providing an extension of our OTB services, including pari-mutuel wagering and simulcasting services, to the Mohegan Tribal Gaming Authority for its new racebook located at the Mohegan Sun Casino in Uncasville, Connecticut under a seven-year agreement. We believe this racebook is a state-of-the-art facility which incorporates the latest wagering technology and the most advanced audio and video simulcasting signals. Since our license permits us to add an additional teletheater location to our operations, we have undertaken to explore new and upgraded site locations around the state. Our revenues are based on an allowed percentage of Handle wagered through the Connecticut OTB. The percentage of the total Handle, or commission, which we may receive is determined by the track where the event is held and varies by type of wager. Our weighted average commission, based on Handle is approximately 22%. In July 1998, we acquired the rights to and began operating, all on-track and off-track pari-mutuel wagering in The Netherlands under a license granted by the Dutch Ministry of Agriculture which extends through June 30, 2003. We received additional license approvals to allow us to modernize and expand pari-mutuel wagering in The Netherlands. These approvals allow us to open up to 10 teletheaters, increase the number of OTBs, expand into arcade shops, implement interactive account wagering, and expand national and international simulcasting of racing. In fiscal 1999, approximately $42 million was wagered in The Netherlands primarily on racing from The Netherlands, UK, and Germany. This is the first year since 1991 that Handle in The Netherlands has increased over the previous year. This improvement was possible because, in fiscal 1999, we provided simulcasting of Dutch racing to all of the OTBs throughout the entire year, and, in August 1999, we added simulcasting of French racing. We currently operate 33 OTB locations countrywide, including three sports cafes, and four on-track OTBs, as well as four on-track wagering systems. Our weighted average commission, based on Handle, for our Dutch operations is approximately 32%. TELECOMMUNICATIONS PRODUCTS GROUP In Europe we are a leading manufacturer of prepaid scratch-off phone cards, which entitle cellular phone users to a defined value of airtime. In 1999, approximately 47% of all European cellular phone subscribers used prepaid calling services. While less common in the U.S., prepaid phone cards offer consumers worldwide a cost-effective way to purchase cellular airtime while avoiding credit checks, connection fees and contract commitments. We estimate that we have approximately 14% of the fragmented European market for prepaid cellular phone cards and are the largest supplier to Vodafone Limited and Orange Personal Communications, two of Europe's leading cellular companies. To prevent fraud, our phone cards incorporate proprietary security technology originally developed for our lottery ticket operations. We have invested approximately $22 million in our U.K. operations in the past two years to modernize our facilities and increase our annual prepaid phone card manufacturing capacity from 120 million cards in early 1999 to an estimated one billion cards by early 2001. 11 SEASONALITY The first quarter of our fiscal year and a portion of our second fiscal quarter traditionally comprise the weakest season for pari-mutuel wagering service revenue. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions which do not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition, instant ticket and prepaid phone card sales may vary depending on the size and timing of contract awards, changes in customer budgets, inventory ticket position, lottery retail sales and general economic conditions. CONTRACT PROCUREMENT LOTTERY GROUP Government operated lotteries in the United States typically operate under state mandated public procurement regulations. Lotteries select an instant ticket or on-line supplier by issuing a Request for Proposal ("RFP") which outlines contractual obligations as well as products and services to be delivered. An evaluation committee frequently comprised of key lottery staff evaluates responses based on various criteria. These criteria usually include quality of product, security plan and features, experience in the industry, quality of personnel and services to be delivered and price. We believe that our product functionality, the quality of our personnel, our technical expertise and our manufacturing efficiency give us many advantages relative to the competition when responding to state lottery RFPs. However, many lotteries still award the contract to the qualified vendor with the lowest price, regardless of factors other than price. Contract awards by lottery authorities in the United States are sometimes challenged by unsuccessful competitors which can result in protracted legal proceedings. Internationally, lottery authorities do not always utilize such a formal bidding process, but rather negotiate with one or more potential vendors. Our contracts periodically expire and/or reach optional extension dates. Upon the expiration of a contract (including any extensions thereof), lottery authorities may award new contracts through the competitive procurement process described above. There can be no assurance that our current contracts will be extended or that we will be awarded new contracts as a result of competitive procurement processes in the future. Lottery contracts typically permit a lottery authority to terminate the contract at any time for failure to perform and other specified reasons, and many of such contracts permit the lottery authority to terminate the contract at will without penalty. Depending upon, among other factors, the amount of revenue derived thereunder, the termination, expiration or failure to renew one or more instant lottery contracts could have a material adverse effect on our results of operation, business or prospects. U.S. instant ticket lottery contracts typically have an initial term of from one to five years and usually provide the customer with options to extend the contract one or more times under the same or mutually agreeable terms and conditions for additional periods generally ranging from one to five years. The average term of a U.S. systems contract is five to ten years, with additional extension options, which limits the number of contracts available for bidding in any given year. PARI-MUTUEL GROUP Contract awards by owners of horse and greyhound racetracks, OTBs and casinos and jai alai frontons, and from state and foreign governments, often involve a lengthy competitive bid process, spanning from specification development to contract negotiation and award. Our contracts for the provision of pari-mutuel services in North America are typically for terms of five years. We have historically been successful in renewing our largest contracts as they have come due for renewal. However, there can be no assurance that we will continue to be able to renew our pari-mutuel systems contracts with our largest customers or our lottery contracts or our other major agreements. If we are unable to renew these contracts, there would be a material adverse effect on us. VENUE MANAGEMENT GROUP Subject to certain licensing and operational requirements, we own and have the right to operate in perpetuity substantially all off-track pari-mutuel wagering in Connecticut. Our license to provide on-track and off-track services in The Netherlands expires in the year 2003. New venue management opportunities generally occur via the privatization of existing government operated OTBs, as in the case of Connecticut and The Netherlands, the acquisition or outsourcing of an existing private racetrack or OTB operations, or new legislation or regulation 12 enabling new distribution channels. These opportunities occur infrequently and may be subject to public procurement bidding requirements. TELECOMMUNICATIONS PRODUCTS GROUP We have contracts with customers representing approximately 25% of our telecommunications products revenues. The remaining customers issue purchase orders with agreed upon terms and conditions. In addition, certain customer purchase orders contain numerous orders for varying periods of time. RESEARCH AND PRODUCT DEVELOPMENT We believe that our ability to attract new lottery and wagering system customers and retain existing customers depends in part on our ability to continue to incorporate technological advances into, and to improve, our systems and related equipment. We maintain a development program directed toward systems development as well as toward the improvement and refinement of our present products and the expansion of their uses and applications. Many of our product developments and innovations have quickly become industry standards. INTELLECTUAL PROPERTY Certain technology associated with our pari-mutuel wagering and lottery products is the subject of issued patents and patent applications currently pending with the United States and selected other countries. Most notable are our patents for the secure printing and validation of probability tickets. We have a number of registered trademarks and other common law trademark rights for certain of our products, including Winner's Choice(TM), Terra 2000(R), SciScan Technologys(R), PROBEs(R), EXTREMA(TM), AEGIS(TM), SGI-NET(TM), ECLIPSE(TM), SAMs(R), MAX(TM), TINY TIMs(R) and others. The software and control systems for our wagering systems are also the subject of copyright and/or trade secret laws. We are not aware of any pending claims of infringement or other challenges to our right to use our patents, trademarks or other intellectual property in any of our current businesses in the United States. PRODUCTION PROCESSES; SOURCES AND AVAILABILITY OF COMPONENTS Our instant lottery ticket production process uses a series of dedicated computer-controlled printing presses and ink-jet imagers. We believe that our tickets incorporate the most advanced technology and security methodology available in the industry. Our facilities are designed for efficient, secure production of instant game tickets and support ink-jet image tape generation, printing, packaging and storage of instant game tickets. Our dedicated computer-controlled printing process is specifically designed for producing instant lottery game tickets for governmentally sanctioned lotteries and promotional games as well as prepaid phone cards. Our specialized equipment contributes to the underlying superior manufacturing and product quality. Instant ticket games are delivered finished and ready for distribution by the lottery, or by us in the jurisdictions which are part of an instant ticket contract with cooperative services provided by us. Paper and ink are the principal raw materials consumed in our ticket manufacturing operations. We have a variety of sources for both paper and ink and should, therefore, not be dependent on any particular supplier. Production of our systems and related component products primarily involve the assembly of electronic components into more complex systems and products. We produce our terminal products primarily at our manufacturing facility in Ballymahon, Ireland, or on a limited basis at our Newark, Delaware administration and development facility. Other manufacturing may be contracted out to third-party vendors, as needed. We normally have sufficient lead-time between reaching an agreement to provide a system and the commencement of operations so that we are able to provide the customer with a fully functioning system, customized to meet their requirements. In the event that current suppliers of central processing units were no longer available, we believe we would be able to adapt our application software to run on the then available hardware in time to allow us to meet new contractual obligations, although the price competitiveness of our products might diminish. The lead-time for obtaining most of the electronic components we use is approximately 90 days. We believe that this is consistent with our competitors' lead-times and is also consistent with the needs of our customers. 13 COMPETITION LOTTERY GROUP The instant and on-line lottery businesses are highly competitive, and we face competition from a number of domestic and foreign instant ticket manufacturers, on-line lottery system providers and other competitors. We currently have two primary instant lottery ticket competitors in the U.S.: Pollard Banknote Limited ("Pollard") and Oberthur Gaming Technologies ("OGT", a subsidiary of Group Francois-Charles Oberthur of France). In addition, Creative Games International, Inc. ("Creative Games", a subsidiary of Canadian Bank Note Company, Ltd.) is a competitor in the U.S. We estimate that the retail sales value of our U.S. customer base was approximately 68% of total U.S. instant ticket retail sales in 1999--approximately twice as large as our next largest competitor. Except as permitted by the applicable provisions of the North American Free Trade Act with respect to Canada and Mexico, it is currently illegal to import lottery tickets into the United States from a foreign country. Our business could be adversely affected should additional foreign competitors in Canada or Mexico export their lottery products to the U.S. or should other foreign competitors establish printing facilities in the U.S., Canada or Mexico to supply the U.S. market. Internationally, there are many lottery instant ticket vendors which compete with us including, among others, OGT, Pollard, Creative Games, GPS Honsel and various other vendors. Our principal competitors in the on-line lottery systems business are GTECH Holdings Corporation ("GTECH") (our major competitor in the on-line market with approximately 72% of the U.S. market based on retail sales) and Automated Wagering International Inc. ("AWI"), a subsidiary of Anchor Gaming Inc. GTECH is also our major competitor in the international on-line market with the balance of the market being served by AWI, EssNet AB, International Lottery and Totalizator Systems, Inc. and a few other companies. The market for our products is affected by changing technology, new legislation and evolving industry standards. Our ability to anticipate such changes and to develop and introduce new and enhanced products on a timely basis will be significant factors in our ability to expand, remain competitive, attract new customers and retain existing contracts. There can be no assurance that we will have the financial or other resources to respond to such changes or to develop and introduce new products on a timely basis. PARI-MUTUEL GROUP The market for pari-mutuel wagering systems is also highly competitive. We compete primarily on the basis of design, performance, reliability and pricing of our products as well as customer service. To effectively compete, we expect to make continued investments in product development and/or acquisitions of technology. Our two principal competitors in the North American pari-mutuel wagering systems business are AmTote International, Inc. and Anchor Gaming, Inc., which operates its pari-mutuel wagering systems business through its subsidiary United Tote. Our competition outside of North America is more fragmented, with competition being provided by several international and regional companies. Competition in the video and data simulcasting business is highly fragmented with ourselves and Roberts Communications Network, LLC having achieved among the most significant market shares in North America. Current and future competitors in Internet-based wagering include YouBet.com and TVG. VENUE MANAGEMENT GROUP While we have exclusive licenses for the operation of our Connecticut and Dutch OTB operations, our revenues may be adversely affected by competition for the consumer's wagering dollar. Other pari-mutuel operations compete with us in Connecticut as well as other gaming entertainment including the lottery, two casinos in Connecticut as well as surrounding states and illegal gambling. Any new non-gaming products in a given market may result in increased competition for wagering dollars. Competition for wagers comes from casinos, lotteries and other forms of legal and illegal gambling. In addition, there are other entertainment options for the consumer's recreational time and dollars. TELECOMMUNICATIONS PRODUCTS GROUP 14 The market for prepaid phone cards is highly fragmented but competition comes from other instant ticket lottery printers utilizing similar lottery security and printing technologies, as well as alternative printing and non-printing technologies. In addition, there are alternative technologies such as smart cards or alternative means to provide the funding of telephone services. We are investing in new higher speed and higher capacity printing and packaging technologies that we believe, in combination with our lottery security and logistics expertise, will provide us a competitive advantage in this market. Our competitors in this area include OGT, Schlumberger Limited and Gemplus S.A. REGULATION GENERAL Lotteries, pari-mutuel wagering, sports wagering, and video gaming may be lawfully conducted only in jurisdictions that have enacted enabling legislation. In jurisdictions that currently permit various wagering activities, regulation is extensive and evolving but customarily includes some form of licensing of a company and its subsidiaries. Regulators in those jurisdictions review many facets of an applicant for or holder of a license including, among other items, financial stability, integrity and business experience. We believe that we are currently in substantial compliance with all regulatory requirements in the jurisdictions where we operate. Any failure to receive a material license or the loss of a material license that we currently hold could have a material adverse effect on our overall operations and financial condition. In 1996, the United States Congress passed legislation authorizing a comprehensive study of gaming, including segments of the gaming industry served by us. That study was completed and released in 1999. In part, as a result of this study, legislation further regulating various forms of wagering on the Internet and telephone wagering on pari-mutuel events is pending in the United States Congress. Current legislation before the U.S. Congress known as the Kyl Bill would generally ban Internet wagering except for, subject to any contrary state law, pari-mutuel wagering and intrastate lotteries. Various proposed amendments to the Kyl Bill may impact intrastate Internet lotteries or inter-state pari-mutuel wagering. In December 2000, Congress enacted legislation authorizing patrons to place pari-mutuel wagers, where lawful in each state involved, by "telephone or other electronic media" with off track betting systems in the same or a different state. This legislation may expand the number of jurisdictions from which we and our customers may accept pari-mutuel wagers by phone or the internet and reduce legal uncertainties concerning such wagers. We are unable to predict how this legislation will be interpreted by regulatory authorities, whether other legislation may be enacted that would impose other regulations or restrictions on telephone and Internet wagering operations, and whether such interpretations or legislation, if any, would have a material adverse impact on us. Furthermore, law enforcement in certain jurisdictions have aggressively opposed the expansion of wagering via the Internet and telecommunications facilities through criminal prosecutions and civil actions. While we believe that our current and planned business activities comply with all applicable laws, and we have not been materially challenged, there can be no assurance that that such activities might not be challenged in the future or that such challenges would not have a material adverse impact on us or our business plans. We have developed and implemented an extensive internal compliance program in an effort to assure that we comply with legal requirements imposed in connection with our wagering-related activities, as well as legal requirements generally applicable to all publicly traded corporations. The compliance program is run on a day-to-day basis by a full-time compliance officer, and is overseen by the Compliance Committee authorized by our Board of Directors. While we are firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses. LOTTERY OPERATIONS At the present time, 37 states, the District of Columbia, Puerto Rico, all the Canadian provinces, Mexico and many other foreign countries authorize lotteries. Lottery contracts and ongoing operations of lotteries both domestically and abroad are subject to extensive regulation. Although certain of the features of a lottery, such as the percentage of gross revenues which must be paid back to players in prize money, are usually fixed by legislation, the various lottery regulatory authorities generally exercise significant discretion, including the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed and the selection of the vendors of equipment and services and retailers of lottery products. Furthermore, laws and regulations applicable to lotteries in 15 the United States and foreign jurisdictions are subject to change and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty. To ensure the integrity of the contract award and wagering process, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, the vendor, its subsidiaries and affiliates and its principal shareholders. Background investigations of the vendor's employees who will be directly responsible for the operation of the system are also generally conducted, and most states reserve the right to require the removal of employees whom they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of a company's securities. The failure of beneficial owners of our securities to submit to background checks and provide such disclosure could result in the imposition of penalties upon these beneficial owners and could jeopardize the award of a lottery contract to us or provide grounds for termination of an existing lottery contract. We from time to time retain governmental affairs representatives in various states of the United States to advise legislators and the public concerning our views on lottery legislation, to monitor such legislation and to advise us in our relations with lottery authorities. We also make campaign contributions to various state political parties and state political candidates. We believe we have complied with applicable laws and regulations concerning campaign contributions and lobbying disclosures. The award of lottery contracts and ongoing operations of lotteries in international jurisdictions also are extensively regulated, although this regulation usually varies from that prevailing in the United States. Restrictions are frequently imposed on foreign corporations seeking to do business in such jurisdictions and, as a consequence, we have, in a number of instances, allied ourselves with a local company when seeking foreign lottery contracts. Laws and regulations applicable to lotteries in the United States and foreign jurisdictions are subject to change and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty. PARI-MUTUEL WAGERING Forty-three states, Puerto Rico, all of the Canadian provinces, Mexico and many other foreign countries have authorized pari-mutuel wagering on horse races, and nineteen states and many foreign countries, including Mexico, have authorized pari-mutuel wagering on dog races. In addition, Connecticut, Rhode Island, Nevada, Florida and Mexico also allow pari-mutuel betting on jai alai matches. Companies that manufacture, distribute and operate pari-mutuel wagering systems in these jurisdictions are subject to the regulations of the applicable regulatory authorities there. These authorities generally require a company, as well as its directors, officers, certain employees and holders of 5% or more of the company's common stock, to obtain various licenses, permits and approvals. Regulatory authorities may also conduct background investigations of the company and its key personnel and stockholders in order to ensure the integrity of the wagering system. These authorities have the power to refuse, revoke or restrict a license for any cause they deem reasonable. The loss of a license in one jurisdiction may cause the company's licensing status to come under review in other jurisdictions as well. In order for our subsidiary to provide pari-mutuel wagering equipment and/or services to certain casinos located in Atlantic City, New Jersey, it must be licensed by the New Jersey Casino Control Commission ("New Jersey Commission") as a gaming related casino service industry and by the New Jersey Racing Commission in accordance with the New Jersey Casino Control Act ("Casino Control Act"). An applicant for a gaming related casino service industry license is required to establish, by clear and convincing evidence, financial stability, integrity and responsibility; good character, honesty and integrity; and sufficient business ability and experience to conduct a successful operation. We must also qualify under the standards of the Casino Control Act. We and our subsidiary may also be required to produce such information, documentation and assurances as required by the regulators to establish the integrity of all our directors, officers and financial backers, who may be required to seek qualification or waiver of qualification. For casino holding companies, the New Jersey Commission traditionally has waived the qualification requirement for non-institutional investors holding less than 15% of a debt issue and for institutional investors holding less than 50% of a debt issue and less than 20% of the issuer's overall debt. The New Jersey Commission has broad discretion in licensing matters and may at any time condition a license or suspend or revoke a license or impose fines upon a finding of disqualification or non-compliance. The New Jersey 16 Commission may require that persons holding five percent or more of our Class A Common Stock qualify under the Casino Control Act. Under the Casino Control Act, a security holder is rebuttably presumed to control a publicly traded corporation if the holder owns at least five percent of the corporation's equity securities; however, for passive institutional investors, qualification is generally not required for a position of less than 10%, and upon a showing of good cause, qualification may be excused for a position of 10% or more. Failure to qualify could jeopardize our license. In addition, the New Jersey Racing Commission also licenses our subsidiary and retains concurrent regulatory oversight over this subsidiary with the New Jersey Commission. As a consequence of the sale of our new convertible preferred stock, the Casino Control Act required our subsidiary that held a casino service industry license to relinquish said license upon the closing of that sale and apply anew for licensure. We obtained preliminary approval from the New Jersey Racing Commission and a transactional waiver from the New Jersey Commission that allows us to continue providing services to Atlantic City casinos pending investigation of the new application that we filed and until our subsidiary is relicensed and our directors, officers and certain security holders are qualified. The prospective purchasers of the convertible preferred stock and certain of their directors and officers will be required to seek qualification, and to seek waiver of qualification, of their directors, officers and shareholders. We believe that all the foregoing actions will be satisfactorily concluded in due course. However, there can be no assurance that this will be the case, and our failure to obtain any of the foregoing approvals could have a material adverse effect on us or our business plans. Our rights to operate the Connecticut OTB system are conditioned on our continuing to hold all licenses required for the operation of the system. In addition, our officers and directors and certain other employees must be licensed. Licensees are generally required to submit to background investigations and provide required disclosures. The Division of Special Revenue of the State of Connecticut (the "Division") may revoke the license to operate the system under certain circumstances, including a false statement in the licensing disclosure materials, a transfer of ownership of the licensed entity without Division approval and failure to meet financial obligations. The approval of the Connecticut regulatory authorities is required before any off-track betting facility is closed or relocated or any new branch or simulcast facility is established. Our telephone wagering operations, based in Connecticut, are subject to the Division's regulation. Legislation recently enacted by Congress may subject these operations to regulation by states in which patrons are located when they call the telephone wagering operation. We are unable to predict whether and how such legislation will effect telephone wagering operations conducted by us and our customers. We have begun to expand the market for our "business-to-consumer" On the Wire(TM) account wagering business through our Connecticut OTB from 13 states to over 30. While in the past and at present we have been the subject of enforcement proceedings instituted by one or more regulatory bodies, we have been able to consensually resolve any such proceedings upon the implementation of remedial measures and/or the payment of settlements or monetary fines to such bodies. We do not believe that any of these proceedings, past or pending, will have a material adverse effect on us. However, there can be no assurance that similar proceedings in the future will be similarly resolved, or that such proceedings will not have a material adverse impact on our ability to retain and renew existing licenses or to obtain new licenses in other jurisdictions. VIDEO GAMING Coin or voucher operated gambling devices offering electronic, video versions of spinning reels, poker, blackjack and similar games are known as VGMs or video lottery terminals ("VLTs"), depending on the jurisdiction. These devices represent a growing area in the wagering industry. We or our subsidiaries manufacture and supply terminals and wagering systems designed for use as VGMs or VLTs. Twenty-four states and Puerto Rico authorize wagering on VGMs or VLTs at casinos, riverboats, racetracks and/or other licensed facilities. Although some states, such as Rhode Island and West Virginia, currently restrict VGMs or VLTs to already existing wagering facilities, others permit these devices to be placed at bars and restaurants as well. Several Indian tribes throughout the United States are also authorized to operate these devices on reservation lands. In addition, all of the Canadian provinces and various foreign countries have authorized their use. From time to time, government officials in other states are considering proposals to legalize or expand video gaming, or video lottery in their states. Many legislators have been enthusiastic about the potential of video gaming to raise significant additional revenues. Some officials, however, are reluctant to expand gaming industry opportunities or have expressed a desire to limit video gaming to established wagering facilities if video gaming is authorized in their jurisdiction at all. 17 Companies that manufacture, sell or distribute VGMs or VLTs are subject to various provincial, state, county and municipal laws and regulations. The primary purposes of these rules are (i) to ensure the responsibility, financial stability and character of equipment manufacturers and their key personnel and stockholders through licensing requirements, (ii) to ensure the integrity and randomness of the machines, and (iii) to prohibit the use of VGMs or VLTs at unauthorized locations or for the benefit of undesirable individuals or entities. The regulations governing VGMs and VLTs generally resemble the pari-mutuel and sports wagering regulations in all the basic elements described above. However, every jurisdiction has differing terminal design and operational requirements, and terminals generally must be certified by local regulatory authorities before being distributed in any particular jurisdiction. These requirements may require us or our subsidiaries to modify our terminals to some degree in order to achieve certification in particular locales. In addition, the intrastate movement of such devices in a jurisdiction where they will be used by the general public is usually allowed only upon prior notification and/or approval of the relevant regulatory authorities. The West Virginia Lottery Commission has licensed us or our subsidiaries to supply VLTs to authorized pari-mutuel racing facilities in that state in accordance with the Racetrack Video Lottery Act. In Canada, one of our subsidiaries has been granted registration as a casino gaming related supplier by the Alcohol and Gaming Commission of Ontario in accordance with the Gaming Control Act, 1992 of Ontario and the Alberta Gaming and Liquor Commission in accordance with the Gaming and Liquor Act of Alberta. Another subsidiary has been granted interim registration as a gaming related supplier to the Manitoba Lottery Commission by the Manitoba Gaming Control Commission. The gaming laws of Ontario, Alberta and Manitoba primarily deal with the responsibility, honesty, integrity and financial stability of gaming equipment manufacturers, distributors and operators as well as persons financially interested or involved in gaming operations. To ensure the integrity of manufacturers and suppliers of gaming supplies, gaming regulators in Ontario, Alberta and Manitoba have the authority to conduct thorough background investigations of us, our officers, directors, key personnel and significant stockholders who are required to file applications detailing their personal and financial information. The gaming regulators may at any time revoke, suspend, condition or restrict a registration for an appropriate cause as determined under the applicable gaming legislation. We believe that we are in compliance with the terms and conditions of its registrations in Ontario, Alberta and Manitoba. We may apply for all necessary licenses in other jurisdictions that may now or in the future authorize video gaming or video lottery operations. We cannot predict the nature of the regulatory schemes or the terminal requirements that will be adopted in any of these jurisdictions, nor whether we or any of our subsidiaries can obtain any required licenses and equipment certifications or will be found suitable. Federal law also affects our video gaming industry activities. The Federal Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful for any person to manufacture, deliver or receive gambling devices, including VGMs and VLTs, across interstate lines unless that person has first registered with the Attorney General of the United States, or to transport such devices into jurisdictions where their possession is not specifically authorized by state law. The Devices Act permits states to exempt themselves from its prohibition on transportation, and several states that authorize the manufacture or use of such devices within their jurisdictions have done so. Certain of our products, such as the PROBE? XLC terminal, are gaming devices subject to the Devices Act and state laws governing such devices. The Devices Act does not apply to machines designed for pari-mutuel betting at a racetrack, such as our pari-mutuel wagering terminals. We have registered under the Devices Act, and believe that we are substantially in compliance with all of the Devices Act's record-keeping and equipment identification requirements. 18 SIMULCASTING The Federal Communications Commission (the "FCC") regulates the use and transfer of earth station licenses used to operate our domestic simulcasting operations. At present, 43 states, Puerto Rico, all of the Canadian provinces, Mexico and many other foreign countries authorize interstate and/or intrastate pari-mutuel wagering, which may involve the simulcasting of the races in question. Licensing and other regulatory requirements associated with such simulcasting activities are similar to those governing pari-mutuel wagering, and are generally enforced by pari-mutuel regulators. In addition, contracts with host tracks whose races are simulcast by us to other facilities within or outside the jurisdictions in which such races are held may be subject to approval by regulatory authorities in the jurisdictions from and/or to which the races are simulcast. We believe that we are in substantial compliance with applicable regulations and that we, and/or the appropriate third parties, have entered into contracts and obtained the necessary regulatory approvals to lawfully conduct current simulcast operations. NEVADA REGULATORY MATTERS We and certain of our wholly-owned subsidiaries are applicants or will be applicants for certain registrations, approvals, findings of suitability and licenses in the State of Nevada (collectively, the "Applications"). There can be no assurances that the pending Applications by us and our Nevada Operating Subsidiaries will be approved or that if approved, they will be approved on a timely basis or without conditions or limitations. The manufacture, sale and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada, the manufacture and distribution of associated equipment for use in Nevada, the operation of an off-track pari-mutuel wagering system in Nevada, the operation an off-track pari-mutuel sports wagering system in Nevada and the operation of slot machine routes in Nevada are subject to: (i) The Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local ordinances and regulations. Such activities are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and various local, city and county regulatory agencies (collectively referred to as the "Nevada Gaming Authorities"). The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming, or manufacturing or distribution of gaming devices at any time or in any capacity; (ii) the strict regulation of all persons, locations, practices, associations and activities related to the operation of licensed gaming establishments and the manufacture or distribution of gaming devices and equipment; (iii) the establishment and maintenance of responsible accounting practices and procedures; (iv) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent practices; and (vi) to provide a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on our various Applications in the event they are granted. No assurances can be given that the Applications will be granted by the Nevada Gaming Authorities. The grant or denial of the Applications is within the discretion of the Nevada Gaming Authorities. We are an applicant for registration by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and are or will be an applicant to be found suitable to own the stock, both directly and indirectly of various wholly-owned subsidiaries which are or will be applicants for approvals and licensing as a manufacturer, distributor an operator of a slot machine route, an operator of an off-track pari-mutuel wagering system and an operator of an off-track pari-mutuel sports wagering system (our "Nevada Operating Subsidiaries"). As a Registered Corporation, we will be required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information that the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, our Nevada Operating Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. We and our Nevada Operating Subsidiaries have or will apply to the Nevada Gaming Authorities for the various registrations, approvals, permits, findings of suitability and licenses (collectively "Gaming Licenses") in order to engage in manufacturing, distribution, slot route activities, and off-track pari-mutuel wagering systems operations in Nevada. The following regulatory requirements will apply to us and our Nevada Operating Subsidiaries if they are approved and licensed. All gaming devices and cashless wagering 19 systems that are manufactured, sold or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming devices manufactured for use or play in Nevada must be approved by the Nevada Commission before distribution or exposure for play. The approval process for gaming devices includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming device meets strict technical standards that are set forth in the regulations of the Nevada Commission. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, us or our Nevada Operating Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of our Nevada Operating Subsidiaries are required to file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Our officers, directors and key employees who are actively and directly involved in the licensed activities of our Nevada Operating Subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause that they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The entity with which the applicant is employed or for which the applicant serves must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with us or our Nevada Operating Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require us and our Nevada Operating Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. We and our Nevada Operating Subsidiaries will be required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by our Nevada Operating Subsidiaries will be required to be reported to or approved by the Nevada Commission. If we are licensed by the Nevada Gaming Authorities, any (i) guarantees issued by our Nevada Operating Subsidiaries in connection with any financing; (ii) hypothecation of the assets of our Nevada Operating Subsidiaries as security in connection with any financing; and/or (iii) pledges of the equity securities of our Nevada Operating Subsidiaries as security in connection with any financing will require the approval of the Nevada Commission to remain effective. If it were determined that the Nevada Act was violated by us or any of our Nevada Operating Subsidiaries, the licenses we or they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, any of our Nevada Operating Subsidiaries, us and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Limitation, conditioning or suspension of the licenses held by us and our Nevada Operating Subsidiaries could (and revocation of any license would) materially adversely affect our manufacturing, distribution and system operations in Nevada. Any beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability determined as a beneficial holder of our voting securities if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered 20 Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. We will be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us, our Nevada Operating Subsidiaries or we (i) pay that person any dividend or interest upon our voting securities, (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pay remuneration in any form to that person for services rendered or otherwise, or (iv) fail to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair market value. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation if the Nevada Commission has reason to believe that his acquisition of such debt security would otherwise be inconsistent with the declared policy of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. We and our Nevada Operating Subsidiaries will be required to maintain a current stock ledger in Nevada, which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. After becoming a Registered Corporation, we may not make a public offering of our securities without the prior approval of the Nevada Commission if the securities or proceeds from that sale are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. While we are not yet subject to the provisions of the Nevada Act or the regulations of the Nevada Commission, such regulations also provide that any entity that is not an "affiliated company," as such term is defined in the Nevada Act, or which is not otherwise subject to the Nevada Act or such regulations, which plans to make a public offering of securities intending to use such securities, or the proceeds from the sale thereof, for the construction or operation of gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes, may apply to the Nevada Commission for prior approval of such offering. The Nevada Commission may find an applicant unsuitable based solely on the fact that it did not submit such an application, unless upon a written request for a ruling, the Nevada Board Chairman has ruled that it is not necessary to submit an application. The exchange offer to exchange publicly registered notes for the notes offered hereby may constitute such a public offering. In response to our request for a ruling from the Nevada Board Chairman that it is not necessary to submit the exchange offer for the Nevada Commission's prior approval, the Nevada Board Chairman ruled that the exchange offer is not subject to the prior approval requirement. 21 Changes in control of a Registered Corporation through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which gaming operations are to be conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; or (ii) the number of gaming devices operated. Annual fees are also payable to the State of Nevada for renewal of licenses as a manufacturer, distributor, operator of a slot machine route and operator of an off-track pari-mutuel wagering system. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the state of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. APPLICATION OF ADDITIONAL OR FUTURE REGULATORY REQUIREMENTS In the future, we intend to seek the necessary licenses, approvals and findings of suitability for us, our personnel and products in other jurisdictions throughout the world wherever significant sales are anticipated to be made. There can be no assurance, however, that such licenses, approvals or findings of suitability will be obtained or, if obtained, will not be conditioned, suspended or revoked or that we will be able to obtain the necessary approvals for any future products as they are developed. If a license, approval or a finding of suitability is required by a regulatory authority and we fail to obtain the necessary license, we may be prohibited from selling our products for use in the respective jurisdiction or may be required to sell our products through other licensed entities at a reduced profit. 22 SECURITY We recognize that security and integrity are the foundation of successful lottery organizations. As the incidence and severity of publicly reported cases of physical and computer crime continue, major lotteries periodically reassess key security questions concerning the vulnerability of lottery games. Attempts to penetrate security measures may come from various combinations of customers, retailers, vendors, lottery employees and others. Because the integrity of a lottery is believed essential to its successful operation, both the vendor and lottery must guard their systems against unauthorized actions. We are not aware of any practical, economically feasible way to breach the security of our instant lottery tickets or on-line games which could result in a material loss to any of our customers, nor are we aware of any breach thereof which has resulted in any material loss to any of our lottery customers. We constantly assess the adequacy of our security systems, incorporating various improvements, such as bar coding and additional layers of protection in our instant tickets. There must be well-planned security measures in place at every stage of the lottery operation. We have pioneered and effected security safeguards in areas of ticket specifications, production, packaging, delivery, distribution and accounting. Also, computer function safeguards, including secure ticket data, control number encryption, winner file data, and ticket stock control have been incorporated in our data processing and the computer operations phase. We also retain a major public accounting firm to perform agreed upon procedures for each game produced before it is sent to the customer. EMPLOYEES As of October 31, 2000, we employed approximately 2,560 persons. Most of Autotote's North American pari-mutuel employees involved in field operations and repairs are represented by the International Brotherhood of Electrical Workers under two separate contracts, extending through October 2001 and May 2004, respectively. Two of Scientific Games' employee groups are represented by a labor union. SG Austria's employees are represented by a Worker's Council, which is typical in many European companies. At the Leeds and Bradford facilities in the United Kingdom, approximately 328 employees are members of the Graphic Print and Media Union. EXECUTIVE OFFICERS OF THE COMPANY Certain information concerning Autotote Corporation's executive officers is set forth below:
NAME AGE POSITION - ---------------------------------------------------------------------------------------------------- A. Lorne Weil.............54 Chairman of the Board, President and Chief Executive Officer Martin E. Schloss.........54 Vice President, General Counsel and Secretary DeWayne E. Laird..........53 Vice President, Chief Financial Officer and Controller Gerald Lawrence...........61 Executive Vice President William J. Huntley........51 President, Scientific Games Systems Division Cliff O. Bickell..........57 President, Printed Products Division of Scientific Games
Our Executive Officers hold office for an indefinite term, subject to the discretion of our Board of Directors. MR. A. LORNE WEIL has been an Autotote director since December 1989, Chairman of the Board since October 31, 1991, Chief Executive Officer since April 1992 and President since August 1997. Mr. Weil held various senior management positions with us and our subsidiaries from October 1990 to April 1992 and was a director and consultant to Autotote Systems, Incorporated from 1982 until we acquired it in 1989. Mr. Weil was President of Lorne Weil, Inc., a firm providing strategic planning and corporate development services to high technology industries, from 1979 to November 1992. Mr. Weil is currently a director of Fruit of the Loom, Inc., General Growth Properties, Inc. and XESystems Inc., a subsidiary of XEROX Corporation. MR. MARTIN E. SCHLOSS has been Autotote's Vice President and General Counsel since December 1992 and Secretary since May 1995. Mr. Schloss also serves as a Vice President and Secretary of most of our subsidiaries. 23 From 1976 to 1992, Mr. Schloss served in various positions in the legal department of General Instrument Corporation, with the exception of a hiatus of approximately one and one-half years. MR. DEWAYNE E. LAIRD has been Autotote's Vice President and Chief Financial Officer since November 1998 and our Corporate Controller since April 1996. From January 1992 to March 1996, Mr. Laird was President of Laird Associates, PC, a CPA firm providing financial consulting services to a variety of industries. From April 1984 to December 1991, he held various senior positions with Philadelphia Suburban Corporation, including Chief Financial Officer and Treasurer. MR. GERALD LAWRENCE has been Autotote's Executive Vice President and President of Autotote Enterprises, Inc., the Autotote subsidiary that operates the Connecticut OTB, since June 1998. Mr. Lawrence served as President of Autotote Systems, Inc., Autotote's principal pari-mutuel subsidiary, from March 1996 to June 1998 and as Vice President from November 1994 to June 1998. From January 1991 to August 1994, Mr. Lawrence held the position of Executive Vice President of The New York Racing Association, Inc. From November 1984 through December 1990, he served as Executive Vice President and Chief Operating Officer of Churchill Downs Incorporated. MR. WILLIAM J. HUNTLEY joined Autotote in 1973 and has served as President of Autotote Lottery Corporation, Autotote's lottery subsidiary, since November 1997. Mr. Huntley served as Vice President of Autotote Systems, Inc. from June 1989 to November 1997 and as Vice President of Operations from 1991 to 1994. In September, 2000, after the Scientific Games acquisition, Mr. Huntley was named President of Scientific Games' Systems division. MR. CLIFF O. BICKELL became President-Printed Products Division of Scientific Games Inc. in September, 2000 after Scientific Games acquisition. Since joining Scientific Games in 1995, he served as Vice President, Treasurer and Chief Financial Officer until the acquisition was completed. Prior to joining Scientific Games, Mr. Bickell was Vice President, Chief Financial Officer and Treasurer of Paragon Trade Brands, a multi-national consumer products manufacturer. In addition, Mr. Bickell has held positions as Senior Vice President, Corporate Administration--Chief Financial Officer of W.A. Krueger Co., a commercial printing company, and Treasurer of Dataproducts Corporation, a multinational electronics manufacturer. 24 ITEM 2. PROPERTIES The following is a list of facilities that we use in the operation of our business. Under the terms of our Credit Facility, all of our interests in the following facilities are subject to a Security interest in favor of Our Senior Secured lenders.
BUSINESS LOCATION SQUARE FEET OWNED/LEASED PURPOSE - ------------------------------------------------------------------------------------------------------------------------ Corporate.......... New York, NY 12,000 Leased Corporate Headquarters Pari-Mutuel........ Newark, DE 45,000 Leased Administration, operations and manufacturing Essen, Germany 4,000 Leased Operations Various 28,500 Leased Warehouse space Cedex, France 10,000 Owned Administration and operations Venue Management... Various cities, CT 44,000 Leased OTB facilities New Haven, CT 2,000 Leased Administration Netherlands 16,000 Leased Administration and operations Various cities, Netherlands 44,000 Leased OTB facilities Netherlands Windsor Locks, CT 39,000 Owned OTB facility New Haven, CT 55,000 Owned OTB facility, administration and operations Lottery............ Rocky Hill, CT 17,000 Leased Administration and operations Barre, VT 3,100 Leased Administration Concord, NH 5,600 Leased Administration and operations Helena, MT 4,000 Leased Administration and operations Urbandale, IA 7,500 Leased Administration and operations Gardner, ME 10,000 Leased Administration and operations Ballymahon, Ireland 10,000 Leased Manufacturing Bradford, England 30,000 Leased Manufacturing Vienna, Austria 10,000 Leased Administration and operations Paris, France 12,000 Leased Administration and operations Various 200,000 Leased Warehouse space Alpharetta, GA (1) 245,000 Owned Manufacturing Telecommunication Products......... Leeds, England 112,000 Leased Manufacturing
- ---------- (1) We have expanded the Alpharetta, Georgia facility by 60,000 square feet to accommodate additional manufacturing and office space. We commenced manufacturing operations in our expanded manufacturing facility in December of 2000 and expect to achieve full operational capacity by March 2001. ITEM 3. LEGAL PROCEEDINGS Although the Company is a party to various claims and legal actions arising in the ordinary course of business, management believes, on the basis of information presently available to it, that the ultimate disposition of these matters will not likely have a material adverse effect on the consolidated financial position or results of operations of the Company. Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority interest in Wintech de Colombia S.A. ("Wintech"), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. ("Ecosalud"), an agency of the Colombian government. The contract projected that certain levels of lottery ticket sales would be attained and provided a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5.0 million if such performance levels were not achieved. In addition, with respect to a further guarantee of performance under the contract with Ecosalud, SGI delivered to Ecosalud a $4.0 million bond issued by a Colombian surety, Seguros del Estado ("Seguros"). Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 1993. On July 1, 1993, Ecosalud adopted resolutions declaring, among other things, that the contract was in default and asserted various claims for compensation and penalties against Wintech, SGI and other shareholders of Wintech. Litigation is pending in Colombia concerning various claims among Ecosalud, Wintech and SGI, relating to the termination of the contracts with Ecosalud (the "Colombian 25 Litigation"). Ecosalud's claims in the Colombian Litigation were for, among other things, realization on the full amount of the penalty, plus interest and costs of the bond. The Colombian surety, Seguros, paid $2.4 million to Ecosalud under its $4.0 million bond, and made demand upon SGI for that amount under the indemnity agreement between the surety and SGI. SGI declined to make or authorize any such payment and notified the surety that any payment in response to Ecosalud's demand on the bond was at the surety's risk. On April 2, 1998, Seguros brought suit against SGI in the District Court for the Northern District of Georgia, Atlanta Division seeking $2.4 million for sums paid by Seguros to Ecosalud under the surety bond on November 1, 1994, plus interest at the Colombian bank rate of interest. On September 29, 1999, the District Court denied various motions of SGI, including a motion to dismiss, based on the Colombian statute of limitations of two years, and granted Seguros' motion for summary judgment, which was filed on May 6, 1998, and entered judgment for Seguros in the amount of $2.4 million or the equivalent in Colombian pesos as of the judgment date, plus pre-judgment interest at a rate of 38.76% per annum, equivalent to approximately $4.6 million. SGI has appealed the District Court's order and judgment and posted a $7.0 million appeal bond. SGI continues to believe that it has meritorious defenses, including that the amount paid by Seguros was improperly paid because of the default by Ecosalud of its obligations to SGI, which claims remain the subject of separate litigation in Colombia. SGI has been advised by Colombian counsel that SGI has various legal defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has certain cross indemnities and undertakings from the two other privately held shareholders of Wintech for their respective shares of any liability to Ecosalud. That obligation is secured in part by a $1.5 million confirmed letter of credit in favor of SGI. No assurance can be given that the other shareholders of Wintech will, or have sufficient assets, to honor their indemnity undertakings to SGI when the claims by Ecosalud against SGI and Wintech are finally resolved, in the event such claims result in any final liability. Although it is not possible to determine the ultimate outcome of the appeal of the order and judgment granted to Seguros or the outcome of any litigation in Colombia, management, believes that any potential losses will not have a material adverse effect on the consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2001. 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATE STOCKHOLDER MATTERS Our Class A Common Stock is traded under the symbol "TTE" on the American Stock Exchange. The following table sets forth, for the periods indicated, the range of high and low closing prices of our Class A Common Stock.
Fiscal 1999 Fiscal 2000 --------------- ----------------- High Low High Low -------- ------ ------- -------- First Quarter.............................$ 2.38 1.69 4.69 2.25 Second Quarter............................ 2.06 1.50 5.31 3.06 Third Quarter............................. 3.38 1.75 4.88 3.00 Fourth Quarter............................ 3.63 2.50 4.75 2.95
On January 25, 2001, the last reported sales price for our Class A Common Stock on the American Stock Exchange was $3.40 per share. The approximate number of holders of record of our Class A Common Stock as of January 26, 2001 was 1,791. We have never paid any cash dividends on our Class A Common Stock. The Board presently intends to retain all earnings, if any, for use in the business. Any future determination as to payment of dividends will depend upon our financial condition and results of operations and such other factors as are deemed relevant by the Board. Further, under the terms of the Indenture governing our Senior Notes, we and our Restricted Subsidiaries (as defined) are not permitted to pay any cash dividends or make certain other restricted payments (other than stock dividends) on our Class A Common Stock. RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS FROM REGISTERED SECURITIES As of October 2, 2000, we issued Warrants to purchase up to 250,000 shares of our Class A Common Stock at a price of $3.58 per share to Ramius Securities, LLC (together with its affiliates, "Ramius") in connection with the services of Ramius as our financial advisor in obtaining certain financing commitments in connection with the acquisition of Scientific Games. Based on representations of Ramius, such Warrants were issued in a private transaction in reliance upon an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Holders of the Warrants will be entitled to certain registration rights. As of October 5, 2000, certain Warrants to purchase up to 2.9 million shares of our Class A Common Stock originally issued to our financial advisors, Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group, Inc. (an affiliate of Lehman Brothers), were retired in exchange for the issuance of 2.9 million shares of such Common Stock, pro rata to the Warrant holders, in a transaction exempt from registration under the Securities Act pursuant to Sections 3(a)(9) and 4(2) thereof. Holders of such shares will be entitled to certain registration rights. The terms of the Company's outstanding Series A Convertible Preferred Stock provide for quarterly dividends at a rate equal to 6% per annum, which must be paid in kind in the form of additional shares of Preferred Stock until the ninth dividend payment, in September 2002, and thereafter may be paid in kind at the Company's option. An aggregate of 21.6 thousand shares of Preferred Stock were issued by the Company in payment of the September 2000 and December 2000 dividends, pro rata to the holders of the outstanding Preferred Stock, as a dividend on the Preferred Stock originally issued in a private transaction exempt from registration under the Securities Act in reliance on Section 4(2) thereof, and without additional consideration. The foregoing is only a summary of certain terms of our Series A Convertible Preferred Stock, the Warrants and related agreements and is qualified by reference to Exhibits 3.2, 10.11, 10.26 and 99.5 which are hereby incorporated by this reference. 27 ITEM 6. SELECTED FINANCIAL DATA Selected historical financial data presented below as of and for the five years ended October 31, 2000 have been derived from the audited consolidated financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants. The following financial information reflects the acquisitions and dispositions of certain businesses during the period 1995 through 2000, including the acquisition of Scientific Games since September 6, 2000, and should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and the notes thereto, included in Item 8 of this Annual Report. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED OCTOBER 31, --------------------------------------------------------------------- 1996 1997 1998 1999 2000 --------- --------- --------- --------- --------- SELECTED STATEMENT OF OPERATIONS DATA: Operating Revenues: Services ....................................... $ 137,794 132,989 135,790 148,660 186,520 Sales .......................................... 38,441 24,343 23,523 62,488 46,828 --------- --------- --------- --------- --------- 176,235 157,332 159,313 211,148 233,348 --------- --------- --------- --------- --------- Costs and Expenses: Cost of services ............................... 86,674 80,496 88,916 99,496 126,601 Cost of sales .................................. 25,864 15,396 15,739 43,937 29,299 Selling, general and administrative ............ 31,921 28,444 26,205 27,178 35,664 Restructuring and write-off of assets .......... (649) -- -- -- -- Depreciation and amortization .................. 40,853 36,728 29,489 22,189 27,826 Interest expense ............................... 14,837 14,367 15,521 16,177 31,231 Other (income) expense ......................... 560 79 (1,064) 15 (456) Litigation settlement .......................... 6,800 -- -- -- -- (Gain) loss on sale of businesses .............. 1,127 (1,823) 66 1,600 -- --------- --------- --------- --------- --------- Total costs and expenses ......................... 207,987 173,687 174,872 210,592 250,165 --------- --------- --------- --------- --------- Income (loss) before income tax expense and extraordinary item ................... (31,752) (16,355) (15,559) 556 (16,817) Income tax expense .................................. 2,443 906 321 177 1,603 --------- --------- --------- --------- --------- Income (loss) before extraordinary item ............. (34,195) (17,261) (15,880) 379 (18,420) Extraordinary item .................................. -- (426) -- -- 12,567 --------- --------- --------- --------- --------- Net income (loss) ................................... (34,195) (17,687) (15,880) 379 (30,987) Preferred dividend .................................. $ -- -- -- -- 1,014 ========= ========= ========= ========= ========= Net Income (loss) available to common stockholders .. $ (34,195) (17,687) (15,880) 379 (32,001) ========= ========= ========= ========= ========= Basic and diluted income (loss) per share: Income (loss) before extraordinary items ............ $ (1.09) (0.50) (0.44) 0.01 (0.50) Extraordinary items ................................. -- (0.01) -- -- (0.34) --------- --------- --------- --------- --------- Net Income (loss) ................................... $ (1.09) (0.51) (0.44) 0.01 (0.84) ========= ========= ========= ========= ========= Net Income (loss) available to common stockholders .. $ (1.09) (0.51) (0.44) 0.01 (0.87) ========= ========= ========= ========= ========= SELECTED BALANCE SHEET DATA (END OF PERIOD): Total assets ........................................ $ 196,793 153,541 156,500 165,559 647,215 Total long-term debt, including current installments ............................... $ 169,024 149,857 158,870 157,144 443,834 Stockholders' equity (deficit) ...................... $ (20,196) (33,240) (48,638) (48,219) 34,319 Weighted average number of shares used in per share calculation: Basic shares ................................... 31,305 34,469 35,696 36,118 36,928 Diluted shares ................................. 31,305 34,469 35,696 38,343 36,928 ========= ========= ========= ========= =========
28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND As a result of the Scientific Games acquisition, we are the largest provider of services, systems and products to both the pari-mutuel gaming and instant ticket lottery industries, and we believe we are the only fully integrated lottery service provider in the world. We believe that we offer the broadest and most technologically advanced array of products and services in these industries and that we are the market leader in creating innovative pari-mutuel wagering and lottery products. Our Lottery Group is the leading provider of instant lottery tickets and related services, accounting for approximately 68% of all retail sales of instant lottery tickets in the United States in 1999. Our Lottery Group also supplies technologically advanced on-line lottery systems and instant ticket validation equipment to lotteries in the U.S. and internationally. Our Pari-mutuel Group is the leading provider of pari-mutuel wagering systems worldwide and has an approximate 65% share of the estimated $20.0 billion of North American racing industry wagers, or "Handle." Our Venue Management Group, utilizing our pari-mutuel business expertise, owns or operates off-track betting venues or "OTBs" in Connecticut, The Netherlands and Germany, from which we earn a significantly higher percentage of the Handle than we earn by providing services to third-party operators. Finally, our Telecommunications Products Group leverages our superior lottery technology to create highly secure, paper-based, prepaid phone cards for the rapidly growing international cellular telephone markets. On September 6, 2000, Autotote completed the acquisition of Scientific Games, a world leading supplier of lottery products, integrated lottery systems and support services, and prepaid telephone cards. This acquisition combines Autotote's pari-mutuel wagering, venue management and on-line lottery businesses with Scientific Games' complementary instant lottery ticket and related services, on-line lottery and instant ticket validation, and rapidly growing prepaid phone card businesses. The acquisition was completed through a merger in which Scientific Games became a wholly-owned subsidiary of Autotote at a cost of approximately $308 million in aggregate merger consideration to Scientific Games stockholders, plus related fees and expenses. The acquisition has been recorded using the purchase method of accounting, and the acquired assets and liabilities have been recorded at their estimated fair value at the date of acquisition and the operating results of Scientific Games businesses have been included in the consolidated statements of operations from the date of the acquisition. The Scientific Games acquisition and the refinancing of substantially all existing debt of both Autotote and Scientific Games, along with the payment of related fees and expenses, was completed with funds provided by: (1) proceeds from the issuance of $150.0 million principal amount of our series A notes; (2) $280.0 million of term loan borrowings under our new senior credit facility; (3) $2.98 million of borrowings under the revolving credit facility of our new senior credit facility; (4) $4.805 million of cash on hand; and (5) $110.0 million of gross proceeds from the sale of new convertible preferred stock, principally to an affiliated entity of Olivetti S.p.A. Autotote historically operated primarily in three business segments: Pari-mutuel Operations, Venue Management Operations and Lottery Operations. Autotote's Lottery Operations have historically included both domestic and international lottery service operations, including the sale of lottery systems and equipment. Autotote's Pari-mutuel Operations have included all aspects of its pari-mutuel service business, encompassing Autotote's North American and international on-track, off-track and inter-track pari-mutuel services, simulcasting and communications services, video gaming, and sales of pari-mutuel systems and equipment. Autotote's Venue Management Operations have included its Connecticut off-track betting operations and its Dutch on-track and off-track betting operations. Subsequent to the Scientific Games acquisition, we reorganized our operations into four business segments: Lottery Group, Pari-Mutuel Group, Venue Management Group and Telecommunications Products Group. Our Lottery Group consists of two product lines: Instant Tickets and Related Services ("ITRS") and Lottery Systems. ITRS includes ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. In addition, this division includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers. Lottery Systems is comprised of our historical Lottery Operations segment as well as Scientific Games' systems business, both of which include the supply of transaction processing software for the accounting and validation of both instant ticket and on-line lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. 29 This product line also includes software and hardware and support service for sports betting and credit card processing systems. Our Pari-Mutuel Group is comprised of the same businesses historically reported in Autotote's Pari-mutuel Operations segment which encompasses our North American and international on-track, off-track and inter-track pari-mutuel services, simulcasting and communications services, and video gaming, as well as sales of pari-mutuel systems and equipment. Our Venue Management Group is comprised of the same businesses historically reported in Autotote's Venue Management Operations segment and include the Connecticut off-track betting operations, and Autotote's Netherlands on-track and off-track betting operations. Our Telecommunications Products Group is comprised of the prepaid cellular phone cards business. In the second quarter of fiscal 2000, Autotote completed the sale of its SJC Video business, which had previously been reported as a separate segment. Autotote's revenues are derived from two principal sources: service revenues and sales revenues. Service revenues are earned pursuant to multi-year contracts to provide ITRS and wagering systems and services; or are derived from wagering by customers at facilities owned or leased by Autotote. Sales revenues are derived from sales of prepaid phone cards, and from contracts for the sale of wagering systems, equipment, and software licenses. The first quarter of Autotote's fiscal year and a portion of its second fiscal quarter traditionally comprise the weakest season for pari-mutuel wagering service revenue. Wagering equipment sales and software license revenues usually reflect a limited number of large transactions which do not recur on an annual basis. Consequently, revenues and operating results can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software license revenue. In addition, instant ticket and prepaid phone card sales may vary depending on the size and timing of contract awards, changes in customer budgets, inventory ticket position, lottery retail sales and general economic conditions. Operating results may also vary significantly from period to period depending on the addition or disposition of business units in each period. The acquisition of Scientific Games in fiscal 2000, the German pari-mutuel service business in fiscal 1999, and the Netherlands pari-mutuel venue management business in fiscal 1998, which were all accounted for as purchases, all affect the comparability of operations from period to period (see Note 3 to Autotote's Consolidated Financial Statements).
RESULTS OF OPERATIONS: YEARS ENDED OCTOBER 31, ------------------------------- 1998 1999 2000 ------- ------- ------- LOTTERY GROUP (IN THOUSANDS) Service revenue ........................ $ 9,217 10,238 43,219 Sales revenue .......................... $ 8,830 39,102 21,161 ------- ------- ------- Total operating revenue ................ $18,047 49,340 64,380 ======= ======= ======= Gross Profit (excluding depreciation and amortization) .......................... $ 5,313 12,672 17,136 ======= ======= ======= PARI-MUTUEL GROUP Service revenue ........................ $74,171 75,788 81,563 Sales revenue .......................... $14,693 23,386 19,678 ------- ------- ------- Total operating revenue ................ $88,864 99,174 101,241 ======= ======= ======= Gross Profit (excluding depreciation and amortization) .......................... $35,317 39,612 40,885 ======= ======= =======
30
YEARS ENDED OCTOBER 31, ---------------------------------- 1998 1999 2000 -------- -------- -------- VENUE MANAGEMENT GROUP Service revenue ........................ $ 50,525 61,562 61,411 ======== ======== ======== Gross Profit (excluding depreciation and amortization) .......................... $ 13,569 15,121 16,785 ======== ======== ======== TELECOMMUNICATIONS PRODUCTS GROUP Sales revenue .......................... $ -- -- 5,989 ======== ======== ======== Gross Profit (excluding depreciation and amortization) .......................... $ -- -- 2,642 ======== ======== ======== SJC VIDEO GROUP Service revenue ........................ $ 1,877 1,072 327 ======== ======== ======== Gross Profit (excluding depreciation and amortization) .......................... $ 459 310 -- ======== ======== ======== COMPANY TOTAL Service revenue ........................ $135,790 148,660 186,520 Sales revenue .......................... $ 23,523 62,488 46,828 -------- -------- -------- Total operating revenue ................ $159,313 211,148 233,348 ======== ======== ======== Gross Profit (excluding depreciation and amortization) .......................... $ 54,658 67,715 77,448 ======== ======== ========
FISCAL 2000 COMPARED TO FISCAL 1999 REVENUE ANALYSIS Lottery Group service revenue of $43.2 million in fiscal 2000 improved $33.0 million from fiscal 1999 due to the addition of Scientific Games in September 2000, plus a full year of service to the Montana lottery which was launched in April 1999, and the start-up of the Vermont and New Hampshire lotteries in July 2000. Sales revenue of $21.2 million in fiscal 2000 decreased $17.9 million from fiscal 1999 due to the April 1999 equipment sale to the Montana lottery plus completion of the 20,000 terminal sale to Sisal Sport Italia SpA. Pari-mutuel Group service revenue of $81.6 million in fiscal 2000 improved $5.8 million or 7.6% from fiscal 1999. $4.0 million of this increase is attributable to the addition of the expanded German operations in the fourth quarter of fiscal 1999, plus revenue improvements in Ireland and in the NASRIN(TM) service operation. These revenue increases were partially offset by lower revenues in the French racing operations and in the North American simulcasting operations. Sales revenue of $19.7 million in fiscal 2000 decreased $3.7 million or 15.9% from fiscal 1999 primarily due to the fiscal 1999 sale of terminals to the UK Tote, partially offset by fiscal 2000 sales to Italy and Chile. Venue Management Group service revenue of $61.4 million in fiscal 2000 were slightly lower than in fiscal 1999 as Handle related revenue increases of 3.4% in the Connecticut OTB operations were completely offset by the effect of the lower Euro exchange rate on the Netherlands revenues. Telecommunications Group sales revenue of $6.0 million in fiscal 2000 are the result of the acquisition of Scientific Games in September 2000. SJC Video Group service revenue of $.3 million in fiscal 2000 are $.7 million less than fiscal 1999 as a result of the sale of the business in February 2000. GROSS PROFIT ANALYSIS The total gross profit earned, exclusive of depreciation and amortization, of $77.4 million in fiscal 2000 increased by $9.7 million, or 14.4%, from fiscal 1999. 31 Lottery Group gross profit of $17.2 million or 26.9% of revenues improved $4.5 million in fiscal 2000 from $12.7 million or 25.7% of revenues in fiscal 1999. The improvement is attributable to the addition of the Scientific Games business coupled with the addition of a full year of operation on the Montana lottery contract and the addition of the Vermont and New Hampshire lottery contracts since July 2000. These increases were offset by lower equipment sales revenues in fiscal 2000 plus Scientific Games business integration costs. In addition, the increases were impacted by the shutdown of the California plant and corresponding start-up of the new press in the Atlanta plant in the Scientific Games manufacturing operation. The combination of the interrupted production and unusually high costs (such as overtime and scrap), coupled with excess costs in the systems business of Scientific Games, is estimated to have had a $5.0 million negative impact on EBITDA in the fourth quarter of fiscal 2000. Pari-mutuel Group gross profit of $40.9 million in fiscal 2000 or 40.4% of revenues improved $1.3 million from $39.6 million or 39.9% of revenues in fiscal 1999. This improvement primarily reflects the benefits of additional revenue in the German operations and the continued growth of the NASRIN operations, plus higher equipment sales, all partially offset by lower revenues in the French operations, reduced satellite transponder bulk market sales, and higher satellite service fees due to a credit received in fiscal 1999 from our satellite provider as a result of a service interruption. During the year, the Company largely completed the conversion of its satellite network to 8 to 1 compression but was unable to eliminate the resulting excess transponder capacity until late in the year due to market softness. Consequently an annualized saving of approximately $2.0 million that was expected to contribute to profitability in fiscal 2000 will not begin until 2001. Venue Management Group gross profit of $16.8 million in fiscal 2000 or 27.3% of revenues improved $1.7 million from $15.1 million or 24.6% of revenues in fiscal 1999. This improvement primarily reflects higher Handle and reduced operating costs in the Connecticut OTB operation, partially offset by approximately $1.0 million of start-up costs incurred in connection with the German OTB joint venture. Telecommunications Group gross profit of $2.6 million in fiscal 2000 represents the Group's results since their acquisition as part of Scientific Games in September 2000. SJC Video Group gross profit of nil in fiscal 2000 is $.3 million less than fiscal 1999 as a result of the sale of the business in January 2000. Gross profit as a percent of service revenues decreased to 32% in fiscal 2000 compared to 33% in fiscal 1999, primarily as a result of the unusual production problems and excess systems costs in the Lottery Group in the fourth quarter of fiscal 2000. The gross profit as a percent of sales revenues was 37% in fiscal 2000, an increase from the gross profit percent of 30% in fiscal 1999 as a result of changes in the mix of equipment and systems sold, and the addition of the Telecommunications Products Group. EXPENSE ANALYSIS Selling, general and administrative expenses, including software development costs, of $35.7 million were $8.5 million or 31.2% higher than in fiscal 1999. This increase is attributable to the addition of the Scientific Games business, expanded German pari-mutuel operations, growing domestic lottery operations in Vermont and New Hampshire, the $1.1 million write-off of the option to purchase Atlantic City Raceway, and Scientific Games business integration costs. These increases were partially offset by cost reductions in NASRIN(TM) and France, and the absence of the SJC Video business. Depreciation and amortization expense of $27.8 million in fiscal 2000 increased $5.6 million from $22.2 million in fiscal 1999. This increase is primarily attributable to the acquisition of Scientific Games, coupled with the expanded domestic lottery business and the expanded German pari-mutuel business. These increases were partially offset by the absence of the SJC Video business and the full depreciation of certain assets in prior periods. Interest expense of $31.2 million in fiscal 2000 increased $15.1 million from $16.2 million in fiscal 1999. $7.5 million of this increase is attributable to payments, in the form of warrants to purchase 2.9 million shares of Autotote common stock, to certain financial advisors in connection with their services in obtaining certain financial commitments; an additional $1.2 million is due to the required pre-funding of the new subordinated debt; and the balance is a result of higher debt levels incurred in connection with the acquisition of Scientific Games. Other income of $.5 million in fiscal 2000 consisted primarily of interest on invested excess cash, and other expense in fiscal 1999 consisted primarily of currency translation expense. 32 INCOME TAX EXPENSE Income tax expense was $1.6 million in fiscal 2000, up from $0.2 million in fiscal 1999. The increase reflects the effects of the acquisition of Scientific Games. Income tax expense principally reflects federal alternative minimum tax, state taxes and foreign taxes, since no tax benefit has been recognized on domestic operating losses. EXTRAORDINARY ITEMS In connection with the fiscal 2000 issuance of the Notes and the subsequent repayment of all amounts outstanding under the existing bank credit facility (see Note 9 and 10 to the Consolidated Financial Statements), Autotote wrote off $2.9 million of unamortized deferred financing fees associated with the Old Notes and the 1998 and 2000 Term Loans and expensed $9.7 million of call premium paid in connection with the redemption of the Old Notes. There were no tax benefits recognized on the net extraordinary loss because Autotote is currently in a tax loss carryforward position. FISCAL 1999 COMPARED TO FISCAL 1998 REVENUE ANALYSIS Revenues increased 32.5% or $51.8 million to $211.1 million in fiscal 1999 from $159.3 million in fiscal 1998. Pari-mutuel Group services revenues of $75.8 million in fiscal 1999 improved $1.6 million or 2.2% from the prior year. This improvement primarily reflects revenues from the new NASRIN(TM) operation and improved simulcasting revenues in Germany. These improvements were partially offset by the loss of a French pari-mutuel service contract and fewer sales of excess transponder time in the domestic simulcasting operations. Pari-mutuel equipment sales revenues of $23.4 million in fiscal 1999 increased $8.7 million or 59.2% from the prior year, primarily due to sales of a system to the Irish Horseracing Association, EXTREMA(TM) terminals to the UK Tote and Max 3000 terminals to other international customers. Venue Management Group service revenues of $61.6 million in fiscal 1999 improved $11.0 million or 21.8% from the prior year. This improvement primarily reflects revenues from the Netherlands operations that were acquired in July 1998, higher Connecticut OTB revenues attributable to increased Handle and the September 1998 opening of the racebook at the Mohegan Sun Casino. Lottery Group service revenues increased $1.0 million in fiscal 1999 to $10.2 million primarily due to the April 1999 launch of the Montana lottery. Lottery equipment sales revenues increased to $39.1 million in fiscal 1999 from $8.8 million in fiscal 1998. This increase is primarily attributable to the fiscal 1999 sales of approximately 10,600 EXTREMA(TM) terminals for use in the Sisal Sport Italia SpA lottery operations, and the March 1999 delivery of a central system, terminals and communications equipment to the Montana Lottery. SJC Video Group service revenues decreased $0.8 million in fiscal 1999 to $1.1 million due to changes in customer preference from video production to film. GROSS PROFIT ANALYSIS The total gross profit earned, exclusive of depreciation and amortization, of $67.7 million in fiscal 1999 increased by $13.1 million, or 23.9%, from fiscal 1998. Gross profits earned by the Pari-mutuel Group of $39.6 million in fiscal 1999 increased $4.3 million from $35.3 million in fiscal 1998, principally due to higher profits in North American pari-mutuel service operations, sales of EXTREMA(TM) terminals to the UK Tote operations, sales of Max 3000 terminals to other international customers, and a full year of operation of the NASRIN(TM) business. These gross profit increases were partially offset by lower profit in the French pari-mutuel operations due to the loss of a service contract in fiscal 1998. Gross profits earned by the Venue Management Group of $15.1 million in fiscal 1999 increased $1.5 million from $13.6 million in fiscal 1998, principally due to the growth in Handle in the Connecticut OTB operations. 33 Gross profits earned by the Lottery Group of $12.7 million for fiscal 1999 increased $7.4 million from $5.3 million in fiscal 1998, primarily due to sales of EXTREMA(TM) terminals for use in the Sisal Sport Italia SpA lottery operations and the March 1999 delivery of a central system, terminals and communications equipment to the Montana Lottery. Gross profit as a percent of service revenues was 33% in fiscal 1999 compared to 35% in fiscal 1998, primarily reflecting lower margins on the Netherlands operations that were acquired in July 1998, partially offset by improved margins in the OTB operations and a full year of NASRIN(TM) operations. The gross profit earned from systems and equipment sales was 30% in fiscal 1999, a decrease from the gross profit percent of 33% in fiscal 1998 as a result of changes in the mix of equipment and systems sold. EXPENSE ANALYSIS Selling, general and administrative expenses include marketing, sales, administrative, engineering and software development, finance, legal and other expenses. Selling, general and administrative expenses increased $1.0 million or 4% to $27.2 million in fiscal 1999 from $26.2 million in fiscal 1998. The increase is primarily the result of the inclusion of the Netherlands operations acquired in July 1998 and lower expenses reported in fiscal 1998 resulting from the collection of receivables previously reserved due to concerns about their recoverability. Depreciation and amortization expenses decreased $7.3 million or 25% to $22.2 million in fiscal 1999 from $29.5 million in fiscal 1998. Depreciation decreased by $5.2 million primarily due to the lengthening of depreciable lives of pari-mutuel terminals from seven to ten years effective November 1, 1998, as the result of the renewal of a number of service contracts and realized equipment durability. Additionally, in fiscal 1998, we completed the installation of new lottery terminals for the Connecticut State Lottery under a contract with an initial five-year term plus five one-year options to extend the contract through May 2008. Based on industry practice of lottery contracts and our historical relationship with the Connecticut State Lottery for the past ten years, we are depreciating the terminals and installation costs on a straight-line method over their estimated useful lives of 10 years. Amortization expenses decreased by $2.1 million primarily as a result of the full amortization of certain intangible assets in fiscal 1998. Interest expense of $16.2 million in fiscal 1999 increased $0.7 million from fiscal 1998 as a result of borrowings in connection with the fiscal 1998 installation of the Connecticut lottery terminals. Other expense in fiscal 1999 consisted primarily of currency translation expenses, and other income of $1.1 million in fiscal 1998 consisted primarily of interest on invested excess cash. LOSS ON DISPOSITION OF BUSINESS A charge of $1.6 million was recorded to reflect the expected loss on disposition by sale of the SJC Video production business as compared to a net loss on disposition of businesses of $0.1 million in fiscal 1998. In fiscal 1999, the SJC Video production business incurred an operating loss of $2.5 million. INCOME TAXES Income tax expense was $0.2 million in fiscal 1999 compared to $0.3 million in fiscal 1998. Income tax expense principally reflects state taxes on Connecticut OTB operations and foreign taxes in fiscal 1999, and foreign taxes in fiscal 1998, since no tax benefit has been recognized on domestic operating losses. LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL DEFICIENCY In order to finance the Scientific Games acquisition and refinance certain existing indebtedness, we conducted a series of financings. As a result, our capital structure changed significantly and, among other things, we are a significantly leveraged company. As a result of the Transactions, at October 31, 2000 we have total indebtedness outstanding of approximately $443.8 million. We have also recorded a substantial increase in goodwill and other intangible assets in connection with the Scientific Games acquisition and a corresponding increase in amortization expense. Under our new senior secured credit facilities, a group of lenders has provided aggregate facilities totaling $345.0 million, comprised of (1) a six-year Term A Loan of $60.0 million, (2) a seven-year Term B Loan of 34 $220.0 million, and (3) a six-year Revolver of $65.0 million. We borrowed the entire $280.0 million of the term loan facilities in connection with the consummation of the Scientific Games acquisition. See Note 9 to the Consolidated Financial Statements for a more detailed explanation of these loan facilities, including interest rates, amortization requirements and other terms. In connection with the consummation of the Scientific Games acquisition, we issued $110.0 million of new convertible preferred stock. The dividends on the new convertible preferred stock accrue at the annual rate of 6% per annum and are payable-in-kind until the ninth dividend payment, at which time we have the option, subject to the terms of the Facility and Notes, to pay dividends in cash; the new convertible preferred stock also has the right to participate in common stock dividends, if any, on an as-converted basis. The new convertible preferred stock is convertible at any time into shares of our common stock at the adjusted conversion price of $5.56 per share, subject to a potential reset to not less than $5.00 per share, and will automatically convert into common stock five years after issuance at the conversion price then in effect. The initial conversion price of $6 per share was adjusted to $5.56 per share due to the issuance of 2.9 million shares in redemption of the warrants issued to our financial advisors. See Note 13 to the Consolidated Financial Statements for a more detailed description of the new convertible preferred stock. At October 31, 2000, Autotote's available cash and borrowing capacity totaled $67.4 million compared to $29.0 million at October 31, 1999. Net cash provided by operating activities was $25.4 million for the year ended October 31, 2000. In fiscal 2000, we spent $34.9 million for wagering systems and capital expenditures, including $6.6 million for the installation of a pari-mutuel system for the Monmouth and Meadowlands Racetrack, $8.8 million in connection with the installation of the New Hampshire and Vermont on-line lotteries and $2.9 million to upgrade our satellite communications infrastructure. In addition, we invested an additional $5.0 million in software, primarily in connection with the above start-up projects. These investments were funded primarily with net cash provided by operating activities, $1.9 million of proceeds from the sale of common stock, and long-term debt. A substantial portion of our cash flows from operations must be used to pay our interest expense and repay our indebtedness, which will reduce the funds that would otherwise be available to us for our operations, and capital expenditures. Based on our current level of operations and anticipated cost savings and operating improvements, we believe that our cash flow from operations, available cash and available borrowings under our new revolving credit facility will be sufficient to meet our liquidity needs for the foreseeable future; however, we cannot assure you that this will be the case. We also may need to refinance all or part of our indebtedness, including the Notes, on or before their maturity; however, we cannot assure that we will able to refinance any of our indebtedness, including our new senior credit facilities and the notes on commercially reasonable terms or at all. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), as amended by SFAS 138. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires entities to record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in each period in current operations or other comprehensive income (loss), based on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in operations. The Company is required to adopt SFAS 133, as amended, effective November 1, 2000. Pursuant to the terms of the Company's credit facility, the Company is required to maintain interest rate hedges for a notional amount of not less than $140 million for a period of not less than two years. In satisfaction of this requirement, the Company entered into three interest rate swap agreements in November 2000 which obligate the Company to pay a fixed LIBOR rate and entitle the Company to receive a variable LIBOR rate on an aggregate $140 million notional amount of debt. The Company has structured these interest rate swap agreements and intends to structure all future such agreements to qualify for hedge accounting pursuant to the provisions of SFAS 133. The Adoption of SFAS 133 did not have a material affect on the Company's consolidated operations or financial position at November 1, 2000. Based on current derivative usage and hedging activities, the Company does not expect the adoption of SFAS 133 to have a material impact on its future consolidated operations or financial position. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the Company's revenue recognition policy is in compliance with the provisions of SAB 101 and that SAB 101 will have not material effect on the consolidated financial positon or results of operations of the Company. RECENT DEVELOPMENTS On January 8, 2001, we announced that the Jamaica Lottery Company Limited had chosen Autotote to supply 750 EXTREMA(TM) terminals, a central system and support services for five years. When finalized, the arrangement will have the potential to generate revenue of $10.9 million and may include three two-year renewals. On January 3, 2001, we announced that the British Columbia Lottery Corporation has chosen us to provide an upgrade of its lottery central gaming system and related lottery support systems. The arrangement is expected to provide revenues of approximately $8.0 million and the new system should be operational in 12-18 months. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our products and services are sold to a diverse group of customers throughout the world. As such, we are subject to certain risks and uncertainties as a result of changes in general economic conditions, sources of supply, competition, foreign exchange rates, tax reform, litigation and regulatory developments. The diversity and breadth of our products and geographic operations mitigate the risk that adverse changes in any event would materially affect our financial position. Additionally, as a result of the diversity of our customer base, we do not consider ourselves exposed to concentration of credit risks. These risks are further minimized by setting credit limits, ongoing monitoring of customer account balances, and assessment of the customers' financial strengths. Inflation has not had an abnormal or unanticipated effect on our operations. Inflationary pressures would be significant to our business if raw materials used for instant lottery ticket production, prepaid phone card production or terminal manufacturing are significantly affected. Available supply from the paper and electronics industries tends to fluctuate and prices may be affected by supply. For fiscal 2000, inflation was not a significant factor in our results of operations, and we were not impacted by significant pricing changes in our costs, except for personnel related expenditures. We are unable to forecast the prices or supply of substrate, component parts or other raw materials in 2001, but we currently do not anticipate any substantial changes that will materially affect our operating results. In certain limited cases, our lottery contracts with our customers contain provisions to adjust for inflation on an annual basis, but we cannot be assured that this adjustment would cover raw material price increases or other costs of services. While we have long-term and generally satisfactory relationships with most of our suppliers, we also believe alternative sources to meet our raw material and production needs are available. In the normal course of business, the Company is exposed to fluctuations in interest rates and equity market risks as the Company seeks debt and equity capital to sustain its operations. At October 31, 2000, approximately one-third of the Company's debt was in fixed rate instruments. We consider the fair value of all financial instruments to be not materially different from their carrying value at year-end. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. PRINCIPAL AMOUNT BY EXPECTED MATURITY - AVERAGE INTEREST RATE OCTOBER 31, 2000 EXPECTED MATURITY DATE (DOLLARS IN $000)
THERE 2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE ---------- --------- ---------- --------- ---------- ---------- --------- ------------ Long-term debt: Fixed interest rate debt $ 150,000 150,000 147,750 Interest rate 12.5% Variable interest rate $ 5,200 8,200 11,200 14,200 17,200 235,250 291,250 291,250 Average interest rate 10.48% 10.35% 10.29% 10.26% 10.24% 10.88% 10.77%
In November 2000, to reduce the risks associated with fluctuations in market interest rates and in response to requirements in the Facility (see Note 9 to the Consolidated Financial Statements) the Company entered into three interest rate swap contracts for an aggregate notional amount of $140,000. The following table provides information about the Company's derivative financial instruments. The table presents notional amounts and weighted-average swap rates by contractual maturity dates. The Company does not hold any market risk instruments for trading purposes. 36 NOTIONAL AMOUNT BY EXPECTED MATURITY - AVERAGE SWAP RATE EXPECTED MATURITY DATE (DOLLARS IN $000)
THERE 2001 2002 2003 2004 2005 AFTER TOTAL FAIR VALUE ---------- --------- ---------- --------- ---------- ---------- --------- ------------ Interest rate swaps: Fixed to variable $ -- -- 140,000 -- -- -- 140,000 137,605 Receive fixed-3-month LIBOR -- -- 6.52% -- -- -- 6.52%
The Company is also exposed to fluctuations in foreign currency exchange rates as the financial results of its foreign subsidiaries are translated into U.S. dollars in consolidation. Assets and liabilities outside the United States are primarily located in the United Kingdom, Germany, Netherlands, France and Austria. The Company's investment in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term investments. Accordingly, the Company does not hedge these net investments. Translation gains and losses historically have not been material. We manage our foreign currency exchange risks on a global basis by one or more of the following: (i) securing payment from our customers in U.S. dollars, when possible, (ii) utilizing borrowings denominated in foreign currency, and (iii) entering into foreign currency exchange contracts. In addition, a significant portion of the cost attributable to our foreign operations is incurred in the local currencies. We believe that a 10% adverse change in currency exchange rates would not have a significant adverse effect on the net earnings or cash flows of the Company. We may, from time to time, enter into foreign currency exchange or other contracts to hedge the risk associated with certain firm sales commitments, anticipated revenue streams and certain assets and liabilities denominated in foreign currencies. We do not engage in currency speculation. Our cash and cash equivalents and investments are in high-quality securities placed with a wide array of financial institutions with high credit ratings. This investment policy limits our exposure to concentration of credit risks. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE AUTOTOTE CORPORATION AND SUBSIDIARIES FORM 10-K (PAGE) Independent Auditors' Report......................................... 40 Consolidated Financial Statements: Balance Sheets as of October 31, 1999 and 2000.................. 41 Statements of Operations for the years ended October 31, 1998, 1999 and 2000.............................. 42 Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for the years ended October 31, 1998, 1999 and 2000..... 43 Statements of Cash Flows for the years ended October 31, 1998, 1999 and 2000.............................. 44 Notes to Consolidated Financial Statements........................... 46 Schedule: II. Valuation and Qualifying Accounts................................ 80 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 38 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Autotote Corporation: We have audited the consolidated financial statements of Autotote Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Autotote Corporation and subsidiaries as of October 31, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Short Hills, New Jersey December 15, 2000 39 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1999 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents ............................. $ 5,067 15,308 Restricted cash ....................................... 771 758 Accounts receivable, net of allowance for doubtful accounts of $2,789 and $4,308 in 1999 and 2000, respectively ......................................... 25,755 54,263 Inventories ........................................... 14,636 24,678 Prepaid expenses, deposits and other current assets ... 2,319 17,420 --------- --------- Total current assets ............................... 48,548 112,427 --------- --------- Property and equipment, at cost ........................... 199,767 317,549 Less accumulated depreciation ......................... 123,039 130,895 --------- --------- Net property and equipment ......................... 76,728 186,654 --------- --------- Goodwill, net ............................................. 5,237 156,557 Operating right, net ...................................... 13,848 12,848 Other intangible assets, net .............................. -- 119,871 Other assets and investments .............................. 21,198 58,858 --------- --------- Total assets ......................................... $ 165,559 647,215 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of long-term debt ................ $ 4,253 5,823 Accounts payable ...................................... 20,102 29,746 Accrued liabilities ................................... 28,015 66,875 Interest payable ...................................... 3,898 4,126 --------- --------- Total current liabilities .......................... 56,268 106,570 --------- --------- Deferred income taxes ..................................... 1,656 60,834 Other long-term liabilities ............................... 2,963 7,481 Long-term debt, excluding current installments ............ 117,891 438,011 Long-term debt, convertible subordinated debentures ....... 35,000 -- --------- --------- Total liabilities .................................. 213,778 612,896 --------- --------- Stockholders' equity (deficit): Convertible preferred stock, par value $1.00 per share, 2,000 shares authorized, none and 1,132 shares outstanding at October 31, 1999 and 2000, respectively.......................................... -- 1,132 Class A common stock, par value $0.01 per share, 99,300 shares authorized, 36,268 and 39,922 shares outstanding at October 31, 1999 and 2000, respectively ......................................... 364 371 Class B non-voting common stock, par value $0.01 per share, 700 shares authorized, none outstanding ....... -- -- Additional paid-in capital ............................ 149,622 264,987 Accumulated losses .................................... (196,852) (228,853) Treasury stock, at cost ............................... (102) (102) Accumulated other comprehensive loss .................. (1,251) (3,216) --------- --------- Total stockholders' equity (deficit) ............... (48,219) 34,319 --------- --------- Commitments and contingencies (Notes 9, 11, 13, 15 and 23). $ 165,559 647,215 ========= =========
See accompanying notes to consolidated financial statements. 40 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1999 2000 --------- --------- --------- Operating revenues: Services .............................................................. $ 135,790 148,660 186,520 Sales ................................................................. 23,523 62,488 46,828 --------- --------- --------- 159,313 211,148 233,348 --------- --------- --------- Operating expenses (exclusive of depreciation and amortization shown below): Services .............................................................. 88,916 99,496 126,601 Sales ................................................................. 15,739 43,937 29,299 --------- --------- --------- 104,655 143,433 155,900 --------- --------- --------- Total gross profit ............................................... 54,658 67,715 77,448 Selling, general and administrative expenses ............................... 26,205 27,178 35,664 Loss on sale of businesses ................................................. 66 1,600 -- Depreciation and amortization .............................................. 29,489 22,189 27,826 --------- --------- --------- Operating income (loss) .......................................... (1,102) 16,748 13,958 Other (income) deductions: Interest expense ...................................................... 15,521 16,177 31,231 Other (income) expense ................................................ (1,064) 15 (456) --------- --------- --------- 14,457 16,192 30,775 --------- --------- --------- Income (loss) before income tax expense and extraordinary items ....... (15,559) 556 (16,817) Income tax expense ......................................................... 321 177 1,603 --------- --------- --------- Income (loss) before extraordinary items .............................. (15,880) 379 (18,420) Extraordinary items--write-off of deferred financing fees and debt call premium ....................................................... -- -- 12,567 --------- --------- --------- Net income (loss) ..................................................... (15,880) 379 (30,987) Convertible preferred stock dividend ....................................... -- -- 1,014 --------- --------- --------- Net income (loss) available to common stockholders ......................... $ (15,880) 379 (32,001) ========= ========= ========= Basic and diluted income (loss) per share: Income (loss) before extraordinary items ................................... $ (0.44) 0.01 (0.50) Extraordinary items ........................................................ -- -- (0.34) --------- --------- --------- Net income (loss) .......................................................... $ (0.44) 0.01 (0.84) ========= ========= ========= Net income (loss) available to common stockholders ......................... $ (0.44) 0.01 (0.87) ========= ========= ========= Weighted average number of shares used in per share calculations: Basic shares .......................................................... 35,696 36,118 36,928 Diluted shares ........................................................ 35,696 38,343 36,928 ========= ========= =========
See accompanying notes to consolidated financial statements. 41 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000 (IN THOUSANDS)
1998 1999 2000 --------- --------- --------- COMMON STOCK: Beginning balance .......................................................... $ 354 360 364 Issuance of Class A common stock, net of issuance expenses ............ 6 4 4 Issuance of 2,900 shares of Class A common stock in warrant exercises . -- -- 3 --------- --------- --------- Ending balance ............................................................. 360 364 371 --------- --------- --------- PREFERRED STOCK: Beginning balance .......................................................... -- -- -- Issuance of 1,128 shares of convertible preferred stock, net of issuance expenses .......................................... -- -- 1,128 Issuance of 4 shares of convertible preferred stock as in-kind dividend -- -- 4 --------- --------- --------- Ending balance ............................................................. -- -- 1,132 --------- --------- --------- ADDITIONAL PAID-IN CAPITAL: Beginning balance .......................................................... 148,238 149,119 149,622 Issuance of Class A common stock, net of issuance expenses ............ 511 233 1,107 Issuance of convertible preferred stock, net of issuance expenses ..... -- -- 105,673 Issuance and exercise of warrants ..................................... -- -- 8,321 Deferred compensation ................................................. 370 270 264 --------- --------- --------- Ending balance ............................................................. 149,119 149,622 264,987 --------- --------- --------- ACCUMULATED LOSSES: Beginning balance .......................................................... (181,351) (197,231) (196,852) Net income (loss) ..................................................... (15,880) 379 (30,987) Convertible preferred stock dividend .................................. -- -- (1,014) --------- --------- --------- Ending balance ............................................................. (197,231) (196,852) (228,853) --------- --------- --------- TREASURY STOCK ............................................................. (102) (102) (102) --------- --------- --------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Beginning balance .......................................................... (379) (784) (1,251) Other comprehensive loss .............................................. (405) (467) (1,965) --------- --------- --------- Ending balance ............................................................. (784) (1,251) (3,216) --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ (48,638) (48,219) 34,319 ========= ========= ========= COMPREHENSIVE LOSS: Net income (loss) .......................................................... $ (15,880) 379 (30,987) Other comprehensive loss: Minimum pension liability adjustment .................................. (495) (107) (5) Foreign currency translation adjustment ............................... 90 (360) (2,277) Unrealized gain on investments ........................................ -- -- 317 --------- --------- --------- Other comprehensive loss ................................................... (405) (467) (1,965) --------- --------- --------- COMPREHENSIVE LOSS ......................................................... $ (16,285) (88) (32,952) ========= ========= =========
See accompanying notes to consolidated financial statements. 42 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000 (IN THOUSANDS)
1998 1999 2000 -------- -------- -------- Cash flows from operating activities: Net income (loss) ........................................... $(15,880) 379 (30,987) -------- -------- -------- Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization .......................... 29,489 22,189 27,826 Change in deferred income taxes, net of effects of businesses acquired ............. (592) 54 120 Loss on sale of businesses ............................. 66 1,600 -- Non-cash interest expense .............................. -- -- 7,511 Extraordinary items .................................... -- -- 12,567 Changes in operating assets and liabilities, net of effects of acquisitions/dispositions of businesses: Restricted cash ................................... 57 (150) (19) Accounts receivable ............................... (7,841) (4,826) 8,605 Inventories ....................................... (4,600) (3,314) 4,681 Accounts payable .................................. 2,909 7,494 (4,351) Accrued liabilities ............................... 2,762 2,034 764 Other .................................................. 1,790 1,089 (1,390) -------- -------- -------- Total adjustments ................................. 24,040 26,170 56,395 -------- -------- -------- Net cash provided by operating activities ........................ 8,160 26,549 25,408 -------- -------- -------- Cash flows from investing activities: Capital expenditures ........................................ (2,773) (2,069) (6,131) Wagering systems expenditures ............................... (21,287) (12,865) (28,915) Increase in other assets and investments .................... (7,277) (9,035) (7,304) Business acquisitions, net of cash acquired ................. 2,177 (2,333) (316,242) Other ....................................................... (63) 759 1,109 -------- -------- -------- Net cash used in investing activities ............................ (29,223) (25,543) (357,483) -------- -------- -------- Cash flows from financing activities: Net borrowings under revolving credit facility .............. -- -- 11,250 Proceeds from issuance of long-term debt .................... 12,059 -- 442,522 Payments on long-term debt .................................. (3,072) (3,154) (201,362) Payment of financing fees ................................... -- -- (16,792) Net proceeds from issuance of common stock .................. 516 237 1,114 Net proceeds from issuance of convertible preferred stock ... -- -- 106,378 -------- -------- -------- Net cash provided by (used in) financing activities .............. 9,503 (2,917) 343,110 -------- -------- -------- Effect of exchange rate changes on cash .......................... 162 169 (794) -------- -------- -------- Increase (decrease) in cash and cash equivalents ................. (11,398) (1,742) 10,241 Cash and cash equivalents, beginning of year ..................... 18,207 6,809 5,067 -------- -------- -------- Cash and cash equivalents, end of year ........................... $ 6,809 5,067 15,308 ======== ======== ========
(Continued) 43 AUTOTOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000 (IN THOUSANDS) NON-CASH INVESTING AND FINANCING ACTIVITIES 1998, 1999 AND 2000 See Notes 10, 11 and 13 for a description of the write-off of deferred financing fees, capital lease transactions and the issuance of common stock warrants to the Company's financial advisors in connection with their services and convertible preferred stock dividends paid-in-kind. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for:
OCTOBER 31, ------------------------------ 1998 1999 2000 ----------- --------- -------- Interest.................................. $ 14,786 15,077 22,177 Income taxes.............................. $ 630 710 2,413
See accompanying notes to consolidated financial statements. 44 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1999 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF THE BUSINESS Autotote Corporation (the "Company") operates primarily in four business segments: Lottery Group, Pari-mutuel Group, Venue Management Group and Telecommunications Products Group. Lottery Group-- encompasses the full range of lottery game consulting and production services, including the manufacturing, warehousing and distribution of instant lottery tickets and related instant-ticket services such as game design, sales and marketing support, retailer telemarketing and field services. The Company also provides on-line lottery systems and systems-related services, including transaction processing software that accommodates instant ticket game accounting and validation and on-line games, point-of-sale terminal hardware which connect to these systems, central site computer and communications hardware which runs these systems and ongoing maintenance for each of these items. Our lottery products and services are provided primarily to domestic and international governmentally sanctioned lotteries worldwide. Pari-mutuel Group-- includes all aspects of our pari-mutuel service business, which encompass our North American and international on-track, off-track and inter-track pari-mutuel services, simulcasting and communications services, video gaming, and sales of pari-mutuel systems and equipment. We are the leading provider of computerized pari-mutuel wagering worldwide. We are one of the leading providers of simulcasting services to the racing industry in the United States and Europe. Venue Management Group-- we own and operate the Connecticut off-track betting operations ("OTBs") and we are the exclusive licensed operator of all on-track and off-track pari-mutuel wagering operations in the Netherlands. Telecommunication Products Group-- through our United Kingdom based operations, we manufacture prepaid scratch-off phone cards incorporating our superior lottery based proprietary technology to create highly secure, paper-based, prepaid phone cards for the rapidly growing international cellular telephone markets. (b) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and subsidiaries in which the Company's ownership is greater than 50%. Investments in other entities where the Company has the ability to exercise significant influence over the investee are accounted for on the equity basis. Under the equity method, investments are stated at cost plus the Company's equity in undistributed earnings after acquisition. All significant inter-company balances and transactions have been eliminated in consolidation. (c) CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an original maturity at the date of purchase of three months or less to be cash equivalents. (d) RESTRICTED CASH Restricted cash represents amounts on deposit by customers for TeleBet wagering. State regulations require the Company to maintain such balances until deposited amounts are wagered or returned to the customer. AUTOTOTE CORPORATION AND SUBSIDIARIES 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (e) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined as follows:
ITEM COST METHOD ---- ----------- Parts First-in, first-out or weighted moving average. Work-in-process First-in, first-out or weighted moving average for direct material and & finished goods labor; other fixed and variable production costs are allocated as a percentage of direct labor cost.
The Company adjusts inventory accounts on a periodic basis to reflect the impact of potential obsolescence. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:
ESTIMATED LIFE ITEM IN YEARS ---- -------------- Machinery and equipment................ 3-10 Transportation equipment............... 3-7 Furniture and fixtures................. 5-10 Buildings and leasehold improvements... 5-40
Depreciation expense includes the amortization of capital leased assets. The Company typically depreciates the equipment and installation costs for new customers on a straight-line method over the life of the initial term of their contracts. (g) DEFERRED INSTALLATION COSTS Certain installation costs consisting of installation materials, customer contracted software and installation labor associated with leased systems are deferred and amortized over the lives of the leases unless such costs are reimbursed by the lessee, in which case such amounts are included in revenue and cost of sales. Deferred installation costs, net of accumulated depreciation, included in property and equipment were approximately $5,807 and $9,831 at October 31, 1999 and 2000, respectively. 46 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (h) GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. Goodwill acquired in connection with the acquisition of Scientific Games (Note 3) and its operating business units is being amortized on a straight-line basis over 20 years, and for the German pari-mutuel wagering business acquired in 1999, goodwill is being amortized on a straight-line basis over 10 to 15 years. Total goodwill amounted to $5,237 and $156,557, net of accumulated amortization of $12,503 and $13,725 as of October 31, 1999 and 2000, respectively. (i) OTHER ASSETS AND INVESTMENTS The Company capitalizes costs associated with internally developed and/or purchased software systems for new products and enhancements to existing products that meet technological feasibility and recoverability tests. The Company also capitalizes costs associated with the procurement of long-term financing, and costs attributable to transponder leases, patents, trademarks, marketing rights, and non-competition and employment agreements arising primarily from business acquisitions. These capitalized costs are amortized on the straight-line basis over their useful lives. (j) IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL The Company assesses the recoverability of long-lived assets and intangibles, including goodwill, whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for goodwill and intangibles, by determining whether the amortization of the goodwill and intangible asset balance over its remaining life can be recovered through undiscounted future cash flows of the acquired operation and other considerations. The amount of impairment of goodwill and intangible assets, if any, is measured based on projected discounted future cash flows. The amount of impairment of other long-lived assets is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair market value, less costs to sell. (k) REVENUE RECOGNITION Revenues from pari-mutuel wagering services, simulcast and communication services and lottery service support contracts are recognized over the contract period pursuant to the terms of the contracts. Costs of providing operating services under contracts are charged to operations in the period incurred. Revenue from the operation of off-track betting concerns is recognized based on a percentage of amounts wagered. Revenues from the sales of products and supplies are recognized when shipped. Revenues from major contracts for the sale of lottery development projects, pari-mutuel wagering systems and revenues for contracted software development are recognized on the percentage of completion method of accounting based on the ratio of costs incurred to estimated costs to complete, or other comparable measures of progress toward completion. Any anticipated losses on fixed price contracts are charged to operations when such losses can be estimated. The Company recognizes revenue from software licenses upon shipment if post-delivery obligations are insignificant and if the terms of the agreement are such that the payment obligation is non-cancelable and non-refundable. 47 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (l) INCOME TAXES Income taxes are calculated using the asset and liability method under Statement of Financial Accounting Standard (SFAS) No. 109. Under this method, deferred income taxes are calculated by applying enacted statutory tax rates to cumulative temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (m) FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign operations are translated at year-end rates of exchange and operations are translated at the average rates of exchange for the year. Gains or losses resulting from translating the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive loss in stockholders' equity (deficit). Gains or losses resulting from foreign currency transactions are included in other income (expense) in the consolidated statements of operations. (n) STOCK-BASED COMPENSATION Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes (see Note 14), pro forma net income (loss) and income (loss) per share data are provided in accordance with Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" as if the fair value method had been applied. (o) FINANCIAL STATEMENT PREPARATION The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates being made involve percentage of completion for contracted lottery development projects and pari-mutuel systems software development projects, capitalization of software development costs, evaluation of the recoverability of assets and assessment of litigation and contingencies, including income and other taxes. Actual results could differ from those estimates. (p) COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of financial statements. SFAS 130 requires that unrealized losses from the Company's foreign currency translation adjustments, unrecognized minimum pension liability and unrealized gains (losses) on investments be included in other comprehensive income (loss). (q) RECLASSIFICATION Certain reclassifications have been made to the prior years consolidated financial statements to conform to the current presentation. 48 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) BASIC INCOME (LOSS) PER COMMON SHARE AND DILUTED INCOME (LOSS) PER COMMON SHARE Basic income (loss) per common share is computed by dividing income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per common share gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares are not included in the calculation of the dilutive loss per share in the applicable years presented, since their inclusion would be anti-dilutive. At October 31, 2000, the Company had outstanding common stock options, warrants, Performance Accelerated Restricted Stock Units, convertible preferred stock and deferred shares which could potentially dilute basic earnings per share in the future (see Notes 13 and 14). The following represents a reconciliation of the numerator and denominator used in computing basic and diluted income (loss) per common share for the years ended October 31, 1998, 1999 and 2000:
YEARS ENDED OCTOBER 31, ----------------------------------- 1998 1999 2000 -------- -------- -------- INCOME (NUMERATOR) Income (loss) before extraordinary items ............. $(15,880) 379 (18,420) Extraordinary items .................................. -- -- (12,567) -------- -------- -------- Net income (loss) .................................... (15,880) 379 (30,987) Convertible preferred stock dividend ................. -- -- 1,014 -------- -------- -------- Net income (loss) available to common stockholders ... $(15,880) 379 (32,001) ======== ======== ======== SHARES (DENOMINATOR) Basic weighted average common shares outstanding ..... 35,696 36,118 36,928 Effect of dilutive securities-stock options, warrants, and deferred shares ............................. -- 2,225 -- -------- -------- -------- Diluted weighted average common shares outstanding ... 35,696 38,343 36,928 ======== ======== ======== BASIC AND DILUTED PER SHARE AMOUNT Income (loss) before extraordinary items ............. $ (0.44) 0.01 (0.50) Extraordinary items .................................. -- -- (0.34) -------- -------- -------- Net income (loss) .................................... $ (0.44) 0.01 (0.84) ======== ======== ======== Net income (loss) available to common stockholders ... $ (0.44) 0.01 (0.87) ======== ======== ========
(3) ACQUISITIONS AND DISPOSITIONS ACQUISITION OF SCIENTIFIC GAMES HOLDINGS CORP. On September 6, 2000, the Company completed the acquisition of Scientific Games Holdings Corp. ("Scientific Games"), a world leading supplier of lottery products, integrated lottery systems and support services, and pre-paid telephone cards. The acquisition was completed through a merger in which Scientific Games became a wholly-owned subsidiary of the Company, at a cost of approximately $308,000 in aggregate merger consideration to Scientific Games stockholders, plus related fees and expenses. The acquisition was recorded using the purchase method of accounting. The acquired assets and liabilities were recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $154,300 and has been recorded as goodwill which is being amortized over 20 years. The operating results of Scientific Games' businesses have been included in the accompanying consolidated statements of operations from the date of the acquisition. 49 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) The Scientific Games acquisition and the refinancing of substantially all existing debt of both the Company and Scientific Games, along with the payment of certain related fees and expenses, was completed with funds provided by: (1) proceeds from the issuance of $150,000 principal amount of the Company's 12 1/2% Senior Subordinated Notes due August 15, 2010; (2) $280,000 of term loan borrowings under the terms of a new senior credit facility; (3) $2,987 of borrowings under the new revolving credit facility of the senior credit facility; (4) $4,805 of cash on hand; and (5) $110,000 of gross proceeds from the sale of new convertible preferred stock, principally to an affiliated entity of Olivetti S.p.A. (see notes 9 and 13). The following table presents unaudited pro forma results of operations as if the Scientific Games acquisition and related financing transactions had occurred at the beginning of the periods presented after giving effect to certain adjustments, including amortization of goodwill and other identifiable intangible assets, additional depreciation expense, increased interest expense, convertible preferred stock dividends and related income tax effects. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal year 1999 or the results which may occur in the future.
YEARS ENDED OCTOBER 31, ------------------------ 1999 2000 --------- --------- (unaudited) Operating revenues ................................... $ 439,811 437,073 Operating income ..................................... 40,158 29,847 Loss before income tax expense and extraordinary items $ (10,084) (19,993) Net loss ............................................. $ (13,738) (24,006) Convertible preferred stock dividend ................. (6,765) (6,765) --------- --------- Net loss available to common stockholders ............ $ (20,503) (30,771) Basic and diluted net loss per share ................. $ (0.57) (0.83) ========= ========= Basic and diluted net loss per common share .......... $ (0.57) (0.83) ========= =========
ACQUISITION OF DATASPORT ASSETS AND INTEREST IN DATEK On September 1, 1999, the Company completed the purchase of selected assets and the assumption of certain liabilities, from Datasport Toto Dienstleistung GmbH & Co KG ("Datasport"). As a result of this purchase, the Company is the sole provider of totalisator and simulcasting services to the 14 thoroughbred racetracks in Germany. The transaction also increased the Company's ownership and control of Datek GmbH ("Datek"), the primary provider of pari-mutuel wagering to OTBs and bookmakers in Germany. The purchase, which included approximately $2,333 in cash and the assumption of certain liabilities, was recorded using the purchase method of accounting, and the acquired assets and liabilities have been recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $3,200 and has been recorded as goodwill which is being amortized over 15 years. The operating results of the Datasport and Datek businesses have been included in the consolidated statements of operations since the date of acquisition. Had the operating results of the Datasport and Datek businesses been included as if the transaction had been consummated on November 1, 1998, the pro forma operating results of the Company would not have been materially different. 50 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (3) ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) ACQUISITION OF NETHERLANDS SUBSIDIARY On July 1, 1998, the Company completed the purchase of Hippo Toto B.V., which was renamed Autotote Nederland B.V. This wholly owned subsidiary holds an exclusive five-year license to operate all on-track and off-track pari-mutuel wagering in The Netherlands. The initial license, granted by the Dutch Ministry of Agriculture, extends through June 30, 2003. The purchase was for nominal consideration and the acquisition was recorded using the purchase method of accounting and, accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair value at the date of acquisition. The operating results of Autotote Nederland B.V. have been included in the consolidated statements of operations since the date of acquisition. DISPOSITION OF BUSINESSES In the fourth quarter of fiscal 1999, the Company commenced negotiations to sell its SJC Video business and recorded an anticipated loss on the sale of approximately $1,600 in fiscal 1999. The sale of the business was completed in the first quarter of fiscal 2000 for its then approximate net book value. (4) INVENTORIES Inventories consist of the following:
OCTOBER 31, ------------------- 1999 2000 --------- -------- Parts and work-in-process.......................... $ 13,735 12,545 Finished goods..................................... 901 12,133 --------- -------- $ 14,636 24,678 ========= ========
Terminals manufactured by the Company may be sold to customers or included as part of a long-term wagering system contract. Parts and work-in-process includes costs for equipment expected to be sold. Costs incurred for equipment associated with specific wagering system contracts not yet placed in service are classified as construction in progress in property and equipment (see Note 5). (5) PROPERTY AND EQUIPMENT Property and equipment, including assets under capital leases, consist of the following:
OCTOBER 31, --------------------- 1999 2000 -------- -------- Machinery, equipment and deferred installation costs... $169,334 245,504 Land and buildings .................................... 14,251 39,154 Transportation equipment .............................. 722 3,097 Furniture and fixtures ................................ 3,971 6,699 Leasehold improvements ................................ 5,886 9,376 Construction in progress .............................. 5,603 13,719 -------- -------- $199,767 317,549 ======== ========
Depreciation expense for the years ended October 31, 1998, 1999, and 2000 amounted to $19,310, $14,158 and $16,528, respectively. 51 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (5) PROPERTY AND EQUIPMENT -- (CONTINUED) Costs for equipment associated with specific wagering systems contracts not yet placed in service are recorded as construction in progress. When the equipment is placed in service at wagering facilities, the related costs are transferred from construction in progress to machinery and equipment, and the Company commences depreciation of the costs. (6) OPERATING RIGHT AND OTHER INTANGIBLE ASSETS Operating right and other intangible assets (net) consist of the following:
OCTOBER 31, -------------------------- 1999 2000 -------- -------- Operating Right ... $ 13,848 12,848 ======== ======== Employee work force $ -- 6,980 Patents ........... -- 15,441 Customer lists .... -- 65,496 Trade name ........ -- 31,954 -------- -------- $ -- 119,871 ======== ========
In connection with the acquisition of Scientific Games (Note 3) identifiable intangible assets were recorded at their estimated fair value at the date of acquisition in the amount of $121,000. These identifiable assets are being amortized on a straight line basis over their estimated useful lives as follows: employee work force- 5 years; patents- 15 years; customer lists- 20 years and trade name- 20 years. Amortization of these intangible assets totaled $1,129 for the year ended October 31, 2000. On July 1, 1993, the Company acquired the exclusive right to operate the Connecticut off-track betting system. This operating asset is being amortized on a straight-line basis over 20 years and amounted to $13,848 and $12,848, net of accumulated amortization of $6,357 and $7,357 at October 31, 1999 and 2000, respectively. (7) OTHER ASSETS AND INVESTMENTS Other assets and investments (net) consist of the following:
OCTOBER 31, ---------------------- 1999 2000 ---------- --------- Software systems development costs........... $ 8,718 29,252 Deferred financing costs..................... 3,351 16,153 Customer notes............................... 3,031 3,154 Other assets................................. 6,098 10,299 ---------- --------- $ 21,198 58,858 ========== =========
In fiscal 1999 and 2000, the Company capitalized $5,246 and $5,695, respectively, of software systems development costs related primarily to video gaming, pari-mutuel wagering and lottery applications, plus $16,800 for the fair value of internally developed software acquired in connection with the acquisition of Scientific Games. Capitalized costs are amortized on a straight-line basis over a period of five to ten years. Amortization of capitalized software systems development costs was $2,318, $2,506 and $2,454 for the years ended October 31, 1998, 1999 and 2000, respectively. 52 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (7) OTHER ASSETS AND INVESTMENTS--(CONTINUED) Deferred financing costs arose in connection with the procurement of long term financing by the Company, and are amortized over the life of the financing agreements. In fiscal 2000, the Company capitalized $16,517 of financing fees incurred in connection with the Transactions. Accordingly, the Company wrote-off, as an extraordinary charge, $2,865 of previously deferred financing costs in connection with its repayment of the Old Facility and 1998 and 2000 Term Loans. Amortization of deferred financing costs amounted to $893, $942 and $1,224 for the fiscal years ended October 31, 1998, 1999 and 2000, respectively. Other assets in fiscal 1999 included $750 loaned by the Company to Atlantic City Racing Association ("ACRA"). The loan was secured by a mortgage on certain real estate owned by ACRA. In consideration for this loan, the Company had the right to acquire ACRA for an additional $6,250 subject to certain other adjustments. Several anticipated legislative and regulatory actions by the State of New Jersey did not occur, and the Company decided not to purchase ACRA at this time. The loan and approximately $385 in deferred acquisition costs were written off in the fourth quarter of fiscal 2000. (8) ACCRUED LIABILITIES Accrued liabilities consist of the following:
OCTOBER 31, ------------------- 1999 2000 --------- -------- Compensation and benefits............................ $ 8,830 12,393 Customer advances.................................... 3,760 1,447 Taxes, other than income............................. 2,043 3,717 Accrued acquisition costs............................ -- 10,571 Accrued contract costs............................... -- 11,746 Other................................................ 13,382 27,001 --------- -------- $ 28,015 66,875 ========= ========
(9) LONG-TERM DEBT Long-term debt consists of the following:
OCTOBER 31, --------------------- 1999 2000 -------- -------- 12 1/2% Series B Senior Subordinated Notes due 2010 ......... $ -- 150,000 Term A loan with varying interest rate due 2006 ............. -- 60,000 Term B loan with varying interest rate due 2007 ............. -- 220,000 Revolving credit facility with varying interest rate due 2006 -- 11,250 10 7/8% Series B Senior Notes due 2004 ...................... 110,000 -- 8.87% Term Loan Due February 2001 ........................... 9,000 -- Term Loan due in November 1999 .............................. 1,250 -- 5.5% convertible subordinated debentures due August 2001 .... 35,000 -- Capital lease obligations, payable monthly through May 2003 Interest from 5.9% to 13.0% ............................ 1,453 1,939 Various loans and bank facilities, interest from 4.3% to 13% 441 645 -------- -------- Total long-term debt .................................. 157,144 443,834 Less current installments ............................. 4,253 5,823 -------- -------- Long-term debt, excluding current installments ........ $152,891 438,011 ======== ========
53 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (9) LONG-TERM DEBT--(CONTINUED) On September 6, 2000, in addition to the payment of the acquisition consideration to the shareholders of Scientific Games, the Company refinanced substantially all existing debt of both the Company and Scientific Games and paid certain related fees and expenses (collectively, the "Transactions"). In addition to cash on hand and proceeds from the sale of convertible preferred stock, the Company incurred the following debt to fund the Transactions: (i) $150,000 principal amount of 12 1/2% Senior Subordinated Notes due August 15, 2010 (the "Notes"); (ii) $280,000 of term loan borrowings under the terms of a new senior credit facility (the "Facility"); and (iii) $2,987 of borrowings under the revolving credit portion of the Facility. The Notes bear interest at the rate of 12 1/2% per annum payable semi-annually on each February 15 and August 15, commencing February 15, 2001. The Notes are senior subordinated, unsecured obligations of the Company, ranking junior to all existing and future senior debt including obligations under the Facility. The Notes are fully and unconditionally guaranteed on a senior subordinated basis by all of the Company's wholly-owned U.S. subsidiaries(Note 24). The Notes will be redeemable, at the option of the Company, at any time on or after August 15, 2005, in whole or in part, at redemption prices equal to 106.250%, 104.167%, 102.083% and 100.000% of the principal amount thereof if redeemed during the 12-month periods commencing on August 15 of years 2005, 2006, 2007, and 2008 and thereafter, respectively. In addition, on or before August 15, 2003, the Company may, at its option, redeem up to 35% of the Notes at 112.5% of the principal amount thereof, plus accrued and unpaid interest, with the net proceeds of equity offerings, provided at least 65% of the original aggregate principal amount of the Notes remain outstanding immediately after such redemption. In addition to the issuance of the Notes, the Company also entered into the Facility with certain lenders, providing for borrowings of up to $345,000. The Facility consists of: (a) a $65,000 revolving credit facility, available for working capital and general corporate purposes (the "Revolver"), which matures in September 2006 with interest at the Base Rate (as defined) plus a margin of 2.25% per annum, or at the rate of LIBOR plus a margin of 3.50% per annum, plus a commitment fee on the unused portion of 0.05% per annum, for the first six months and thereafter as determined by reference to a leverage-based pricing grid; (b) a $60,000 term loan (the "Term A Loan") which matures in September 2006 with interest at the Base Rate plus a margin of 2.25% per annum, or at the rate of LIBOR plus 3.50% per annum for the first six months and thereafter as determined by reference to a leverage-based pricing grid; and (c) a $220,000 term loan (the "Term B Loan") which matures in September 2007 with interest at the Base Rate plus a margin of 3.00% per annum, or at the rate of LIBOR plus 4.25% per annum. The Facility is secured by a first priority, perfected lien on: (i) substantially all the property and assets (real and personal, tangible and intangible) of the Company and its domestic subsidiaries, (ii) 100% of the capital stock of all of the direct and indirect domestic subsidiaries and 65% of the capital stock of the foreign subsidiaries of the Company and (iii) all inter-company indebtedness owing to the Company and its material subsidiaries. The Facility is supported by guarantees provided by all of the Company's direct and indirect, wholly-owned domestic subsidiaries. Average interest rates at October 31, 2000 were 10.45% per annum on Revolver borrowings, 10.13% per annum on Term A Loan borrowings and 10.96% per annum on Term B Loan borrowings. At October 31, 2000, availability under the Revolver was $52,091. Under the terms of the Facility, the Company is required to maintain interest rate hedges for a notional amount of not less than $140,000 for a period of not less than two years. In satisfaction of this requirement, the Company entered into three interest rate swap agreements in November 2000 which obligate the Company to pay a fixed LIBOR rate and entitle the Company to receive a variable LIBOR rate on an aggregate $140,000 notional amount of debt. 54 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (9) LONG-TERM DEBT--(CONTINUED) Term A Loan requires quarterly principal payments $750 in the first year of borrowing, $1,500 in the second year after the borrowing, $2,250 in the third year after the borrowing, $3,000 in the fourth year after the borrowing, and $3,750 in the fifth and sixth years after the borrowing. Term B Loan requires quarterly principal payments of $550 during the first through the sixth years after the borrowing, and $51,700 in the seventh year after the borrowing. The aggregate scheduled maturities under the Facility are $5,200, $8,200, $11,200, $14,200, and $17,200 for fiscal years 2001, 2002, 2003, 2004 and 2005, respectively. In addition, the Facility will be subject to the following mandatory prepayments, with certain customary exceptions: (i) 100% of the net cash proceeds from the sale or issuance of debt securities; (ii) 100% of the net proceeds from the sale of assets and casualty insurance proceeds; (iii) 50% of the Company's excess cash flow (as defined), or if the leverage ratio is less than 3.00 to 1.00, 25% of the Company's excess cash flow; and (iv) 50% of the net cash proceeds from the sale or issuance of equity (except for the issuance of the Company's new convertible preferred stock). The indenture governing the Notes and the agreement governing the Facility contain certain covenants that, among other things, limit the Company's ability, and the ability of certain of the Company's restricted subsidiaries, to incur additional indebtedness, pay dividends or distributions or make certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all assets, and create certain liens and other encumbrances on new assets. Additionally, the agreement governing the Facility contains the following financial covenants which will be computed quarterly on a rolling four-quarter basis as applicable: (i) minimum Interest Coverage ratio, (ii) minimum Fixed Charge Coverage ratio; (iii) maximum Leverage ratio; and (iv) minimum Net Worth. Prior to the September 6, 2000 Transactions, the Company's debt consisted primarily of: (a) $110,000 of 10 7/8% Series B Senior Notes due August 1, 2004 (the "Old Notes"), (b) $35,000 of 5.5% convertible subordinated debentures due 2001 (the "Debentures"), (c) $18,634 of borrowings under a revolving credit facility (the "Old Facility"), (d) a $7,200 term loan (the "1998 Term Loan"), and (e) a $9,900 term loan (the "2000 Term Loan"). The Old Notes, the Debentures, borrowings under the Old Facility, the 1998 Term Loan, and the 2000 Term Loan were all repaid in full with cash on hand and with proceeds from the debt and equity financing in the Transactions. The Debentures were convertible into 1,750 shares of Class A Common Stock at a conversion price of $20.00 per share. The Old Notes were issued by the Company in July 1997. The Old Notes bore interest at a rate of 10 7/8% per annum payable semi-annually on each February 1 and August 1. The Old Notes were senior, unsecured obligations of the Company, ranking senior in right and priority of payment to all indebtedness of the Company that by its terms was expressly subordinated to the Old Notes. The Old Notes were jointly and severally guaranteed by substantially all of the Company's wholly-owned U.S. subsidiaries. The Old Notes were redeemable, in whole or in part, at the option of the Company, at any time on or after August 1, 2001, at varying redemption prices plus accrued and unpaid interest, if any, to the date of redemption. In connection with the redemption of the Old Notes on September 6, 2000, the Company paid a call premium to the Old Note holders in the amount of $9,702. This call premium was recorded as an extraordinary item in the Company's consolidated statements of operations in fiscal 2000. In connection with the issuance of the Old Notes, the Company also entered into the Old Facility with certain lenders which had an original maturity date of February 2001, and which provided, subject to certain terms and conditions, for borrowings of up to $25,000 with a $15,000 sublimit for letters of credit. Borrowings under the Old Facility were available for working capital and general corporate purposes and bore interest at the Base Rate (as defined) plus a margin ranging from 1.00% to 1.75% per annum, or the Eurodollar Rate (as defined) plus a margin ranging from 2.00% to 2.75% per annum, in each case depending on the Company's performance as 55 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (9) LONG-TERM DEBT--(CONTINUED) measured by the ratio of net debt (as defined) to EBITDA (as defined). Fees were payable on outstanding letters of credit equal to the applicable Eurodollar Rate margin (2.25% as of October 31, 1999), plus a facing fee of 1/8% per annum. A commitment fee of 1/2% per annum was payable on the unused amount of the Old Facility. Obligations under the Old Facility were jointly and severally guaranteed by substantially all of the Company's U.S. subsidiaries. In addition, the Old Facility was secured by (i) first priority security interests in substantially all tangible and intangible assets of the Company and its U.S. subsidiaries, and (ii) a first priority lien on all of the capital stock of the Company's U.S subsidiaries and on 65% of the capital stock of the Company's non-U.S. subsidiaries. At October 31, 1999, there were no borrowings outstanding under the Old Facility. Therefore, the Company had approximately $23,960 available for borrowing, after deducting approximately $1,040 for letters of credit which were guaranteed under the Old Facility. The 1998 Term Loan was arranged to partially finance the development and installation of a lottery system for the Connecticut State Lottery, including the manufacture of approximately three thousand new lottery terminals, entered into by the Company and Autotote Lottery Corporation on May 22, 1998. The 1998 Term Loan bore interest at a fixed rate of 8.87% payable quarterly and at maturity on February 15, 2001, with principal payments of $600 due quarterly through January 31, 2001 with a final principal payment of $6,000 due at maturity. The Term Loan was secured by a first priority security interest in substantially all of the Company's Connecticut lottery assets. The 2000 Term Loan was arranged in June 2000 with an original maturity of February 15, 2001. The 2000 Term Loan bore interest at a rate of prime plus 2.50% per annum or LIBOR plus 3.50% per annum, with such interest to be paid quarterly beginning August 15, 2000. Principal payments of $100 were due on August 15 and November 15, 2000, with a final principal payment of $9,800 due at maturity. (10) EXTRAORDINARY ITEMS In connection with the acquisition of Scientific Games and the related financing transactions and the subsequent repayment of all amounts outstanding under the Company's previous credit facilities (see Note 9), the Company wrote-off $2,865 of deferred financing fees and expensed $9,702 in call premium on the Old Notes. There were no tax benefits recognized on the net extraordinary loss because the Company is currently in a tax loss carryforward position. 56 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (11) COMMITMENTS LEASES At October 31, 2000, the Company was obligated under operating leases covering office equipment, office and warehouse space, transponders and transportation equipment expiring at various dates through 2006. Future minimum lease payments required under these leasing arrangements at October 31, 2000 are as follows: 2001, $10,313; 2002, $9,680; 2003, $8,511; 2004, $8,100; 2005 $7,861 and thereafter $5,186. The Company also leases equipment as needed under various month-to-month lease agreements. Total rental expense under these operating leases was $9,109, $8,155, and $9,051 in the years ended October 31, 1998, 1999 and 2000, respectively. The Company acquired $59 of capitalized leases with the acquisition of the Netherlands operations in the year ended October 31, 1998 and acquired $1,426 of capitalized leases with the acquisition of the Datasport and Datek businesses in the year ended October 31, 1999. During the year ended October 31, 2000, the Company entered into capital lease obligations of $62 and acquired capitalized leases of $40 in connection with the Scientific Games acquisition. PERFORMANCE OBLIGATIONS The Company is required to provide performance bonds under many of its lottery contracts and pursuant to various other contracts and regulatory requirements. At October 31, 2000, performance bonds totaling $93,582 were outstanding. (12) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is determined by reference to market data and other valuation techniques as appropriate. The Company believes the fair value of its financial instruments, principally cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable, and accrued liabilities approximates their recorded values. The Company believes that the fair value of the Old Notes approximated $112,200 at October 31, 1999, based on reference to dealer markets and quoted market prices. The Company was, however, unable to determine the fair value of the Debentures in fiscal year 1999. The Company believes that the fair value of the Notes approximated $147,750 at October 31, 2000 based on reference to dealer markets and global market prices. The fair value of the outstanding Term A Loan and Term B Loan and revolving credit facility borrowings approximate their recorded values, respectively, based on the variable rates of these facilities and currently available terms and conditions for similar debt at October 31, 2000. (13) CAPITAL STOCK CONVERTIBLE PREFERRED STOCK The Company has 2,000 shares of preferred stock, $1.00 par value, authorized for issuance. On September 6, 2000, the Company issued, for gross proceeds of $110,000, 1,100 shares of new Series A Convertible Preferred Stock (the "Preferred Stock"), including $100,000 to Cirmatica Gaming, S.A., an affiliate of Lottomatica S.p.A. (the state concessionaire for the Italian Lotto game and an affiliate of Olivetti S.p.A. and Telecom Italia S.p.A.), and $10,000 to other investors through Ramius Securities, LLC (together with its affiliates, "Ramius"), which acted as placement agent. 57 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (13) CAPITAL STOCK--(CONTINUED) The Preferred Stock is presently convertible, after adjustment, into the Company's common stock at a price of $5.56 per share (subject to potential reset to no less than $5.00 per share based on possible future market price minimums), will mature and become mandatorily convertible into common stock after five years and will pay dividends at the rate of 6% per annum (payable in kind in additional shares or, at the Company's option beginning with the ninth quarterly dividend date, in cash). The holders of Preferred Stock also have the right to participate on an as-converted basis in any dividends with respect to the common stock. The holders of Preferred Stock have the right to vote along with the holders of common stock on all matters on which the holders of common stock are entitled to vote, are entitled to vote separately as a class with respect to certain matters, and are also entitled to certain rights of first refusal with respect to future financings. The Preferred Stock is also subject to certain customary anti-dilution provisions. In addition, the holders of Preferred Stock have the right to designate, initially, four members of the Company's Board of Directors (and to elect three additional Directors in the event of certain defaults by the Company). The Preferred Stock has preference over common stock with regard to the distribution of assets upon a liquidation, dissolution or other winding up of the Company. For the period from the date of issue through October 31, 2000, the Company issued approximately 32 shares of Series A Convertible Preferred Stock in connection with payment of the paid-in-kind dividends on such stock and as partial payment of a placement agent fee. For fiscal 2000, the Company recorded preferred stock dividends of $1,014, of which $575 was accrued and unpaid at October 31, 2000. Preferred stock dividends have been deducted in determining the amount of the net loss available to common stockholders in the consolidated statements of operations. COMMON STOCK The Company has two classes of common stock consisting of Class A Common Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of Class A Common Stock and Class B Common Stock entitle holders to the same rights and privileges except that the Class B Common Stock is non-voting. Each share of Class B Common Stock is convertible into one share of Class A Common Stock. On September 6, 2000, the Company issued warrants (the "September 2000 Warrants") to purchase up to 2,900 shares of the Company's common stock with a nominal exercise price to its financial advisors, Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group, Inc. (an affiliate of Lehman Brothers), which received 80% and 20%, respectively, of the September 2000 Warrants, in connection with their services to the Company in obtaining certain financing commitments. The Company has recorded the estimated fair value of the September 2000 Warrants at the date of issue of approximately $7,511 as interest expense, with a corresponding increase to additional paid in capital. On October 5, 2000, 2,900 shares of the Company's common stock were issued upon retirement of the September 2000 Warrants. On October 2, 2000, in connection with the acquisition of Scientific Games, the Company issued warrants (the "October 2000 Warrants") to purchase up to 250 shares of the Company's common stock to a financial advisor in connection with their services to the Company in obtaining certain financing commitments. The October 2000 Warrants are exercisable until October 1, 2004 at a price of $3.58 per share, equal to the fair market value of the Company's common stock on the date of issue. The estimated fair market value of the October 2000 Warrants on the date of issue was $305, which was recorded as an increase to goodwill with a corresponding increase in additional paid in capital. 58 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (13) CAPITAL STOCK--(CONTINUED) WARRANTS At October 31, 2000, the Company had the following warrants outstanding, after giving effect to adjustments made in accordance with certain anti-dilution provisions:
EXERCISE SHARES PRICE EXPIRATION ---------- --------- ----------------- Warrants to purchase Class A Common Stock: 1998 Warrants....................... 2,298 $ 1.69 October 31, 2002 2000 Class A Warrants............... 43 $ 3.32 April 30, 2003 October 2000 Warrants............... 250 $ 3.58 October 1, 2004 ---------- Total Class A Common Stock Warrants. 2,591 ========== Warrants to purchase Class B Common Stock 147 $ 3.83 October 30, 2003 ==========
(14) STOCK OPTIONS The Company has four stock option plans under which shares of Class A Common Stock have been authorized for issuance to employees, officers and directors: the 1984 Stock Option Plan (the "1984 Plan") - 1,350 shares; the 1992 Equity Incentive Plan (the "1992 Plan") - 3,000 shares; the 1995 Equity Incentive Plan (the "1995 Plan") - 4,000 shares: and the 1997 Incentive Compensation Plan, as amended in April 2000 (the "1997 Plan") - 3,400 shares. In May 1995, the Company offered holders of stock options with exercise prices above market value as of May 26, 1995 the right to cancel such options in exchange for Performance Accelerated Restricted Stock Units (the "PARS"). The PARS represent deferred shares of Class A Common Stock which vest in 20% increments on the sixth, seventh, eighth, ninth and tenth anniversaries of the date of grant, or, in certain circumstances, on an accelerated basis based on the Company's stock trading at certain per share prices, or at the discretion of the Board of Directors. Options to purchase 1,976 shares were exchanged for 504 PARS. Additionally, restricted shares and deferred shares with a three year vesting schedule were granted to certain non-employee directors under the 1992 Plan as follows: a total of 110 deferred shares at a fair market value of $4.1250 per share were granted in fiscal 1995, a total of 50 deferred shares at a fair market value of $3.1875 per share were granted in fiscal 1996, a total of 135 deferred shares at a fair market value of $1.3125 per share were granted in fiscal 1997, a total of 40 restricted shares at a fair market value of $2.4375 per share were granted in fiscal 1998, a total of 40 restricted shares at a fair market value of $2.000 per share were granted in fiscal 1999 and a total of 40 restricted shares at a fair market value of $2.5625 per share were granted in fiscal 2000. Accordingly, the Company has recorded compensation expense of $371, $272 and $264 in fiscal 1998, 1999 and 2000, respectively. Additional compensation expense aggregating $450 will be charged to expense through fiscal 2002 as the restricted shares become fully vested. 59 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) STOCK OPTIONS--(CONTINUED) Stock options granted under the Company's equity incentive plans are exercisable at not less than the fair market value of the stock at the date of grant, and none may be exercised more than 10 years from the date of grant. Options are generally exercisable in four equal installments on the first, second, third and fourth anniversaries of the date of grant. The Board of Directors may, in its discretion, accelerate the exercisability, the lapsing of restrictions, or the expiration of deferral or vesting period of any award under the plans. From time to time, the Company grants additional stock options to individuals outside of the 1992, 1995 and 1997 Plans in recognition of contributions made to the Company. Information with respect to the Company's stock options is as follows:
AVERAGE STOCK OPTIONS SHARES PRICE (1) ------------- ---------- --------- Outstanding at October 31, 1997...................... 5,769 2.63 Granted........................................... 732 2.65 Canceled.......................................... 397 1.83 Exercised......................................... 10 1.26 ---------- --------- Outstanding at October 31, 1998...................... 6,094 2.69 Granted........................................... 1,860 2.24 Canceled.......................................... 365 2.40 Exercised......................................... 216 1.09 ---------- --------- Outstanding at October 31, 1999...................... 7,373 2.63 ---------- --------- Granted........................................... 1,892 3.44 Canceled.......................................... 237 3.40 Exercised......................................... 377 2.41 ---------- --------- Outstanding at October 31, 2000...................... 8,651 2.80 ========== =========
(1) WEIGHTED AVERAGE EXERCISE PRICE. Summarized information about stock options outstanding and exercisable at October 31, 2000 is as follows:
OUTSTANDING EXERCISABLE -------------------------------- ----------------------- EXERCISABLE AVERAGE AVERAGE AVERAGE PRICE RANGE SHARES LIFE(1) PRICE(2) SHARES PRICE(2) ------------- --------- --------- ---------- --------- ------------ $ 1.00 to 2.00 2,466 6.26 $ 1.33 1,520 $ 1.23 $ 2.01 to 3.00 3,334 6.24 2.65 2,137 2.68 $ 3.01 to 4.00 2,452 7.23 3.49 838 3.46 over $4.00 399 3.65 8.84 337 9.69 --------- --------- 8,651 4,832 ========= =========
(1) WEIGHTED AVERAGE CONTRACTUAL LIFE REMAINING IN YEARS. (2) WEIGHTED AVERAGE EXERCISE PRICE. The number of shares and weighted average exercise price per share of options exercisable at October 31, 1998, 1999, and 2000 were 3,185 shares at $3.36, 3,859 shares at $3.13, and 4,832 shares at $2.85, respectively. At October 31, 1998, 1999 and 2000, 3,302 shares, 1,797 shares, and 1,909 shares, respectively, were available for future grants under the terms of these plans. Outstanding options expire prior to October 3, 2010 and are exercisable at prices ranging from $1.06 to $17.00 per share. 60 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) STOCK OPTIONS--(CONTINUED) The Company applies the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement defines a fair value method of accounting for an employee stock option or similar equity instrument. However, it allows an entity to continue to measure compensation cost for those instruments using the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", provided it discloses the effect of SFAS 123 in footnotes to the financial statements. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no stock option related compensation expense has been recognized for its stock-based compensation plans. Had the Company, however, elected to recognize compensation cost based on fair value of the stock options at the date of grant under SFAS 123, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company's net income (loss) and net income (loss) per share would have changed to the pro forma amounts indicated in the table below. Pro forma net income (loss) and income (loss) per basic and diluted share for the years ended:
OCTOBER 31, ------------------------------- 1998 1999 2000 --------- -------- --------- Net income (loss): As reported.................. $ (15,880) 379 (30,987) Pro forma.................... (17,605) (1,597) (33,250) Net income (loss) available to common stockholders : As reported.................. $ (15,880) 379 (32,001) Pro forma.................... (17,605) (1,597) (34,264) Net income (loss) per basic and diluted share: As reported.................. (0.44) 0.01 (0.84) Pro forma.................... (0.49) (0.04) (0.90) Net income (loss) available to common stockholders per basic and diluted share: As reported.................. (0.44) 0.01 (0.87) Pro forma.................... (0.49) (0.04) (0.93)
The fair value of the options granted was estimated using the Black-Scholes option-pricing model based on the weighted average market price at date of grant of $2.65 in fiscal 1998, $2.24 in fiscal 1999 and $3.44 in fiscal 2000 and the following weighted average assumptions: risk-free interest rate of 4.5% for fiscal 1998, 5.8% for fiscal 1999 and 6.3% for fiscal 2000; expected option life of 7.0 years for fiscal 1998, 1999 and 2000; volatility of 75% fiscal 1998, 59% for 1999 and 55% for fiscal 2000; and no dividend yield in any year. The average fair values of options granted during fiscal years 1998, 1999 and 2000 were $1.93, $1.45 and $2.15, respectively. 61 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (15) SERVICE CONTRACT ARRANGEMENTS Service contracts for pari-mutuel wagering systems in North America generally cover a five-year period and provide for substantial related services such as software, maintenance personnel, computer operators and certain operating supplies. Under such contracts, the Company retains ownership of all equipment located at the wagering facilities. The service contracts also provide for certain warranties covering operation of the equipment, machines, display equipment and central computing equipment. The breach of such warranties could result in significant liquidated damages. The equipment is placed at customer facilities under contracts generally providing for revenue based on the greater of a percentage of total amounts wagered or, if appropriate, a specified minimum. Minimum annual payments expected to be received under service contracts in effect as of October 31, 2000 with specified minimums are as follows: 2001, $15,594; 2002, $15,811; 2003, $13,306; 2004, $11,715; 2005, $10,134 and thereafter $2,993. (16) EXPORT SALES AND MAJOR CUSTOMERS Sales to foreign customers amounted to, $9,717, $49,939 and $41,389 in fiscal years 1998, 1999 and 2000, respectively. No single customer represented more than 10% of revenues in fiscal 1998. In fiscal 1999 and 2000. One customer in the Lottery Group segment represented $35,969 or 17% and $29,830 or 13% of revenues, respectively. (17) PENSION PLANS The Company has a defined benefit plan for U.S. based union employees. Retirement benefits under the plan are based upon the number of years of credited service up to a maximum of thirty years for the majority of the employees. The Company also has a defined benefit plan for U.K. based employees. The deined benefit plan for U.K. employees was assumed in connection with the acquisition of Scientific Games. Retirement benefits under the plan are based on an average of the employee's compensation over two years preceding retirement or leave of service. The Company's policy is to fund the minimum contribution permissible by the respective tax authorities. In September 2000, the Board of Directors approved the adoption of a Supplemental Executive Retirement Plan, or "SERP," intended to provide supplemental retirement benefits for certain senior officers of the Company. The SERP will provide for retirement benefits according to a formula based on each participant's years of service with the Company and average rate of compensation. The SERP had no activity through October 31, 2000. 62 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (17) PENSION PLANS--(CONTINUED) The net cost for the Company's defined benefit plans consisted of the following components:
PENSION BENEFITS --------------------------------- U.S. U.K. PLAN PLAN -------------------- ------- 1999 2000 2000 ------- ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year ............................. $ 1,802 1,828 13,772 Service cost ........................................................ 88 104 145 Amendments .......................................................... -- 52 -- Interest cost ....................................................... 116 121 145 Actuarial gain ...................................................... (49) (141) (435) Benefits paid ....................................................... (129) (56) -- Revaluation loss .................................................... -- -- -- ------- ------- ------- Benefit obligation at end of year ................................... 1,828 1,908 13,627 ------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year ...................... 1,600 1,555 14,207 Actual return on plan assets ........................................ (45) (43) (435) Employer contribution ............................................... 129 178 -- Benefits paid ....................................................... (129) (56) -- ------- ------- ------- Fair value of plan assets at end of year ............................ 1,555 1,634 13,772 ------- ------- ------- Funded status ....................................................... (273) (274) 145 Unrecognized actuarial loss ......................................... 567 577 275 Unrecognized prior service cost ..................................... 79 118 -- Unrecognized net transition obligation .............................. 35 30 -- ------- ------- ------- Net amount recognized ............................................... $ 408 451 420 ======= ======= ======= Amounts recognized in the statement of financial position consist of: Accrued benefit liability ........................................... $ (681) (725) -- Intangible asset .................................................... 79 118 -- Accumulated other comprehensive income .............................. 602 607 -- Prepaid pension cost ................................................ 408 408 420 ------- ------- ------- Net amount recognized ............................................... $ 408 408 420 ======= ======= =======
PENSION BENEFITS --------------------------------------------- U.S. U.K. PLAN PLAN ------------------------------ ---------- 1999 2000 2000 -------------- ------------ ---------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF OCTOBER 31: Discount rate...................................................... 6.750% 7.000% 6.500% Expected return on plan assets..................................... 8.000% 8.000% 7.500% Rate of compensation............................................... None None 4.500%
63 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (17) PENSION PLANS--(CONTINUED)
PENSION BENEFITS ---------------------------------------------- U.S. U.K. PLAN PLAN ---------------------------------- --------- 1998 1999 2000 2000 ----------- ---------- ------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost................... $ 63 88 104 145 Interest cost.................. 108 116 121 145 Expected return on plan assets. (114) (129) (127) (435) Net amortization and deferral.. 23 27 37 -- ----------- ---------- ------- --------- Net periodic cost.............. $ 80 102 135 (145) =========== ========== ======= =========
The accumulated benefit obligation represents the actuarial present value of benefits based upon the benefit multiplied by the participants' historical years of service. The plan assets for the U.S. based plan are invested in insurance company general accounts guaranteed as to principal. The plan assets for the U.K. based plan are primarily invested in equity securities. As required by Financial Accounting Standards Board Statement No. 87 ("SFAS 87"), "Employers' Accounting for Pensions" for pension plans where the accumulated benefit obligation exceeds the fair value of plan assets, the Company has recognized in the consolidated balance sheet at October 31, 1999 and 2000 the additional minimum liability of the unfunded accumulated benefit obligation of $681 and $725, respectively, as a long-term liability, with a partially offsetting intangible asset and equity adjustment. In connection with its U.S. based collective bargaining agreements, the Company participates with other companies in a defined benefit pension plan covering union employees. Payments made to the multi-employer plan were approximately, $280, $469 and $479 during the years ended October 31, 1998, 1999 and 2000, respectively. The Company has a 401K plan covering all U.S. based employees who are not covered by a collective bargaining agreement. Company contributions to the plan are at the discretion of the Board of Directors. Pension expense for the years ended October 31, 1998, 1999 and 2000 amounted to approximately $926, $1,015 and $1,004, respectively. The Company has a 401K plan for all union employees which does not provide for Company contributions. (18) MANAGEMENT INCENTIVE COMPENSATION The Company has an incentive compensation plan for key management personnel based on business unit performance, overall performance of the Company and individual performance. Management incentive compensation expense amounted to $1,686, $2,000 and $2,532 in fiscal years 1998, 1999 and 2000, respectively. 64 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (19) INCOME TAX EXPENSE The consolidated income (loss) before income tax expense and extraordinary item, by domestic and foreign source, is as follows:
YEARS ENDED OCTOBER 31, ------------------------------------------ 1998 1999 2000 -------- -------- -------- Domestic ............................ $(14,371) 128 (14,488) Foreign ............................. (1,188) 428 (2,329) -------- -------- -------- Consolidated income (loss) before income tax expense and extraordinary item $(15,559) 556 (16,817) ======== ======== ======== Income tax expense (benefit) consists of: CURRENT DEFERRED TOTAL -------- -------- -------- 1998- Foreign ...................... $ 1,040 (719) 321 ======== ======== ======== 1999- Federal ...................... $ (33) (15) (48) - Foreign ...................... 137 (161) (24) - State ........................ 249 -- 249 -------- -------- -------- - Total ........................ $ 353 (176) 177 ======== ======== ======== 2000- Federal ...................... -- -- -- - Foreign ...................... 1,079 143 1,222 - State ........................ 381 -- 381 -------- -------- -------- - Total ........................ $ 1,460 143 1,603 ======== ======== ========
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 1999 2000 ---------- --------- Accrued vacation.................................. $ (767) (608) Inventory......................................... (532) (4,367) Accrued litigation expenses....................... (612) (602) Accrued loss on disposition of business........... (600) -- Other accrued liabilities......................... (942) (754) Reserve for doubtful accounts..................... (959) (773) ---------- --------- Current deferred tax asset..................... (4,412) (7,104) ---------- --------- Intangible assets-difference in basis and amortization periods........................... 1,298 55,937 Property and equipment-differences in basis and depreciation methods........................... 4,747 12,684 Other, net........................................ 58 -- Interest charge, Domestic International Sales Corp 5,927 6,301 ---------- --------- Noncurrent deferred tax liability, net......... 12,030 74,922 ---------- ---------
65 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (19) INCOME TAX EXPENSE --(CONTINUED) Net operating loss carryforward................... (48,746) (59,163) Deferred compensation............................. (627) (572) Partnership investments........................... (354) (978) Alternative minimum tax credits................... (335) (335) Research and experimentation credits.............. (34) (9) ---------- --------- Noncurrent deferred tax asset.................. (50,096) (61,057) Valuation allowance............................... 44,134 54,073 ---------- --------- Noncurrent deferred tax asset, net............. (5,962) (6,984) ---------- --------- Noncurrent deferred tax liability.............. 6,068 67,938 ---------- --------- Net deferred tax liability on balance sheet.... 1,656 60,834 ========== =========
The aggregate deferred tax assets before valuation allowance at October 31, 1999 and 2000 were $54,508 and $68,161, respectively. The aggregate deferred tax liabilities at October 31, 1999 and 2000 were $12,030 and $74,922, respectively. The actual tax expense differs from the "expected" tax expense (computed by applying the U.S. Federal corporate rate of 34% to income (loss) before income tax expense and extraordinary item) as follows:
OCTOBER 31, ---------------------------- 1998 1999 2000 --------- ------- ------- Computed "expected" tax expense (benefit)............... $ (5,290) 189 (5,718) Increase (reduction) in income taxes resulting from: Unused net operating loss............................ 4,788 -- 4,924 Foreign tax differential............................. 725 (201) 2,014 Other, net........................................... 98 189 383 --------- ------- ------- $ 321 177 1,603 ========= ======= =======
The Company has regular tax net operating loss carryforwards of approximately $34,149 that expire in 2009, $40,777 that expire in 2010, $25,406 that expire in 2011, $11,074 that expire in 2012, $10,150 that expire in 2018 and $27,051 that expire in 2020. In connection with the acquisition of Scientific Games and the concurrent sale of convertible preferred stock, the Company incurred an ownership change pursuant to Section 382 of the Internal Revenue Code of 1986. As a result, the availability of tax net operating loss carryforwards realized by the Company prior to the change in ownership, totaling approximately $120,000, to offset post acquisition taxable income will be limited to approximately $7,500 annually, except with respect to any taxable income, if any, attributable to sales of pre-acquisition assets. The Company has minimum tax credit carryforwards (which can be carried forward indefinitely) of approximately $335 and research and experimentation credit carryforwards of approximately $9. The research and experimentation credits expire from 2002 to 2003. The net changes in the valuation allowance for deferred tax assets for the years ended October 31, 1999 and 2000 were an increase of $2,414 and a decrease of $9,939, respectively. 66 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (19) INCOME TAX EXPENSE --(CONTINUED) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, limitations on the utilization of tax net operating loss carryforwards and tax planning strategies in making this assessment. Because of tax losses in recent years, no deferred tax assets have been recorded. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of October 31, 2000 will be allocated as follows: Income tax benefit that would be reported in the consolidated statements of operations......................... $ 51,223 Additional capital (benefit from exercise of stock options)... 2,850 ----------- 54,073 ===========
(20) BUSINESS AND GEOGRAPHIC SEGMENTS The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in fiscal 1999. Business segments are defined by SFAS 131 as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker assessing performance and making operating and capital decisions. The following tables represent revenues, profits, depreciation and assets by business and geographic segments for the years ended October 31, 1998, 1999 and 2000. Operating revenues are allocated among geographic segments based on where the customer is located. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Corporate expenses are allocated among business and geographic segments. Interest expense and other (income) deductions are not allocated to business segments. Prior year's segment information has been restated to conform to the requirements of SFAS 131.
YEARS ENDED OCTOBER 31, ---------------------------- BUSINESS SEGMENTS 1998 1999 2000 --------- ------- ------- Service and Sales Revenue Lottery Group............................ 18,047 49,340 64,380 Pari-mutuel Group........................ $ 88,864 99,174 101,241 Venue Management Group................... 50,525 61,562 61,411 Telecommunications Group................. -- -- 5,989 SJC Video Group.......................... 1,877 1,072 327 --------- ------- ------- $ 159,313 211,148 233,348 ========= ======= ======= Gross profit Lottery Group............................ 5,313 12,672 17,136 Pari-mutuel Group........................ $ 35,317 39,612 40,885 Venue Management Group................... 13,569 15,121 16,785 Telecommunications Group................. -- -- 2,642 SJC Video Group.......................... 459 310 -- --------- ------- ------- $ 54,658 67,715 77,448 ========= ======= =======
67 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
YEARS ENDED OCTOBER 31, ------------------------------ BUSINESS SEGMENTS 1998 1999 2000 --------- ------- ------- Operating income (loss) Lottery Group............................ 321 7,999 1,186 Pari-mutuel Group........................ $ (6,410) 5,383 5,344 Venue Management Group................... 5,570 5,839 6,859 Telecommunications Group................. -- -- 569 SJC Video Group.......................... (583) (2,473) -- --------- ------- ------- $ (1,102) 16,748 13,958 ========= ======= ======= Included in operating income (loss) Depreciation and amortization Lottery Group............................ 2,100 2,297 7,746 Pari-mutuel Group........................ $ 23,912 16,386 17,034 Venue Management Group................... 2,633 2,778 2,830 Telecommunications Group................. -- -- 216 SJC Video Group.......................... 844 728 -- --------- ------- ------- $ 29,489 22,189 27,826 ========= ======= ======= (Gain) loss on sale/disposition of businesses Lottery Group............................ (1,184) -- -- SJC Video Group.......................... 1,250 1,600 -- --------- ------- ------- $ 66 1,600 -- ========= ======= ======= A reconciliation of total segment operating income to consolidated income (loss) before income tax expense and extraordinary item is as follows: Total reported segments.................... $ (1,102) 16,748 13,958 Interest expense........................... 15,521 15,941 31,231 Other (income) expense..................... (1,064) 251 (456) --------- ------- ------- $ (15,559) 556 (16,817) ========= ======= ======= Assets Lottery Group............................ 17,380 20,348 350,367 Pari-mutuel Group........................ $ 99,946 110,598 227,049 Venue Management Group................... 36,537 34,613 34,207 Telecommunications Group................. -- -- 35,592 SJC Video Group.......................... 2,637 -- -- --------- ------- ------- $ 156,500 165,559 647,215 ========= ======= ======= Capital and wagering systems expenditures Lottery Group............................ 13,312 2,615 11,306 Pari-mutuel Group........................ $ 9,217 10,714 20,851 Venue Management Group................... 1,368 1,492 2,373 Telecommunications Group................. -- -- 516 SJC Video Group.......................... 163 113 -- --------- ------- ------- $ 24,060 14,934 35,046 ========= ======= =======
68 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (20) BUSINESS AND GEOGRAPHIC SEGMENTS--(CONTINUED)
YEARS ENDED OCTOBER 31, ----------------------------- GEOGRAPHIC SEGMENTS 1998 1999 2000 --------- -------- -------- Service and Sales Revenue North America............................ $ 126,726 135,299 150,899 Italy.................................... 11,298 36,331 29,828 Other ................................... 21,289 39,518 52,621 --------- -------- -------- $ 159,313 211,148 233,348 ========= ======== ======== Long-lived assets (excluding identifable intangibles) North America............................ $ 73,270 70,576 156,460 Europe................................... 4,252 5,629 8,224 Other.................................... 911 523 21,970 --------- -------- -------- $ 78,433 76,728 186,654 ========= ======== ========
(21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED) Selected quarterly financial data for the years ended October 31, 1999 and 2000 is as follows:
YEAR ENDED OCTOBER 31, 1999 ------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- ------- ------- -------- Total operating revenues...................... $ 45,652 53,079 53,170 59,247 Gross profit.................................. 14,333 16,631 17,631 19,120 Net income (loss)............................. (2,434) 572 1,895 346 Net income (loss) per basic share and diluted share......................................... $ (0.07) 0.02 0.05 0.01 ======== ======= ======= ======== Weighted average number of shares used in per share calculations: Basic shares............................. 35,998 36,032 36,169 36,246 Diluted shares........................... 35,998 37,371 38,699 39,465 ======== ======= ======= ========
69 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (21) SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)--(CONTINUED)
YEAR ENDED OCTOBER 31, 2000 ---------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Total operating revenues...................... $ 49,565 51,061 49,979 82,743 Gross profit.................................. 17,089 18,257 18,252 23,850 Income (loss) before extraordinary items...... 464 2,306 1,661 (22,851) Extraordinary items- write-off of deferred finance fees and debt call premium .......... -- -- -- 12,567 -------- -------- -------- -------- Net income (loss)............................. 464 2,306 1,661 (35,418) Convertible preferred stock dividend.......... -- -- -- 1,014 -------- -------- -------- -------- Net income (loss) available to common stockholders.................................. $ 464 2,306 1,661 (36,432) ======== ======== ======== ======== Basic and diluted earnings per share: Basic income (loss) before extraordinary items $ 0.01 0.06 0.05 (0.60) ======== ======== ======== ======== Diluted income (loss) before extraordinary items......................................... $ 0.01 0.06 0.04 (0.60) ======== ======== ======== ======== Extraordinary items per basic and diluted share $ -- -- -- (0.34) ======== ======== ======== ======== Basic net income (loss)....................... $ 0.01 0.06 0.05 (0.94) ======== ======== ======== ======== Diluted net income (loss)..................... $ 0.01 0.06 0.04 (0.94) ======== ======== ======== ======== Basic income (loss) available to common stockholders.................................. $ 0.01 0.06 0.05 (0.96) ======== ======== ======== ======== Diluted income (loss) available to common stockholders.................................. $ 0.01 0.06 0.04 (0.96) ======== ======== ======== ======== Weighted average number of shares used in per share calculations: Basic shares............................. 36,388 36,622 36,886 37,809 Diluted shares........................... 40,353 41,878 41,430 37,809 ======== ======== ======== ========
(22) UNUSUAL ITEMS AND FOURTH QUARTER RESULTS In fiscal 1998, the Company recognized unusual charges of $1,500 for severance and downsizing costs, primarily in the Company's French pari-mutuel operations, and accelerated the amortization of related goodwill due to the loss of a major service contract. In addition, in fiscal 1998, the Company reversed reserves of $1,300 in connection with the collection of receivables previously reserved due to concerns about their recoverability and for cost savings related to the refurbishment of certain terminals. In fiscal 2000, the Company recognized unusual interest expense charges in the amount of $7,511 attributable to payments, in the form of warrants, to purchase 2,900 shares of Autotote common stock, to certain financial advisors in connection with their services in obtaining certain financial commitments to acquire Scientific Games, $1,200 of additional interest expense as a result of the required pre-funding of the Notes, and approximately $2,300 of incremental business integration costs as a result of the Scientific Games acquisition. The Company also recorded a $1,135 write-off of its option to purchase the Atlantic City Raceway as a result of the New Jersey legislature's failure to pass the necessary legislation to allow OTB expansion in the state and recorded an extraordinary charge of $12,567 in connection with the payment of the call premium on the Old Notes and the write-off of deferred financing fees. 70 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (23) LITIGATION Although the Company is a party to various claims and legal actions arising in the ordinary course of business, management believes, on the basis of information presently available to it, that the ultimate disposition of these matters will not likely have a material adverse effect on the consolidated financial position or results of operations of the Company. Autotote's subsidiary, Scientific Games Inc. ("SGI"), owns a minority interest in Wintech de Colombia S.A. ("Wintech"), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. ("Ecosalud"), an agency of the Colombian government. The contract projected that certain levels of lottery ticket sales would be attained and provided a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5,000 if such performance levels were not achieved. In addition, with respect to a further guarantee of performance under the contract with Ecosalud, SGI delivered to Ecosalud a $4,000 bond issued by a Colombian surety, Seguros del Estado ("Seguros"). Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 1993. On July 1, 1993, Ecosalud adopted resolutions declaring, among other things, that the contract was in default and asserted various claims for compensation and penalties against Wintech, SGI and other shareholders of Wintech. Litigation is pending in Colombia concerning various claims among Ecosalud, Wintech and SGI, relating to the termination of the contracts with Ecosalud (the "Colombian Litigation"). Ecosalud's claims in the Colombian Litigation were for, among other things, realization on the full amount of the penalty, plus interest and costs of the bond. The Colombian surety, Seguros, paid $2,400 to Ecosalud under its $4,000 bond, and made demand upon SGI for that amount under the indemnity agreement between the surety and SGI. SGI declined to make or authorize any such payment and notified the surety that any payment in response to Ecosalud's demand on the bond was at the surety's risk. On April 2, 1998, Seguros brought suit against SGI in the District Court for the Northern District of Georgia, Atlanta Division seeking $2,400 for sums paid by Seguros to Ecosalud under the surety bond on November 1, 1994, plus interest at the Colombian bank rate of interest. On September 29, 1999, the District Court denied various motions of SGI, including a motion to dismiss, based on the Colombian statute of limitations of two years, and granted Seguros' motion for summary judgment, which was filed on May 6, 1998, and entered judgment for Seguros in the amount of $2,400 or the equivalent in Colombian pesos as of the judgment date, plus pre-judgment interest at a rate of 38.76% per annum, equivalent to approximately $4,600. SGI has appealed the District Court's order and judgment and posted a $7,000 appeal bond. SGI continues to believe that it has meritorious defenses, including that the amount paid by Seguros was improperly paid because of the default by Ecosalud of its obligations to SGI, which claims remain the subject of separate litigation in Colombia. SGI has been advised by Colombian counsel that SGI has various legal defenses to Ecosalud's claims which we intend to vigorously pursue. SGI also has certain cross indemnities and undertakings from the two other privately held shareholders of Wintech for their respective shares of any liability to Ecosalud. That obligation is secured in part by a $1,500 confirmed letter of credit in favor of SGI. No assurance can be given that the other shareholders of Wintech will, or have sufficient assets, to honor their indemnity undertakings to SGI when the claims by Ecosalud against SGI and Wintech are finally resolved, in the event such claims result in any final liability. Although it is not possible to determine the ultimate outcome of the appeal of the order and judgment granted to Seguros or the outcome of any litigation in Colombia, management, believes that any potential losses will not have a material adverse effect on the consolidated financial position or results of operations. 71 AUTOTOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (24) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES The Company conducts substantially all of its business through its domestic and foreign subsidiaries. The Notes and Facility issued on September 6, 2000 in connection with the acquisition of Scientific Games are jointly and severally guaranteed by substantially all of the Company's wholly owned domestic subsidiaries (the "Guarantor Subsidiaries"). Presented below is condensed consolidating financial information for (i) Autotote Corporation (the "Parent Company") which includes the activities of Autotote Management Corporation, (ii) the Guarantor Subsidiaries and (iii) the wholly owned foreign subsidiaries and the non-wholly owned domestic and foreign subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1999 and October 31, 2000 and for the fiscal years ended October 31, 1998, 1999 and 2000. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the guarantee structure of the Notes was in effect at the beginning of the periods presented. Separate financial statements for Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors. The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. In addition, corporate interest and administrative expenses have not been allocated to the subsidiaries. 72 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET OCTOBER 31, 1999 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents .................... $ 1,598 506 2,963 -- 5,067 Accounts receivable, net ..................... -- 21,083 4,672 -- 25,755 Other current assets ......................... 30 14,143 4,017 (464) 17,726 Property and equipment, net .................. 298 66,973 9,708 (251) 76,728 Investment in subsidiaries ................... 58,214 -- -- (58,214) -- Goodwill ..................................... 198 353 4,686 -- 5,237 Other assets ................................. 6,199 30,385 659 (2,197) 35,046 --------- --------- --------- --------- --------- Total assets ............................. $ 66,537 133,443 26,705 (61,126) 165,559 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities .......................... $ 12,219 29,546 10,922 (672) 52,015 Current installments of long-term debt ....... 1,250 2,429 574 -- 4,253 Long-term debt, excluding current installments .............................. 145,000 6,627 1,264 -- 152,891 Other non-current liabilities ................ 2,193 1,233 1,766 (573) 4,619 Intercompany balances ........................ (45,906) 43,214 1,942 750 -- Stockholders' equity (deficit) ............... (48,219) 50,394 10,237 (60,631) (48,219) --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) ........................ $ 66,537 133,443 26,705 (61,126) 165,559 ========= ========= ========= ========= =========
AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET OCTOBER 31, 2000 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ ASSETS Cash and cash equivalents .................... $ 379 7,791 7,137 1 15,308 Accounts receivable, net ..................... -- 40,699 18,180 (4,616) 54,263 Other current assets ......................... 531 33,352 9,407 (434) 42,856 Property and equipment, net .................. 2,020 151,536 33,937 (839) 186,654 Investment in subsidiaries ................... 193,740 -- -- (193,740) -- Goodwill ..................................... 191 145,549 10,817 -- 156,557 Intangible assets ............................ -- 110,432 22,287 -- 132,719 Other assets ................................. 20,516 79,756 997 (42,411) 58,858 --------- --------- --------- --------- --------- Total assets ............................. $ 217,377 569,115 102,762 (242,039) 647,215 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities .......................... $ 20,503 60,097 24,195 (4,048) 100,747 Current installments of long-term debt ....... 5,256 7 560 -- 5,823 Long-term debt, excluding current installments 437,490 (212) 4,997 (4,264) 438,011 Other non-current liabilities ................ 3,222 59,682 22,237 (16,826) 68,315 Intercompany balances ........................ (283,857) 258,203 26,138 (484) -- Stockholders' equity (deficit) ............... 34,763 191,338 24,635 (216,417) 34,319 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity (deficit) ....................... $ 217,377 569,115 102,762 (242,039) 647,215 ========= ========= ========= ========= =========
73 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 Gain on sale/disposition of business ....... 66 -- -- -- 66 Depreciation and amortization .............. 140 25,674 3,963 (288) 29,489 -------- -------- -------- -------- -------- Operating income (loss) ................. (9,385) 9,320 (686) (351) (1,102) Interest expense ........................... 14,985 340 274 (78) 15,521 Other (income) deductions .................. (610) (110) (422) 78 (1,064) -------- -------- -------- -------- -------- Income (loss) before equity in income of subsidiaries and income taxes .......... (23,760) 9,090 (538) (351) (15,559) Equity in income of subsidiaries ........... 8,055 -- -- (8,055) -- Income tax expense ......................... 175 53 93 -- 321 -------- -------- -------- -------- -------- Net income (loss) .......................... $(15,880) 9,037 (631) (8,406) (15,880) ======== ======== ======== ======== ========
AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1999 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ Operating revenues ......................... $ -- 181,387 48,660 (18,899) 211,148 Operating expenses ......................... -- 119,324 42,994 (18,885) 143,433 -------- -------- -------- -------- -------- Gross profit ............................ -- 62,063 5,666 (14) 67,715 Selling, general and administrative expenses 9,170 13,515 4,511 (18) 27,178 Loss on sale/disposition of businesses .... -- 1,600 -- -- 1,600 Depreciation and amortization .............. 196 18,981 3,115 (103) 22,189 -------- -------- -------- -------- -------- Operating income (loss) ................. (9,366) 27,967 (1,960) 107 16,748 Interest expense ........................... 15,129 883 401 (236) 16,177 Other (income) deductions .................. (2,075) (690) 36 2,744 15 -------- -------- -------- -------- -------- Income (loss) before equity in income of subsidiaries, and income taxes ......... (22,420) 27,774 (2,397) (2,401) 556 Equity in income of subsidiaries ........... 23,031 -- -- (23,031) -- Income tax expense (benefit) ............... 232 252 (307) -- 177 -------- -------- -------- -------- -------- Net income (loss) .......................... $ 379 27,522 (2,090) (25,432) 379 ======== ======== ======== ======== ========
74 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 2000 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ Operating revenues ........................... $ -- 186,408 60,286 (13,346) 233,348 Operating expenses ........................... -- 122,400 46,766 (13,266) 155,900 -------- -------- -------- -------- -------- Gross profit .............................. -- 64,008 13,520 (80) 77,448 Selling, general and administrative expenses . 13,572 16,186 5,917 (11) 35,664 Loss on sale/disposition of businesses ....... -- -- -- -- -- Depreciation and amortization ................ 291 23,210 4,428 (103) 27,826 -------- -------- -------- -------- -------- Operating income (loss) ................... (13,863) 24,612 3,175 34 13,958 Interest expense ............................. 30,535 531 1,037 (872) 31,231 Other (income) deductions .................... (1,000) (275) (198) 1,017 (456) -------- -------- -------- -------- -------- Income (loss) before equity in income of subsidiaries, and income taxes ............ (43,398) 24,356 2,336 (111) (16,817) -------- -------- -------- -------- -------- Equity in income of subsidiaries ............. 25,195 -- -- (25,195) -- Income tax expense (benefit) ................. -- 812 791 -- 1,603 -------- -------- -------- -------- -------- Net income (loss) before extraordinary items . (18,203) 23,544 1,545 (25,306) (18,420) -------- -------- -------- -------- -------- Extraordinary items: Write-off of deferred financing fees and expenses, net of gain on early retirement of debt ................................. 12,522 45 -- -- 12,567 -------- -------- -------- -------- -------- Net income (loss) ............................ $(30,725) 23,499 1,545 (25,306) (30,987) ======== ======== ======== ======== ========
75 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/disposition of businesses .. 66 -- -- -- 66 Other non-cash adjustments .............. 1,234 (77) (414) -- 743 Changes in working capital .............. (1,957) (4,404) (51) 154 (6,258) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities ................................. (24,452) 30,230 2,867 (485) 8,160 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital and wagering systems expenditures (316) (21,620) (2,557) 433 (24,060) Cash acquired with business acquisition . -- -- 2,177 -- 2,177 Other assets and investments ............ (973) (6,059) (479) 171 (7,340) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities .............................. (1,289) (27,679) (859) 604 (29,223) -------- -------- -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of long term-debt ............................. -- 12,084 (25) -- 12,059 Payments on long-term debt .............. -- (2,774) (310) 12 (3,072) Other, principally intercompany balances 12,208 (11,930) 274 (36) 516 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities ................................. 12,208 (2,620) (61) (24) 9,503 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash .... 5 1 251 (95) 162 -------- -------- -------- -------- -------- Increase/(decrease) in cash and cash equivalents ................................ (13,528) (68) 2,198 -- (11,398) Cash and cash equivalents, beginning of year 15,582 328 2,297 -- 18,207 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year ..... $ 2,054 260 4,495 -- 6,809 ======== ======== ======== ======== ========
76 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 1999 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ Net income (loss) ........................... $ 379 27,522 (2,090) (25,432) 379 Depreciation and amortization ............ 196 18,981 3,115 (103) 22,189 Equity in income of subsidiaries ......... (23,031) -- -- 23,031 -- Loss on sale/disposition of businesses ... -- 1,600 -- -- 1,600 Other non-cash adjustments ............... 1,081 109 25 -- 1,215 Changes in working capital ............... (235) 924 568 (91) 1,166 -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities .................................. (21,610) 49,136 1,618 (2,595) 26,549 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital and wagering systems expenditures (41) (11,835) (3,054) (4) (14,934) Business acquisition, net of cash acquired (512) -- (2,333) 512 (2,333) Other assets and investments ............. (631) (6,559) (699) (387) (8,276) -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities .................................. (1,184) (18,394) (6,086) 121 (25,543) -------- -------- -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of long term-debt ............................. -- 60 26 (86) -- Payments on long-term debt ............... -- (2,739) (514) 99 (3,154) Other, principally intercompany balances . 22,286 (27,450) 3,141 2,260 237 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities .................................. 22,286 (30,129) 2,653 2,273 (2,917) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash ..... 52 (367) 283 201 169 -------- -------- -------- -------- -------- Increase/(decrease) in cash and cash equivalents ................................. (456) 246 (1,532) -- (1,742) Cash and cash equivalents, beginning of year 2,054 260 4,495 -- 6,809 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year ...... $ 1,598 506 2,963 -- 5,067 ======== ======== ======== ======== ========
77 AUTOTOTE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 2000 (IN THOUSANDS)
Parent Guarantor Non-Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------- ----------- ------------ Net income (loss) ............................ $ (30,725) 23,499 1,545 (25,306) (30,987) Depreciation and amortization ............. 291 23,210 4,428 (103) 27,826 Equity in income of subsidiaries .......... (25,195) -- -- 25,195 -- Loss on sale/disposition of businesses .... -- 411 3 -- 414 Non-cash interest expense ................. 7,511 -- -- -- 7,511 Other non-cash adjustments ................ 15,553 (230) 211 -- 15,534 Changes in working capital ................ 7,208 3,323 (5,455) 34 5,110 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities ................................... (25,357) 50,213 732 (180) 25,408 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital and wagering systems expenditures . (1,863) (27,581) (5,715) 113 (35,046) Business acquisition, net of cash acquired (111,305) (215,091) 73 10,081 (316,242) Proceeds from sale of business and assets disposals ............................... -- 100 245 -- 345 Other assets and investments .............. (240,221) 230,282 4,945 (1,546) (6,540) --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities ................................... (353,389) (12,290) (452) 8,648 (357,483) --------- --------- --------- --------- --------- Cash flows from financing activities: Net borrowing under lines of credit ....... 11,250 -- -- -- 11,250 proceeds from issuance of long term-debt .. 441,501 -- 1,043 (22) 442,522 Payments on long-term debt ................ (165,957) (34,301) (1,104) -- (201,362) Net Proceeds from Stock Issue ............. 107,525 (547) 993 (479) 107,492 Payment of finance fees ................... (16,792) -- -- -- (16,792) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities ................................... 377,527 34,848 932 (501) 343,110 --------- --------- --------- --------- --------- Effect of exchange rate changes on cash ...... -- 370 (1,228) 64 (794) --------- --------- --------- --------- --------- Increase/(decrease) in cash and cash equivalents .................................. (1,219) 3,445 (16) 8,031 10,241 Cash and cash equivalents, beginning of year . 1,598 4,346 7,153 (8,030) 5,067 --------- --------- --------- --------- --------- Cash and cash equivalents, end of year ....... $ 379 7,791 7,137 1 15,308 ========= ========= ========= ========= =========
78 SCHEDULE II AUTOTOTE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED OCTOBER 31, 2000 (IN THOUSANDS)
ADDITIONS ------------------- CHARGED BALANCE TO BALANCE AT COSTS AT BEGINNING AND END OF OF PERIOD EXPENSES OTHER DEDUCTIONS(1) PERIOD --------- -------- ------ ------------- -------- YEAR ENDED OCTOBER 31, 1998 Allowance for doubtful accounts..... $ 1,976 888 -- 1,053 1,811 Reserve for inventory obsolescence.. $ 2,238 296 50 247 2,337 YEAR ENDED OCTOBER 31, 1999 Allowance for doubtful accounts..... $ 1,811 1,140 -- 162 2,789 Reserve for inventory obsolescence.. $ 2,337 221 -- 712 1,846 YEAR ENDED OCTOBER 31, 2000 Allowance for doubtful accounts..... $ 2,789 2,077 -- 558 4,308 Reserve for inventory obsolescence.. $ 1,846 31 -- 311 1,566
(1) Amounts written off. 79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to directors of the Company and information relating to disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is incorporated herein by reference to the Company's proxy statement in connection with the year 2001 Annual Meeting of Stockholders under the caption "Election of Directors." Information relating to executive officers of the Company is included in Part I of this Form 10-K as permitted in General Instruction [G3]. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation under the caption "Executive Compensation; Certain Arrangements," in the Company's proxy statement in connection with the year 2001 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management under the caption, "Security Ownership" in the Company's proxy statement in connection with the year 2001 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information under the caption "Certain Arrangements Between the Company and its Directors and Officers" in the Company's proxy statement in connection with the year 2001 Annual Meeting of Stockholders is incorporated herein by reference. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements--See Index to Consolidated Financial Statements attached hereto, page 39. 2. Financial Statements Schedule--See Index to Consolidated Financial Statements attached hereto, page 39. 3. Exhibits--The following is a list of exhibits:
EXHIBIT NUMBER DESCRIPTION - --------- ----------- 2 Agreement and Plan of Merger, dated as of May 18, 2000, among Autotote Corporation, ATX Enterprises, Inc. and Scientific Games Holdings Corp. (Incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K filed on May 26, 2000.) 3.(i)(a) Certificate of Incorporation of the Company, as amended through June 29, 1995. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1995.) 3.(i)(b) Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Convertible Preferred Stock, filed with the Secretary of State of Delaware on September 6, 2000. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000 (the "July 2000 10-Q").) 3.(ii) Amended and Restated Bylaws of the Company. (+) 4.1 Indenture, dated as of August 14, 2000, among the Company, the Subsidiary Guarantors and The Bank of New York, as Trustee, relating to the 12 1/2% senior subordinated notes due 2010 (the "Series A 12 1/2% Senior Notes"). (Incorporated by reference to Exhibit 4.6 to the Company's July 2000 10-Q.) 4.2 Form of Series A 12 1/2% Senior Notes. (Incorporated by reference to Exhibit A to Exhibit 4.6 to the Company's July 2000 10-Q.) 4.3 First Supplemental Indenture, dated as of September 6, 2000, among the Company, the Guarantors, the Additional Guarantors and The Bank of New York, as trustee, supplementing the Indenture, dated as of August 14, 2000, among the Company, the Guarantors and the Trustee, relating to Series A 12 1/2% Senior Notes. (Incorporated by reference to Exhibit 4.8 to the Company's July 2000 10-Q.) 4.4 Registration Rights Agreement by and among the Company, the Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc., dated as of August 14, 2000. (Incorporated by reference as Exhibit 4.9 to the Company's July 2000 10-Q.) 10.2 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the State of Connecticut, Division of Special Revenue, dated June 30, 1993. (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 1, 1993.) 10.3 Agreement between the Company and Elettronica Ingegneria Sistemi dated February 19, 1998. (Incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998 (the "April 1998 10-Q").) 10.4 General Agreement between the Company and Sisal Sport Italia SpA dated February 19, 1998. (Incorporated by reference to Exhibit 10.29 to the Company's April 1998 10-Q.) 10.5 Agreement between Autotote Corporation and Stichting Hippo Toto dated June 29, 1998 relating to purchase of Autotote Nederland B.V. (Incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1998.) 81 10.6 Instant Ticket and Associated Products and Services Agreement dated May 4, 1993 by and between Georgia Lottery Corporation and Scientific Games Inc. (Incorporated by reference to Scientific Games Holding Corp.'s Registration Statement (No. 33-75168) filed on February 11, 1994.) 10.7 Instant Lottery Tickets Supply Agreement between Thomas De La Rue Limited, Scientific Games Inc. and Camelot Group plc, dated June 15, 1995. (Incorporated by reference to Scientific Games Holding Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. Portions of this Exhibit deemed confidential by Scientific Games Holdings Corp. have been omitted.) 10.8 Supply Agreement for Instant Lottery Computer Management System between La Francais Des Jeux and Scientific Games Inc. (Incorporated by reference to Exhibit 10.53 to Scientific Games Holding Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. Portions of this Exhibit deemed confidential by Scientific Games Holdings Corp. have been omitted.) 10.9 Agreement of Purchase and Sale, dated January 19, 1996, between Autotote Systems, Inc. and Fusco Properties, L.P. (Incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K/A for the fiscal year ended October 31, 1995 (the "1995 10-K/A").) 10.10 Lease Agreement, dated as of January 19, 1996, between Fusco Properties, L.P. and Autotote Systems, Inc. (Incorporated by reference to Exhibit 10.43 to the Company's 1995 10-K/A.) 10.11 Stockholders' Agreement by and among Cirmatica Gaming, S.A., The Oak Fund, Peconic Fund Ltd., Ramius Securities, LLC, Olivetti International S.A. and the Company, dated September 6, 2000, relating to the Series A Convertible Preferred Stock. (Incorporated by reference to Exhibit 10.38 to the Company's July 2000 10-Q.) 10.12 1984 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-46594) which became effective on March 20, 1992.) * 10.13 1992 Equity Incentive Plan, as amended and restated. (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 (the "1998 10-K").)* 10.14 1995 Equity Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997.)* 10.15 1997 Incentive Compensation Plan as amended. (+)* 10.16 Form of Option dated March 3, 1992 issued to A. Lorne Weil. (Incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 (the "1992 10-K").)* 10.17 Employment Agreement effective November 1, 1997 between A. Lorne Weil and Autotote Corporation (the "Weil Employment Agreement"). (Incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998.)* 10.18 Amendment dated September 10, 1998 to the Weil Employment Agreement. (Incorporated by reference to Exhibit 10.27 to the Company's 1998 10-K.)* 10.19 Amendment dated September 1, 2000 to the Weil employment Agreement. (+)* 10.20 Form of Change in Control Agreement effective November 1, 1997 between Autotote Corporation and certain officers. (Incorporated by reference to Exhibit 10.27 to the Company's April 1998 10-Q.)* 10.21 Letter Agreement dated January 11, 2001 between Autotote Corporation and DeWayne Laird. (+)* 10.22 Letter Agreement dated January 11, 2001 between Autotote Corporation and Martin Schloss. (+)* 82 10.23 The Autotote Corporation Key Executive Deferred Compensation Plan, as amended. (+) * 10.24 Amended and Restated Credit Agreement among the Company, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager, Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, dated as of October 6, 2000. (+) 10.25 Amended and Restated Security Agreement among the Company, the Subsidiary Guarantors and the Administrative Agent, dated as of October 6, 2000. (+) 10.26 Warrant Registration Rights Agreement among the Company, Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group Inc. dated as of September 6, 2000. (Incorporated by reference to Exhibit 10.41 to the Company's July 2000 10-Q.)* 10.27 Form of Employment and Severance Benefit Agreement, entered into between Scientific Games Inc. and certain employees effective September 6, 2000. (Incorporated by reference to Exhibit 10.42 to the Company's July 2000 10-Q.)* 10.28 Form of Consulting Agreement by and between the Company and William G. Malloy, dated May 18, 2000 and effective September 6, 2000. (Incorporated by reference to Exhibit 10.43 to the Company's July 2000 10-Q.)* 21.1 List of Subsidiaries. (+) 23 Consent of KPMG LLP. (+) 27 Financial Data Schedule 99.1 Warrant to Purchase Class B Nonvoting Common Stock of Autotote Corporation dated October 30, 1992 issued to various lenders. (Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.) 99.2 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant Agreement"). (Incorporated by reference to Exhibit 99.8 to the Company's Registration Statement on Form S-4/A (Registration No. 333-34465) which became effective on September 12, 1997 (the "1997 S-4/A").) 99.3 Amendment dated January 29, 1997 to the 1995 Warrant Agreement. (Incorporated by reference to Exhibit 99.10 to the Company's 1997 S-4/A.) 99.4 Form of Amended and Restated Warrant issued November 2, 1998 to Certain Members of Management and Several Employees. (Incorporated by reference to Exhibit 10.36 to the Company's Form 10-K for the fiscal year ended October 31, 1999.) 99.5 Form of Warrant issued to Donaldson, Lufkin & Jenrette Securities Corporation and LBI Group Inc. (Incorporated by reference to Exhibit 99.11 to the Company's July 2000 10-Q.)
(+) Filed herewith. * Includes management contracts and compensation plans and arrangements. (b) Reports on Form 8-K Current reports on Form 8-K were filed on September 21, 2000 regarding the pro forma financials related to the acquisition of Scientific Games Holding Corp. and certain related matters, and on December 29, 2000 regarding the determination by the Company to change its fiscal year from the year ending October 31 to a calendar year, beginning with the year ending December 31, 2001. 83 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. AUTOTOTE CORPORATION Dated: January 29, 2001 By: /s/ A. LORNE WEIL ----------------------------------- A. Lorne Weil, Chairman of Board, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON JANUARY 28, 2000.
SIGNATURE TITLE DATE - ------------------------------------ -------------------------- ---------------- Chairman of the Board, /s/ A. LORNE WEIL President and Chief January 29, 2001 --------------------------- Executive Officer, and A. LORNE WEIL Director (principal executive officer) Vice President and Chief /s/ DEWAYNE E. LAIRD Financial Officer January 29, 2001 --------------------------- (principal financial and DEWAYNE E. LAIRD accounting officer) /s/ LARRY J. LAWRENCE Director January 29, 2001 --------------------------- LARRY J. LAWRENCE /s/ SIR BRIAN G. WOLFSON Director January 29, 2001 --------------------------- SIR BRIAN G. WOLFSON /s/ ALAN J. ZAKON Director January 29, 2001 --------------------------- ALAN J. ZAKON /s/ WILLIAM G. MALLOY Director January 29, 2001 --------------------------- WILLIAM G. MALLOY /s/ PETER A. COHEN Director January 29, 2001 --------------------------- PETER A. COHEN /s/ COLIN J. O'BRIEN Director January 29, 2001 --------------------------- COLIN J. O'BRIEN /s/ LUCIANO LA NOCE Director January 29, 2001 --------------------------- LUCIANO LA NOCE /s/ MICHAEL S. IMMORDINO Director January 29,2001 --------------------------- MICHAEL S. IMMORDINO /s/ ROBERTO SGAMBATI Director January 29, 2001 --------------------------- ROBERTO SGAMBATI
84 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ----------- -------------------------------------------------------- ---------- 3.(ii) Amended and Restated Bylaws of the Company. 10.15 1997 Incentive Compensation Plan as amended. 10.19 Amendment dated September 1, 2000 to the Weil employment Agreement. 10.21 Letter Agreement dated January 11, 2001 between Autotote Corporation and DeWayne Laird. 10.22 Letter Agreement dated January 11, 2001 between Autotote Corporation and Martin Schloss. 10.23 The Autotote Corporation Key Executive Deferred Compensation Plan, as amended. 10.24 Amended and Restated Credit Agreement among the Company, DLJ Capital Funding, Inc., Lehman Commercial Paper Inc., DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager, Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, dated as of October 6, 2000. 10.25 Amended and Restated Security Agreement among the Company, the Subsidiary Guarantors and the Administrative Agent, dated as of October 6, 2000 21.1 List of Subsidiaries. 23 Consent of KPMG LLP. 27 Financial Data Schedule.
85 EX-3.(II) 2 a2036456zex-3_ii.txt EXHIBIT 3.(II) EXHIBIT 3.(II) AMENDED AND RESTATED BYLAWS OF AUTOTOTE CORPORATION ARTICLE I. OFFICES, CORPORATE SEAL Section 1.01. OFFICES. The Corporation shall have a registered office, a principal office and such other offices as the Board of Directors may determine. Section 1.02. CORPORATE SEAL. There shall be no corporate seal. ARTICLE II. MEETINGS OF STOCKHOLDERS Section 2.01. PLACE AND TIME OF MEETINGS. Meetings of the stockholders may be held at such place and at such time as may be designated by the Board of Directors. Section 2.02. ANNUAL MEETINGS. The annual meeting of the stockholders of the Corporation shall be held at such place and at such time as designated by the Board of Directors. The purpose of this meeting shall be for the election of directors and for the transaction of such other business as may properly come before the meeting. Section 2.03. SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes shall be called by the Secretary at the written request of a majority of the total number of directors, by the Chairman of the Board, by the President or by the stockholders owning a majority of the shares outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to the purposes stated in the notice. Section 2.04. QUORUM. ADJOURNED MEETINGS. The holders of a majority of the shares outstanding and entitled to vote shall constitute a quorum for the transaction of business at any annual or special meeting. If a quorum is not present at a meeting, those present shall adjourn to such day as they shall agree upon by majority vote. Notice of any adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the stockholders may continue to transact business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 2.05. ORGANIZATION. At each meeting of the stockholders, the Chairman of the Board or in his absence the President or in his absence the chairman chosen by a majority in voting interest of the stockholders present in person or proxy and entitled to vote shall act as chairman; and the Secretary of the Corporation or in his absence an Assistant Secretary or in his absence any person whom the chairman of the meeting shall appoint shall act as secretary of the meeting. 2 Section 2.06. ORDER OF BUSINESS. The order of business at all meetings of the stockholders shall be determined by the Chairman of the meeting. Section 2.07. VOTING. Each stockholder of the Corporation entitled to vote at a meeting of stockholders should have one vote in person or by proxy for each share of stock having voting rights held by him and registered in his name on the books of the Corporation. Upon the request of any stockholder, the vote upon any question before a meeting shall be by written ballot, and all elections of directors shall be by written ballot. All questions at a meeting shall be decided by a majority vote of the number of shares entitled to vote represented at the meeting at the time of the vote except where otherwise required by statute, the Certificate of Incorporation or these Bylaws. For the election of directors, the persons receiving the largest number of votes (up to and including the number of directors to be elected) shall be directors. Section 2.08. INSPECTORS OF ELECTION. At each meeting of the stockholders, the chairman of such meeting may appoint two inspectors of election. Each inspector of election so appointed shall first subscribe an oath or affirmation to execute the duties of an inspector of election at such meeting with strict impartiality and according to the best of his ability. Such inspectors of election, if any, shall take charge of the ballots at such meeting and after the balloting thereat on any question shall count the ballots cast thereon and shall make a report in writing to the Secretary of such meeting of the results thereof. An inspector of election need not be a stockholder of the Corporation, and any officer or employee of the Corporation may be an inspector of election on any question other than a vote for or against his election to any position with the corporation or on any other question in which he may be directly interested. Section 2.09. NOTICES OF MEETINGS AND CONSENTS. Except as otherwise provided by the Certificate of Incorporation or by statute, a written notice of each annual and special meeting of stockholders shall be given not less than 10 nor more than 60 days before the date of such meeting to each stockholder of record of the Corporation entitled to vote at such meeting by delivering such notice of meeting to him personally or depositing the same in the United States mail, postage prepaid, directed to him at the post office address shown upon the records of the Corporation. Service of notice is complete upon mailing. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. Section 2.10. PROXIES. Each stockholder entitled to vote at a meeting of stockholders may authorize a proxy to represent him at the meeting by an instrument executed in writing. No such proxy shall be valid after three years from the date of its execution unless the proxy provides for a longer period. A proxy may be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient to support an irrevocable power. Subject to the above, any proxy may be revoked if an instrument revoking it or proxy bearing a later date is filed with the Secretary. Section 2.11. WAIVER OF NOTICE. Notice of any annual or special meeting may be waived either before, at or after such meeting in writing signed by the person or persons entitled to the notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transacting of any business because the meeting is not lawfully called or convened. Section 2.12. WRITTEN ACTION. Any action that may be taken at a meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the actions so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be required to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 2.13. STOCKHOLDER PROPOSALS. Except as otherwise provided by law, no proposal or matter shall be considered or acted upon at any meeting of stockholders which has not been submitted to and approved by the Board of Directors. 3 ARTICLE III. BOARD OF DIRECTORS Section 3.01. GENERAL POWERS. The business of the corporation shall be managed by the Board of Directors. Section 3.02. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of directors, except to the extent, if any, otherwise provided in the Certificate of Incorporation, shall be established from time to time by a resolution adopted by a majority of the total number of directors, but shall in no case be less than three. Directors need not be stockholders. Each director shall hold office until the annual meeting of stockholders next held after his election or until the stockholders have elected directors by consent in writing without a meeting and until his successor is elected and qualified or until his earlier death, resignation or removal. Section 3.03. ANNUAL MEETING. As soon as practicable after each election of directors, the Board of Directors shall meet at the registered office of the corporation, or at such other place previously designated by the Board of Directors, for the purpose of electing the officers of the corporation and for the transaction of such other business as may come before the meeting. Section 3.04. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held from time to time at such time and place as may be fixed by resolution adopted by a majority of the total number of directors. Section 3.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, or by any two of the directors and shall be held from time to time at such time and place as may be designated in the notice of such meeting. Section 3.06. NOTICE OF MEETINGS. No notice need be given of any annual or regular meeting of the Board of Directors. Notice of each special meeting of the Board of Directors shall be given by the secretary who shall give at least twenty-four hours' notice thereof to each director by mail, telephone, telegram, or in person. Notice shall be effective upon receipt. Section 3.07. WAIVER OF NOTICE. Notice of any meeting of the Board of Directors may be waived either before, at, or after such meeting in writing signed by each director. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 3.08. QUORUM. A majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless these Bylaws require a greater number. Section 3.09. VACANCIES. Any vacancy among the directors or increase in the authorized number of directors shall be filled for the unexpired term by a majority of the directors then in office though less than a quorum or by the sole remaining director. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office may fill such vacancy or vacancies to take effect when such resignation or resignations shall become effective. Section 3.10. REMOVAL. Any director may be removed from office at any special meeting of the stockholders either with or without cause. If the entire Board of Directors or any one or more directors be so removed, new directors may be elected at the same meeting. 4 Section 3.11. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the total number of directors, designate one or more committees, each to consist of two or more of the directors of the Corporation, which, to the extent provided in the resolution, may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined by the resolution adopted by the directors. The committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. Section 3.12. WRITTEN ACTION. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if all directors or committee members consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 3.13. COMPENSATION. Directors who are not salaried officers of the Corporation may receive a fixed sum per meeting attended or a fixed annual sum, or both, and such other forms of reasonable compensation as may be determined by resolution of the Board of Directors. All directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Any director may serve the Corporation in any other capacity and receive proper compensation therefor. Section 3.14. CONFERENCE COMMUNICATIONS. Directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by means of a conference telephone conversation or other comparable communication technique whereby all persons participating in the meeting can hear and communicate to each other. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.14 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. ARTICLE IV. OFFICERS Section 4.01. NUMBER. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary, a Treasurer, and any other officers and agents as the Board of Directors by a majority vote of the total number of directors may designate. Any person may hold two or more offices. Section 4.02. ELECTION, TERM OF OFFICE, AND QUALIFICATIONS. At each annual meeting of the Board of Directors all officers shall be elected. Such officers shall hold office until the next annual meeting of the directors or until their successors are elected and qualified, or until such office is eliminated by a vote of the majority of all directors. Officers who may be directors shall hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from his office by a majority vote of the total number of directors with or without cause. A vacancy among the officers by death, resignation, removal, or otherwise shall be filled for the unexpired term by the Board of Directors. Section 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is elected, shall preside at all meetings of the stockholders and directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. Section 4.05. PRESIDENT. The President shall have general active management of the business of the Corporation. In event of the absence or disability of the Chairman of the Board, he shall preside at all meetings of the stockholders and directors. He shall see that all orders and resolutions of the directors are carried into effect. He 5 may execute and deliver in the name of the Corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Corporation and in general shall perform all duties usually incident to the office of the president. He shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.06. VICE PRESIDENT. Each Vice President shall have such powers and shall perform such duties as may be prescribed by the Board of Directors or by the President. In the event of absence or disability of the President, Vice Presidents shall succeed to his power and duties in the order designated by the Board of Directors. Section 4.07. SECRETARY. The Secretary shall be secretary of and shall attend all meetings of the stockholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the Corporation. He shall give proper notice of meetings of stockholders and the Board of Directors. He shall perform such other duties as may from time to time be prescribed by the Board of Directors or by the President. Section 4.08. TREASURER. The Treasurer shall keep accurate accounts of all moneys of the Corporation received or disbursed. He shall deposit all moneys, drafts and checks in the name of and to the credit of the Corporation in such banks and depositories as a majority of the whole Board of Directors shall from time to time designate. He shall have power to endorse for deposit all notes, checks and drafts received by the Corporation. He shall disburse the funds of the Corporation as ordered by the directors, making proper vouchers therefor. He shall render to the President and the Board of Directors whenever required an account of all his transactions as Treasurer and of the financial condition of the Corporation and shall perform such other duties as may from time to time be prescribed by the Board of Directors or by the President. Section 4.09. EXECUTION OF CONTRACTS AND DOCUMENTS. Except as otherwise directed by the Board of Directors, all contracts, deeds, promissory notes, checks, drafts, or other instruments calling for the payment of money shall be signed by the President or a Vice President and, if a second signature is required, the Secretary or Treasurer. Section 4.10. DUTIES OF OTHER OFFICERS. The duties of such other officers and agents as the Board of Directors may designate shall be set forth in the resolution creating such office or by subsequent resolution. Section 4.11. COMPENSATION. The officers of the Corporation shall receive such compensation for their services as may be determined from time to time by resolution of the Board of Directors or by one or more committees to the extent so authorized from time to time by the Board of Directors. ARTICLE V. SHARES AND THEIR TRANSFER Section 5.01. CERTIFICATES FOR STOCK. Every holder of stock in the Corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Directors, certifying the number of shares in the Corporation owned by him. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such certificate shall have been so cancelled, except in cases provided for in section 5.04. Section 5.02. ISSUANCE OF STOCK. The Board of Directors is authorized to cause to be issued stock of the Corporation up to the full amount authorized by the Certificate of Incorporation is such amounts and for such consideration as may be determined by the Board of Directors. No shares shall be allotted except in consideration of cash, labor, personal property, or real property, or leases thereof, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of such allotment of stock, the Board of Directors shall state its 6 determination of the fair value to the Corporation in monetary terms of any consideration other than cash for which shares are allotted. Stock so issued shall be fully paid and nonassessable. The amount of consideration to be received in cash or otherwise shall not be less than the par value of the shares so allotted. Treasury shares may be disposed of by the Corporation for such consideration, expressed in dollars, as may be fixed by the Board of Directors. Section 5.03. TRANSFER OF STOCK. Transfer of stock on the books of the Corporation may be authorized only by the stockholder named in the certificate, the stockholder's legal representative or the stockholder's duly authorized attorney-in-fact and upon surrender of the certificate or the certificates for such stock. The Corporation may treat as the absolute owner of stock of the Corporation the person or persons in whose name stock is registered on the books of the Corporation. Section 5.04. LOSS OF CERTIFICATES. Any stockholder claiming a certificate for stock to be lost, stolen or destroyed shall make an affidavit of that fact in such form as the Board of Directors may require and shall, if the Board of Directors so requires, give the Corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the Corporation against any claims which may be made against it on account of the alleged loss, theft or destruction of the certificate or issuance of such new certificate. A new certificate may then be issued in the same tenor and for the same number of shares as the one claimed to have been lost, stolen or destroyed. Section 5.05. FACSIMILE SIGNATURES. Whenever any certificate is countersigned by a transfer agent or by a registrar other than the Corporation or its employee, then the signatures of the officers or agents of the Corporation may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on any such certificate shall cease to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation as though the person who signed such certificate or whose facsimile signature or signatures had been placed thereon were such officer, transfer agent or registrar at the date of issue. ARTICLE VI. BOOKS AND RECORDS, AUDIT, FISCAL YEAR Section 6.01. BOOKS AND RECORDS. The Board of Directors of the Corporation shall cause to be kept: (a) a share ledger which shall be a charge of an officer designated by the Board of Directors; (b) records of all proceedings of stockholders and directors; and (c) such other records and books of account as shall be necessary and appropriate to the conduct of the corporate business. Section 6.02. AUDIT. The Board of Directors shall cause the records and books of account of the Corporation to be audited at least once in each fiscal year and at such other times as it may deem necessary or appropriate. Section 6.03. ANNUAL REPORT. The Board of Directors shall cause to be filed with the Delaware Secretary of State in each year the annual report required by law. Section 6.04. FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 of each year. ARTICLE VII. INDEMNIFICATION Section 7.01. INDEMNIFICATION. The Corporation shall indemnify, and the Board of Directors may authorize the purchase and maintenance of insurance for the purpose of such indemnification, such persons for such 7 liabilities in such manner under such circumstances and to such extent as permitted by Section 145 of the Delaware General Corporation Law, as now enacted or hereafter amended. ARTICLE VIII. MISCELLANEOUS Section 8.01. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjustment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. (b) If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (3) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 8.02. PERIODS OF TIME. During any period of time prescribed by these Bylaws, the date from which the designated period of time begins to run shall not be included, and the last day of the period so computed shall be included. Section 8.03. VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise ordered by the Board of Directors, the President shall have full power and authority on behalf of the Corporation (a) to attend and to vote at any meeting of security holders of other corporations in which the Corporation may hold securities; (b) to execute any proxy for such meeting on behalf of the Corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of the Corporation. At such meeting, by such proxy or by such writing in lieu of meeting, the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the Corporation might have possessed and exercised if it had been present. The Board of Directors may, from time to time, confer like powers upon any other person or persons. Section 8.04. PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered by the Board of Directors, the President shall have power and authority on behalf of the Corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the Corporation and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons. ARTICLE IX. AMENDMENTS 8 Section 9.01. These Bylaws may be amended, altered or repealed by a vote of the majority of the total number of directors or of the stockholders at any meeting upon proper notice. 9 EX-10.15 3 a2036456zex-10_15.txt EXHIBIT 10.15 Exhibit 10.15 AUTOTOTE CORPORATION ----------------------------------------------------- 1997 INCENTIVE COMPENSATION PLAN, AS AMENDED 1 PAGE 1. Purpose........................................................... 1 2. Definitions....................................................... 1 3. Administration.................................................... 3 (a) Authority of the Committee.................................... 3 (b) Manner of Exercise of Committee Authority..................... 3 (c) Limitation of Liability....................................... 4 4. Limitations on Plan Awards........................................ 4 (a) Overall Number of Shares Available for Delivery............... 4 (b) Application of Limitation to Grants of Awards................. 4 (c) Availability of Shares Not Delivered under Awards ............ 4 5. Eligibility; Per-Person Award Limitations......................... 5 6. Specific Terms of Awards.......................................... 5 (a) General....................................................... 5 (b) Options....................................................... 5 (c) Stock Appreciation Rights..................................... 6 (d) Restricted Stock.............................................. 6 (e) Deferred Stock................................................ 7 (f) Bonus Stock and Awards in Lieu of Obligations................. 8 (g) Dividend Equivalents.......................................... 8 (h) Other Stock-Based Awards...................................... 8 (i) Performance Goals Applicable to Designated Covered Employees.. 8 7. Certain Provisions Applicable to Awards........................... 10 (a) Stand-Alone, Additional, Tandem, and Substitute Awards ....... 10 (b) Term of Awards................................................ 10 (c) Form and Timing of Payment under Awards; Deferrals ........... 10 (d) Exemptions from Section 16(b) Liability....................... 11 8. Change in Control................................................. 11 (a) Effect of "Change in Control"................................. 11 (b) Definition of "Change in Control"............................. 11 (c) Definition of "Change in Control Price" ...................... 12 9. General Provisions................................................ 12 (a) Compliance with Legal and Other Requirements.................. 12 (b) Limits on Transferability; Beneficiaries...................... 12 (c) Adjustments................................................... 13 (d) Taxes......................................................... 13 (e) Changes to the Plan and Awards................................ 13 (f) Limitation on Rights Conferred under Plan..................... 14 (g) Unfunded Status of Awards; Creation of Trusts................. 14 (h) Nonexclusivity of the Plan.................................... 14 (i) Payments in the Event of Forfeitures; Fractional Shares ...... 15 (j) Governing Law................................................. 15 (k) Plan Effective Date........................................... 15 2 AUTOTOTE CORPORATION 1997 INCENTIVE COMPENSATION PLAN, AS AMENDED 1. PURPOSE. The purpose of this 1997 Incentive Compensation Plan (the "Plan") is to assist Autotote Corporation, a Delaware corporation (the "Company"), and its subsidiaries in attracting, retaining, and rewarding executives, directors, employees, and other persons who provide services to the Company and/or its subsidiaries, enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company's stockholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of stockholder value. The Plan is also intended to qualify certain compensation awarded under the Plan for tax deductibility under Code Section 162(m) (as hereafter defined) to the extent deemed appropriate by the Committee which administers the Plan. 2. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof: (a) "Award" means any award of an Option, SAR (including Limited SAR), Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, or Other Stock-Based Award, together with any other right or interest granted to a Participant under the Plan. (b) "Beneficiary" means the person, persons, trust, or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or to which Awards or other rights are transferred if and to the extent permitted under Section 9(b) hereof. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means person, persons, trust, or trusts entitled by will or the laws of descent and distribution to receive such benefits. (c) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act and any successor to such Rule. (d) "Board" means the Company's Board of Directors. (e) "Change in Control" means Change in Control as defined with related terms in Section 8 of the Plan. (f) "Change in Control Price" means the amount calculated in accordance with Section 8(c) of the Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto. (h) "Committee" means a committee of two or more directors designated by 3 the Board to administer the Plan; provided, however, that directors appointed as members of the Committee shall not be employees of the Company or any subsidiary. In appointing members of the Committee, the Board will consider whether a member is or will be a Qualified Member, but such members are not required to be Qualified Members at the time of appointment or during their term of service on the Committee. (i) "Covered Employee" means an Eligible Person who is a "covered employee" within the meaning of Code Section 162(m). (j) "Deferred Stock" means a right, granted to a Participant under Section 6(e) hereof, to receive Stock, at the end of a specified deferral period. (k) "Dividend Equivalent" means a right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. (l) "Effective Date" means the date of approval of the Plan by stockholders of the Company. (m) "Eligible Person" means each executive officer and other officer or employee of the Company or of any subsidiary, including each such person who may also be a director of the Company, each non-employee director of the Company, and each other person who provides substantial services to the Company and/or its subsidiaries and who is designated as eligible by the Committee. An employee on leave of absence may be considered as still in the employ of the Company or a subsidiary for purposes of eligibility for participation in the Plan. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto. (o) "Fair Market Value" means the fair market value of Stock, Awards, or other property as determined by the Committee or under procedures established by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock shall be the average of the high and low sales prices of Stock on a given date or, if there are no sales on that date, on the latest previous date on which there were sales, reported for composite transactions in securities listed on the principal trading market on which Stock is then listed. (p) "Incentive Stock Option" or "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Code Section 422 or any successor provision thereto. (q) "Limited SAR" means a right granted to a Participant under Section 6(c) hereof. (r) "Option" means a right, granted to a Participant under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods. 4 (s) "Other Stock-Based Awards" means Awards granted to a Participant under Section 6(h) hereof. (t) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (u) "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and an "outside director" within the meaning of Regulation 1.162-27 under Code Section 162(m). (v) "Restricted Stock" means Stock granted to a Participant under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture. (w) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (x) "Stock" means the Company's Class A Common Stock, $.01 par value, and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 9(c) hereof. (y) "Stock Appreciation Rights" or "SAR" means a right granted to a Participant under Section 6(c) hereof. 3. ADMINISTRATION. (a) AUTHORITY OF THE COMMITTEE. Except as otherwise provided below, the Plan shall be administered by the Committee. The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants, grant Awards, determine the type, number, and other terms and conditions of, and all other matters relating to, Awards, prescribe Award agreements (which need not be identical for each Participant) and rules and regulations for the administration of the Plan, construe and interpret the Plan and Award agreements and correct defects, supply omissions, or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. The foregoing notwithstanding, the Board shall perform the functions of the Committee for purposes of granting Awards under the Plan to non-employee directors, and may perform any function of the Committee under the Plan for any other purpose, including for the purpose of ensuring that transactions under the Plan by Participants who are then subject to Section 16 of the Exchange Act in respect of the Company are exempt under Rule 16b-3. In any case in which the Board is performing a function of the Committee under the Plan, each reference to the Committee herein shall be deemed to refer to the Board, except where the context otherwise requires. (b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. At any time that a member of the Committee is not a Qualified Member, any action of the Committee relating to an Award granted or to be granted to a Participant who is then subject to Section 16 5 of the Exchange Act in respect of the Company, or relating to an Award intended by the Committee to qualify as "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder, may be taken either (i) by a subcommittee, designated by the Committee, composed solely of two or more Qualified Members, or (ii) by the Committee but with each such member who is not a Qualified Member abstaining or recusing himself or herself from such action; provided, however, that, upon such abstention or recusal, the Committee remains composed of two or more Qualified Members. Such action, authorized by such a subcommittee or by the Committee upon the abstention or recusal of such non-Qualified Member(s), shall be the action of the Committee for purposes of the Plan. Any action of the Committee shall be final, conclusive and binding on all persons, including the Company, its subsidiaries, Participants, Beneficiaries, transferees under Section 9(b) hereof, or other persons claiming rights from or through a Participant, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent that such delegation will not result in the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to qualify as "performance-based compensation" under Code Section 162(m) to fail to so qualify. The Committee may appoint agents to assist it in administering the Plan. (c) LIMITATION OF LIABILITY. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any executive officer, other officer or employee of the Company or a subsidiary, the Company's independent auditors, consultants, or any other agents assisting in the administration of the Plan. Members of the Committee and any officer or employee of the Company or a subsidiary acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination. 4. LIMITATIONS ON PLAN AWARDS. (a) OVERALL NUMBER OF SHARES AVAILABLE FOR DELIVERY. Subject to adjustment as provided in Section 9(c) hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be 3.4 million1. Any shares of Stock delivered under the Plan shall consist of authorized and unissued shares or treasury shares. (b) APPLICATION OF LIMITATION TO GRANTS OF AWARDS. No Award may be granted if the number of shares of Stock to which such Award relates, when added to the number of shares of Stock to which other then-outstanding Awards relate and the number of shares of Stock issued or delivered upon settlement of previously granted Awards, exceeds the number of shares of Stock reserved for issuance under this - ----------------- 1 Increased from 1.6 to 3.4 million effective March 23, 2000. 6 Section 4. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. (c) AVAILABILITY OF SHARES NOT DELIVERED UNDER AWARDS. Shares of Stock subject to an Award under the Plan that is canceled, expired, forfeited, settled in cash, or otherwise terminated without a delivery of shares to the Participant, including (i) the number of shares withheld in payment of any exercise or purchase price of an Award or taxes relating to Awards, and (ii) the number of shares surrendered in payment of any exercise or purchase price of an Award or taxes relating to any Award, will again be available for Awards under the Plan, except that if any such shares could not again be available for Awards to a particular Participant under any applicable law or regulation, such shares shall be available exclusively for Awards to Participants who are not subject to such limitation. 5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted under the Plan only to Eligible Persons. In each fiscal year during any part of which the Plan is in effect, an Eligible Person who is an employee of the Company or any of its subsidiaries may not be granted Awards relating to more than one million shares of Stock, subject to adjustment as provided in Section 9(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), and 6(h). 6. SPECIFIC TERMS OF AWARDS. (a) GENERAL. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 9(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of an Award that is not mandatory under the Plan. Except as expressly provided by the Committee (including for purposes of complying with requirements of the Delaware General Corporation Law relating to lawful consideration for issuance of shares), no consideration other than services will be required for the grant (but not the exercise) of any Award. (b) OPTIONS. The Committee is authorized to grant Options to Participants on the following terms and conditions: (i) EXERCISE PRICE. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee, provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option except as provided under Section 7(a) hereof. (ii)TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which or the circumstances under which an Option may be 7 exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including, without limitation, cash, Stock, other Awards or awards granted under other plans of the Company or any subsidiary, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Stock will be delivered or deemed to be delivered to Participants. (iii) ISOS. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs (including any SAR in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Code Section 422, unless the Participant has first requested the change that will result in such disqualification. ISOs may be granted only to employees of the Company or any of its subsidiaries. To the extent that the aggregate Fair Market Value (determined as of the time the Option is granted) of the Stock with respect to which ISOs granted under this Plan and all other plans of the Company and any subsidiary are first exercisable by any employee during any calendar year shall exceed the maximum limit (currently, $100,000), if any, imposed from time to time under Code Section 422, such Options shall be treated as Options that are not ISOs. (c) STOCK APPRECIATION RIGHTS. The Committee is authorized to grant SARs to Participants on the following terms and conditions: (i) RIGHT TO PAYMENT. A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a "Limited SAR," the Fair Market Value determined by reference to the Change in Control Price, as defined under Section 8(c) hereof) over (B) the grant price of the SAR as determined by the Committee. (ii)OTHER TERMS. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR. Limited SARs that may only be exercised in connection with a Change in Control or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. SARs and Limited SARs may be either freestanding or in tandem with other Awards. (d) RESTRICTED STOCK. The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions: 8 (i) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). During the restricted period applicable to the Restricted Stock, subject to Section 9(b) below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined, or otherwise encumbered by the Participant. (ii) FORFEITURE. Except as otherwise determined by the Committee, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock. (iii) CERTIFICATES FOR STOCK. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) DIVIDENDS AND SPLITS. As a condition to the grant of an Award of Restricted Stock, the Committee may require that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of Restricted Stock or applied to the purchase of additional Awards under the Plan. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed. (e) DEFERRED STOCK. The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock at the end of a specified deferral period, subject to the following terms and conditions: (i) AWARD AND RESTRICTIONS. Settlement of an Award of Deferred Stock shall occur upon expiration of the deferral period specified for such Deferred 9 Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine. (ii) FORFEITURE. Except as otherwise determined by the Committee, upon termination of employment during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Deferred Stock. (iii) DIVIDEND EQUIVALENTS. Unless otherwise determined by the Committee at date of grant, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock and the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles, as the Committee shall determine or permit the Participant to elect. (f) BONUS STOCK AND AWARDS IN LIEU OF OBLIGATIONS. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements. Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. (g) DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify. (h) OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or 10 exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. (i) PERFORMANCE GOALS APPLICABLE TO DESIGNATED COVERED EMPLOYEES. If the Committee determines that an Award described in Sections 6(d), 6(e) or 6(h) to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise, and/or settlement of such Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 6(i). (i) PERFORMANCE GOALS GENERALLY. The performance goals for such Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 6(i). Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Awards shall be granted, exercised, and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise, and/or settlement of such Awards. Performance goals may differ for Awards granted to any one Participant or to different Participants. (ii) BUSINESS CRITERIA. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used by the Committee in establishing performance goals for such Awards: (1) earnings per share; (2) revenues; (3) cash flow; (4) cash flow return on investment; (5) return on net assets, return on assets, return on investment, return on capital, return on equity; (6) economic value added; (7) operating margin; (8) net income; pretax earnings; pretax earnings before interest, depreciation and amortization; pretax operating earnings after interest expense and before incentives, service fees, and extraordinary or special items; operating earnings; (9) total stockholder return; and (10) any of the above goals as compared to the performance of a published or special index deemed applicable by the Committee including, but not limited to, the Standard & Poor's 500 Stock Index or a group of comparator companies. (iii) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING PERFORMANCE GOALS. 11 Achievement of performance goals in respect of such Awards shall be measured over a performance period of up to ten years, as specified by the Committee. Performance goals shall be established not later than 90 days after the beginning of any performance period applicable to such Awards, or at such other date as may be required or permitted for "performance-based compensation" under Code Section 162(m). (iv) OTHER TERMS. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of an Award subject to this Section 6(i). All determinations by the Committee as to the establishment of performance goals, and the achievement of performance goals relating to Awards subject to this Section 6(i), shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). The Committee may not delegate any responsibility relating to such Awards, and the Board shall not perform such functions at any time that the Committee is composed solely of Qualified Members. Because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of an Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan as in effect on the date of adoption or any agreements relating to Awards that are designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 7. CERTAIN PROVISIONS APPLICABLE TO AWARDS. (a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, or any other right of a Participant to receive payment from the Company or any subsidiary. Such additional, tandem, and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any subsidiary, in which the value of Stock subject to the Award is equivalent in value to the cash compensation (for example, Deferred Stock or Restricted Stock), or in which the exercise price, grant price, or purchase price of the Award in the nature of a right that may be exercised is equal to the Fair Market Value of the underlying Stock minus the value of the cash compensation surrendered (for example, Options granted with an exercise price "discounted" by the amount of the cash compensation surrendered). (b) TERM OF AWARDS. The term of each Award shall be for such period as may 12 be determined by the Committee; provided that in no event shall the term of any Option or SAR exceed a period of ten years (or, in the case of an ISO, such shorter term as may be required under Code Section 422). (c) FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in Stock, other Awards, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated in the discretion of the Committee or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the Committee (subject to Section 9(e) of the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. (d) EXEMPTIONS FROM SECTION 16(B) LIABILITY. It is the intent of the Company that the grant of any Awards to or other transaction by a Participant who is subject to Section 16 of the Exchange Act shall be exempt under Rule 16b-3 (except for transactions which a Participant has been advised in advance are non-exempt). Accordingly, if any provision of this Plan or any Award agreement does not comply with the requirements of Rule 16b-3 as then applicable to any such transaction, such provision shall be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 so that such Participant shall avoid liability under Section 16(b). 8. CHANGE IN CONTROL. (a) EFFECT OF "CHANGE IN CONTROL." In the event of a "Change in Control," the following provisions shall apply unless otherwise provided in the Award agreement: (i) Any Award carrying a right to exercise that was not previously exercisable and vested shall become fully exercisable and vested as of the time of the Change in Control; (ii) If any optionee holds an Option immediately prior to a Change in Control that was not previously exercisable and vested in full throughout the 60-day period preceding the Change in Control, he shall be entitled to elect, during the 60-day period preceding the Change in Control, in lieu of acquiring the shares of Stock covered by the portion of the Option that was not vested and exercisable within such 60-day period, to receive, and the Company shall be obligated to pay, in cash the excess of the Change in Control Price over the exercise price of such Option, multiplied by the number of shares of Stock covered by such portion of the Option; (iii) The restrictions, deferral of settlement, and forfeiture conditions 13 applicable to any other Award granted under the Plan shall lapse and such Awards shall be deemed fully vested as of the time of the Change in Control, except to the extent of any waiver by the Participant and subject to applicable restrictions set forth in Section 9(a) hereof; and (iv) With respect to any outstanding Award subject to achievement of performance goals and conditions under the Plan, such performance goals and other conditions will be deemed to be met if and to the extent so provided by the Committee in the Award agreement relating to such Award. (b) DEFINITION OF "CHANGE IN CONTROL." A "Change in Control" shall mean the occurrence of any of the following: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing at least 40% percent (or such greater percentage as the Committee may specify in connection with the grant of any Award) of the combined voting power of the Company's then-outstanding securities; or (ii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary through purchase of assets, or by merger, or otherwise. (c) DEFINITION OF "CHANGE IN CONTROL PRICE." The "Change in Control Price" means an amount in cash equal to the higher of (i) the amount of cash and fair market value of property that is the highest price per share paid (including extraordinary dividends) in any transaction triggering the Change in Control, or (ii) the highest Fair Market Value per share at any time during the 60-day period preceding the Change in Control. 9. GENERAL PROVISIONS. (a) COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule, or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other securities of the Company are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit 14 to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control. (b) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party, or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more Beneficiaries or other transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee pursuant to the express terms of an Award agreement (subject to any terms and conditions which the Committee may impose thereon). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. (c) ADJUSTMENTS. In the event that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of shares of Stock by which annual per-person Award limitations are measured under Section 5 hereof, (iii) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (iv) the exercise price, grant price or purchase price relating to any Award and/or make provision for payment of cash or other property in respect of any outstanding Award. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including performance goals) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or any business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that such authority 15 or the making of such adjustment would cause Options, SARs, or Awards granted under Section 6(i) hereof to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. (d) TAXES. The Company and any subsidiary is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations, either on a mandatory or elective basis in the discretion of the Committee. (e) CHANGES TO THE PLAN AND AWARDS. The Board may amend, alter, suspend, discontinue, or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any amendment or alteration to the Plan shall be subject to the approval of the Company's stockholders not later than the annual meeting next following such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to the Plan to stockholders for approval; provided that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate any Award theretofore granted and any Award agreement relating thereto, except as otherwise provided in the Plan; provided that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interest accounting shall be available, including the substitution of Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interest accounting. (f) LIMITATION ON RIGHTS CONFERRED UNDER PLAN. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary, (ii) interfering in any way with the right of the Company or a subsidiary to terminate any Eligible Person's or Participant's employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or 16 transferred shares of Stock in accordance with the terms of an Award. (g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. The trustee of such trusts may be authorized to dispose of trust assets and reinvest the proceeds in alternative investments, subject to such terms and conditions as the Committee may specify and in accordance with applicable law. (h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable including incentive arrangements and awards which do not qualify under Code Section 162(m). (i) PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash or other consideration, the Participant shall be repaid the amount of such cash or other consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (j) GOVERNING LAW. The validity, construction and effect of the Plan, any rules and regulations under the Plan, and any Award agreement shall be determined in accordance with the Delaware General Corporation Law, without giving effect to principles of conflicts of laws, and applicable federal law. (k) PLAN EFFECTIVE DATE. The Plan became Effective on August 13, 1997 and was amended Effective March 23, 2000. 17 EX-10.19 4 a2036456zex-10_19.txt EXHIBIT 10.19 Exhibit 10.19 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement is entered into as of the 1st of September, 2000, by and between A. Lorne Weil ("Executive") and Autotote Corporation, a Delaware corporation (the "Company"). WHEREAS, the Company and Executive have entered into an Employment Agreement dated as of November 1, 1997, as amended by the letter agreement dated September 10, 1998 (the "Existing Agreement"); and WHEREAS, the Company and Executive wish to amend certain provisions of the Existing Agreement concerning the term of Executive's employment; Executive's base salary; and Executive's rights upon termination with respect to any supplemental executive retirement plan or similar plan; NOW, THEREFORE, in consideration of the premises and the mutual benefits to be derived herefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Existing Agreement is hereby amended, effective as of September 1, 2000, as follows: 1. TERM: Section 2 of the Existing Agreement is hereby amended and restated to provide in its entirety as follows: The term of employment of Executive under this Agreement (the "Term") shall be the period commencing on the Effective Date and ending on October 31, 2004, together with any additional period or periods for which such term may be extended from time to time in accordance with this Section 2, subject to earlier termination in accordance with Section 6 or 7. The Term shall be extended 1 automatically, without further action by either party, by one additional year beyond the then-scheduled end of the Term, on October 31, 2004 (extending the Term to October 31, 2005) and on each succeeding October 31 thereafter, unless either party, prior to the April 30 preceding the date upon which such extension would become effective, shall have served upon the other party written notice in accordance with the provisions of Section 12(d) electing not to so extend the Term, in which case the term of Executive's employment shall terminate at the then-scheduled end of the Term, subject to earlier termination in accordance with Section 6 or 7. 2. BASE SALARY: Section 4(a) the Existing Agreement is hereby amended and restated to provide in its entirety as follows: The Company will pay to Executive during the Term a base salary at the initial annual rate of $475,000, payable in cash in substantially equal monthly installments during each year, or portion thereof, of the Term commencing at the beginning of the Term, and otherwise in accordance with the Company's usual payroll practices with respect to senior executives (except to the extent deferred under Section 5(d)). Executive's annual base salary shall be increased to $750,000 effective September 1, 2000, and shall be increased annually on each succeeding September 1 thereafter by a percentage of Executive's annual base salary then in effect equal to the percentage increase, if any, during the preceding twelve months in the Consumer Price Index for the Greater New York area; provided, however, that if the independent consultants that the Company retains to review the Company's compensation structure conclude that Executive's base salary is insufficient, Executive's base salary shall be increased in accordance with the recommendations of such consultants. In no event shall Executive's base salary be reduced. 2 3. PARTICIPATION IN ANY SERP ADOPTED BY THE COMPANY: Section 5 of the Existing Agreement is hereby amended as follows: a. Subsection 5(c)(iii) of the Existing Agreement is hereby renumbered as Subsection 5(c)(iv); b. Subsection 5(c)(iv) of the Existing Agreement is hereby renumbered as Subsection 5(c)(v); and c. The following provision is hereby added in its entirety as Subsection 5(c)(iii): (iii) If the Company adopts any supplemental executive retirement plan or substantially similar plan (a "SERP") during the Term, Executive shall be entitled to participate in such SERP in accordance with its terms, subject to the provisions of Sections 6 and 7 of this Agreement. 4. ENTITLEMENT UNDER SERP UPON TERMINATION DUE TO NORMAL RETIREMENT, APPROVED EARLY RETIREMENT, DEATH, OR DISABILITY: Section 6 of the Existing Agreement is hereby amended as follows: a. Subsection 6(vi) of the Existing Agreement is hereby renumbered as Subsection 6(vii); b. Subsection 6(vii) of the Existing Agreement is hereby renumbered as Subsection 6(viii); and c. The following provision is hereby added in its entirety as Subsection 6(vi): (vi) If the Company adopts any supplemental executive retirement plan or substantially similar plan (a "SERP") during the Term, Executive shall be entitled to receive, in lieu of any payments and benefits under the SERP, the greater of: (a) an actuarially-adjusted lump sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP and (b) an actuarially-adjusted lump 3 sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP if Executive had 15 years of service with the Company; provided, however, that if Executive receives such payment under this Subsection 6(vi), Executive shall forfeit all rights under the SERP, and the SERP shall have no force and effect with respect to Executive. 5. ENTITLEMENT UNDER SERP UPON TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON, PRIOR TO OR MORE THAN TWO YEARS AFTER A CHANGE IN CONTROL: Section 7 of the Existing Agreement is hereby amended to add the following provision as Subsection 7(b)(i)(J): (J) If the Company adopts any SERP during the Term, Executive shall be entitled to receive, in lieu of any payments and benefits under the SERP, the greater of: (a) an actuarially-adjusted lump sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP and (b) an actuarially-adjusted lump sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP if Executive had 15 years of service with the Company; provided, however, that if Executive receives such payment under this Subsection 7(b)(i)(J), Executive shall forfeit all rights under the SERP, and the SERP shall have no force and effect with respect to Executive. 6. ENTITLEMENT UNDER SERP UPON TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON, WITHIN TWO YEARS AFTER A CHANGE IN CONTROL: Section 7 of the Existing Agreement is hereby amended to add the following provision as Subsection 7(b)(ii)(J): (J) If the Company adopts any SERP during the Term, Executive shall be entitled to receive, in lieu of any payments and benefits under the SERP, the greater of: (a) an actuarially-adjusted lump sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP and (b) an actuarially-adjusted lump sum cash payment equal to the cash value of all payments and benefits to which Executive would have been entitled under the SERP if Executive had 15 years of service with the Company; provided, however, that if Executive receives such payment under this Subsection 7(b)(ii)(J), 4 Executive shall forfeit all rights under the SERP, and the SERP shall have no force and effect with respect to Executive. 7. RATIFICATION AS TO OTHER RESPECTS: The Existing Agreement is hereby ratified and confirmed and remains in full force and effect in all respects except as modified herein. 5 IN WITNESS WHEREOF, Executive has signed his name and the Company, by the signature of its duly authorized officer, has executed this Amendment to Employment Agreement, as of the date and year first above written. THE COMPANY: AUTOTOTE CORPORATION, a Delaware corporation By:______________________________ Alan J. Zakon Chairman of the Executive Committee of the Board of Directors EXECUTIVE: ---------------------------------- A. Lorne Weil 6 EX-10.21 5 a2036456zex-10_21.txt EXHIBIT 10.21 Exhibit 10.21 January 11, 2001 DeWayne Laird 565 Fox Meadow Lane West Chester, PA 19382 Dear DeWayne: This letter memorializes the resolutions approved by the Board of Directors of Autotote Corporation (the "Company"), on August 30, 2000 and September 7, 2000, concerning your continued employment. The Board approved the following five terms: 1. TERM: Subject to earlier termination for cause, death, or disability, the term of your employment shall be extended, effective September 1, 2000, through and until August 31, 2003 (the "Term"). 2. POSITION: During the Term, you will serve as Vice President and Chief Financial Officer of the Company. You will report directly to the Chief Executive Officer of the Company (the "CEO") and shall have such duties and authority consistent with your title as shall be reasonably assigned to you from time to time by the CEO or the Board of Directors. 3. SALARY: Effective September 1, 2000, your annual salary has been increased to $250,000 and will be increased annually on each succeeding September 1 thereafter by an amount not less than a percentage of your annual salary then in effect equal to the percentage increase, if any, during the preceding twelve months in the Consumer Price Index for Philadelphia, Pennsylvania. 4. BENEFITS: During the term you will be entitled to participate in any and all benefit plans and programs of the Company that are made available to its senior executives, including the Company's Supplemental Executive Retirement Plan. 5. COMPENSATION UPON CHANGE IN CONTROL: If your employment is terminated without cause within two years of a Change in Control, as defined in the agreement between you and the Company, dated as of November 1, 1997 (the "Change in Control Agreement"), you will be entitled to receive, in lieu of any payment under the Change in Control Agreement, a cash payment in an amount equal to three times the sum of (i) your annual salary on the date of such termination and (ii) the Severance Annual Incentive Amount, as defined in the Change of Control Agreement. 1 DeWayne Laird January 11, 2001 Page 2 You and Autotote agree that the terms contained in this letter will be memorialized in a formal employment agreement. Please indicate your acceptance of these terms by countersigning this letter below and returning it to my attention. Very truly yours, A. Lorne Weil Chief Executive Officer and Chairman of the Board AGREED AND ACCEPTED: - -------------------------- ------------------- DeWayne Laird Date 2 EX-10.22 6 a2036456zex-10_22.txt EXHIBIT 10.22 Exhibit 10.22 January 11, 2001 Martin E. Schloss 869 President Street Brooklyn, New York 11215 Dear Marty: This letter memorializes the resolutions approved by the Board of Directors of Autotote Corporation (the "Company"), on August 30, 2000 and September 7, 2000, concerning your continued employment. The Board approved the following five terms: 1. TERM: Subject to earlier termination for cause, death, or disability, the term of your employment shall be extended, effective September 1, 2000, through and until August 31, 2003 (the "Term"). 2. POSITION: During the Term, you will serve as Vice President, General Counsel and Secretary of the Company. You will report directly to the Chief Executive Officer of the Company (the "CEO") and shall have such duties and authority consistent with your title as shall be reasonably assigned to you from time to time by the CEO or the Board of Directors. 3. SALARY: Effective September 1, 2000, your annual salary has been increased to $300,000 and will be increased annually on each succeeding September 1 thereafter by an amount not less than a percentage of your annual salary then in effect equal to the percentage increase, if any, during the preceding twelve months in the Consumer Price Index for New York, New York. 4. BENEFITS: During the term you will be entitled to participate in any and all benefit plans and programs of the Company that are made available to its senior executives, including the Company's Supplemental Executive Retirement Plan. 5. COMPENSATION UPON CHANGE IN CONTROL: If your employment is terminated without cause within two years of a Change in Control, as defined in the agreement between you and the Company, dated as of November 1, 1997 (the "Change in Control Agreement"), you will be entitled to receive, in lieu of any payment under the Change in Control Agreement, a cash payment in an amount equal to three times the sum of (i) your annual salary on the date of such termination and (ii) the Severance Annual Incentive Amount, as defined in the Change of Control Agreement. Martin E. Schloss January 11, 2001 Page 2 You and Autotote agree that the terms contained in this letter will be memorialized in a formal employment agreement. Please indicate your acceptance of these terms by countersigning this letter below and returning it to my attention. Very truly yours, A. Lorne Weil Chief Executive Officer and Chairman of the Board AGREED AND ACCEPTED: - -------------------------- ------------------- Martin E. Schloss Date 2 EX-10.23 7 a2036456zex-10_23.txt EXHIBIT 10.23 Exhibit 10.23 THE AUTOTOTE CORPORATION KEY EXECUTIVE DEFERRED COMPENSATION PLAN, AS AMENDED ARTICLE 1 INTRODUCTION 1.1 PURPOSE OF PLAN The Company has adopted the Plan set forth herein to provide a means by which certain Eligible Individuals may elect to defer receipt of designated percentages or amounts of their Compensation. 1.2 STATUS OF PLAN The Plan is intended to be an unfunded "bonus program" under 29 CFR Part 2510.3-2(c) and a plan that is "unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and shall be interpreted and administered to the extent possible in a manner consistent with that intent. ARTICLE 2 DEFINITIONS Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: 2.1 ACCOUNT means, for each Participant, an account maintained on the books and records of the Company (and in the Trust) that is established for his or her benefit under Section 5.1. 2.2 ADOPTION AGREEMENT means the Merrill Lynch Special Nonqualified Deferred Compensation Plan for Select Employees Adoption Agreement signed by the Company to establish the Plan and containing all the options selected by the Company, as the same may be amended from time to time. 2.3 CHANGE OF CONTROL means the occurrence of any of the following: (a) any "person" as defined in section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in sections 13(d) and 14(d) thereof, including a "group" as defined in section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing at least 40% of the combined voting power of the Company's then outstanding securities; (b) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, or the consummation of any such transactions if stockholder approval is not obtained, other than any such transaction which would result in at least 60% of the total voting power represented by the voting securities of the Company or the surviving entity outstanding immediately prior to such transaction being beneficially owned by persons who together beneficially owned at least 80% of the combined voting power of the securities of the Company outstanding immediately prior to such transaction; PROVIDED THAT, for purposes of this paragraph (b), such continuity of ownership (and preservation of relative 1 voting power) shall be deemed to be satisfied if the failure to meet such 60% threshold is due solely to the acquisition of voting securities by an employee benefit plan of the Company or such surviving entity; (c) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the its assets (or any transaction having a similar effect); or (d) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board"), together with any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (b), or (c) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election of nomination for election was previously so approved (the "Continuing Directors"), cease for any reason to constitute a majority of the Board. 2.4 CODE means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. 2.5 COMPANY means the corporation referred to in the Adoption Agreement, any successor to all or a major portion of the Company's assets or business that assumes the obligations of the Company, and each other entity that is affiliated with the Company, that adopts the Plan with the consent of the Company, provided that the entity that signs the Adoption Agreement shall have the sole power to amend this Plan and shall be the Plan Administrator if no other person or entity is so serving at any time. 2.6 COMPENSATION has the meaning elected by the Company in the Adoption Agreement. The definition of Compensation may differ for each Participant or class of Participants. 2.7 DEFERRAL DATE means the date within 30 business days after the date the Company pays end-of-year bonuses to Eligible Individuals for the Fiscal Year to which an Elective Deferral relates (whether or not a particular Participant receives or would be entitled to receive a bonus for such Fiscal Year) or such other date selected by the Plan Administrator prior to the beginning of the Fiscal Year to which an Elective Deferral relates. 2.8 DISTRIBUTION DATE means, with respect to each Elective Deferral (as adjusted for earnings and losses) the later of: (a) (i) with respect to Elective Deferrals made in respect of Compensation payable for the Company's 1998 Fiscal Year, the date two years after the date as of which the Elective Deferral is credited to the Participant's Account, (ii) with respect to Elective Deferrals made in respect of Compensation payable for the Company's 1999 Fiscal Year, the date one year after the date as of which the Elective Deferral is credited to the Participant's Account, (iii) with respect to Elective Deferrals made in respect of Compensation payable for the Company's 2000 Fiscal Year, the date two years after the date as of which the Elective Deferral is credited to the Participant's Account and (iv) with respect to the Company's 2001 and later Fiscal Years, the date selected by the Participant prior to the beginning of the Fiscal Year to which the election relates, provided such date is at least three years after the date as of which the Elective Deferral is credited to the Participant's Account; and (b) the date resulting from a Participant's Long Term Deferral Election. 2.9 EFFECTIVE DATE means the date chosen in the Adoption Agreement as of which the Plan first becomes effective. 2.10 ELECTION FORM means the participation election form as approved and prescribed by the Plan Administrator. 2.11 ELECTIVE DEFERRAL means the portion of Compensation that is deferred by a Participant under Section 4.1. -2- 2.12 ELIGIBLE INDIVIDUAL means, on the Effective Date or on any Entry Date thereafter, each employee or non-employee director of the Company who satisfies the criteria established in the Adoption Agreement. 2.13 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to any section or subsection of ERISA includes reference to any comparable or succeeding provisions of any legislation that amends, supplements or replaces such section or subsection. 2.14 FISCAL YEAR2 means the 12-month period beginning each January 1 and ending December 31. 2.15 INSOLVENT means either (a) the Company is unable to pay its debts as they become due or (b) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 2.16 INVESTMENT VEHICLE means a theoretical investment made available under the Plan by the Plan Administrator from time to time in which a Participant's Account may be deemed to be invested in accordance with Section 5.2 hereof in order to measure the value of the Account. 2.17 LONG TERM DEFERRAL ELECTION means, with respect to each Elective Deferral (as adjusted to reflect earnings and losses as provided for hereunder), an election on such form as may be required by the Plan Administrator and that is filed with the Plan Administrator, all in accordance with Section 7.1(b) hereof. 2.18 PARTICIPANT means any Eligible Individual who participates in the Plan in accordance with Article 3. 2.19 PLAN means this Autotote Corporation Key Executive Deferred Compensation Plan together with the Adoption Agreement and all amendments thereto. 2.20 PLAN ADMINISTRATOR means the person, persons or entity designated by the Company in the Adoption Agreement to administer the Plan and to serve as the agent for the "Company" with respect to the Trust as contemplated by the agreement establishing the Trust. If no such person or entity is so serving at any time, the Company shall be the Plan Administrator. 2.21 PLAN YEAR means the 12-month period beginning each January 1 and ending December 31. 2.22 TOTAL AND PERMANENT DISABILITY means the failure of a Participant to render and perform the services required of the Participant for a total of 180 days or more during any consecutive 12-month period, because of any physical or mental incapacity or disability as determined by a physician or physicians selected by the Company and reasonably acceptable to the Participant unless, within 30 days after the Participant has received written notice from the Company of a proposed termination due to such status, the Participant shall have returned to the full performance of his duties and shall have presented to the Company a written certificate of the Participant's good health prepared by a physician selected by he Company and reasonably acceptable to the Participant. 2.23 TRUST means a grantor trust within the meaning of section 671 of the Code that is established by the Company to assist it in meeting its obligations under the Plan and that identifies the Plan as a plan with respect to which assets are to be held by the Trustee. 2.24 TRUSTEE means the trustee or trustees of the Trust. 2.25 UNFORESEEABLE EMERGENCY means a severe financial hardship resulting from a sudden unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar circumstances as a result of events beyond the control of the Participant and, in each case, would constitute an "unforeseeable emergency" within the meaning of Treasury Regulation section 1.457-2(h)(4), and that may not be relieved (a) through reimbursement or compensation by insurance or otherwise, (b) - ---------- 2 Prior to the Fiscal Year beginning January 1, 2001 and ending December 31, 2001, the Fiscal Year was the period beginning each November 1 and ending each October 31. -3- by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (c) by cessation of deferrals under the Plan. An Unforeseeable Emergency shall not include the need to send a Participant's child to college or the desire to purchase a home. ARTICLE 3 PARTICIPATION 3.1 COMMENCEMENT OF PARTICIPATION Any Eligible Individual who elects to defer part of his or her Compensation in accordance with Section 4.1 shall become a Participant in the Plan as of the date such deferrals commence in accordance with Section 4.1. 3.2 CONTINUED PARTICIPATION A Participant in the Plan shall continue to be a Participant so long as any amount remains credited to his or her Account. ARTICLE 4 ELECTIVE DEFERRALS 4.1 ELECTIVE DEFERRALS (a) FISCAL YEAR 1998 COMPENSATION. An Eligible Individual may, by completing an Election Form and filing it with the Plan Administrator no later than October 21, 1998, elect to defer a percentage or dollar amount of the Eligible Individual's Compensation attributable to the 1998 Fiscal Year of the Company, on such terms as the Plan Administrator may permit. (b) FISCAL YEAR 1999 AND LATER COMPENSATION. An Eligible Individual may, by completing an Election Form and filing it with the Plan Administrator not later than the last day of each Fiscal Year of the Company beginning with the 1998 Fiscal Year, elect to defer a percentage or dollar amount of the Eligible Individual's Compensation attributable to the next succeeding Fiscal Year of the Company (I.E., Compensation attributable to the 1999 Fiscal Year and later fiscal years), on such terms as the Plan Administrator may permit. (c) MECHANICS OF DEFERRAL. A Participant's Compensation shall be reduced in accordance with the Participant's election hereunder and amounts deferred hereunder shall be paid by the Company to the Trust as soon as administratively feasible and credited to the Participant's Account as of the Deferral Date. (d) REVOCATION OF DEFERRAL ELECTION. To the extent permitted by the Plan Administrator, a Participant may change or revoke his or her Deferral Election with respect to Compensation payable for a succeeding Fiscal Year of the Company by giving written notice to the Plan Administrator in such form as may be required by the Plan Administrator, before the first day of such Fiscal Year. ARTICLE 5 ACCOUNTS 5.1 ACCOUNTS The Plan Administrator shall establish an Account for each Participant reflecting the Participant's Elective Deferrals, together with any adjustments for income, gain or loss (determined in accordance with Section 5.2(a)) and any payments from the Account. The Plan Administrator may cause the Trustee to maintain and invest separate asset accounts corresponding to each Participant's Account. The Plan Administrator shall (and may cause the Trustee to) establish sub-accounts for each Participant that has more than one Deferral Election and such other sub-accounts as are necessary for the proper administration of the Plan. The Plan Administrator -4- or the Trustee shall provide each Participant with a periodic statement of his or her Account reflecting the income, gains and losses (realized and unrealized), amounts of deferrals, and distributions of such Account since the prior statement. 5.2 DEEMED INVESTMENT OF ACCOUNTS (a) ADJUSTMENT OF ACCOUNTS. The amount of each Participant's Elective Deferral for a Fiscal Year shall be credited to the Participant's Account as of the Deferral Date for such Elective Deferral. The Account shall be adjusted from time to time to reflect (i) subsequent years' deferrals, if any, and (ii) gains (or losses) determined as if the Account were invested in one or more Investment Vehicles selected by the Participant. The Plan Administrator may adopt such rules and administrative practices as it shall deem necessary or appropriate in connection with a Participant's ability to select Investment Vehicles hereunder including restrictions on the timing or frequency of such elections; all such Investment Vehicle selections shall be made in such form as may be required by the Plan Administrator from time to time. (b) INVESTMENT OF TRUST ASSETS. The assets of the Trust shall be invested in such investments (which may, but are not required to be, the Investment Vehicles) as the Trustee shall be directed by the Company or, to the extent permitted by the Company with respect to each Participant's Account, as the Trustee shall be directed by each Participant. ARTICLE 6 VESTING 6.1 GENERAL Without limitation on Section 10.1, each Participant shall be immediately vested in, I.E., shall have a nonforfeitable right to, the balance in the Participant's Account. ARTICLE 7 PAYMENTS 7.1 TIME AND FORM OF PAYMENT (a) TIMING OF DISTRIBUTIONS. Unless sooner distributed in accordance with the terms hereof, each Participant shall receive a distribution in a single lump sum of the portion of the Participant's Account attributable to each Elective Deferral within 30 business days after the Distribution Date for such Elective Deferral. (b) LONG TERM DEFERRAL ELECTIONS. To the extent permitted by the Plan Administrator, each Participant who is employed by the Company shall be entitled to make a Long Term Deferral Election with respect to the amounts credited to the Participant's Account with respect to a Deferral Election. Any such Long Term Deferral Election shall be delivered to the Plan Administrator no later than a date one year prior to any date a Participant's Distribution Date otherwise would occur in accordance with Section 2.7 hereof. The effect of a Long Term Deferral Election will be to defer the distribution of an amount in respect of a Deferral Election until the earlier of the expiration of the period designated in the Long Term Deferral Election and the date described in Section 7.2, 7.3 or 7.4. The Plan Administrator may, in its discretion, limit the ability of any Participant to make a Long Term Deferral Election. 7.2 CHANGE OF CONTROL As soon as possible following a Change of Control of the Company, each Participant shall be paid his or her entire Account balance in a single lump sum. 7.3 TERMINATION OF EMPLOYMENT -5- Within 30 business days after the termination of a Participant's employment for any reason, the Participant shall receive a distribution of his or her entire Account balance in a single lump 7.4 DEATH If a Participant dies prior to the complete distribution of his or her Account, the balance of the Account shall be paid as soon as practicable to the Participant's designated beneficiary or beneficiaries in effect on the date of the Participant's death. Any designation of a beneficiary shall be made by the Participant on an appropriate Election Form filed with the Plan Administrator and may be changed by the Participant at any time by filing another Election Form containing the revised instructions. If no beneficiary is designated or no designated beneficiary survives the Participant, payment shall be made to the Participant's surviving spouse, or, if none, to his or her issue PER STIRPES, in a single payment. If no spouse or issue survives the Participant, payment shall be made in a single lump sum to the representative of the Participant's estate. No payment shall be made to the representative of a Participant's estate until the Plan Administrator shall have been furnished with such evidence as it shall deem necessary or appropriate to establish the validity of the payment. 7.5 UNFORESEEABLE EMERGENCY If a Participant suffers an Unforeseeable Emergency, the Plan Administrator, in its sole discretion, may pay to the Participant only that portion, if any, of the Participant's Account that the Plan Administrator determines is necessary to satisfy the emergency need, including any amounts necessary to pay any Federal, State or local income taxes reasonably anticipated to result from the distribution. A Participant requesting an emergency payment shall apply for the payment in writing in a form approved by the Plan Administrator and shall provide such additional information as the Plan Administrator may require. 7.6 TAXES All federal, state or local taxes that the Plan Administrator determines are required to be withheld in respect of any Elective Deferrals hereunder or from any payments made pursuant to this Article 7 shall be withheld from amounts payable hereunder or from any other amounts payable to a Participant. ARTICLE 8 PLAN ADMINISTRATOR 8.1 PLAN ADMINISTRATION AND INTERPRETATION The Plan Administrator shall oversee the administration of the Plan. The Plan Administrator shall have complete control and authority to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan. The Plan Administrator shall have complete discretion to interpret the Plan and to decide all matters under the Plan. Such interpretation and decision shall be final, conclusive and binding on all Participants and any person claiming under or through any Participant (in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously). Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Plan Administrator shall be entitled to rely on information furnished by a Participant, a beneficiary, the Company or the Trustee. The Plan Administrator shall have the responsibility for complying with any reporting and disclosure requirements of ERISA. 8.2 POWERS, DUTIES, PROCEDURES, ETC. The Plan Administrator shall have such powers and duties, may adopt such rules and tables, may act in accordance with such procedures, may appoint such officers or agents, may delegate such powers and duties, -6- may receive such reimbursements and compensation, and shall follow such claims and appeal procedures with respect to the Plan as it may establish. 8.3 INFORMATION To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require. 8.4 INDEMNIFICATION OF PLAN ADMINISTRATOR The Company agrees to indemnify and to defend to the fullest extent permitted by law any officer(s) or employee(s) who serve as Plan Administrator (including any such individual who formerly served as Plan Administrator) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Company) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. ARTICLE 9 AMENDMENT AND TERMINATION 9.1 AMENDMENTS The Company shall have the right to amend the Plan from time to time, subject to Section 9.3, by an instrument in writing that has been executed on the Company's behalf by its duly authorized officer. 9.2 TERMINATION OF PLAN This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Eligible Individual (or any other person) or a consideration for, or an inducement or condition of employment for, the performance of the services by any Eligible Individual (or other person). The Company reserves the right to terminate the Plan at any time with respect to any or all Participants, subject to Section 9.3, by an instrument in writing that has been executed on the Company's behalf by its duly authorized officer. Upon termination, the Company may, with respect to each Participant affected by any termination (an "Affected Participant") on a Participant-by-Participant basis, (a) elect to continue to maintain the Participant's Account and pay benefits hereunder as they become due as if the Plan had not terminated or (b) pay (or direct the Trustee to pay) promptly to each Affected Participant (or such Affected Participant's beneficiary or beneficiaries) the balance of the Affected Participant's Account. 9.3 EXISTING RIGHTS No amendment or modification to, or termination of, the Plan shall be effective to the extent that it would reduce the value of a Participant's Account immediately prior to the amendment, modification or termination, without the Participant's prior written consent. ARTICLE 10 MISCELLANEOUS 10.1 NO FUNDING The Plan constitutes a mere promise by the Company to make payments in accordance with the terms of the Plan, and Participants and beneficiaries shall have the status of general unsecured creditors of the Company. Nothing in the Plan will be construed to give any employee or any other person rights to any specific assets of -7- the Company or of any other person. In all events, it is the intent of the Company that the Plan be treated as unfunded for tax purposes and for purposes of Title I of ERISA. 10.2 NON-ASSIGNABILITY None of the benefits, payments, proceeds or claims of any Participant or beneficiary shall be subject to any claim of any creditor of any Participant or beneficiary and, in particular, the same shall not be subject to attachment or garnishment or other legal process by any creditor of such Participant or beneficiary, nor shall any Participant or beneficiary have any right to alienate, participate, commute, pledge, encumber or assign any of the benefits or payments or proceeds that he or she may expect to receive, contingently or otherwise, under the Plan. 10.3 LIMITATION OF PARTICIPANTS' RIGHTS Nothing contained in the Plan shall confer upon any person a right to be employed or to continue in the employ of the Company, or interfere in any way with the right of the Company to terminate the employment of a Participant at any time, with or without cause. In addition, nothing shall confer on any individual a right to participate in the Plan in any Fiscal Year. The fact that an individual is an Eligible Individual in one year shall not give the individual a right to participate in the Plan in any other year. 10.4 PARTICIPANTS BOUND Any action with respect to the Plan taken by the Plan Administrator or the Company or the Trustee or any action authorized by or taken at the direction of the Plan Administrator, the Company or the Trustee shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan. 10.5 RECEIPT AND RELEASE Any payment to any Participant or beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Company, the Plan Administrator and the Trustee under the Plan, and the Plan Administrator may require such Participant or beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. If any Participant or beneficiary is determined by the Plan Administrator to be incompetent by reason of physical or mental disability (including minority) to give a valid receipt and release, the Plan Administrator may cause the payment or payments becoming due to such person to be made to another person for his or her benefit without responsibility on the part of the Plan Administrator, the Company or the Trustee to follow the application or use of such funds. 10.6 GOVERNING LAW The Plan shall be construed, administered, and governed in all respects under and by the laws of the State of New York without reference to the principles of conflicts of law, unless preempted by applicable federal law. If any provision of the Plan shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 10.7 HEADINGS AND SUBHEADINGS Headings and subheadings in this Plan are inserted for convenience only and are not to be considered in the construction of the provisions hereof. -8- EX-10.24 8 a2036456zex-10_24.txt EXHIBIT 10.24 Exhibit 10.24 EXECUTION $345,000,000 AUTOTOTE CORPORATION AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of October 6, 2000, and entered into by and among AUTOTOTE CORPORATION, a Delaware corporation ("COMPANY"), THE LENDERS PARTIES HERETO (each individually referred to herein as a "LENDER" and collectively as "LENDERS"), DLJ CAPITAL FUNDING, INC. ("DLJ"), as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"), DLJ, as syndication agent for Lenders (in such capacity, "SYNDICATION AGENT"), Lead Arranger and Sole Book Running Manager, LEHMAN COMMERCIAL PAPER INC., ("LCPI"), as documentation agent for Lenders (in such capacity, "DOCUMENTATION AGENT"), and LEHMAN BROTHERS INC. ("Lehman") as Co-Arranger. Capitalized terms used herein without definition shall have the meanings set forth therefor in subsection 1.1. PRELIMINARY STATEMENTS o Company, Lenders, Administrative Agent, Syndication Agent, and Documentation Agent are parties to that certain Credit Agreement dated as of September 6, 2000 (the "CLOSING DATE CREDIT AGREEMENT"). o Company, Lenders, Administrative Agent, Syndication Agent and Documentation Agent desire to amend and restate the Closing Date Credit Agreement in its entirety in order to, among other things, (i) complete the syndication of the Lenders and (ii) provide that the terms and provisions of the Closing Date Credit Agreement shall otherwise be modified as set forth herein. o Company agrees that its existing pledge and grant of a security interest in substantially all of its present and future real and personal property pursuant to the Security Agreement dated as of September 6, 2000 by and among Company, certain of Company's Subsidiaries and Administrative Agent shall be continued without interruption and shall be amended and restated in its entirety. o Each Subsidiary Guarantor agrees that its existing guaranty of the Obligations of Company under the Closing Date Credit Agreement pursuant to the Subsidiary Guaranty dated as of September 6, 2000 entered into by the Subsidiary Guarantors in favor of the Administrative Agent for the benefit of 1 Lenders shall be continued without interruption and shall be amended and restated in its entirety. o All modifications to the Closing Date Credit Agreement and the other Loan Documents made hereby require the concurrence of all Lenders and the Loan Parties. The Lenders identified on the signature pages hereof have acquired all of the loans and commitments under the Closing Date Credit Agreement as indicated in Schedule 2.1. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders, Administrative Agent, Syndication Agent and Documentation Agent agree that the Closing Date Credit Agreement shall be amended and restated, without novation, as follows: SECTION 1. DEFINITIONS o DEFINED TERMS. The following terms used in this Agreement shall have the following meanings: "ACQUIRED BUSINESS" has the meaning assigned to that term in the definition of "Permitted Acquisition" in this subsection 1.1. "ACQUISITION CO." means ATX Enterprises, Inc., a Delaware corporation and wholly-owned Subsidiary of Company. "ACQUISITION FINANCING REQUIREMENTS" means the aggregate of all amounts necessary (i) to finance the purchase price for all of the outstanding shares of Scientific Games Common Stock (and the retirement of all outstanding stock options (including related withholding tax with respect to the exercise of such options)) pursuant to the Merger in an aggregate amount of approximately $307.7 million; (ii) to repay in full the Existing Company Bank Debt in an aggregate principal amount of approximately $36.0 million; (iii) to repay Existing Company Senior Notes in an aggregate principal amount of $110 million; (iv) to repay the Existing Company Convertible Debt in an aggregate principal amount of $35 million; (v) to pay the Tender Premiums in an amount not to exceed $9.5 million; (vi) to repay in full the Existing Scientific Games Bank Debt in an aggregate principal amount of approximately $25.0 million; (vii) to pay accrued interest on existing Indebtedness in the approximate amount of $1.8 million; (viii) to cash collateralize the Existing Letters of Credit in an aggregate amount not to exceed $1.4 million; and (ix) to pay Transaction Costs in an amount not to exceed $30.1 million. "ADDITIONAL MORTGAGED PROPERTY" has the meaning assigned to that term in subsection 6.9B. "ADDITIONAL MORTGAGE POLICY" has the meaning assigned to that term in subsection 6.9B(iv). "ADDITIONAL MORTGAGES" has the meaning assigned to that term in subsection 6.9B(i). 2 "ADJUSTED CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED that there shall be excluded therefrom (i) the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) except as otherwise expressly permitted under this Agreement, the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries and (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary; provided that the foregoing clause (iii) shall not apply with respect to the income of any Foreign Subsidiary to the extent that the restriction on the declaration or payment of dividends or similar distributions by that Foreign Subsidiary of that income is permitted by subsection 7.2C(c) or 7.2D(d). "ADJUSTED LIBO RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a LIBO Rate Loan, the rate per annum obtained by DIVIDING (i) the rate per annum (rounded upward to the nearest 1/16 of one percent) which appears on the British Bankers Association Telerate page 3750 (or such other comparable page as may, in the reasonable opinion of the Administrative Agent with the consent of Company (which consent shall not be unreasonably withheld or delayed), replace such page for the purpose of displaying such rate), at which Dollar deposits with a maturity comparable to such Interest Period as of approximately 11:00 a.m. (London time) on such Interest Rate Determination Date BY (ii) a percentage equal to 100% MINUS the stated maximum rate of all reserve requirements (including any marginal, emergency, supplemental, special or other reserves) applicable on such Interest Rate Determination Date to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D (or any successor category of liabilities under Regulation D). "ADMINISTRATIVE AGENT" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.5A. "AFFECTED CLASS" has the meaning assigned to that term in subsection 10.6. "AFFECTED LENDER" has the meaning assigned to that term in subsection 2.6C. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. 3 "AGENTS" means, collectively, the Syndication Agent, the Documentation Agent and the Administrative Agent and any Supplemental Collateral Agents (as defined in subsection 9.1B). "AGREEMENT" means this Amended and Restated Credit Agreement dated as of October 6, 2000 and all the exhibits and schedules hereto, as it may be amended, supplemented or otherwise modified from time to time. "AGREEMENT OF JOINDER" means an Agreement of Joinder in substantially the form of Exhibit XIV annexed hereto. "ANNUALIZED" means (i) with respect to the Fiscal Quarter of Company ending September 30, 2000, (x) the applicable amount for the period from and including the Closing Date through and including September 30, 2000 MULTIPLIED by (y) (i) 360 DIVIDED by (ii) the number of days from and including the Closing Date through and including September 30, 2000, (ii) with respect to the Fiscal Quarter of Company ending December 31, 2000, (x) the applicable amount for the period from and including the Closing Date through and including December 31, 2000 MULTIPLIED by (y) (i) 360 DIVIDED by (ii) the number of days from and including the Closing Date through and including December 31, 2000, and (iii) with respect to the Fiscal Quarter of Company ending March 31, 2001, (x) the applicable amount for the period from and including the Closing Date through and including March 31, 2001 multiplied by (y) (i) 360 DIVIDED by (ii) the number of days from and including the Closing Date through and including March 31, 2001. "APPLICABLE BASE RATE MARGIN" means, as at any date of determination, (i) with respect to Tranche B Term Loans, 3.00% per annum, and (ii) with respect to Tranche A Term Loans and Revolving Loans, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio calculated on a Pro Forma Basis:
CONSOLIDATED LEVERAGE RATIO APPLICABLE BASE RATE MARGIN ------------------------------------------------------------------ greater than or equal to 2.50% 5.00:1.00 less than 5.00:1.00 but greater than or equal to 4.50:1.00 2.25% less than 4.50:1.00 but greater than or equal to 4.00:1.00 2.00% less than 4.00:1.00 but greater than or equal to 3.50:1.00 1.75% less than 3.50:1.00 but greater than or equal to 3.00:1.00 1.50% less than 3.00:1.00 1.25%
; PROVIDED that until the delivery of the first Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1 (xviii) after the six-month anniversary of the Closing Date, the Applicable Base Rate Margin for Tranche A Term Loans and Revolving Loans shall be 2.25% per annum. 4 "APPLICABLE LIBO RATE MARGIN" means, as at any date of determination, (i) with respect to Tranche B Term Loans, 4.25% per annum, and (ii) with respect to Tranche A Term Loans and Revolving Loans, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio calculated on a Pro Forma Basis:
CONSOLIDATED LEVERAGE RATIO APPLICABLE LIBO RATE MARGIN ------------------------------------------------------------------ greater than or equal to 5.00:1.00 3.75% less than 5.00:1.00 but greater than or equal to 4.50:1.00 3.50% less than 4.50:1.00 but greater than or equal to 4.00:1.00 3.25% less than 4.00:1.00 but greater than or equal to 3.50:1.00 3.00% less than 3.50:1.00 but greater than or equal to 3.00:1.00 2.75% less than 3.00:1.00 2.50%
; PROVIDED that until the delivery of the first Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1 (xviii) after the six-month anniversary of the Closing Date, the Applicable LIBO Rate Margin for Tranche A Term Loans and Revolving Loans shall be 3.50% per annum. "APPROVED FUND" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. "ARRANGER" means DLJ Capital Funding, Inc. as Lead Arranger and Sole Book Running Manager. "ASSET SALE" means the sale, lease, assignment or other transfer (whether voluntary or involuntary) for value (collectively, a "TRANSFER") by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (i) any of the equity ownership of any of Company's Subsidiaries, (ii) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory sold in the ordinary course of business, (b) other equipment transferred for not in excess of $2 million for any single transaction or related series of transactions and $4 million in the aggregate for each Fiscal Year, and (c) any such other assets to the extent that (x) the aggregate value of such assets transferred in any single transaction or related series of transactions is equal to $2 million or less and (y) the aggregate value of such assets transferred in any Fiscal Year is equal to $4 million or less). "ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially the form of EXHIBIT IX annexed hereto. 5 "AUTHORIZED REPRESENTATIVE" means any of the President, the Chief Financial Officer and the Treasurer (or any other senior executive officer designated in writing by the Company to the Administrative Agent and reasonably acceptable to the Administrative Agent). "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "BASE RATE" means, at any time, the higher of (x) the Prime Rate or (y) the rate which is 1/2 of 1% plus the Federal Funds Effective Rate. "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "BUSINESS DAY" means (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close, and (ii) with respect to all notices, determinations, fundings and payments in connection with the Adjusted LIBO Rate or any LIBO Rate Loans, any day that is a Business Day described in clause (i) above and that is also a day for trading by and between banks in Dollar deposits in the London interbank market. "CAPITAL LEASE", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "CASH" means money, currency or a credit balance in a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100 million; and (v) shares of any money market mutual fund that (a) invests solely in the types of investments referred to in clauses (i) through (iv) above or in substantially similar investments and (b) has a rating of no less than "AAA" from Moody's and an equivalent rating from S&P. 6 "CASH JUNIOR PAYMENT" has the meaning assigned to that term in the definition of "Consolidated Fixed Charges" in this subsection 1.1. "CERTIFICATE OF DESIGNATION" means the Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Convertible Preferred Stock of Autotote Corporation dated as of September 6, 2000. "CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in the form of EXHIBIT X annexed hereto delivered by a Lender to Administrative Agent pursuant to subsection 2.7B(iii). "CHANGE IN CONTROL" means: (i) a change shall occur in the Board of Directors of Company so that a majority of the Board of Directors of Company ceases to consist of the individuals who constituted the Board of Directors of Company on the Closing Date (or individuals whose election or nomination for election was approved by a vote of at least a majority of the directors then in office who either were directors on the Closing Date or whose election or nomination for election was previously so approved); or (ii) any Person or group (within the meaning of Rule 13d-3 of the Securities and Exchange Commission) (other than Olivetti or an affiliate of Olivetti or a group in which Olivetti or an affiliate of Olivetti is the largest beneficial owner of shares of the voting capital stock of Company) shall become or be the owner, directly or indirectly, beneficially or of record, of shares representing more than 35% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Company on a fully diluted basis; or (iii) a "Change of Control" occurs as that term is defined in the Senior Subordinated Note Indenture or any other indenture or agreement pursuant to which Subordinated Indebtedness has been issued. "CLASS" means, as applied to Lenders, each of the following classes of Lenders: (i) Lenders having Tranche A Term Loan Exposure; (ii) Lenders having Tranche B Term Loan Exposure; (iii) Lenders having Revolving Loan Exposure; and (iv) Lenders having exposure in additional commitments made in accordance with clause (vi) of subsection 10.6A. "CLOSING DATE" means September 6, 2000. "CLOSING DATE CREDIT AGREEMENT" has the meaning assigned to that term in paragraph A of the Preliminary Statements of this Agreement. "CLOSING DATE MORTGAGED PROPERTY" has the meaning assigned to that term in subsection 4.1G. "CLOSING DATE MORTGAGE POLICIES" has the meaning assigned to that term in subsection 4.1G(v). 7 "CLOSING DATE MORTGAGES" has the meaning assigned to that term in subsection 4.1G. "COLLATERAL" means, collectively, all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "COLLATERAL ACCESS AGREEMENT" means any landlord agreement and waiver, mortgagee agreement and waiver, bailee letter or any similar acknowledgement or agreement of any landlord or mortgagee in respect of any Real Property Asset where any Collateral is located or any warehouseman or other bailee in possession of any Collateral of any Loan Party, substantially in the form of EXHIBIT XV annexed hereto with such changes thereto as may be agreed to by Administrative Agent in the reasonable exercise of its discretion. "COLLATERAL DOCUMENTS" means the Security Agreement or any Mortgage executed by Company or any of Company's Subsidiaries and granting a Lien on any real, personal or mixed property of such Person to secure the Obligations and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "COMMERCIAL LETTER OF CREDIT" means any letter of credit or similar instrument issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services of Company or any of its Subsidiaries in the ordinary course of business of Company or such Subsidiary. "COMMITMENT FEE PERCENTAGE" means, as at any date of determination, a percentage per annum as set forth below opposite the applicable Consolidated Leverage Ratio calculated on a Pro Forma Basis.
CONSOLIDATED LEVERAGE RATIO COMMITMENT FEE PERCENTAGE ------------------------------------------------------------------ greater than or equal to 0.50% 3.50:1.00 less than 3.50:1.00 0.375%
; PROVIDED that until the delivery of the first Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(xviii) after the six-month anniversary of the Closing Date, the Commitment Fee Percentage shall be 0.50% per annum. "COMMITMENTS" means the commitments of Lenders to make Loans as set forth in subsection 2.1A. "COMPANY" has the meaning assigned to that term in the introduction to this Agreement. 8 "COMPANY EMPLOYEE BENEFIT PLAN" means any Employee Benefit Plan which is maintained or contributed to by Company or any of its Subsidiaries. "COMPANY PENSION PLAN" means any Pension Plan which is a Company Employee Benefit Plan. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form of EXHIBIT V annexed hereto delivered to Administrative Agent and Lenders by Company pursuant to subsection 6.1(iv). "COMPUTATION DATE" has the meaning assigned to that term in subsection 2.1F(i). "CONFORMING LEASEHOLD INTEREST" means any Recorded Leasehold Interest as to which the lessor (and all other parties having a consent right) has agreed in writing for the benefit of Administrative Agent (which writing has been delivered to Administrative Agent), whether under the terms of the applicable lease, under the terms of a Landlord Consent and Estoppel, or otherwise, to the matters described in the definition of "Landlord Consent and Estoppel," which interest, if a subleasehold or sub-subleasehold interest, is not subject to any contrary restrictions contained in a superior lease or sublease. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on a consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "additions to property, plant or equipment" or comparable items reflected in the consolidated statement of cash flows of Company and its Subsidiaries; PROVIDED that Consolidated Capital Expenditures shall not include expenditures made in acquisitions constituting Permitted Acquisitions; PROVIDED, FURTHER that all calculations of Consolidated Capital Expenditures for any period that ends prior to the Closing Date or that includes the Closing Date shall be made on a Pro Forma Basis assuming the Merger was consummated on the first day of the Fiscal Quarter ending September 30, 2000 and the Merger was a Permitted Acquisition; PROVIDED, STILL FURTHER, that for purposes of calculating Consolidated Capital Expenditures (on a Pro Forma Basis) for the period ending (x) December 31, 2000, Consolidated Capital Expenditures for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $21.8 million and Consolidated Capital Expenditures for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $19.9 million and (y) March 31, 2001, Consolidated Capital Expenditures for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $19.9 million; PROVIDED, STILL FURTHER, that Consolidated Capital Expenditures shall not include Consolidated Capital Software Expenditures. "CONSOLIDATED CAPITAL SOFTWARE EXPENDITURES" means, for any period, the sum of the aggregate of all expenditures by Company and its Subsidiaries during that period to purchase or develop computer software or systems (but only to the extent such expenditures are capitalized on a consolidated balance sheet of Company and its Subsidiaries in conformity with GAAP); PROVIDED that Consolidated Capital Software Expenditures shall not include expenditures made in acquisitions constituting Permitted Acquisitions; PROVIDED, FURTHER that all calculations of Consolidated Capital Software Expenditures for any period that ends prior to the Closing Date or that includes the Closing Date shall be made on a Pro Forma Basis assuming the 9 Merger was consummated on the first day of the Fiscal Quarter ending September 30, 2000 and the Merger was a Permitted Acquisition; PROVIDED, STILL FURTHER, that for purposes of calculating Consolidated Capital Software Expenditures (on a Pro Forma Basis) for the period ending (x) December 31, 2000, Consolidated Capital Software Expenditures for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $1.2 million and Consolidated Capital Software Expenditures for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $1.5 million and (y) March 31, 2001, Consolidated Capital Software Expenditures for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $1.5 million. "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, Consolidated Interest Expense for such period EXCLUDING, HOWEVER, any interest expense not payable in Cash (including amortization of discount and amortization of debt issuance costs). "CONSOLIDATED CASH TAXES" means, for any period, federal, state, local and foreign income taxes of Company and its Subsidiaries paid in Cash during such period. "CONSOLIDATED CURRENT ASSETS" means, as at any date of determination, the total assets of Company and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP, but excluding Cash and Cash Equivalents. "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of determination, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP, but excluding the Revolving Loans and the current portion of long term Indebtedness of Company (including the Term Loans). "CONSOLIDATED EBITDA" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense (including without limitation any amortization of amounts referred to in subsection 2.3 payable to Arranger, Agents and Lenders on or before the Closing Date), (vi) other non-cash items reducing Consolidated Net Income LESS other non-cash items increasing Consolidated Net Income, and (vii) in each case, to the extent (x) actually paid in Cash by Company on or before the Closing Date and (y) resulting in a reduction of Consolidated Net Income for the Fiscal Quarter ending September 30, 2000, (A) any fees paid by Company in connection with the placement of the Convertible Preferred Stock and (B) the Tender Premiums, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP; PROVIDED that all calculations of Consolidated EBITDA for any period that ends prior to the Closing Date or that includes the Closing Date shall be made on a Pro Forma Basis assuming the Merger was consummated on the first day of the Fiscal Quarter ending September 30, 2000 and the Merger was a Permitted Acquisition; PROVIDED, FURTHER that for purposes of calculating Consolidated EBITDA (on a Pro Forma Basis) and for purposes of each of the Consolidated Fixed Charge Coverage Ratio, the Consolidated Leverage Ratio and the Consolidated Interest Coverage Ratio, for the period ending (x) September 30, 2000, Consolidated EBITDA for the Fiscal Quarter deemed to have ended December 31, 1999 shall be deemed to be $24.1 million, Consolidated EBITDA for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $24.2 million and 10 Consolidated EBITDA for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $24.8 million, (y) December 31, 2000, Consolidated EBITDA for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $24.2 million and Consolidated EBITDA for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $24.8 million, and (z) March 31, 2001, Consolidated EBITDA for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $24.8 million. "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount (if positive) equal to (i) the sum, without duplication, of the amounts for such period of (a) Consolidated EBITDA and (b) the Consolidated Working Capital Adjustment MINUS (ii) the sum, without duplication, of the amounts for such period of (a) voluntary and scheduled repayments of Consolidated Total Debt (excluding repayments of Revolving Loans except to the extent the Revolving Loan Commitments are permanently reduced in connection with such repayments), (b) Consolidated Capital Expenditures (net of any proceeds of any related financings with respect to such expenditures), (c) Consolidated Capital Software Expenditures, (d) amounts expended on Permitted Acquisitions, (e) Consolidated Cash Interest Expense, (f) Consolidated Cash Taxes and (g) dividends paid in cash. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, as of any date of determination, the ratio computed for the four Fiscal Quarter period most recently ended on or before such date of determination of (x) Consolidated EBITDA to (y) Consolidated Fixed Charges. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without duplication) of the amounts for such period of (i) Consolidated Cash Interest Expense, (ii) Consolidated Cash Taxes, (iii) the aggregate amount of scheduled payments of principal on Indebtedness of Company and its Subsidiaries (including that portion attributable to Capital Leases in accordance with GAAP) ("SCHEDULED PRINCIPAL PAYMENTS") for such period, and (iv) the amount of Restricted Junior Payments paid in cash during such period permitted under subsection 7.5 ("CASH JUNIOR PAYMENTS"), all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP; PROVIDED that all calculations of Consolidated Fixed Charges for any period that ends prior to the Closing Date or that includes the Closing Date shall be made on a Pro Forma Basis assuming the Merger was consummated on the first day of the Fiscal Quarter ending September 30, 2000 and the Merger was a Permitted Acquisition; PROVIDED, FURTHER, that for purposes of calculating Consolidated Fixed Charges (on a Pro Forma Basis) for the period ending (x) September 30, 2000, Consolidated Cash Taxes for the Fiscal Quarter deemed to have ended December 31, 1999 shall be deemed to be $1.5 million, Consolidated Cash Taxes for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $1.5 million and Consolidated Cash Taxes for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $1.5 million, and Scheduled Principal Payments for the Fiscal Quarter deemed to have ended December 31, 1999 shall be deemed to be $0.3 million, Scheduled Principal Payments for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $0.3 million and Scheduled Principal Payments for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $0.3 million, (y) December 31, 2000 , Consolidated Cash Taxes for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $1.5 million and Consolidated Cash Taxes for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $1.5 million and Scheduled Principal Payments for the Fiscal Quarter deemed to have ended March 31, 2000 shall be deemed to be $0.3 million and Scheduled Principal Payments for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $0.3 million, and (z) March 31, 2001, Consolidated Cash Taxes for the Fiscal 11 Quarter deemed to have ended June 30, 2000 shall be deemed to be $1.5 million and Scheduled Principal Payments for the Fiscal Quarter deemed to have ended June 30, 2000 shall be deemed to be $0.3 million; PROVIDED, STILL FURTHER, that notwithstanding anything to the contrary contained in the first proviso to this sentence, for purposes of the calculation of Consolidated Fixed Charges for the period ending on September 30, 2000, December 31, 2000 and March 31, 2001, Consolidated Cash Interest Expense and Cash Junior Payments for the Fiscal Quarter ending September 30, 2000, December 31, 2000 and March 31, 2001 shall NOT be determined on a Pro Forma Basis but shall be determined on an Annualized basis. "CONSOLIDATED INTEREST COVERAGE RATIO" means, as of any date of determination, the ratio computed for the four Fiscal Quarter period most recently ended on or before such date of determination of Consolidated EBITDA to Consolidated Cash Interest Expense; PROVIDED that Consolidated Cash Interest Expense for the Fiscal Quarters ending September 30, 2000, December 31, 2000 and March 31, 2001, shall be determined on an Annualized basis. "CONSOLIDATED INTEREST EXPENSE" means, for any period, the sum of total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding, however, the amortization of any amounts referred to in subsection 2.3 payable to Arranger, Agents and Lenders on or before the Closing Date. "CONSOLIDATED LEVERAGE RATIO" means, as at any date of determination, the ratio of (a) Consolidated Total Debt as of the last day of the Fiscal Quarter for which such determination is being made to (b) Consolidated EBITDA for the consecutive four Fiscal Quarters ending on the last day of the Fiscal Quarter for which such determination is being made. "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; PROVIDED that there shall be excluded therefrom (i) the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) except as otherwise expressly permitted under this Agreement, the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary; provided that the foregoing clause (iii) shall not apply with respect to the income of any Foreign Subsidiary to the extent that the restriction on the declaration or payment of dividends or similar distributions by that Foreign Subsidiary of that income is permitted by subsection 7.2C(c) or 7.2D(d), (iv) any after-tax gains 12 or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains. "CONSOLIDATED NET WORTH" means, as of any date of determination, the sum of the capital stock (including, without limitation, Convertible Preferred Stock) and additional paid-in capital plus retained earnings (or minus accumulated deficits) of Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED WORKING CAPITAL" means, as at any date of determination, the excess (or deficit) of Consolidated Current Assets over Consolidated Current Liabilities. "CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any period on a consolidated basis, the amount (which may be a negative number) by which Consolidated Working Capital as of the beginning of such period exceeds (or is less than) Consolidated Working Capital as of the end of such period. "CONSULTING AGREEMENT" means that certain Consulting Agreement dated as of May 18, 2000 by and between Company and William G. Malloy, as such agreement may be amended from time to time to the extent permitted under subsection 7.14. "CONTINGENT OBLIGATION", as applied to any Person, means, without duplication, any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. 13 "CONTRACTUAL OBLIGATION", as applied to any Person, means any material provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CONVERTIBLE PREFERRED STOCK" means Company's Series A Convertible Preferred Stock. "CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT" means that certain Preferred Stock Purchase Agreement dated as of August 31, 2000 by and among Company, Olivetti and Tote Holdings, L.P., as Purchasers, providing for the aggregate purchase and sale of shares of Convertible Preferred Stock in an amount not to exceed $110 million, as such purchase agreement may be amended from time to time to the extent permitted under subsection 7.14. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "DLJ" means DLJ Capital Funding, Inc. "DOCUMENTATION AGENT" has the meaning assigned to that term in the introduction to this Agreement. "DOLLAR EQUIVALENT" means, at any time, (x) as to any amount denominated in Dollars, the amount thereof at such time, and (y) as to any amount denominated in a currency other than Dollars, the equivalent amount in Dollars as determined by Administrative Agent at such time on the basis of the Exchange Rate for the purchase of Dollars with such currency on the most recent Computation Date provided for in subsection 2.1F(i) or such other time as may be reasonably specified by Administrative Agent. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. "DOMESTIC SUBSIDIARY" means a direct or indirect Subsidiary of Company that is incorporated or organized under the laws of a state of the United States of America or the District of Columbia. "ELIGIBLE ASSIGNEE" means (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other person (other than a natural Person) approved by the Administrative Agent, in the case of any assignment of a Revolving Loan, the Issuing Lender, and, unless (X) such Person is taking delivery of an assignment in connection with physical settlement of a credit derivatives transaction or (Y) an Event of Default has occurred and is continuing, Company (each such approval not to be unreasonably withheld or delayed). If the consent of Company to an assignment or to an Eligible Assignee is required hereunder (including a consent to an assignment which does not meet the minimum assignment thresholds specified in subsection 10.1B(i)), Company shall be deemed to have given its consent five (5) Business Days after the date notice thereof has been delivered by the assigning Lender (through the 14 Administrative Agent) unless such consent is expressly refused by Company prior to such fifth Business Day. "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is, or during the last six years was, maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. Any such plan of a former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an Employee Benefit Plan within the meaning of this definition solely with respect to the period during which such former ERISA Affiliate was an ERISA Affiliate of Company or any of its Subsidiaries with respect to liabilities for which Company or any of its Subsidiaries could be liable under the Internal Revenue Code or ERISA. "ENVIRONMENTAL CLAIM" means any investigation, written notice, written notice of violation, claim, action, suit, proceeding, written demand, abatement order or other order or directive (conditional or otherwise), by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. "ENVIRONMENTAL LAWS" means any and all federal, state, foreign or local statutes, ordinances, orders, rules, regulations, judgments, Governmental Authorizations, binding and enforceable guidance documents, or any other requirements of governmental authorities now or hereafter in effect relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C.ss.9601 ET SEQ.), the Hazardous Materials Transportation Act (49 U.S.C.ss.1801 ET SEQ.), the Resource Conservation and Recovery Act (42 U.S.C.ss.6901 ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C.ss.1251 ET SEQ.), the Clean Air Act (42 U.S.C.ss.7401 ET SEQ.), the Toxic Substances Control Act (15 U.S.C. ss.2601 ET SEQ.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.ss.136 ET SEQ.), the Occupational Safety and Health Act (29 U.S.C.ss.651 ET SEQ.), the Oil Pollution Act (33 U.S.C.ss.2701 ET SEQ.) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C.ss.11001 ET SEQ.), each as amended or supplemented, any analogous state or local statutes or laws, now or hereafter in effect, and any regulations promulgated pursuant to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA AFFILIATE" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation 15 described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal, during any year for which it was a "substantial employer" (as defined in Section 4001(a) of ERISA), by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which would reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which would reasonably be expected to give rise to the imposition on Company or any of its Subsidiaries of material fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the occurrence of an act or omission which would reasonably be expected to give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of material fines, penalties, taxes or related charges under Section 4071 of ERISA in respect of any Employee Benefit Plan; (x) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan, which could reasonably be expected to result in a liability to the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $500,000; (xi) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify 16 under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xii) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EVENT OF DEFAULT" means each of the events set forth in Section 8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXCHANGE RATE" means, on any date when an amount expressed in a currency other than Dollars is to be determined with respect to any Letter of Credit, the nominal rate of exchange of the applicable Issuing Lender in the New York foreign exchange market for the purchase by such Issuing Lender (by cable transfer) of such currency in exchange for Dollars at 12:00 noon (New York time) one Business Day prior to such date, expressed as a number of units of such currency per one Dollar. "EXISTING COMPANY BANK DEBT" means the Indebtedness under (x) the Credit Agreement dated as of July 28, 1997 by and among Company, the various financial institutions named therein, and Heller Financial, Inc., as agent, (y) the Term Loan Agreement dated as of May 28, 1998 by and among Company, the various financial institutions named therein, and Heller Financial, Inc., as agent, and (z) the Term Loan Agreement dated as of June 9, 2000 by and among Company, the various financial institutions named therein, and DLJ, as agent, each as amended, supplemented or otherwise modified through the Closing Date. "EXISTING COMPANY CONVERTIBLE DEBT" means Company's 5-1/2% Convertible Subordinated Debentures due 2001 in an aggregate principal amount of $35 million. "EXISTING COMPANY SENIOR NOTES" means Company's 10-7/8% Senior Notes due 2004 in an aggregate principal amount of $110 million. "EXISTING LETTERS OF CREDIT" means the letters of credit identified as such in SCHEDULE 7.4 annexed hereto (but not any refinancings, renewals or extensions thereof). "EXISTING SCIENTIFIC GAMES BANK DEBT" means the Indebtedness under (i) the Credit Agreement dated as of November 30, 1999 by and among Scientific Games and Scientific Games, Inc., a Delaware corporation, as co-borrowers, the lenders referred to therein and First Union National Bank, as administrative agent thereunder, and (ii) the 364-Day Credit Agreement dated as of November 30, 1999 by and among Scientific Games and Scientific Games, Inc., as borrowers, and First Union National Bank, as administrative agent, each as amended, supplemented or otherwise modified through the Closing Date. "FACILITIES" means any and all real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by Company, Scientific Games or any of their respective Subsidiaries or any of their respective predecessors or Affiliates. 17 "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent. "FINANCIAL CONDITION CERTIFICATE" means a Financial Condition Certificate, substantially in the form of EXHIBIT VI annexed hereto, dated as of the Closing Date. "FINANCIAL PLAN" has the meaning assigned to that term in subsection 4.1J(iv). "FIRST PRIORITY" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral (other than Permitted Encumbrances which as a matter of statutory law have priority over any other Lien irrespective of the prior perfection or filing of such other Lien) and (ii) such Lien is the only Lien (other than Permitted Encumbrances) to which such Collateral is subject. "FISCAL QUARTER" means a fiscal quarter of Company or its Subsidiaries ending on January 31, April 30, July 31 and October 31 of each calendar year; PROVIDED that, until the date on which Company changes its Fiscal Year from a Fiscal Year ending on October 31 of each calendar year to a Fiscal Year ending on December 31 of each calendar year pursuant to subsection 6.11, "Fiscal Quarter" shall be deemed for all purposes hereunder to mean, unless the context otherwise requires, a fiscal quarter of Company and its Subsidiaries ending on March 31, June 30, September 30 and December 31 of each calendar year; PROVIDED, FURTHER that, from and after the date on which Company changes its fiscal year from a fiscal year ending on October 31 of each calendar year to a fiscal year ending on December 31 of each calendar year, "Fiscal Quarter" shall mean a fiscal quarter of Company and its Subsidiaries ending on March 31, June 30, September 30 and December 31 of each calendar year. "FISCAL YEAR" means the fiscal year, in the case of Company and its Subsidiaries (other than Scientific Games and its Subsidiaries), ending on October 31 of each calendar year, and in the case of Scientific Games and its Subsidiaries, ending on December 31 of each calendar year; PROVIDED that, until Company changes its fiscal year from a fiscal year ending on October 31 of each calendar year to a fiscal year ending on December 31 of each calendar year, "Fiscal Year" of Company and its Subsidiaries shall be deemed for all purposes hereunder to mean, unless context otherwise requires, a fiscal year of Company deemed for all purposes hereunder to end on December 31 of each calendar year; PROVIDED, FURTHER that, from and after the date on which Company changes its fiscal year from a fiscal year ending on October 31 of each calendar year to a fiscal year ending on December 31 of each calendar year, "Fiscal Year" shall mean a fiscal year of Company and its Subsidiaries ending on December 31 each calendar year. 18 "FLOOD HAZARD PROPERTY" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "FOREIGN SUBSIDIARY" means a direct or indirect Subsidiary of Company which is incorporated or organized under the laws of any government or sovereignty other than any state of the United States of America or the District of Columbia. "FUND" means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of business. "FUNDING AND PAYMENT OFFICE" means (i) the office of Administrative Agent and Swing Line Lender located at 277 Park Avenue, New York, NY 10172 or (ii) such other office of Administrative Agent and Swing Line Lender as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent and Swing Line Lender to Company and each Lender. "FUNDING DATE" means the date of the funding of a Loan, which date shall be a Business Day. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "GOVERNMENTAL ACTS" has the meaning assigned to that term in subsection 3.5A. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "HAZARDOUS MATERIALS" means (i) any chemical, material or substance at the applicable time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) any asbestos-containing materials; (vii) urea 19 formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority. "HAZARDOUS MATERIALS ACTIVITY" means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, presence, storage, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "HEDGE AGREEMENT" means an Interest Rate Agreement or a Currency Agreement designed to hedge against fluctuations in interest rates or currency values, respectively, and not entered into for speculative purposes. "INACTIVE SUBSIDIARY" means any Subsidiary of Company that does not engage in any business activity, which Subsidiary, together with all other Inactive Subsidiaries, (a) does not own assets with an aggregate value for all such Inactive Subsidiaries of greater than $50,000, and (b) does not, together with all other Inactive Subsidiaries, generate aggregate revenues of greater than $50,000 in any single Fiscal Year; and all Inactive Subsidiaries shall be designated as such on SCHEDULE 5.1. "INDEBTEDNESS", as applied to any Person, means, without duplication, (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements and Currency Agreements constitute (X) in the case of Hedge Agreements, Contingent Obligations, and (Y) in all other cases, Investments, and in neither case constitute Indebtedness. "INDEMNIFIED LIABILITIES" has the meaning assigned to that term in subsection 10.3. "INDEMNITEE" has the meaning assigned to that term in subsection 10.3. "INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. 20 "INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan, the last Business Day of each March, June, September and December, of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any LIBO Rate Loan, the last Business Day of each Interest Period applicable to such Loan; PROVIDED that in the case of each Interest Period of longer than three months "Interest Payment Date" shall also include the Business Day that is three months, or any multiple thereof, after the commencement of such Interest Period. "INTEREST PERIOD" has the meaning assigned to that term in subsection 2.2B. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (including any Subsidiary of Company other than a wholly-owned Domestic Subsidiary), (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its wholly-owned Domestic Subsidiaries, of any equity Securities of such Subsidiary, (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person (other than a wholly-owned Domestic Subsidiary), including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business, or (iv) Interest Rate Agreements or Currency Agreements not constituting Hedge Agreements. The amount of any Investment shall be the original cost of such Investment PLUS the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment; PROVIDED that the amount of an Investment shall be reduced by the amount of capital returned on such Investment (as determined on an after tax basis). "IP COLLATERAL" means, collectively, any Collateral under the Security Agreement consisting of trademarks, servicemarks, tradenames, tradesecrets, business names, logos, patents, patent applications, licenses, copyrights, any registration and franchise rights and interests relating thereto, and any other intellectual property of any type, and all goodwill associated with any of the foregoing. "ISSUING LENDER" means, with respect to any Letter of Credit, the Revolving Lender that agrees or is otherwise obligated to issue such Letter of Credit, determined as provided in subsection 3.1B(ii). 21 "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; PROVIDED that in no event shall any Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. "LANDLORD CONSENT AND ESTOPPEL" means, with respect to any Leasehold Property, a letter, certificate or other instrument in writing from the lessor (and all other parties having a consent right) under the related lease, satisfactory in form and substance to Administrative Agent, pursuant to which such lessor (and all other parties having a consent right) agrees, for the benefit of Administrative Agent, (i) that without any further consent of such lessor (and all other parties having a consent right) or any further action on the part of the Loan Party holding such Leasehold Property, such Leasehold Property may be encumbered pursuant to a Mortgage and may be assigned to the purchaser at a foreclosure sale or in a transfer in lieu of such a sale (and to a subsequent third party assignee if any Agent, any Lender, or an Affiliate of either so acquires such Leasehold Property), (ii) that such lessor shall not terminate such lease as a result of a default by such Loan Party thereunder without first giving Administrative Agent notice of such default and at least 15 days in the case of a monetary default and 30 days in the case of a non-monetary default beyond the cure period afforded to the tenant thereunder to cure such default, and (iii) that the related lease is in full force and effect, that no defaults by the lessee exist thereunder, and such other information as is customarily included in a lessor's estoppel certificate, and (iv) to such other matters relating to such Leasehold Property as Administrative Agent may reasonably request. "LCPI" has the meaning assigned to that term in the introduction to this Agreement. "LEASEHOLD PROPERTY" means any leasehold interest of any Loan Party as lessee under any lease of real property. "LENDER" and "LENDERS" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1, and the term "Lenders" shall include Swing Line Lender unless the context otherwise requires. "LETTER OF CREDIT" or "LETTERS OF CREDIT" means Commercial Letters of Credit and Standby Letters of Credit issued or to be issued by Issuing Lenders for the account of Company pursuant to subsection 3.1. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding PLUS (ii) the aggregate amount of all drawings under Letters of Credit honored by Issuing Lenders and not theretofore reimbursed by Company. For the purposes of this definition, any amount described in clause (i) or (ii) of the preceding sentence which is denominated in a currency other than Dollars shall be valued based on the applicable Exchange Rate for such currency as of the applicable date of determination. "LIBO RATE LOANS" means Loans bearing interest at rates determined by reference to the Adjusted LIBO Rate as provided in subsection 2.2A. 22 "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means one or more of the Tranche A Term Loans, Tranche B Term Loans, Revolving Loans or Swing Line Loans or any combination thereof. "LOAN DOCUMENTS" means this Agreement, the Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of an Issuing Lender relating to, the Letters of Credit), the Subsidiary Guaranty and the Collateral Documents. "LOAN PARTY" means each of Acquisition Co., Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "LOAN PARTIES" means all such Persons, collectively. "MARGIN DETERMINATION CERTIFICATE" means a Margin Determination Certificate of Company delivered pursuant to 6.1(xviii) setting forth in reasonable detail the calculation of the Consolidated Leverage Ratio for the four-Fiscal Quarter period ending as of the last day of the Fiscal Quarter immediately preceding the Fiscal Quarter in which such certificate is delivered. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MASTER RESTATEMENT CONFIRMATION" means that certain Master Restatement Confirmation among the Loan Parties and the Administrative Agent substantially in the form of EXHIBIT XVI annexed hereto. "MATERIAL ADVERSE EFFECT" means (i) any event or change in or effect on the business of Company and its Subsidiaries, taken as a whole, that is or can reasonably be expected to be materially adverse to the business, operations, properties (including intangible properties), condition (financial or otherwise), assets, liabilities or prospects of Company and its Subsidiaries, taken as a whole, or (ii) the impairment in any material respect of the ability of any Loan Party to perform, or of Administrative Agent or Lenders to enforce, the Obligations. "MATERIAL LEASEHOLD PROPERTY" means a Leasehold Property reasonably determined by Administrative Agent to be of material value as Collateral or of material importance to the operations of Company or any of its Subsidiaries. "MERGER" means the merger of Acquisition Co. with and into Scientific Games pursuant to the Merger Agreement, with Scientific Games as the surviving corporation. "MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of May 18, 2000 by and among Company, Acquisition Co. and Scientific Games, as such agreement may be amended from time to time to the extent permitted under subsection 7.14. 23 "MERGER DATE" means the date upon which the Merger is consummated. "MORTGAGE" means (i) a security instrument (whether designated as a deed of trust or a mortgage or by any similar title) executed and delivered by any Loan Party, substantially in such form as may be approved by Administrative Agent in its reasonable discretion, in each case with such changes thereto as may be recommended by Administrative Agent's local counsel based on local laws or customary local mortgage or deed of trust practices, or (ii) at the option of Administrative Agent, in the case of an Additional Mortgaged Property, an amendment to an existing Mortgage, in form reasonably satisfactory to Administrative Agent, adding such Additional Mortgaged Property to the Real Property Assets encumbered by such existing Mortgage, in either case as such security instrument or amendment may be amended, supplemented or otherwise modified from time to time, and "MORTGAGES" means all such instruments, including the Closing Date Mortgages, and any Additional Mortgages, collectively. "MORTGAGED PROPERTY" means a Closing Date Mortgaged Property or an Additional Mortgaged Property. "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of (a) any amounts properly reserved on the financial statements of Company and its Subsidiaries in accordance with GAAP with respect to contingent liabilities directly related to such Asset Sale (provided that the aggregate amount of such reserved amount shall not exceed $5 million at any time), and (b) any bona fide direct costs incurred in connection with such Asset Sale, including (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in connection with such Asset Sale and (ii) payment of the outstanding principal amount of, and premium or penalty, if any, and interest on, any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale. "NET DEBT SECURITIES PROCEEDS" has the meaning assigned to that term in subsection 2.4B(iii)(d). "NET EQUITY SECURITIES PROCEEDS" has the meaning assigned to that term in subsection 2.4B(iii)(c). "NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any business interruption or casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof. 24 "NOTES" means one or more of the Tranche A Term Notes, Tranche B Term Notes, Revolving Notes or Swing Line Notes or any combination thereof. "NOTICE OF BORROWING" means a notice substantially in the form of EXHIBIT I annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in the form of EXHIBIT II annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein. "OBLIGATIONS" means all obligations of every nature of each Loan Party from time to time owed to Agents, Lenders or any of them under the Loan Documents to which any of the Lenders is a party, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "OFFICER'S CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its president, one of its vice-presidents, its chief financial officer (or if there is no chief financial officer, its chief accounting officer) or its treasurer; PROVIDED that every Officer's Certificate with respect to the compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officer's Certificate has or have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signer or signers, such signer or signers has or have made or has or have caused to be made such examination or investigation as is necessary to enable such signer or signers to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signer or signers, such condition has been complied with. "OLIVETTI" means Olivetti S.p.A. "OPERATING LEASE" means, as applied to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease in accordance with GAAP other than any such lease under which that Person is the lessor. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ACQUISITION" means any acquisition, whether by purchase, merger, reorganization or any other method, by Company or any of its Subsidiaries of (x) another Person which is engaged primarily in the same or a related line of business as Company and its Subsidiaries or (y) any assets or other property of another Person relating primarily to the same or a related line of business as Company and its Subsidiaries (any such Person, assets or other 25 property being an "Acquired Business"); provided that any such Permitted Acquisition shall comply with the provisions of subsection 7.7(vii). "PERMITTED CURRENCY" means, Euros, Pounds Sterling, Italian Lire, French Francs, Belgium Francs, Irish Punts, German Marks, Luxembourg Francs, Dutch Guilders and Austrian Schillings. "PERMITTED ENCUMBRANCES" means the following types of Liens (excluding (x) any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA and (y) any such Lien relating to or imposed in connection with any Environmental Claim which, solely with respect to Liens within the ambit of this clause (y), would give rise to a Material Adverse Effect): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3 but excluding any lien for the reimbursement of charges incurred by any governmental authorities in connection with any Hazardous Materials Activity; (ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 15 days) are being contested in good faith by appropriate proceedings, so long as (1) such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, and (2) in the case of a Lien with respect to any portion of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral on account of such Lien; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof; (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; (v) leases or subleases granted to third parties in accordance with any applicable terms of the Collateral Documents and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or resulting in a material diminution in the value of any Collateral as security for the Obligations; (vi) easements, rights-of-way, covenants, conditions, restrictions, encroachments, and other defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries or result in a material diminution in the value of any Collateral as security for the Obligations; (vii) any (a) interest or title of a lessor or sublessor under any lease permitted under this Agreement, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease; 26 (viii) Liens arising from filing UCC financing statements relating solely to leases not prohibited by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; and (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company or such Subsidiary. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "POTENTIAL EVENT OF DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by Credit Suisse First Boston ("CSFB") as its prime commercial lending rate in effect at its principal office in New York City. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. CSFB or any Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRO FORMA BASIS" means, as of any date of determination, the compliance of Company with the financial covenants set forth in subsection 7.6A, 7.6B and 7.6C as of the last day of the four Fiscal Quarter period most recently ended prior to such date of determination for which the relevant financial information is available (the "COMPLIANCE PERIOD"), after giving effect on a PRO FORMA basis to any Permitted Acquisitions made during such Compliance Period and any dispositions made during such Compliance Period, other than sales of inventory in the ordinary course of business and dispositions of obsolete equipment on the following basis: (i) any Indebtedness incurred or assumed by Company or any of its Subsidiaries in connection with such Permitted Acquisitions and any Indebtedness repaid in connection with such Permitted Acquisitions or dispositions shall be deemed to have been incurred or repaid, respectively, as of the first day of the Compliance Period; (ii) if such Indebtedness incurred or assumed by Company or any of its Subsidiaries in connection with such Permitted Acquisitions has a floating or formula rate, then the rate of interest for such Indebtedness for the applicable period shall be 27 computed as if the rate in effect for such Indebtedness on the relevant measurement date had been the applicable rate for the entire applicable period; (iii) income statement items (whether positive or negative) attributable to the property or business acquired or disposed of in such Permitted Acquisitions or dispositions shall be included as if such acquisitions or dispositions took place on the first day of such Compliance Period on a PRO FORMA BASIS; and (iv) any historical extraordinary non-recurring costs or expenses or other verifiable costs or expenses that will not continue after the acquisition or disposition date may be eliminated and other expenses and cost reductions may be reflected on a basis consistent with Regulation S-X promulgated by the Securities and Exchange Commission. With respect to any such Permitted Acquisitions, such pro forma calculations shall be based on the audited or reviewed financial results to the extent delivered in compliance with clause (g) of subsection 7.7(vii). All PRO FORMA adjustments shall be approved by the Administrative Agent. "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Tranche A Term Loan Commitment or the Tranche A Term Loan of any Lender, the percentage obtained by DIVIDING (x) the Tranche A Term Loan Exposure of that Lender BY (y) the aggregate Tranche A Term Loan Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Tranche B Term Loan Commitment or the Tranche B Term Loan of any Lender, the percentage obtained by DIVIDING (x) the Tranche B Term Loan Exposure of that Lender BY (y) the aggregate Tranche B Term Loan Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender or any participations in any Swing Line Loans purchased or deemed purchased by any Revolving Lender, the percentage obtained by DIVIDING (x) the Revolving Loan Exposure of that Lender BY (y) the aggregate Revolving Loan Exposure of all Lenders, and (iv) for all other purposes with respect to each Lender, the percentage obtained by DIVIDING (x) the sum of the Tranche A Term Loan Exposure of that Lender PLUS the Tranche B Term Loan Exposure of Lender PLUS the Revolving Loan Exposure of that Lender BY (y) the sum of the aggregate Tranche A Term Loan Exposure of all Lenders PLUS the Tranche B Term Loan Exposure of all Lenders PLUS the aggregate Revolving Loan Exposure of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. The initial Pro Rata Share of each Lender for purposes of each of clauses (i), (ii) and (iii) of the preceding sentence is set forth opposite the name of that Lender in SCHEDULE 2.1 annexed hereto. "PTO" means the United States Patent and Trademark Office or any successor or substitute office in which filings are necessary or, in the opinion of Administrative Agent, desirable in order to create or perfect Liens on any IP Collateral. "PURCHASE MONEY INDEBTEDNESS" means Indebtedness of Company or any of its Subsidiaries incurred in connection with the purchase of assets or other property for the business of Company or any of its Subsidiaries; provided that the recourse of the lenders with respect to 28 such Indebtedness is limited solely to the assets or other property so purchased (and the proceeds of such assets or other property) without further recourse to either Company or any of its Subsidiaries. "REAL PROPERTY ASSET" means, at any time of determination, any interest then owned by any Loan Party in any real property. "RECORDED LEASEHOLD INTEREST" means a Leasehold Property with respect to which a Record Document (as hereinafter defined) has been recorded in all places necessary or desirable, in the reasonable judgment of Administrative Agent, to give constructive notice of such Leasehold Property to third-party purchasers and encumbrancers of the affected real property. For purposes of this definition, the term "RECORD DOCUMENT" means, with respect to any Leasehold Property, (a) the lease evidencing such Leasehold Property or a memorandum thereof, executed and acknowledged by the owner of the affected real property, as lessor, or (b) if such Leasehold Property was acquired or subleased from the holder of a Recorded Leasehold Interest, the applicable assignment or sublease document or a memorandum thereof, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to Administrative Agent. "REFUNDED SWING LINE LOANS" has the meaning assigned to that term in subsection 2.1A(iv). "REGISTER" has the meaning assigned to that term in subsection 2.1D. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT DATE" has the meaning assigned to that term in subsection 3.3B. "RELATED AGREEMENTS" means, collectively, the Merger Agreement, the Convertible Preferred Stock Purchase Agreement, the Stockholders Agreement, the Certificate of Designations, the Senior Subordinated Note Indenture and the Senior Subordinated Notes. "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, surface water or groundwater. "REPLACED LENDER" has the meaning assigned to that term in subsection 2.8. "REPLACEMENT LENDER" has the meaning assigned to that term in subsection 2.8. 29 "REQUEST FOR ISSUANCE OF LETTER OF CREDIT" means a notice substantially in the form of EXHIBIT III annexed hereto delivered by Company to Administrative Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. "REQUISITE CLASS LENDERS" means, at any time of determination, (i) for the Class of Lenders having Tranche A Term Loan Exposure, Lenders having or holding more than 50% of the aggregate Tranche A Term Loan Exposure of all Lenders, (ii) for the Class of Lenders having Tranche B Term Loan Exposure, Lenders having or holding more than 50% of the aggregate Tranche B Term Loan Exposure of all Lenders, (iii) for the Class of Lenders having Revolving Loan Exposure, Lenders having or holding more than 50% of the aggregate Revolving Loan Exposure of all Lenders and (iv) for any Lenders having exposure in additional commitments or loans in any additional Class created in accordance with clause (vi) of subsection 10.6A, Lenders having or holding more than 50% of the aggregate exposure in commitments or loans of such Class. "REQUISITE LENDERS" means Lenders having or holding more than 50% of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders PLUS (ii) the aggregate Tranche B Term Loan Exposure of all Lenders PLUS (iii) the aggregate Revolving Loan Exposure of all Lenders. "RESTRICTED JUNIOR PAYMENT" means (i) any distribution, direct or indirect, on account of any class of stock of Company now or hereafter outstanding, except a distribution payable solely in shares of that class of stock payable solely to holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness. "RESTATEMENT DATE AGREEMENTS" shall mean this Agreement, the Security Agreement, the Subsidiary Guaranty and the Master Restatement Confirmation. "RESTATEMENT EFFECTIVE DATE" means the date on or before October 6, 2000, on which the conditions set forth in subsection 4.4 are satisfied or waived in writing by Administrative Agent and Requisite Lenders. "REVISED FINANCIAL PLAN" has the meaning assigned to that term in subsection 6.1(xiii). "REVOLVING LENDER" means a Lender having a Revolving Loan Commitment. "REVOLVING LOAN COMMITMENT" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A(iii), and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "REVOLVING LOAN COMMITMENT TERMINATION DATE" means September 30, 2006. 30 "REVOLVING LOAN EXPOSURE" means, with respect to any Revolving Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Revolving Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Revolving Lender PLUS (b) in the event that Revolving Lender is an Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Revolving Lender (in each case net of any participations purchased or deemed purchased by other Revolving Lenders in such Letters of Credit or any unreimbursed drawings thereunder) PLUS (c) the aggregate amount of all participations purchased or deemed purchased by that Revolving Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit PLUS (d) in the case of Swing Line Lender, the aggregate outstanding principal amount of all Swing Line Loans (net of any participations therein purchased or deemed purchased by other Revolving Lenders) PLUS (e) the aggregate amount of all participations purchased or deemed purchased by that Revolving Lender in any outstanding Swing Line Loans. "REVOLVING LOANS" means the Loans made by Revolving Lenders to Company pursuant to subsection 2.1A(iii). "REVOLVING NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1E(iii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to subsection 10.1B in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Revolving Lenders, in each case substantially in the form of EXHIBIT IV-C annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "SCHEDULED PRINCIPAL PAYMENTS" has the meaning assigned to that term in the definition of "Consolidated Fixed Charges" in this subsection 1.1. "SCIENTIFIC GAMES" means Scientific Games Holdings Corp., a Delaware corporation. "SCIENTIFIC GAMES COMMON STOCK" means prior to the Merger the Common Stock, $.001 par value, of Scientific Games. "SECURITY AGREEMENT" means (i) on and after the Closing Date and before the Restatement Effective Date, the Security Agreement executed and delivered by Company and the wholly-owned Domestic Subsidiaries and to be executed and delivered by additional wholly-owned Domestic Subsidiaries from time to time thereafter in accordance with subsection 6.8, substantially in the form of EXHIBIT XII annexed to the Closing Date Credit Agreement, as such Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time and any documents or agreements delivered by Company or any of its wholly-owned Domestic Subsidiaries with respect to the pledge of capital stock or other equity interests in Foreign Subsidiaries pursuant to subsection 6.8D; and (ii) on and after the Restatement Effective Date, the Amended and Restated Security Agreement executed and delivered by Company and the wholly-owned Domestic Subsidiaries and to be executed and delivered by additional wholly-owned Domestic Subsidiaries from time to time thereafter in accordance with subsection 6.8, substantially in the form of EXHIBIT XII annexed hereto, as such Security Agreement may thereafter be amended, supplemented or otherwise modified from time to time and any 31 documents or agreements delivered by Company or any of its wholly-owned Domestic Subsidiaries with respect to the pledge of capital stock or other equity interests in Foreign Subsidiaries pursuant to subsection 6.8D. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SENIOR SUBORDINATED NOTE INDENTURE" means the Indenture dated as of August 14, 2000 executed by Company and a trustee named therein pursuant to which the Senior Subordinated Notes were issued, as amended by the First Supplemental Indenture dated as of September 6, 2000, and as such indenture may be further amended from time to time to the extent permitted under subsection 7.14. "SENIOR SUBORDINATED NOTES" means the unsecured Senior Subordinated Notes due 2010, issued by Company pursuant to the Senior Subordinated Note Indenture, as such Senior Subordinated Notes may be amended from time to time to the extent permitted under subsection 7.14, all the proceeds of which are to be used pursuant to subsection 4.1D. "SGIL" has the meaning assigned to that term in subsection 7.1(x). "SOLVENT" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "STANDBY LETTER OF CREDIT" means any standby letter of credit or similar instrument issued for the purpose of supporting (i) Indebtedness of Company or any of its Subsidiaries in respect of industrial revenue or development bonds or financings, (ii) workers' compensation liabilities of Company or any of its Subsidiaries, (iii) the obligations owed to third party insurers of Company or any of its Subsidiaries, (iv) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (v) performance, payment, deposit or surety obligations of Company or any of its Subsidiaries, in any case if 32 required by law or governmental rule or regulation or in accordance with custom and practice in the industry; provided that Standby Letters of Credit may not be issued for the purpose of supporting (a) trade payables or (b) any Indebtedness constituting "antecedent debt" (as that term is used in Section 547 of the Bankruptcy Code). "STOCKHOLDERS' AGREEMENT" means that certain Stockholders' Agreement dated as of September 6, 2000, by and among Company, Cermatica Gaming, S.A., Olivetti International, S.A., The Oak Fund, Peconic Fund Ltd. and Ramius Securities, LLC. "SUBORDINATED INDEBTEDNESS" means the Senior Subordinated Notes, the Convertible Subordinated Debt and any other Indebtedness of Company subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance reasonably satisfactory to Administrative Agent and Requisite Lenders. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "SUBSIDIARY GUARANTOR" means (i) any wholly-owned Domestic Subsidiary with respect to the Subsidiary Guaranty executed and delivered by such Subsidiary in favor of Administrative Agent, on behalf of Lenders, on the Closing Date and to be executed and delivered by any additional wholly-owned Domestic Subsidiaries from time to time thereafter in accordance with subsection 6.8, and (ii) any wholly-owned Domestic Subsidiary that executes and delivers a counterpart of the Subsidiary Guaranty in favor of Administrative Agent, on behalf of Lenders, from time to time after the Closing Date in accordance with subsection 6.8. "SUBSIDIARY GUARANTY" means (i) on and after the Closing Date and before the Restatement Effective Date , the Subsidiary Guaranty in favor of Administrative Agent, on behalf of Lenders, executed and delivered by the wholly-owned Domestic Subsidiaries (other than any Inactive Subsidiary) on the Closing Date and to be executed and delivered by additional wholly-owned Domestic Subsidiaries (other than any Inactive Subsidiary) from time to time thereafter in accordance with subsection 6.8, substantially in the form of Exhibit XIII annexed to the Closing Date Credit Agreement, as such Subsidiary Guaranty may thereafter be amended, supplemented or otherwise modified from time to time; and (ii) on and after the Restatement Effective Date, the Amended and Restated Subsidiary Guaranty in favor of Administrative Agent, on behalf of Lenders, executed and delivered by the wholly-owned Domestic Subsidiaries (other than any Inactive Subsidiary) on the Restatement Effective Date and to be executed and delivered by additional wholly-owned Domestic Subsidiaries (other than any Inactive Subsidiary) from time to time thereafter in accordance with subsection 6.8, substantially in the form of Exhibit XIII annexed hereto, as such Subsidiary Guaranty may hereafter be amended, supplemented or otherwise modified from time to time. 33 "SUPERMAJORITY LENDERS" means Lenders having or holding more than [90%] of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders PLUS (ii) the aggregate Tranche B Term Loan Exposure of all Lenders PLUS (iii) the aggregate Revolving Loan Exposure of all Lenders. "SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to that term in subsection 9.1B. "SWING LINE LENDER" means DLJ, or any Person serving as a successor Administrative Agent hereunder, in its capacity as Swing Line Lender hereunder. "SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(iv). "SWING LINE LOANS" means the Loans made by Swing Line Lender to Company pursuant to subsection 2.1A(iv). "SWING LINE NOTE" means (i) the promissory note of Company issued pursuant to subsection 2.1E(iii) on the Closing Date and (ii) any promissory note issued by Company to any successor Swing Line Lender pursuant to the last sentence of subsection 9.5B, in each case substantially in the form of EXHIBIT IV-D annexed hereto, as it may be amended, supplemented or otherwise modified from time to time. "SYNDICATION AGENT" has the meaning assigned to that term in the introduction to this Agreement. "TAX" or "TAXES" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; PROVIDED that "TAX ON THE OVERALL NET INCOME" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "TENDER PREMIUMS" means the tender premiums and/or redemption payable under the Existing Company Senior Notes. "TERM LOANS" means the Tranche A Term Loans and the Tranche B Term Loans. "TITLE COMPANY" means one or more title insurance companies reasonably satisfactory to Administrative Agent. "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans 34 PLUS (ii) the aggregate principal amount of all outstanding Swing Line Loans PLUS (iii) the Letter of Credit Usage. "TRANCHE A TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche A Term Loan to Company pursuant to subsection 2.1A(i), and "TRANCHE A TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE A TERM LOAN EXPOSURE" means, with respect to any Tranche A Term Loan Lender as of any date of determination (i) prior to the funding of all of the Tranche A Term Loans, that Lender's original Tranche A Term Loan Commitment and (ii) after the funding of all of the Tranche A Term Loans, the outstanding principal amount of the Tranche A Term Loan of that Lender. "TRANCHE A TERM LOAN LENDER" means any Lender who holds a Tranche A Term Loan Commitment, or who has made a Tranche A Term Loan hereunder and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE A TERM LOANS" means the Tranche A Term Loans made by Tranche A Term Loan Lenders to Company pursuant to subsection 2.1A(i). "TRANCHE A TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1E(iii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to subsection 10.1B in connection with assignments of the Tranche A Term Loan Commitments or Tranche A Term Loans of any Tranche A Term Loan Lenders, in each case substantially in the form of EXHIBIT IV-A annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(ii), and "TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE B TERM LOAN EXPOSURE" means, with respect to any Tranche B Term Loan Lender as of any date of determination (i) prior to the funding of the Tranche B Term Loans, that Lender's Tranche B Term Loan Commitment and (ii) after the funding of the Tranche B Term Loans, the outstanding principal amount of the Tranche B Term Loan of that Lender. "TRANCHE B TERM LOAN LENDER" means any Lender who holds a Tranche B Term Loan Commitment or who has made a Tranche B Term Loan hereunder, and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE B TERM LOANS" means the Tranche B Term Loans made by Tranche B Term Loan Lenders to Company pursuant to subsection 2.1A(ii). "TRANCHE B TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1E(iii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to subsection 10.1B in connection with assignments of the Tranche B Term Loan Commitments or Tranche B Term Loans of any Tranche B Term Loan Lenders, in each 35 case substantially in the form of EXHIBIT IV-B annexed hereto, as they may be amended, supplemented or otherwise modified from time to time. "TRANSACTION COSTS" means the fees, costs and expenses payable by any Loan Party or by Scientific Games in connection with the Merger, the related financing and other transactions contemplated by the Loan Documents and the Related Agreements in an aggregate amount not to exceed $30.1 million; PROVIDED that the foregoing shall not include any related non-cash compensation paid to any of the Lenders or any Affiliates of any of the Lenders on or before the Closing Date in connection with any of the financings contemplated by the Loan Documents. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. "UK PROPERTY" shall mean the property located at Quayside, Thwaitgate, Leeds LS10, England. o ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS UNDER AGREEMENT. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 6.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 5.3. o OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION. o Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. o References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. o The use in any of the Loan Documents of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. 36 o AMOUNTS AND TERMS OF COMMITMENTS AND LOANS o COMMITMENTS; MAKING OF LOANS; NOTES. o COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Tranche A Term Loan Lender hereby severally agrees to make the Tranche A Term Loans described in subsection 2.1A(i), each Tranche B Term Loan Lender hereby severally agrees to make the Tranche B Term Loans described in subsection 2.1A(ii), each Revolving Lender hereby severally agrees to make the Revolving Loans described in subsection 2.1A(iii) and each Swing Line Lender hereby agrees to make the Swing Line Loans described in subsection 2.1A(iv). o TRANCHE A TERM LOANS. Each Tranche A Term Loan Lender severally agrees to lend to Company on the Closing Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche A Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche A Term Loan Lender's Tranche A Term Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate amount of the Tranche A Term Loan Commitments is $60 million; PROVIDED that the Tranche A Term Loan Commitments of the Tranche A Term Loan Lenders shall be adjusted to give effect to any assignments of the Tranche A Term Loan Commitments pursuant to subsection 10.1B. Each Tranche A Term Loan Lender's Term Loan Commitment to the extent unused, shall expire on the close of business on the Closing Date. Amounts borrowed under this subsection 2.1A(i) and subsequently repaid or prepaid may not be reborrowed. o TRANCHE B TERM LOANS. Each Tranche B Term Loan Lender severally agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche B Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche B Term Loan Lender's Tranche B Term Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate amount of the Tranche B Term Loan Commitments is $220 million; PROVIDED that the Tranche B Term Loan Commitments of Tranche B Term Loan Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Tranche B Term Loan Lender's Tranche B Term Loan Commitment to the extent unused, shall expire on the close of business on the Closing Date. Amounts borrowed under this subsection 2.1A(ii) and subsequently repaid or prepaid may not be reborrowed. o REVOLVING LOANS. Each Revolving Lender severally agrees, subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company 37 from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the purposes identified in subsection 2.5B. The original amount of each Revolving Lender's Revolving Loan Commitment is set forth opposite its name on SCHEDULE 2.1 annexed hereto and the aggregate original amount of the Revolving Loan Commitments is $65 million; PROVIDED that the Revolving Loan Commitments of the Revolving Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and PROVIDED FURTHER that the amount of the Revolving Loan Commitments shall be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Revolving Lender's Revolving Loan Commitment shall expire on September 30, 2000 if the Term Loans are not made on or before such date or on the Revolving Loan Commitment Termination Date if the Term Loans are made and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than the Revolving Loan Commitment Termination Date. Amounts borrowed under this subsection 2.1A(iii) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect. o SWING LINE LOANS. Swing Line Lender hereby agrees, subject to the limitations set forth below with respect to the maximum amount of Swing Line Loans permitted to be outstanding from time to time, to make a portion of the Revolving Loan Commitments available to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date by making Swing Line Loans to Company in an aggregate amount not exceeding the amount of the Swing Line Loan Commitment to be used for the purposes identified in subsection 2.5B, notwithstanding the fact that such Swing Line Loans, when aggregated with Swing Line Lender's outstanding Revolving Loans and Swing Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect, may exceed Swing Line Lender's Revolving Loan Commitment. The original amount of the Swing Line Loan Commitment is $10 million; PROVIDED that any reduction of the Revolving Loan Commitments made pursuant to subsection 2.4B(ii) or 2.4B(iii) which reduces the aggregate Revolving Loan Commitments to an amount less than the then current amount of the Swing Line Loan Commitment shall result in an automatic corresponding reduction of the Swing Line Loan Commitment to the amount of the Revolving Loan Commitments, as so reduced, without any further action on the part of Company, Administrative Agent or Swing Line Lender. The Swing Line Loan Commitment shall expire on September 30, 2000 if the Term Loans are not made on or before such date or on the Revolving Loan Commitment 38 Termination Date if the Term Loans are made and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans shall be paid in full no later than the Revolving Loan Commitment Termination Date. Amounts borrowed under this subsection 2.1A(iv) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the limitation that in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect. With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to subsection 2.4B(i), Swing Line Lender may, at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to Company), no later than 1:00 P.M. (New York City time) on the first Business Day in advance of the proposed Funding Date, a notice (which shall be deemed to be a Notice of Borrowing given by Company) requesting Revolving Lenders to make Revolving Loans that are Base Rate Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which Swing Line Lender requests Revolving Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Revolving Loans made by Revolving Lenders other than Swing Line Lender shall be immediately delivered by Administrative Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and (ii) on the day such Revolving Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by Swing Line Lender, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note of Swing Line Lender but shall instead constitute part of Swing Line Lender's outstanding Revolving Loans and shall be due under the Revolving Note of Swing Line Lender. Company hereby authorizes Administrative Agent and Swing Line Lender to charge Company's accounts with Administrative Agent and Swing Line Lender (up to the amount available in each such account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Revolving Loans made by Revolving Lenders, including the Revolving Loan deemed to be made by Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Revolving Lenders (other than any Lender which has defaulted in making Refunded Swing Line Loans to the extent of the defaulting amount) in the manner contemplated by subsection 10.5. Immediately upon funding of a Swing Line Loan, each Revolving Lender shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans in an amount equal to its Pro Rata Share of the unpaid amount of such Swing Line Loans together with accrued interest thereon. Upon one Business Day's notice from Swing Line Lender, each Revolving Lender shall deliver to Swing Line Lender an amount equal to its respective participation in same day funds at the Funding and Payment Office. In the event any Revolving Lender fails to make available to Swing Line Lender the amount of such Revolving Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the Federal Funds Effective Rate for three Business Days and thereafter at the Base Rate. In the event Swing Line Lender receives a payment of any amount in which other Revolving Lenders have purchased participations as provided in this paragraph, Swing Line Lender shall promptly distribute to each such other Revolving Lender its Pro Rata Share of such payment. Anything contained herein to the contrary notwithstanding, each Revolving Lender's obligation to make Revolving Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Revolving Lender's obligation to purchase a participation in 39 any unpaid Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including (a) any set-off, counterclaim, recoupment, defense or other right which such Revolving Lender may have against Swing Line Lender, Company or any other Person for any reason whatsoever; (b) the occurrence or continuation of an Event of Default or a Potential Event of Default; (c) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (d) any breach of this Agreement or any other Loan Document by any party thereto (other than Swing Line Lender); or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; PROVIDED that such obligations of each Revolving Lender are subject to satisfaction of one of the following conditions (X) Swing Line Lender believes in good faith that all conditions under Section 4 to the making of the applicable Refunded Swing Line Loans or unpaid Swing Line Loans, as the case may be, were satisfied at the time such Refunded Swing Line Loans or unpaid Swing Line Loans were made or (Y) the satisfaction of any such condition not satisfied has been waived in accordance with subsection 10.6 prior to or at the time such Refunded Swing Line Loans or other unpaid Swing Line Loans were made. Notwithstanding anything herein to the contrary, with respect to any Swing Line Loan, the aggregate amount that any Revolving Lender shall be required to fund, whether by means of a Revolving Loan pursuant to the third paragraph of this subsection 2.1A(iv) and/or by means of a participation pursuant to the fourth paragraph of this subsection 2.1A(iv), shall not exceed such Revolving Lender's Pro Rata Share of such Swing Line Loan. o INCREASES OF THE REVOLVING LOAN COMMITMENTS. With the written consent of Administrative Agent, Company may request in writing at any time during the period from the Closing Date to and including July 31, 2005 that the then effective aggregate principal amount of Revolving Loan Commitments be increased; PROVIDED that (1) the aggregate principal amount of the increases in Revolving Loan Commitments pursuant to this subsection 2.1A(v) shall not exceed $35 million, (2) Company may not make more than one request for such increase in Revolving Loan Commitments, (3) no Event of Default or Potential Event of Default shall have occurred and be continuing or shall occur as a result of such increases in Revolving Loan Commitments, and (4) Company shall, and shall cause its Subsidiaries to, execute and deliver such documents and instruments and take such other actions (including, without limitation, obtaining appropriate endorsements to title insurance policies) as may be reasonably requested by Administrative Agent in connection with such increases. Any request under this subsection 2.1A(v) shall be submitted by Company to Administrative Agent (which shall forward copies to Lenders), specify the proposed effective date and amount of such increase and be accompanied by an Officer's Certificate stating that no Event of Default or Potential Event of Default exists or will occur as a result of such increase. Company may also specify any fees offered to those Lenders (the "Increasing Lenders") which agree to increase the principal amount of their Revolving Loan Commitments, which fees may be variable based upon the amount by which any such Lender is willing to increase the principal amount of its Revolving Loan Commitment. No Lender shall have any obligation, express or implied, to offer to increase the aggregate principal amount of its Revolving Loan Commitment. Only the consent of each Increasing Lender and Administrative Agent shall be required for an increase in the aggregate principal amount of Revolving Loan Commitments pursuant to this subsection 2.1A(v). No Lender which elects not to increase the principal amount of its 40 Revolving Loan Commitment may be replaced in respect of its existing Revolving Loan Commitment as a result thereof without such Lender's consent. Each Increasing Lender shall as soon as practicable specify the amount of the proposed increase which it is willing to assume. Company may accept some or all of the offered amounts or designate new lenders who qualify as Eligible Assignees and which are reasonably acceptable to Administrative Agent as additional Lenders hereunder in accordance with this subsection 2.1A(v) (each such new lender being a "NEW LENDER"), which New Lender may assume all or a portion of the increase in the aggregate principal amount of the Revolving Loan Commitments. Company and Administrative Agent shall have discretion jointly to adjust the allocation of the increased aggregate principal amount of Revolving Loan Commitments, among Increasing Lenders and New Lenders. Each New Lender designated by Company and reasonably acceptable to Administrative Agent shall become an additional party hereto as a New Lender concurrently with the effectiveness of the proposed increase in the aggregate principal amount of the Revolving Loan Commitments, upon its execution of an Agreement of Joinder in the form of EXHIBIT XIV (and, in each case, otherwise in form and substance reasonably satisfactory to Administrative Agent). Subject to the foregoing, any increase requested by Company shall be effective as of the date proposed by Company and shall be in the principal amount equal to (i) the principal amount which Increasing Lenders are willing to assume as increases to the principal amount of their Revolving Loan Commitments, PLUS (ii) the principal amount offered by New Lenders with respect to Revolving Loan Commitments, in either case as adjusted by Company and Administrative Agent pursuant to this subsection 2.1A(v). Upon effectiveness of any such increase, the Pro Rata Share of each Lender will be adjusted to give effect to the increase in Revolving Loan Commitments, Administrative Agent shall distribute to Lenders a revised SCHEDULE 2.1 reflecting the Revolving Loan Commitment and Pro Rata Share of each Lender after giving effect to such increase. To the extent that the adjustment of Pro Rata Shares results in loss or expenses to any Lender as a result of the prepayment of any Adjusted LIBO Rate Loan on a date other than the scheduled last day of the applicable Interest Period, Company shall be responsible for such loss or expense pursuant to subsection 2.6D. o BORROWING MECHANICS. Loans made on any Funding Date as Base Rate Loans (other than Revolving Loans made pursuant to a request by Swing Line Lender pursuant to subsection 2.1A(iii) for the purpose of repaying any Refunded Swing Line Loans or Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it) shall be in an aggregate minimum amount of $1 million and multiples of $50,000 in excess of that amount and Loans made on any Funding Date as LIBO Rate Loans with a particular Interest Period shall be in an aggregate minimum amount of $3 million and multiples of $500,000 in excess of that amount. Swing Line 41 Loans made on any Funding Date shall be in an aggregate minimum amount of $200,000 and multiples of $50,000 in excess of that amount. Whenever Company desires that Lenders make Loans it shall deliver to Administrative Agent a Notice of Borrowing no later than 12:00 Noon (New York City time) at least three Business Days in advance of the proposed Funding Date (in the case of a LIBO Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall deliver to Administrative Agent a Notice of Borrowing no later than 1:00 P.M. (New York City time) on the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and type of Loans requested, (iii) in the case of Swing Line Loans, that such Loans shall be Base Rate Loans, (iv) whether such Loans shall be Base Rate Loans or LIBO Rate Loans, and (v) in the case of any Loans requested to be made as LIBO Rate Loans, the initial Interest Period requested therefor. Term Loans and Revolving Loans may be continued as or converted into Base Rate Loans and LIBO Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall be confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on the date of such telephonic notice. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Loans hereunder. Company shall notify Administrative Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a LIBO Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. o DISBURSEMENT OF FUNDS. All Loans (other than Swing Line Loans) under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares of the Tranche A Term Loan Commitment, Tranche B Term Loan Commitment and the Revolving Loan Commitment, as 42 the case may be, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender or Swing Line Lender, as the case may be, of the proposed borrowing. Each Lender shall make the amount of its Loan available to Administrative Agent not later than 1:00 P.M. (New York City time) on the applicable Funding Date, and Swing Line Lender shall make the amount of its Swing Line Loan available to Administrative Agent not later than 2:00 P.M. (New York City time) on the applicable Funding Date, in each case in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 2.1A(iii) or subsection 3.3B with respect to Revolving Loans used to repay Refunded Swing Line Loans or to reimburse any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 (in the case of Loans made on the Closing Date), 4.2 (in the case of all Loans) and 4.3 (in the case of the issuance of any Letter of Credit), Administrative Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders or Swing Line Lender, as the case may be, to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified in writing by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the Federal Funds Effective Rate for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. 43 o THE REGISTER. o Administrative Agent shall maintain, at its address referred to in subsection 10.8, a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the "REGISTER"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. Upon the Company's written request, the Administrative Agent shall provide the Company with a copy of the Register. o Administrative Agent shall record in the Register the Tranche A Term Loan Commitment, the Trance B Term Loan Commitment and the Revolving Loan Commitment, and the Tranche A Term Loan, the Tranche B Term Loan and the Revolving Loans from time to time of each Lender, the Swing Line Loan Commitment and the Swing Line Loans from time to time of Swing Line Lender, and each repayment or prepayment in respect of the principal amount of the Tranche A Term Loan, the Tranche B Term Loan or the Revolving Loans of each Lender or the Swing Line Loans of Swing Line Lender. Any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; PROVIDED that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any applicable Loans. o Each Lender shall record on its internal records (including, without limitation, the Notes held by such Lender) the amount of the Tranche A Term Loan, the Tranche B Term Loan and each Revolving Loan made by it and each payment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; PROVIDED that failure to make any such recordation, or any error in such recordation, shall not affect any Lender's Commitments or Company's Obligations in respect of any applicable Loans; and PROVIDED FURTHER that in the event of any inconsistency between the Register and any Lender's records, the recordations in the Register shall govern. o Company, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Commitments and Loans listed therein for all purposes hereof, and no assignment or transfer of any such Commitment or Loan shall be effective, in each case unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 10.1B(ii). Prior to such recordation, all amounts owed with respect to the applicable Commitment or Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Commitments or Loans. 44 Company hereby designates Administrative Agent to serve as Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and Company hereby agrees that, to the extent Administrative Agent serves in such capacity, Administrative Agent and its officers, directors and employees shall constitute Indemnitees for all purposes under subsection 10.3. o EVIDENCE OF DEBT. (i) The Register maintained by the Administrative Agent pursuant to Section 2.1D shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date, amount and tenor, as applicable, of each Loan, the type of Loan and the Interest Period (if any) applicable thereto, (ii) the terms of each Assignment Agreement delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Lender hereunder, and (iv) the amount of any sum received by the Administrative Agent from the Company hereunder and each Lender's share thereof. o The entries made in the Register shall be conclusive and binding for all purposes, absent manifest error. o If, in the opinion of any Lender, a promissory note or other evidence of debt is required, appropriate or desirable to reflect or enforce the indebtedness of the Company resulting from a Tranche A Loan, a Tranche B Loan, a Revolving Loan or a Swing Line Loan made, or to be made, by such Lender to the Company, then, upon written request of such Lender, the Company shall promptly execute and deliver to such Lender a promissory note substantially in the form of EXHIBIT IV-A in the case of Tranche A Loans, EXHIBIT IV-B in the case of Tranche B Loans, EXHIBIT IV-C in the case of Revolving Loans and EXHIBIT IV-D in the case of Swing Line Loans, payable to the order of such Lender in an amount up to the maximum amount of Tranche A Loans, Tranche B Loans, Revolving Loans or Swing Line Loans, as the case may be, payable or to be payable by Company to such Lender from time to time hereunder. o Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii). Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, assignee or transferee of that Note or of any Note or Notes issued in exchange therefor. o SPECIAL PROVISIONS GOVERNING FOREIGN CURRENCY LETTERS OF Credit. Notwithstanding any other provision of this Agreement to the contrary, the 45 following provisions shall govern with respect to Letters of Credit denominated in a currency other than Dollars, in each case as to the matters covered: (ii) CALCULATION OF DOLLAR EQUIVALENT AMOUNT OF FOREIGN CURRENCY LETTERS OF CREDIT. For purposes of determining (1) whether the Total Utilization of Commitments exceeds the Revolving Loan Commitments then in effect or (2) the Letter of Credit Usage, Administrative Agent shall determine the Dollar Equivalent amounts with respect to any Letters of Credit denominated in a currency other than Dollars (a) on the first Business Day following each monthly anniversary of the issuance of such Letter of Credit, and (b) at such other dates as Administrative Agent may reasonably require (each such date under clauses (a) and (b) being a "COMPUTATION DATE"). Administrative Agent shall determine the Dollar Equivalent amount for a particular Letter of Credit at the time a Request for Issuance of Letter of Credit is given with respect to such Letter of Credit. o EUROPEAN MONETARY UNION. The European Monetary Union (the "European Monetary Union") anticipates the introduction of a single currency and the substitution of such currency for the national currencies of the member states participating in the European Monetary Union. On the date on which any currency under which a Letter of Credit is issued is replaced by such single currency, the conversion of any outstanding Letters of Credit denominated in such foreign currency into such single currency shall take effect; PROVIDED that the original foreign currency shall be retained for so long as legally permissible; PROVIDED FURTHER that any such conversion shall be based on the rate of conversion officially fixed by the European Monetary Union on the date such single currency replaces the applicable foreign currency. Notwithstanding anything contained herein to the contrary, none of the introduction of such single currency, the rate of conversion or any economic consequences that arise from any of the aforementioned events or otherwise in connection with the European Monetary Union shall give rise to any right to terminate prematurely, contest, cancel, rescind, modify or renegotiate this Agreement or any of its provisions or to raise any other objections and/or exceptions or to assert any claim for compensation. (iii) LIMITATION TO PERMITTED CURRENCIES. Letters of Credit issued in a currency other than Dollars shall only be issued in a Permitted Currency. o INTEREST ON THE LOANS. o RATE OF INTEREST. Subject to the provisions of subsections 2.6 and 2.7, each Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted LIBO Rate. Subject to the provisions of subsection 2.7, each Swing Line Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate. The applicable basis for determining the rate of interest with 46 respect to any Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that Loan shall bear interest determined by reference to the Base Rate. o Subject to the provisions of subsections 2.2E and 2.7, the Tranche A Term Loans, the Tranche B Term Loans and the Revolving Loans shall bear interest through maturity as follows: o if a Base Rate Loan, then at the sum of the Base Rate PLUS the Applicable Base Rate Margin or o if a LIBO Rate Loan, then at the sum of the Adjusted LIBO Rate PLUS the Applicable LIBO Rate Margin. o Subject to the provisions of subsections 2.2E and 2.7, the Swing Line Loans shall bear interest through maturity at the sum of the Base Rate PLUS the Applicable Base Rate Margin for Revolving Loans MINUS the Commitment Fee Percentage. Upon delivery of a Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(xviii), each of the Applicable Base Rate Margin and the Applicable LIBO Rate Margin shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the next succeeding Business Day following the receipt by Administrative Agent of such Margin Determination Certificate; PROVIDED that if at any time a Margin Determination Certificate is not delivered at the time required pursuant to subsection 6.1(xviii), the highest Applicable Base Rate Margin or Applicable LIBO Rate Margin, as the case may be, shall be applicable from such time until delivery of such Margin Determination Certificate; PROVIDED FURTHER that if a Margin Determination Certificate erroneously indicates an applicable margin more favorable to Company than should be afforded by the actual calculation of the Consolidated Leverage Ratio, Company shall promptly pay additional interest, letter of credit fees and all other applicable fees or commitment fees, as the case may be, to correct such error. o INTEREST PERIODS. In connection with each LIBO Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall be, at Company's option, either a one, two, three or six month period; PROVIDED that: o the initial Interest Period for any LIBO Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a 47 LIBO Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a LIBO Rate Loan; o in the case of immediately successive Interest Periods applicable to a LIBO Rate Loan continued as such pursuant to a Notice of Conversion/ Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; o if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; PROVIDED that, if any Interest Period would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; o any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; o no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond July 31, 2006, no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond July 31, 2007 and no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan Commitment Termination Date; o no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal of the Tranche A Term Loans unless the sum of (a) the aggregate principal amount of Tranche A Term Loans that are Base Rate Loans PLUS (b) the aggregate principal amount of Tranche A Term Loans that are LIBO Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the Tranche A Term Loans on such date; o no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal of the Tranche B Term Loans unless the sum of (a) the aggregate principal amount of Tranche B Term Loans that are Base Rate Loans PLUS (b) the aggregate principal amount of Tranche B Term Loans that are LIBO Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the Tranche B Term Loans on such date; o there shall be no more than ten Interest Periods outstanding at any time; and 48 o in the event Company fails to specify an Interest Period for any LIBO Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. o INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity); PROVIDED that in the event any Swing Line Loans or any Revolving Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i), interest accrued on such Swing Line Loans or Revolving Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). o CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option to convert at any time all or any part of its outstanding Loans equal to $3 million and multiples of $500,000 in excess of that amount from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to an alternative basis or (ii) upon the expiration of any Interest Period applicable to a LIBO Rate Loan, to continue all or any portion of such Loan equal to $3 million and multiples of $500,000 in excess of that amount as a LIBO Rate Loan; PROVIDED, HOWEVER, that (i) a LIBO Rate Loan may only be converted into a Base Rate Loan on the expiration date of an Interest Period applicable thereto. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 10:00 A.M. (New York City time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a LIBO Rate Loan). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a LIBO Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a LIBO Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; PROVIDED that such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/ Continuation to Administrative Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. 49 Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a LIBO Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. o DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2.00% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2.00% per annum plus the interest rate otherwise payable under this Agreement for Base Rate Loans which are Tranche A Term Loans, Tranche B Term Loans or Revolving Loans, as applicable); PROVIDED that, in the case of LIBO Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such LIBO Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2.00% per annum plus the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of any Agent or any Lender. o COMPUTATION OF INTEREST. Interest on the Loans shall be computed on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a LIBO Rate Loan, the date of conversion of such LIBO Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a LIBO Rate Loan, the date of conversion of such Base Rate Loan to such LIBO Rate Loan, as the 50 case may be, shall be excluded; provided that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. o FEES. o COMMITMENT FEES. Company agrees to pay to Administrative Agent, for distribution to each Revolving Lender in proportion to that Lender's Pro Rata Share of the Revolving Loan Commitments, commitment fees for the period from and including the Closing Date to and excluding the Revolving Loan Commitment Termination Date or earlier date of termination of the Revolving Loan Commitments equal to (x) the average of the daily excess of the Revolving Loan Commitments over the Total Utilization of Revolving Loan Commitments (but not including any outstanding Swing Line Loans) MULTIPLIED BY (y) the applicable Commitment Fee Percentage, such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on the last Business Day of each March, June, September and December of each year, commencing on the first such date to occur after the Closing Date, and on the Revolving Loan Commitment Termination Date or earlier date of termination of the Revolving Loan Commitments. Upon delivery of a Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(xviii), the Commitment Fee Percentage shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the next succeeding Business Day following the receipt by Administrative Agent of such Margin Determination Certificate; PROVIDED that if at any time a Margin Determination Certificate is not delivered at the time required pursuant to subsection 6.1(xviii), the highest Commitment Fee Percentage shall be applicable from such time until delivery of such Margin Determination Certificate; PROVIDED FURTHER that if a Margin Determination Certificate erroneously indicates a Commitment Fee Percentage more favorable to Company than should be afforded by the actual calculation of the Consolidated Leverage Ratio, Company shall promptly pay additional commitment fees to correct such error. o OTHER FEES. Company agrees to pay to Arranger and Administrative Agent such other fees in the amounts and at the times separately agreed upon between Company, Arranger and Administrative Agent (including that certain letter agreement dated May 18, 2000 relating to fees for the Commitments and Loans made hereunder). o TRANCHE B TERM LOAN PREPAYMENT FEES. Voluntary payments or prepayments of Tranche B Term Loans made on or before the second anniversary of the Closing Date shall be accompanied by payment of a prepayment fee as follows: o if such voluntary payment or prepayment is made on or before the first anniversary of the Closing Date, a fee equal to 2% of the amount of such voluntary payment or prepayment; and 51 o if such voluntary payment or prepayment is made after the first anniversary of the Closing Date but on or before the second anniversary of the Closing Date, a fee equal to 1% of the amount of such voluntary payment or prepayment. o REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN LOAN COMMITMENTS; GENERAL PROVISIONS REGARDING PAYMENTS. o Scheduled Payments of Term Loans. o Company shall make principal payments on the Tranche A Term Loans on each of the following dates in the aggregate amount set forth opposite such date in the table set forth below:
------------------------------------------------------------- Scheduled Repayment Date Scheduled Repayment of Tranche A Term Loans ------------------------------------------------------------- December 31, 2000 $750,000.00 March 31, 2001 $750,000.00 June 30, 2001 $750,000.00 September 30, 2001 $750,000.00 December 31, 2001 $1,500,000.00 March 31, 2002 $1,500,000.00 June 30, 2002 $1,500,000.00 September 30, 2002 $1,500,000.00 December 31, 2002 $2,250,000.00 March 31, 2003 $2,250,000.00 June 30, 2003 $2,250,000.00 September 30, 2003 $2,250,000.00 December 31, 2003 $3,000,000.00 March 31, 2004 $3,000,000.00 June 30, 2004 $3,000,000.00 September 30, 2004 $3,000,000.00 December 31, 2004 $3,750,000.00 March 31, 2005 $3,750,000.00 June 30, 2005 $3,750,000.00 September 30, 2005 $3,750,000.00 December 31, 2005 $3,750,000.00 March 31, 2006 $3,750,000.00 June 30, 2006 $3,750,000.00 September 30, 2006 $3,750,000.00 ----------------------------- Total $60,000,000.00
; PROVIDED that the scheduled installments of principal of the Tranche A Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche A Term Loans in accordance with subsection 2.4B(iv); and PROVIDED FURTHER that the Tranche A Term Loans and all other amounts owed hereunder with respect to the Tranche A Term Loans shall be paid in full no later than September 30, 2006, and the final installment payable by Company in respect of the Tranche A Term 52 Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche A Term Loans. o Company shall make principal payments on the Tranche B Term Loans on each of the following dates in the aggregate amount set forth opposite such date in the table set forth below:
------------------------------------------------------------- Scheduled Repayment Date Scheduled Repayment of Tranche B Term Loans ------------------------------------------------------------- December 31, 2000 $550,000.00 March 31, 2001 $550,000.00 June 30, 2001 $550,000.00 September 30, 2001 $550,000.00 December 31, 2001 $550,000.00 March 31, 2002 $550,000.00 June 30, 2002 $550,000.00 September 30, 2002 $550,000.00 December 31, 2002 $550,000.00 March 31, 2003 $550,000.00 June 30, 2003 $550,000.00 September 30, 2003 $550,000.00 December 31, 2003 $550,000.00 March 31, 2004 $550,000.00 June 30, 2004 $550,000.00 September 30, 2004 $550,000.00 December 31, 2004 $550,000.00 March 31, 2005 $550,000.00 June 30, 2005 $550,000.00 September 30, 2005 $550,000.00 December 31, 2005 $550,000.00 March 31, 2006 $550,000.00 June 30, 2006 $550,000.00 September 30, 2006 $550,000.00 December 31, 2006 $51,700,000.00 March 31, 2007 $51,700,000.00 June 30, 2007 $51,700,000.00 September 30, 2007 $51,700,000.00 ------------------------------ Total $220,000,000.00
; PROVIDED that the scheduled installments of principal of the Tranche B Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche B Term Loans in accordance with subsection 2.4B(iv); and PROVIDED FURTHER that the Tranche B Term Loans and all other amounts owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later September 30, 2007, and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans. 53 o Prepayments of Loans and Unscheduled Reductions in Revolving Loan Commitments. o VOLUNTARY PREPAYMENTS. o Company may, upon written or telephonic notice to Administrative Agent on or prior to 12:00 Noon (New York City time) on the date of prepayment, which notice, if telephonic, shall be promptly confirmed in writing, at any time and from time to time prepay, without premium or penalty, any Swing Line Loan on any Business Day in whole or in part in an aggregate minimum amount of $100,000 and multiples of $50,000 in excess of that amount. Subject to subsection 2.3C, Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of LIBO Rate Loans, in each case given to Administrative Agent by 12:00 Noon (New York City time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay, without premium or penalty, any Loans on any Business Day in whole or in part in an aggregate minimum amount of $500,000 and multiples of $50,000 in excess of that amount; PROVIDED, HOWEVER, that a LIBO Rate Loan may only be prepaid on the expiration of the Interest Period applicable thereto unless Company complies with subsection 2.6D with respect to any breakage costs resulting from such prepayment being made on a date prior to the expiration of the applicable Interest Period. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iv). o In the event Company is entitled to replace a non-consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Administrative Agent (which notice Administrative Agent shall promptly transmit to each of the Lenders), to prepay all Loans, together with accrued and unpaid interest, fees and other amounts owing to such Lender (including without limitation amounts owing to such Lender pursuant to subsection 2.6D and subsection 2.3C) in accordance with subsection 10.6B so long as (1) in the case of the prepayment of the Revolving Loans of any Lender pursuant to this subsection 2.4B(i)(b), the Revolving Loan Commitment of such Lender is terminated concurrently with such prepayment pursuant to subsection 2.4B(ii)(b) (at which time SCHEDULE 2.1 shall be deemed modified to reflect the changed Revolving Loan Commitments), and (2) in the case of the prepayment of the Loans of any Lender, the consents required by subsection 10.6B in connection with the prepayment pursuant to this subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, 54 except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2 and 10.3), which shall survive as to such Lender. o VOLUNTARY REDUCTIONS OF LOAN COMMITMENTS. o Company may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Revolving Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction; PROVIDED that any such partial reduction shall be in an aggregate minimum amount of $500,000 and multiples of $100,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Loan Commitment of each Revolving Lender proportionately to its Pro Rata Share. o In the event Company is entitled to replace a non-consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Administrative Agent (which notice Administrative Agent shall promptly transmit to each of the Lenders), to terminate the entire Revolving Loan Commitment of such Lender so long as (1) all Loans, together with accrued and unpaid interest, fees and other amounts owing to such Lender are repaid, including without limitation amounts owing to such Lender pursuant to subsection 2.6D, pursuant to subsection 2.4B(i)(b) concurrently with the effectiveness of such termination (at which time SCHEDULE 2.1 shall be deemed modified to reflect such changed amounts), and (2) the consents required by subsection 10.6B in connection with the prepayment pursuant to subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2 and 10.3), which shall survive as to such Lender. o MANDATORY PREPAYMENTS AND MANDATORY REDUCTIONS OF LOAN COMMITMENTS. The Loans shall be prepaid and/or the Revolving Loan Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4B(iv): 55 o PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. No later than the first Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any Asset Sale, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% of such Net Asset Sale Proceeds MINUS, except as provided in subsection 7.9, any such Net Asset Sale Proceeds (the "PROPOSED ASSET SALE REINVESTMENT PROCEEDS") that Company or any Subsidiary intends to use within 360 days of such date of receipt to acquire any asset used or useful to the Company or such Subsidiary in conducting its business; PROVIDED that Company shall have delivered to Administrative Agent, on or before such first Business Day, an Officer's Certificate setting forth the proposed use of the Proposed Asset Sale Reinvestment Proceeds and such other information with respect to such proposed use as Administrative Agent may reasonably request. In addition, no later than 360 days after receipt of any Net Asset Sale Proceeds, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount equal to the amount of any related Proposed Asset Sale Reinvestment Proceeds that have not been applied to the purchase of an asset by Company or such Subsidiary as provided above; PROVIDED FURTHER that the aggregate amount of any such Proposed Asset Sale Reinvestment Proceeds so reinvested in the business of Company or any Subsidiary shall not exceed $20 million for any Fiscal Year. If, following the receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds, Company is required to apply or cause to be applied any portion of such Net Asset Sale Proceeds to prepay any Indebtedness evidenced by any of the Related Agreements pursuant to the applicable Related Agreement, then, notwithstanding anything contained in this subsection 2.4B(iii)(a), Company shall prepay the Loans and/or reduce the Revolving Loan Commitments as set forth in this subsection 2.4B(iii)(a) so as to eliminate any obligation to prepay such Indebtedness. o PREPAYMENTS AND REDUCTIONS FROM NET INSURANCE/CONDEMNATION PROCEEDS. No later than the fifth Business Day following the date of receipt by Administrative Agent or by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds, Company shall, or shall instruct the Administrative Agent to, prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% of the amount of such Net Insurance/Condemnation Proceeds MINUS any such Net Insurance/Condemnation Proceeds (the "PROPOSED REINVESTMENT PROCEEDS") that Company or such Subsidiary intends to use within 360 days of such date of receipt to pay or reimburse the costs of repairing, restoring or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received; PROVIDED that Company shall have delivered to Administrative Agent, on or before such first Business Day, an Officer's Certificate setting forth the proposed use of the Proposed Reinvestment Proceeds and such other information with respect to such 56 proposed use as Administrative Agent may reasonably request. In addition, no later than 360 days after receipt of any Net Insurance/Condemnation Proceeds, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an amount equal to the amount of any related Proposed Reinvestment Proceeds that have not been applied to the costs of repairing, restoring or replacing the applicable assets of Company or such Subsidiary as provided above; PROVIDED FURTHER that the aggregate amount of any such Proposed Reinvestment Proceeds so applied to such repair, restoration or replacement shall not exceed $35 million for any Fiscal Year. o PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE OF EQUITY SECURITIES. No later than the first Business Day following receipt by Company or any of its Subsidiaries of the Cash proceeds (any such Cash proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses, being "NET EQUITY SECURITIES PROCEEDS"), from the issuance of equity Securities of Company (other than proceeds from (i) the Convertible Preferred Stock and (ii) common equity Securities (including options, warrants or other convertible equity securities) of Company issued to officers, employees, directors, consultants and certain other qualified persons of Company and its Subsidiaries pursuant to option plans or other similar plans or agreements adopted by Company's Board of Directors), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 50% of such Net Equity Securities Proceeds. o PREPAYMENTS AND REDUCTIONS DUE TO ISSUANCE OF DEBT SECURITIES. No later than the first Business Day following receipt by Company or any of its Subsidiaries of the Cash proceeds (any such Cash proceeds, net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal fees and expenses, being "NET DEBT SECURITIES PROCEEDS"), from the issuance of debt Securities of Company or any of its Subsidiaries after the Closing Date (including the Net Debt Securities Proceeds of Indebtedness permitted under subsection 7.1(x) but excluding the Net Debt Securities Proceeds of Indebtedness permitted under subsection 7.1 as in effect on the Closing Date (other than subsection 7.1(x)), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% of such Net Debt Securities Proceeds. o PREPAYMENTS AND REDUCTIONS FROM CONSOLIDATED EXCESS CASH FLOW. In the event that there shall be Consolidated Excess Cash Flow for any Fiscal Year (commencing with the Fiscal Year ending on or about December 31, 2001), Company shall, no later than ninety (90) days after the end of such Fiscal Year, prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 50% of such Consolidated Excess Cash Flow; PROVIDED that such percentage shall be 57 reduced to 25% if the Consolidated Leverage Ratio as at the last day of such Fiscal Year is less than 3.00:1.00. o PREPAYMENTS DUE TO RESTRICTIONS ON REVOLVING LOANS COMMITMENTS OR CURRENCY FLUCTUATIONS. Company shall from time to time prepay first the Swing Line Loans and second the Revolving Loans and cash collateralize Letters of Credit to the extent necessary so that the Total Utilization of Revolving Loan Commitments shall not exceed the Revolving Loan Commitments then in effect. If on any Computation Date Administrative Agent shall have determined that the Total Utilization of Revolving Loan Commitments exceeds the Revolving Loan Commitments because of a change in applicable rates of exchange between Dollars and any other currency under which a Letter of Credit has been issued, then Administrative Agent shall give notice to the Company that a prepayment is required under this subsection 2.4B(iii)(f) and Company shall promptly (x) prepay first its Swing Line Loans and second its Revolving Loans and/or (y) cash collateralize its outstanding Letters of Credit by depositing Dollars into the Collateral Account established under the Security Agreement, in each case to the extent necessary so that the Total Utilization of Revolving Loan Commitments shall not exceed the Revolving Loan Commitments. o CALCULATIONS OF NET PROCEEDS AMOUNTS; ADDITIONAL PREPAYMENTS AND REDUCTIONS BASED ON SUBSEQUENT CALCULATIONS. Concurrently with any prepayment of the Loans and/or reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(e), Company shall deliver to Administrative Agent an Officer's Certificate demonstrating the calculation of the amount (the "NET PROCEEDS AMOUNT") of the applicable Net Asset Sale Proceeds or Net Insurance/Condemnation Proceeds, or Net Equity Securities Proceeds (as such term is defined in subsection 2.4B(iii)(c)) or Net Debt Securities Proceeds (as such term is defined in subsection 2.4B(iii)(d)) or the applicable Consolidated Excess Cash Flow, as the case may be, that gave rise to such prepayment and/or reduction. In the event that Company shall subsequently determine that the actual Net Proceeds Amount exceeded the amount set forth in such Officer's Certificate by $100,000 or more, Company shall promptly make an additional prepayment of the Loans (and/or, if applicable, the Revolving Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officer's Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess. o APPLICATION OF PREPAYMENTS. o APPLICATION OF VOLUNTARY PREPAYMENTS BY TYPE OF LOANS AND ORDER OF MATURITY. Any voluntary prepayments pursuant to subsection 2.4B(i) shall be applied to the Loans as specified by Company in the applicable notice of prepayment; PROVIDED that in the event Company fails to specify the Loans to 58 which any such prepayment shall be applied, such prepayment shall be applied FIRST to repay outstanding Swing Line Loans to the full extent thereof, SECOND to repay outstanding Revolving Loans to the full extent thereof and THIRD to repay outstanding Term Loans to the full extent thereof. Any voluntary prepayments of the Term Loans pursuant to subsection 2.4B(i) (whether the application thereof is specified by Company or not) shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and shall be applied on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to each scheduled installment of principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, set forth in subsection 2.4A(i) or 2.4A(ii), respectively, that is unpaid at the time of such prepayment; provided that, notwithstanding anything to the contrary contained in the sentence immediately preceding this proviso, up to the first $25 million of any voluntary prepayment of the Term Loans shall be applied to prepay the Tranche A Term Loans or Tranche B Term Loans, or both, as the case may be, as specified by the Company and shall be applied on a pro rata basis (in accordance with the respective outstanding principal thereof) to each scheduled installment of principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, set forth in subsection 2.4A(i) or 2.4A(ii), respectively, that is unpaid at the time of such prepayment. o APPLICATION OF MANDATORY PREPAYMENTS BY TYPE OF LOANS. Any amount (the "APPLIED AMOUNT") required to be applied as a mandatory prepayment of the Loans and/or a reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(e) shall be applied FIRST to prepay the Term Loans to the full extent thereof as provided in subsection 2.4B(iv)(c), SECOND, to the extent of any remaining portion of the Applied Amount, to prepay the Swing Line Loans to the full extent thereof and to permanently reduce the Revolving Loan Commitments by the amount of such prepayment, THIRD, to the extent of any remaining portion of the Applied Amount, to prepay the Revolving Loans to the full extent thereof and to further permanently reduce the Revolving Loan Commitments by the amount of such prepayments, and FOURTH, to the extent of any remaining portion of the Applied Amount, to further permanently reduce the Revolving Loan Commitments to the full extent thereof; PROVIDED, HOWEVER that the Revolving Loan Commitments shall not be reduced pursuant to this subsection 2.4B(iv)(b) to an amount less than $35 million. o APPLICATION OF MANDATORY PREPAYMENTS TO TERM LOANS AND THE SCHEDULED INSTALLMENTS OF PRINCIPAL THEREOF. Any mandatory prepayments of the Term Loans pursuant to subsection 2.4B(iii) shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and shall be applied on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to each scheduled installment of 59 principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, set forth in subsection 2.4A(i) or 2.4A(ii), respectively, that is unpaid at the time of such prepayment; PROVIDED, HOWEVER, that Tranche B Term Lenders shall have the option to waive their rights to receive any such prepayment (a "WAIVABLE MANDATORY PREPAYMENT"). In the event any such Tranche B Term Lender desires to waive such Lender's right to receive such Waivable Mandatory Prepayment, (1) such Tranche B Term Lender shall so advise Administrative Agent in writing no later than the close of business on the Business Day following the date it receives notice of the prepayment from Administrative Agent and (2) upon receipt of such written advice from such Tranche B Term Lender, Administrative Agent shall apply the amount so waived by such Tranche B Term Lender to prepay the Tranche A Term Loans and to reduce the unpaid scheduled installments of principal on the Tranche A Term Loans set forth in subsection 2.4A(i) on a PRO RATA basis and apply the remainder of the amount so waived by such Lender to prepay the Revolving Loans. Company shall use its best efforts to notify Administrative Agent (which shall promptly notify the Tranche B Term Lenders) of any Waivable Mandatory Prepayment at least three Business Days prior to the payment to Administrative Agent of such Waivable Mandatory Prepayment. o APPLICATION OF PREPAYMENTS TO BASE RATE LOANS AND LIBO RATE LOANS. Considering Tranche A Term Loans, Tranche B Term Loans and Revolving Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to LIBO Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. o General Provisions Regarding Payments. o MANNER AND TIME OF PAYMENT. All payments by Company of principal, interest, fees and other Obligations hereunder and under the Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 2:00 P.M. (New York City time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). o APPLICATION OF PAYMENTS TO PRINCIPAL AND INTEREST. Except as provided in subsection 2.2C, all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such 60 Loan) shall be applied to the payment of interest before application to principal. o APPORTIONMENT OF PAYMENTS. Aggregate principal and interest payments in respect of Loans shall be apportioned among all outstanding Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any LIBO Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. o PAYMENTS ON BUSINESS DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. o NOTATION OF PAYMENT. Each Lender agrees that before disposing of any Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; PROVIDED that the failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect the obligations of Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note. o Application of Proceeds of Collateral and Payments Under Guaranties o APPLICATION OF PROCEEDS OF COLLATERAL. Except as provided in subsection 2.4B(iii)(a) with respect to prepayments from Net Asset Sale Proceeds, all proceeds received by Administrative Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral under any Collateral Document may, in the discretion of Administrative Agent, be held by Administrative Agent as Collateral for, and/or (then or at any time thereafter) applied in full or in part by Administrative Agent against, the applicable Secured Obligations (as defined in such Collateral Document) in the following order of priority: 61 o To the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to Lenders, Administrative Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Lenders or Administrative Agent in connection therewith, and all amounts for which Lenders or Administrative Agent is entitled to indemnification under such Collateral Document and all advances made by Lenders or Administrative Agent thereunder for the account of the applicable Loan Party, and to the payment of all costs and expenses paid or incurred by Lenders or Administrative Agent in connection with the exercise of any right or remedy under such Collateral Document, all in accordance with the terms of this Agreement and such Collateral Document; o thereafter, to the extent of any excess such proceeds, to the payment of all other such Secured Obligations for the ratable benefit of the holders thereof; o thereafter, to the extent of any excess such proceeds, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and o thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of such Loan Party or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. o APPLICATION OF PAYMENTS UNDER SUBSIDIARY GUARANTY. All payments received by Administrative Agent under the Subsidiary Guaranty shall be applied promptly from time to time by Administrative Agent in the following order of priority: o to the payment of the costs and expenses of any collection or other realization under the Subsidiary Guaranty, including reasonable compensation to Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, all in accordance with the terms of this Agreement and the Subsidiary Guaranty; o thereafter, to the extent of any excess such payments, to the payment of all other Guarantied Obligations (as defined in the Subsidiary Guaranty) for the ratable benefit of the holders thereof; o thereafter, to the extent of any excess such payments, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and o thereafter, to the extent of any excess such payments, to the payment to the applicable Subsidiary Guarantor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 62 o USE OF PROCEEDS. o TERM LOANS. On the Closing Date, after application of approximately $3.9 million in cash on hand, the cash proceeds, if any, of $150 million of the Senior Subordinated Notes and $110 million of the Convertible Preferred Stock, both as described in subsection 4.1D, then the proceeds of the Term Loans shall be applied by Company to pay any remaining Acquisition Financing Requirements on the Closing Date. o REVOLVING LOANS; SWING LINE LOANS. On the Closing Date, after the application of the proceeds of the Term Loans, then approximately $3.0 million of the proceeds of the Revolving Loans and any Swing Line Loans may be applied to pay any remaining Acquisition Financing Requirements to be paid on the Closing Date and the remaining proceeds of the Revolving Loans and Swing Line Loans shall be applied by Company for working capital and general corporate purposes, which may include the making of interest payments on the Loans, Permitted Acquisitions, the payment of any remaining Acquisition Financing Requirements to be paid after the Closing Date and the making of intercompany loans to any of Company's Subsidiaries in accordance with subsection 7.1(iv) for their own working capital purposes, and Letters of Credit may be issued for the purposes set forth in the definition of such term. o MARGIN REGULATIONS. No portion of the proceeds of any borrowing under this Agreement, and no Letter of Credit, shall be used by Company or any of its Subsidiaries in any manner that might cause such borrowing or the application of such proceeds or the issuance of such Letter of Credit to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds or of such issuance. o SPECIAL PROVISIONS GOVERNING LIBO RATE LOANS. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to LIBO Rate Loans as to the matters covered: o DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 10:00 A.M. (New York City time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the LIBO Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. o INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Administrative Agent shall have determined (which determination shall be 63 final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any LIBO Rate Loans, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted LIBO Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made or continued as, or converted to, LIBO Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company. o ILLEGALITY OR IMPRACTICABILITY OF LIBO RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its LIBO Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the London interbank market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "Affected Lender" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make or continue Loans as, or to convert Loans to, LIBO Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a LIBO Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding LIBO Rate Loans (the "Affected Loans") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a LIBO Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, 64 to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, LIBO Rate Loans in accordance with the terms of this Agreement. o COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth in reasonable detail the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by that Lender to lenders of funds borrowed by it to make or carry its LIBO Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any LIBO Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any LIBO Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including any prepayment pursuant to subsection 2.4B(i)) or other principal payment or any conversion of any of its LIBO Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, (iii) if any prepayment of any of its LIBO Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its LIBO Rate Loans when required by the terms of this Agreement. o BOOKING OF LIBO RATE LOANS. Any Lender may make, carry or transfer LIBO Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. o ASSUMPTIONS CONCERNING FUNDING OF LIBO RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant LIBO Rate Loans through the purchase of a LIBO deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted LIBO Rate in an amount equal to the amount of such LIBO Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such LIBO deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; PROVIDED, HOWEVER, that each Lender may fund each of its LIBO Rate Loans in any manner it sees fit and the foregoing assumptions shall be utilized only for the 65 purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. o LIBO RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Loan be made or maintained as, or converted to, a LIBO Rate Loan after the expiration of any Interest Period then in effect for that Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. o INCREASED COSTS; TAXES; CAPITAL ADEQUACY. o COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that the adoption, effectiveness, phase-in or applicability after the date hereof of, or any change after the date hereof in, any law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, or any determination of a court or governmental authority, in each case that becomes effective after the date hereof (or with respect to a Person which becomes a Lender after the date hereof or increases its Commitment hereunder after the date hereof, the date such Person becomes a Lender or increases its Commitment, as the case may be), or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): o subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; o imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to LIBO Rate Loans to the extent reflected in the definition of Adjusted LIBO Rate); or 66 o imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the London interbank market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto in an amount deemed by such Lender (in its sole discretion) to be material; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender on an after-tax basis for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. o Withholding of Taxes. o PAYMENTS TO BE FREE AND CLEAR. All sums payable by Company under this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. o GROSSING-UP OF PAYMENTS. If Company or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Loan Documents: o Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; o Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; o the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and 67 o within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; PROVIDED that no such additional amount shall be required to be paid to any Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) affecting any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement (or with respect to a Person which becomes a Lender after the date hereof or increases its Commitment hereunder after the date hereof, the date such Person becomes a Lender or increases its Commitment, as the case may be), as the case may be, in respect of payments to such Lender. o EVIDENCE OF EXEMPTION FROM U.S. WITHHOLDING TAX. o Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "NON-US LENDER") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the signature pages hereof) or on or prior to the date of the Assignment Agreement (or with respect to a Person which becomes a Lender after the date hereof or increases its Commitment hereunder after the date hereof, the date such Person becomes a Lender or increases its Commitment, as the case may be), pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents. 68 o Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. o Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b)(1) of this subsection 2.7B(iii); PROVIDED that if such Lender shall have satisfied the requirements of subsection 2.7B(iii)(a) on the Closing Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender) (or with respect to a Person which becomes a Lender after the date hereof or increases its Commitment hereunder after the date hereof, the date such Person becomes a Lender or increases its Commitment, as the case may be), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). o CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of, or any change after the date hereof in, any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a 69 consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. o OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE; REPLACEMENT OF LENDER. o MITIGATION. Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be materially reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; PROVIDED that such Lender or Issuing Lender will not be obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by 70 Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. o REPLACEMENT OF LENDER. If Company receives a notice pursuant to subsection 2.7A, 2.7B, 2.7C or 3.6, if a Lender defaults in its obligations hereunder or in the event a Lender has not consented to a proposed change, waiver, discharge or termination with respect to this Agreement which requires the consent of all Lenders and which has been approved by Requisite Lenders, as provided in subsection 10.6B, Company shall have the right, if no Potential Event of Default or Event of Default then exists, to replace such Lender (a "REPLACED LENDER") with one or more Eligible Assignees (collectively, the "REPLACEMENT LENDER") acceptable to Administrative Agent; PROVIDED that (i) at the time of any replacement pursuant to this subsection 2.8, the Replacement Lender shall enter into one or more Assignment Agreements pursuant to subsection 10.1B (and with all fees payable pursuant to subsection 10.1B to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the outstanding Loans and Commitments of, and in each case participations in Letters of Credit and Swing Line Loans by, the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, (B) an amount equal to all unpaid drawings with respect to Letters of Credit that have been funded by (and not reimbursed to) such Replaced Lender, together with all then unpaid interest with respect thereto at such time and (C) an amount equal to all accrued, but theretofore unpaid, fees owing to the Replaced Lender with respect thereto, and all fees which become payable as a result of such replacement (including any fees under subsection 2.3C, it being agreed that such replacements shall be deemed a prepayment of the Loans of the Replaced Lender for purposes of such subsection), (y) the appropriate Issuing Lender an amount equal to such Replaced Lender's Pro Rata Share of any unpaid drawings with respect to Letters of Credit (which at such time remains an unpaid drawing) issued by it to the extent such amount was not theretofore funded by such Replaced Lender, and (z) Swing Line Lender an amount equal to such Replaced Lender's Pro Rata Share of any Refunded Swing Line Loans to the extent such amount was not theretofore funded by such Replaced Lender, and (ii) all obligations (including without limitation all such amounts, if any, owing under subsection 2.6D and, except in the case in which Company is replacing such Replaced Lender because such Replaced Lender has defaulted in its obligations hereunder, all fees which become payable as a result of such replacement under subsection 2.3C (it being acknowledged and agreed that such replacement shall be deemed to be a voluntary prepayment of the Loans of the Replaced Lender for purposes of subsection 2.3C)) of Company owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase 71 price has been, or is concurrently being, paid), shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment Agreements, recordation of such assignment in the Register by Administrative Agent pursuant to subsection 2.1D, the payment of amounts referred to in clauses (i) and (ii) above and delivery to the Replacement Lender of the appropriate Note or Notes executed by Company, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder except with respect to indemnification provisions under this Agreement which by the terms of this Agreement survive the termination of this Agreement, which indemnification provisions shall survive as to such Replaced Lender. Notwithstanding anything to the contrary contained above, no Issuing Lender may be replaced hereunder at any time while it has Letters of Credit outstanding hereunder unless arrangements satisfactory to such Issuing Lender (including the furnishing of a Standby Letter of Credit in form and substance, and issued by an issuer, satisfactory to such Issuing Lender or the furnishing of cash collateral in amounts and pursuant to arrangements satisfactory to such Issuing Lender) have been made with respect to such outstanding Letters of Credit. o LETTERS OF CREDIT o ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS THEREIN. o LETTERS OF CREDIT. In addition to Company requesting that Revolving Lenders make Revolving Loans pursuant to subsection 2.1A(iii) and that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(iv), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Closing Date to but excluding the date which is thirty (30) days prior to the Revolving Loan Commitment Termination Date, that one or more Revolving Lenders issue Letters of Credit negotiated on a sight basis for the account of Company for the purposes specified in the definitions of Commercial Letters of Credit and Standby Letters of Credit. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, any one or more Revolving Lenders may, but (except as provided in subsection 3.1B(ii)) shall not be obligated to, issue such Letters of Credit in accordance with the provisions of this subsection 3.1; PROVIDED that Company shall not request that any Revolving Lender issue (and no Revolving Lender shall issue): o any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments then in effect; 72 o any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed $25 million; o any Standby Letter of Credit having an expiration date later than the earlier of (a) the date which is ten (10) Business Days prior to the Revolving Loan Commitment Termination Date and (b) the date that is one year from the date of issuance of such Standby Letter of Credit; PROVIDED that the immediately preceding clause (b) shall not prevent any Issuing Lender from agreeing that a Standby Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each (but in no event to a date which is after the date specified in clause (a)) unless such Issuing Lender elects not to extend for any such additional period (it being understood and agreed that such Issuing Lender will not include in such Letter of Credit the date which is ten (10) Business Days prior to the Revolving Loan Commitment Termination Date as an expiration date on any Standby Letter of Credit issued by such Issuing Lender pursuant to this proviso prior to the succeeding period in which the Revolving Loan Commitment Termination Date will occur); and PROVIDED FURTHER that such Issuing Lender shall elect not to extend such Standby Letter of Credit if it has knowledge that an Event of Default or Potential Event of Default has occurred and is continuing (and has not been waived in accordance with subsection 10.6) at the time such Issuing Lender must elect whether or not to allow such extension. o any Commercial Letter of Credit having an expiration date (a) later than the earlier of (X) the date which is thirty (30) days prior to the Revolving Loan Commitment Termination Date and (Y) the date which is 180 days from the date of issuance of such Commercial Letter of Credit or (b) that is otherwise unacceptable to the applicable Issuing Lender in its reasonable discretion; o any Letter of Credit at a tenor other than at sight; or o any Letter of Credit denominated in a currency other than Dollars if, after giving effect to such issuance, the Dollar Equivalent of the Letter of Credit Usage for all Letters of Credit denominated in a currency other than Dollars would exceed $25 million. o Mechanics of Issuance. o REQUEST FOR ISSUANCE. Whenever Company desires the issuance of a Letter of Credit, it shall deliver to the proposed Issuing Lender (with, simultaneously, a copy to Administrative Agent if the Person which is Administrative Agent is not the proposed Issuing Lender) a Request for Issuance of Letter of Credit in the form of EXHIBIT III annexed hereto no later than 12:00 Noon (New York City time) at least five Business Days, or such shorter period as may be agreed to by the applicable Issuing Lender in any particular instance, in advance of the proposed date of issuance. The applicable Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter 73 of Credit or any documents described in or attached to the Request for Issuance of Letter of Credit. No Letter of Credit shall require payment against a conforming demand for payment to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the applicable Issuing Lender to which such demand for payment is required to be presented is located) that such demand for payment is presented if such presentation is made after 10:00 A.M. (in the time zone of such office of the applicable Issuing Lender) on such business day. Each Request for Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) whether the requested Letter of Credit is to be a Standby Letter of Credit or a Commercial Letter of Credit, (c) the face amount of the Letter of Credit, (d) in the case of a Letter of Credit which Company requests to be denominated in a currency other than Dollars, the currency in which Company requests such Letter of Credit to be issued, (e) the expiration date of the requested Letter of Credit, (f) the name and address of the beneficiary, (g) the name of the Revolving Lender which has agreed to be the Issuing Lender and (h) either the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the applicable Issuing Lender to make payment under the Letter of Credit; PROVIDED that the applicable Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit or any such documents. COMPANY SHALL NOTIFY THE APPLICABLE ISSUING LENDER (AND ADMINISTRATIVE AGENT, IF THE PERSON WHICH IS ADMINISTRATIVE AGENT IS NOT SUCH ISSUING LENDER) PRIOR TO THE ISSUANCE OF ANY LETTER OF CREDIT IN THE EVENT THAT ANY OF THE MATTERS TO WHICH COMPANY IS REQUIRED TO CERTIFY IN THE APPLICABLE REQUEST FOR ISSUANCE OF LETTER OF CREDIT IS NO LONGER TRUE AND CORRECT AS OF THE PROPOSED DATE OF ISSUANCE OF SUCH LETTER OF CREDIT, AND UPON THE ISSUANCE OF ANY LETTER OF CREDIT COMPANY SHALL BE DEEMED TO HAVE RE-CERTIFIED, AS OF THE DATE OF SUCH ISSUANCE, AS TO THE MATTERS TO WHICH COMPANY IS REQUIRED TO CERTIFY IN THE APPLICABLE REQUEST FOR ISSUANCE OF LETTER OF CREDIT. o DETERMINATION OF ISSUING LENDER. Upon receipt by a proposed Issuing Lender of a Request for Issuance of Letter of Credit pursuant to subsection 3.1B(i) requesting the issuance of a Letter of Credit, (a) in the event the Person which is Administrative Agent is the proposed Issuing Lender, the Person which is Administrative Agent shall be the Issuing Lender with respect to such Letter of Credit, notwithstanding the fact that the Letter of Credit Usage with respect to such Letter of Credit and with respect to all other Letters of Credit issued by the Person which is Administrative Agent, when aggregated with such Person's outstanding Revolving Loans and Swing Line Loans, may exceed such Person's Revolving Loan Commitment then in effect; PROVIDED that the Person which is Administrative Agent shall not be obligated to issue any Letter of Credit denominated in a foreign currency which in the judgment of the Person which is Administrative Agent is not readily and freely available; 74 and (b) in the event any other Revolving Lender is the proposed Issuing Lender, such other Revolving Lender shall promptly notify Company and Administrative Agent whether or not, in its sole discretion, it has elected to issue such Letter of Credit, and (1) if such other Revolving Lender so elects to issue such Letter of Credit it shall be the Issuing Lender with respect thereto and (2) if such Revolving Lender fails to so promptly notify Company and Administrative Agent or declines to issue such Letter of Credit, Company may request the Person which is Administrative Agent or another Revolving Lender to be the Issuing Lender with respect to such Letter of Credit in accordance with the provisions of this subsection 3.1B. o ISSUANCE OF LETTER OF CREDIT. Upon satisfaction or waiver (in accordance with subsection 10.6) of the conditions set forth in subsection 4.3, the applicable Issuing Lender shall issue the requested Letter of Credit in accordance with such Issuing Lender's standard operating procedures. o NOTIFICATION TO REVOLVING LENDERS. Upon the issuance of or amendment to any Letter of Credit the applicable Issuing Lender shall promptly notify Administrative Agent of such issuance or amendment. The notice to Administrative Agent shall be accompanied by a copy of such Letter of Credit or amendment and in the event a Revolving Lender requests a copy of such issuance or amendment, such copies will be provided by Administrative Agent. Promptly after receipt of such notice (or, if the Person which is Administrative Agent is the Issuing Lender, together with such notice), Administrative Agent shall notify each Revolving Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C. o REPORTS TO REVOLVING LENDERS. In the event that the applicable Issuing Lender is other than the Person which is Administrative Agent, such Issuing Lender will send by facsimile transmission to Administrative Agent, promptly on the first Business Day of each month, the daily maximum amount available to be drawn for the Letters of Credit issued by it for the previous month. Administrative Agent shall deliver to each Revolving Lender, upon each Letter of Credit fee payment, a report setting forth for such period the daily maximum amount available to be drawn under the Letters of Credit issued by all Issuing Lenders during such period. o COLLATERALIZATION OF LETTERS OF CREDIT DUE TO CURRENCY FLUCTUATION. If on any Computation Date the Administrative Agent determines that the Letter of Credit Usage exceeds the amount permitted under subsection 3.1A(ii) by an amount greater than $50,000 because of a change in applicable rates of exchange between Dollars and any Permitted Currency, then Administrative Agent shall give notice to the Company that cash collateralization of the Letter of Credit Usage exceeding the amount permitted under subsection 3.1A(ii) is required and Company shall cash collateralize its outstanding Letters of Credit by depositing Dollars into the Collateral Account established 75 under the Security Agreement in an amount equal to the extent that the Letter of Credit Usage exceeds the amount permitted under subsection 3.1A(ii). o REVOLVING LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Revolving Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the applicable Issuing Lender a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Revolving Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. o LETTER OF CREDIT FEES. Company agrees to pay the following amounts with respect to Letters of Credit issued hereunder: o with respect to each Letter of Credit, (a) a fronting fee, payable directly to the applicable Issuing Lender for its own account, equal to the greater of (x) $500 and (y) 0.25% per annum of the Dollar Equivalent of the daily amount available to be drawn under such Letter of Credit and (b) a letter of credit fee, payable to Administrative Agent for the account of Revolving Lenders (based upon their respective Pro Rata Shares), equal to (x) the Applicable LIBO Rate Margin for Revolving Loans MULTIPLIED BY (y) the Dollar Equivalent of the daily maximum amount available from time to time to be drawn under such Letter of Credit, each such fronting fee or letter of credit fee to be payable in arrears on and to (but excluding) the last Business Day of each March, June, September and December of each year (or if such Letter of Credit expires or is terminated or cancelled, upon such date of expiration, termination or cancellation) and computed on the basis of a 360-day year for the actual number of days elapsed; and o with respect to the issuance, amendment or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clause (i) above), documentary and processing charges payable directly to the applicable Issuing Lender for its own account in accordance with such Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be. For purposes of calculating any fees payable under clause (i) of this subsection 3.2, (1) the Dollar Equivalent of the daily amount available to be drawn under any Letter of Credit shall be determined as of the close of business on any date of determination and (2) the Dollar Equivalent of any amount described in such clause which is denominated in a currency other than Dollars shall be determined by the applicable Exchange Rate for such currency as of the immediately preceding monthly anniversary of the date of issuance of such Letter of Credit. Promptly upon receipt by Administrative Agent of any amount described in clause (i)(b) of this subsection 3.2, Administrative Agent shall distribute to each Revolving Lender its Pro Rata Share of such amount. 76 o DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT. o RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the applicable Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in substantial accordance with the terms and conditions of such Letter of Credit. o REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In the event an Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, such Issuing Lender shall immediately notify Company and Administrative Agent, and Company shall reimburse such Issuing Lender on or before the Business Day immediately following the date on which such drawing is honored (the "Reimbursement Date") in an amount in Dollars (which amount, in the case of a drawing under a Letter of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) and in same day funds equal to the amount of such drawing; PROVIDED that, anything contained in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent and such Issuing Lender prior to 10:00 A.M. (New York City time) on the date such drawing is honored that Company intends to reimburse such Issuing Lender for the amount of such drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars (which amount, in the case of a drawing under a Letter of Credit which is denominated in a currency other than Dollars, shall be calculated by reference to the applicable Exchange Rate) equal to the amount of such drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.3B, Revolving Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse such Issuing Lender for the amount of such drawing; and PROVIDED FURTHER that if for any reason proceeds of Revolving Loans are not received by such Issuing Lender on the Reimbursement Date in an amount equal to the amount of such drawing, Company shall reimburse such Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Revolving Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have against any Revolving Lender resulting from the failure of such Lender to make such Revolving Loans under this subsection 3.3B. 77 o Payment by Revolving Lenders of Unreimbursed Amounts Paid Under Letters of Credit. o PAYMENT BY REVOLVING LENDERS. In the event that Company shall fail for any reason to reimburse any Issuing Lender as provided in subsection 3.3B in an amount (calculated, in the case of a drawing under a Letter of Credit denominated in a currency other than Dollars, by reference to the applicable Exchange Rate) equal to the amount of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall promptly notify each other Revolving Lender of the unreimbursed amount of such drawing and of such other Revolving Lender's respective participation therein based on such Revolving Lender's Pro Rata Share. Each Revolving Lender shall make available to such Issuing Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of such Issuing Lender specified in such notice, not later than 12:00 Noon (New York City time) on the first business day (under the laws of the jurisdiction in which such office of such Issuing Lender is located) after the date notified by such Issuing Lender. In the event that any Revolving Lender fails to make available to such Issuing Lender on such business day the amount of such Revolving Lender's participation in such Letter of Credit as provided in this subsection 3.3C, such Issuing Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the Federal Funds Effective Rate for three Business Days and thereafter at the Base Rate and such defaulting Revolving Lender shall not be entitled to receive its ratable share of amounts recovered pursuant to subsection 10.5 to the extent of such defaulted amount. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Revolving Lender to recover from any Issuing Lender any amounts made available by such Revolving Lender to such Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Lender in respect of which payment was made by such Revolving Lender constituted gross negligence or willful misconduct on the part of such Issuing Lender. o DISTRIBUTION TO REVOLVING LENDERS OF REIMBURSEMENTS RECEIVED FROM COMPANY. In the event any Issuing Lender shall have been reimbursed by other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Revolving Lender's Pro Rata Share of all payments subsequently received by such Issuing Lender from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. 78 o MAXIMUM LIABILITY OF REVOLVING LENDERS. Notwithstanding anything herein to the contrary, with respect to any drawing under any Letter of Credit which is paid by the applicable Issuing Lender, the aggregate amount that any Revolving Lender shall be required to fund, whether by means of a Revolving Loan pursuant to subsection 3.3B and/or by means of a participation pursuant to this subsection 3.3C, shall not exceed such Revolving Lender's Pro Rata Share of such drawing. o Interest on Amounts Paid Under Letters of Credit. o PAYMENT OF INTEREST BY COMPANY. Company agrees to pay to each Issuing Lender, with respect to drawings honored under any Letters of Credit issued by it, interest on the amount paid by such Issuing Lender in respect of each such drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date of such drawing to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, a rate which is 2.00% per annum plus the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. o DISTRIBUTION OF INTEREST PAYMENTS BY ISSUING LENDER. Promptly upon receipt by any Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing under a Letter of Credit issued by it, (a) such Issuing Lender shall distribute to each other Revolving Lender, out of the interest received by such Issuing Lender in respect of the period from the date of such drawing to but excluding the date on which such Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Revolving Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been honored under such Letter of Credit, and (b) in the event such Issuing Lender shall have been reimbursed by other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of such drawing, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such drawing such other Revolving Lender's Pro Rata Share of any interest received by such Issuing Lender in respect of that portion of such drawing so reimbursed by other Revolving 79 Lenders for the period from the date on which such Issuing Lender was so reimbursed by other Revolving Lenders to but excluding the date on which such portion of such drawing is reimbursed by Company. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. o OBLIGATIONS ABSOLUTE. The obligation of Company to reimburse each Issuing Lender for drawings made under the Letters of Credit issued by it and to repay any Revolving Loans made by Revolving Lenders pursuant to subsection 3.3B and the obligations of Revolving Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including any of the following circumstances: o any lack of validity or enforceability of any Letter of Credit; o the existence of any claim, set-off, defense or other right which Company or any Revolving Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); o any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; o payment by the applicable Issuing Lender under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; o any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; o any breach of this Agreement or any other Loan Document by any party thereto; o any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or o the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing; PROVIDED, in each case, that payment by the applicable Issuing Lender under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of such Issuing Lender under the circumstances in question (as determined by a final judgment of a court of competent jurisdiction). 80 o INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES. o INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless each Issuing Lender and each Revolving Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which such Issuing Lender or Revolving Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of such Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by such Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of such Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). o NATURE OF ISSUING LENDERS' DUTIES. As between Company and any Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, such Issuing Lender and the other Revolving Lenders shall not be responsible (absent a determination of a court of competent jurisdiction of gross negligence or willful misconduct by such Issuing Lender) for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of such Issuing Lender, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of such Issuing Lender's rights or powers hereunder. 81 In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability arising solely out of the gross negligence or willful misconduct of such Issuing Lender, as determined by a final judgment of a court of competent jurisdiction. o INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Issuing Lender or Revolving Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by any Issuing Lender or Revolving Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): o subjects such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of such Issuing Lender or Revolving Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered by any particular Issuing Lender; o imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement in respect of any Letters of Credit issued by any Issuing Lender or participations therein purchased by any Revolving Lender; or o imposes any other condition (other than with respect to a Tax matter) on or affecting such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; and the result of any of the foregoing is to increase the cost to such Issuing Lender or Revolving Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) with respect thereto (in any amount deemed by such Issuing Lender or Revolving Lender (in its sole discretion) to be material); then, in any case, Company shall promptly pay to such Issuing Lender or Revolving Lender on an after-tax basis, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Issuing Lender or Revolving Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Issuing Lender or Revolving Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Issuing Lender or Revolving Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 82 o CONDITIONS TO LOANS AND LETTERS OF CREDIT The obligations of Lenders to make Loans, the issuance of Letters of Credit and the effectiveness of the Restatement Date Agreements hereunder are subject to the satisfaction of the following conditions: o CONDITIONS TO INITIAL LOANS. The obligations of Lenders to make the initial Loans made on the Closing Date were, in addition to the conditions precedent specified in subsection 4.2, subject to prior or concurrent satisfaction of the following conditions: o LOAN PARTY DOCUMENTS. On or before the Closing Date, Company shall, and shall cause each other Loan Party to, deliver to Administrative Agent for Lenders (with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: o Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; o Copies of the Bylaws of such Person, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; o Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Loan Documents and the Related Agreements to which it is a party, and the consummation of the transactions contemplated by the foregoing, certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; o Signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party; o Executed originals of the Loan Documents, in each case to which such Person is a party; and o Such other documents as Administrative Agent may reasonably request in writing. 83 o SCIENTIFIC GAMES DOCUMENTS. On or before the Closing Date, Company shall, or shall cause Scientific Games and its Domestic Subsidiaries to, as the case may be, deliver to Administrative Agent for Lenders (with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following, each, unless otherwise noted, dated the Closing Date: o Certified copies of the Certificate or Articles of Incorporation of each of Scientific Games and its Domestic Subsidiaries, together with, where applicable, a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which Scientific Games or any of its Domestic Subsidiaries is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; o Copies of the Bylaws of each of Scientific Games and its Domestic Subsidiaries, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; o Resolutions of the Board of Directors of Scientific Games and its Domestic Subsidiaries approving and authorizing the execution, delivery and performance of the Loan Documents and the Related Agreements to which it is a party and the consummation of the transactions contemplated by the foregoing, each certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; o Signature and incumbency certificates of the officers of Scientific Games and its Subsidiaries executing the Loan Documents to which it is a party; o Originals of the Loan Documents, in each case executed by Scientific Games and each of its Domestic Subsidiaries that is a party thereto, as the case may be; and o Such other documents as Administrative Agent may reasonably request in writing; o NO MATERIAL ADVERSE CHANGE. Since October 31, 1999, Company and each of its Subsidiaries and, since December 31, 1999, Scientific Games and each of its Subsidiaries, shall have conducted its business in the ordinary course of business and consistent with past practice and there shall not have been any Material Adverse Effect. o SENIOR SUBORDINATED NOTES AND CONVERTIBLE PREFERRED STOCK; USE OF PROCEEDS. o SENIOR SUBORDINATED NOTES. On or before the Closing Date the Senior Subordinated Notes shall have been sold for gross proceeds of not less than 84 $150 million and the Senior Subordinated Note Indenture as amended by the First Supplemental Indenture dated as of September 6, 2000 (the "FIRST SUPPLEMENTAL") shall be in full force and effect and shall not have been amended, supplemented, waived or otherwise modified without the consent of Administrative Agent, and executed or conformed copies thereof (including all exhibits and schedules thereto) and any amendments thereto and all material documents executed in connection therewith shall have been delivered to Administrative Agent. o CONVERTIBLE PREFERRED STOCK. On or before the Closing Date, (1) Company shall have executed and delivered the Convertible Preferred Stock Purchase Agreement and such agreement shall be in full force and effect and shall not have been amended, supplemented, waived or otherwise modified without the consent of Administrative Agent, and executed or conformed copies thereof (including all exhibits and schedules thereto) and any amendment thereto and all documents executed in connection therewith shall have been delivered to Administrative Agent and (2) Company shall have received the net cash proceeds from the issuance of $110 million of Convertible Preferred Stock. o USE OF PROCEEDS. On or before the Closing Date, (1) Company shall have contributed the net cash proceeds from the Senior Subordinated Notes issuance to Acquisition Co., and Company and Acquisition Co. shall have applied such proceeds to the Acquisition Financing Requirements; (2) Company shall have applied the net cash proceeds from the Convertible Preferred Stock issuance to the Acquisition Financing Requirements; and (3) Company shall have applied approximately $3.9 million in cash on hand to the Acquisition Financing Requirements. o NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company, Acquisition Co. and Scientific Games shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements and the continued operation of the business conducted by Company and its Subsidiaries and Scientific Games and its Subsidiaries in substantially the same manner as conducted prior to the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods relating to competition or antitrust laws and regulations shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Merger, the related financings and the transactions contemplated by the Loan Documents and the Related Agreements. No action, request for stay, petition for review or rehearing, reconsideration, or 85 appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. o MERGER MATTERS. o MERGER AGREEMENT AND CERTAIN OTHER RELATED AGREEMENTS. Administrative Agent shall have received fully executed or conformed copies of the Merger Agreement and any documents executed in connection therewith, and the Merger Agreement shall be in full force and effect and no provision thereof shall have been amended, supplemented, waived or otherwise modified in any respect determined by Administrative Agent to be material (including, without limitation, any increase in the price to be paid for the Scientific Games Common Stock to an amount in excess of $26.00 per share), in each case without the consent of Administrative Agent; o MERGER CONDITIONS. All conditions to the Merger set forth in the Merger Agreement shall have been satisfied or the fulfillment of any such conditions shall have been waived with the consent of Administrative Agent and Requisite Lenders; o MERGER EFFECTIVE. The Merger shall have become effective in accordance with the terms of the Merger Agreement and the Delaware General Corporation Law; o MERGER DOCUMENTS. Administrative Agent shall have received satisfactory evidence of the filing of the documents with the Secretary of State of the State of Delaware effecting the Merger on the Merger Date; o AGGREGATE CASH CONSIDERATION. The aggregate cash consideration for the shares of Scientific Games Common Stock to be acquired in any manner whatsoever in connection with the Merger shall not exceed approximately $307.7 million in the aggregate; o TRANSACTION COSTS. Transaction Costs incurred as of the Closing Date shall not exceed $30.1 million and Administrative Agent shall have received evidence to its satisfaction to such effect; o USE OF PROCEEDS. Company shall have provided evidence satisfactory to Administrative Agent that the proceeds of the Senior Subordinated Notes, Convertible Preferred Stock and the Company's cash on hand described in subsection 4.1D have been irrevocably committed, prior to the application of the proceeds of the Term Loans and the Revolving Loans made on the Closing Date, to the payment of a portion of the Acquisition Financing Requirements; o MERGER OFFICER'S CERTIFICATE. Administrative Agent shall have received an Officer's Certificate of Company to the effect set forth in clauses (i)-(vii) above; 86 o OFFICER'S CERTIFICATES. Administrative Agent shall have received an Officer's Certificate from Company to the effect that the representations and warranties of each of Acquisition Co. and Scientific Games in the Merger Agreement are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date. Administrative Agent shall have received Officer's Certificates from Company to the effect that (a) the Merger Agreement is in full force and effect and no provision thereof has been amended, supplemented, waived or otherwise modified in any material respect without the consent of Administrative Agent and (b) each of the parties to the Merger Agreement has complied with all agreements, terms and conditions contained in the Merger Agreement and any agreements or documents referred to therein required to be performed or complied with by each of them on or before the Closing Date, except where such failure to comply or perform could not reasonably be expected to have a Material Adverse Effect, and none of such Persons is in default in their performance or compliance with any of the terms or provisions thereof, except where such default could not reasonably be expected to have a Material Adverse Effect; o EXISTING COMPANY INDEBTEDNESS; RELEASE OF LIENS. Contemporaneously with the application of the proceeds of the initial Loans to be made on the Closing Date: o Company shall have paid the Tender Premiums and shall have repaid in full the Existing Company Bank Debt, the Existing Company Senior Notes and the Existing Company Convertible Debt, and shall have terminated any commitments to lend or make other extensions of credit under the agreements relating to the Existing Company Bank Debt and no other Indebtedness of Company and its Subsidiaries shall remain outstanding other than the Indebtedness permitted under subsection 7.1; o Company shall have delivered to Administrative Agent all documents and instruments and taken all other actions, in each case necessary to release all Liens securing the Existing Company Bank Debt in connection therewith; o Company shall have made arrangements satisfactory to Administrative Agent with respect to the cancellation of any letters of credit outstanding under the agreements relating to the Existing Company Bank Debt or the issuance of Letters of Credit to support the obligations of Company and its Subsidiaries with respect thereto; o Administrative Agent shall have received an Officer's Certificate of Company stating that, after giving effect to the transactions described in this subsection 4.1F, there shall be no existing Indebtedness of Company or its Subsidiaries outstanding after consummation of the Closing Date transactions other than the Indebtedness permitted under subsection 7.1, such Indebtedness to be in form and substance satisfactory to Administrative Agent; 87 o EXISTING SCIENTIFIC GAMES INDEBTEDNESS. Contemporaneously with the application of the proceeds of the initial Loans to be made on the Closing Date: o Scientific Games and its Subsidiaries shall have repaid in full the Existing Scientific Games Bank Debt and shall have terminated any commitments to lend or make other extensions of credit thereunder; o Scientific Games shall have delivered to Administrative Agent all documents and instruments and taken all other actions, in each case necessary to release all Liens securing the Existing Scientific Games Bank Debt in connection therewith; and o Scientific Games shall have made arrangements satisfactory to Administrative Agent with respect to the cancellation of any letters of credit (other than the Existing Letters of Credit) outstanding under the agreements relating to the Existing Scientific Games Bank Debt or the issuance of Letters of Credit to support the obligations of Scientific Games and its Subsidiaries with respect thereto; and o EXISTING LETTERS OF CREDIT. Company shall have furnished to Administrative Agent copies of all Existing Letters of Credit and all amendments thereto. Company shall have (x) cash collateralized the Existing Letters of Credit on or before the Closing Date and (y) paid to the issuing lenders with respect to such Existing Letters of Credit all fees and other amounts owing with respect thereto through and including the Closing Date. o MORTGAGES; MORTGAGE POLICIES; ETC. Administrative Agent shall have received from Company and each applicable Subsidiary of Company: o MORTGAGES. Fully executed and notarized Mortgages and any assignments thereof in favor of Administrative Agent, on behalf of Lenders (each a "CLOSING DATE MORTGAGE" and, collectively, the "CLOSING DATE MORTGAGES"), in proper form for recording in all appropriate places in all applicable jurisdictions, encumbering each Real Property Asset listed in SCHEDULE 5.5 annexed hereto and identified as a Closing Date mortgaged property (each a "CLOSING DATE MORTGAGED PROPERTY" and, collectively, the "CLOSING DATE MORTGAGED PROPERTIES"); o MATTERS RELATING TO FLOOD HAZARD PROPERTIES. (a) Evidence, which may be in the form of a letter from an insurance broker or a municipal engineer, as to whether (1) any Closing Date Mortgaged Property is a Flood Hazard Property and (2) the community in which any such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if there are any such Flood Hazard Properties, such Person's written acknowledgement of receipt of written notification from Administrative Agent (1) as to the existence of each such Flood Hazard Property and (2) as to whether the 88 community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event any such Flood Hazard Property is located in a community that participates in the National Flood Insurance Program, evidence that Company or the applicable Subsidiary of Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System; o OPINIONS OF LOCAL COUNSEL. If reasonably required by Administrative Agent, an opinion of counsel (which counsel shall be reasonably satisfactory to Administrative Agent) in each state in which a Closing Date Mortgaged Property is located with respect to the enforceability of the form(s) of Closing Date Mortgages to be recorded in such state and such other matters as Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Administrative Agent; o LANDLORD CONSENTS AND ESTOPPELS; RECORDED LEASEHOLD Interests. In the case of each Closing Date Mortgaged Property consisting of a Leasehold Property, (a) a Landlord Consent and Estoppel with respect thereto and (b) evidence that such Leasehold Property is a Recorded Leasehold Interest; o TITLE INSURANCE. (a) ALTA mortgagee title insurance policies or unconditional commitments therefor (the "CLOSING DATE MORTGAGE POLICIES") issued by the Title Company with respect to the Closing Date Mortgaged Properties listed on SCHEDULE 5.5 annexed hereto, in amounts not less than the respective amounts designated therein with respect to any particular Closing Date Mortgaged Properties, insuring fee simple title to, or a valid leasehold interest in, each such Closing Date Mortgaged Property vested in such Loan Party and assuring Administrative Agent that the applicable Closing Date Mortgages create valid and enforceable First Priority mortgage Liens on the respective Closing Date Mortgaged Properties encumbered thereby (provided that Company may cause to be delivered to Administrative Agent on the Closing Date a Closing Date Mortgage Policy listing as an exception any of the items set forth on SCHEDULE 5.5 annexed hereto so long as such exception is removed by endorsement within 15 days of the Closing Date), which Closing Date Mortgage Policies (1) shall include an endorsement for mechanics' liens, for future advances under this Agreement and for any other matters reasonably requested by Administrative Agent and (2) shall provide for affirmative insurance and such reinsurance as Administrative Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Administrative Agent; and (b) evidence satisfactory to Administrative Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits required by the Title Company in connection with the issuance of the Closing Date Mortgage Policies and (ii) paid to the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Closing Date Mortgage Policies and all recording and stamp taxes (including mortgage recording and 89 intangible taxes) payable in connection with recording the Closing Date Mortgages in the appropriate real estate records; o SURVEYS. Unless otherwise approved by Administrative Agent for delivery pursuant to subsection 6.9D, ALTA surveys of each Closing Date Mortgaged Property satisfactory in form and substance to the Administrative Agent and the Title Company reasonably current and certified to Administrative Agent and Title Company by a licensed surveyor. Notwithstanding anything to the contrary herein, if Administrative Agent, in its sole discretion, determines not to record a Mortgage against one or more Mortgaged Properties on the Closing Date, because the survey for such Mortgaged Property has not been delivered to Administrative Agent, Company shall not be in default hereunder for failure to satisfy the requirements of this subsection with respect to such Mortgaged Property; PROVIDED, HOWEVER, that Company or the applicable Subsidiary Guarantor shall satisfy such requirements no later than forty-five (45) days after the Closing Date; o COPIES OF DOCUMENTS RELATING TO TITLE EXCEPTIONS. Copies of all recorded documents listed as exceptions to title or otherwise referred to in the Closing Date Mortgage Policies; and o ENVIRONMENTAL INDEMNITY. If requested by Administrative Agent, or if required by any Supplemental Collateral Agent, an environmental indemnity agreement, reasonably satisfactory in form and substance to Administrative Agent and its counsel, to such Supplemental Collateral Agent and its counsel and to Company and its counsel, with respect to the indemnification of Agents and Lenders for any liabilities that may be imposed on or incurred by any of them as a result of any Hazardous Materials Activity. o SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. To the extent not otherwise satisfied pursuant to subsection 4.1G, Administrative Agent shall have received evidence satisfactory to it that Company and Subsidiary Guarantors shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii) and (iv) below) that may be necessary or, in the reasonable opinion of Administrative Agent, desirable in order to create in favor of Administrative Agent, a valid and (upon such filing and recording) perfected First Priority security interest in the entire personal and mixed property Collateral (including Collateral property fixtures). Such actions shall include the following: o SCHEDULES TO COLLATERAL DOCUMENTS. Delivery to Administrative Agent of accurate and complete schedules to all of the applicable Collateral Documents; 90 o STOCK CERTIFICATES AND INSTRUMENTS. Delivery to Administrative Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise satisfactory in form and substance to Administrative Agent) representing all capital stock pledged pursuant to the Security Agreement executed by Company and the Subsidiary Guarantors and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner satisfactory to Administrative Agent) evidencing any Collateral; o LIEN SEARCHES AND UCC TERMINATION STATEMENTS. Delivery to Administrative Agent of (a) the results of a recent search, by a Person satisfactory to Administrative Agent, of all effective UCC financing statements and fixture filings which may have been made with respect to any personal or mixed property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement); o UCC FINANCING STATEMENTS AND FIXTURE FILINGS. Delivery to Administrative Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by each applicable Loan Party with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the reasonable opinion of Administrative Agent, desirable to perfect the security interests created in such Collateral pursuant to the Collateral Documents; o PTO COVER SHEETS, ETC. Delivery to Administrative Agent of all cover sheets or other documents or instruments required to be filed with the PTO in order to create or perfect Liens in respect of any IP Collateral; and o OPINIONS OF LOCAL COUNSEL. To the extent reasonably required by Administrative Agent, delivery to Administrative Agent of an opinion of counsel (which counsel shall be reasonably satisfactory to Administrative Agent) under the laws of each jurisdiction in which any Loan Party or any personal or mixed property Collateral is located with respect to the creation and perfection of the security interests in favor of Administrative Agent, for the benefit of Lenders, in such Collateral and such other matters governed by the laws of such jurisdiction regarding such security interests as Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Administrative Agent. o ENVIRONMENTAL REPORTS. Administrative Agent shall have received all reports in possession or control of Company and related letters from the respective authors of such reports authorizing Lenders to rely on such to the same extent 91 as though they were addressed to Lenders and other information in possession or control of Company, in form, scope and substance satisfactory to Administrative Agent, regarding environmental matters relating to Company, its Subsidiaries, Scientific Games and its Subsidiaries and the Facilities, which reports shall include a Phase I environmental site assessment of the Facility owned by Scientific Games, Inc. and located in Alpharetta, Georgia, and updates of the existing Phase I environmental site assessments of the Facilities owned by Autotote Enterprises, Inc. and located in New Haven, Connecticut and in Windsor Locks, Connecticut, and, as to the Facility located in New Haven, Connecticut, an estimate of the reasonable cost of investigating and remediating any Hazardous Materials Activity thereon (to the extent any such reliance letter, Phase I, update or estimate has not been received by Administrative Agent on the Closing Date, Company shall provide oral reports of the environmental consultants' findings and conclusions as work on such reports proceeds, and Company shall deliver to Administrative Agent no later than 30 days after the Closing Date such completed reliance letter, Phase I, updates and estimate) (collectively, the "PHASE I AND II REPORTS"). Such Phase I environmental site assessments and updates shall conform to the ASTM Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, E 1527. o FINANCIAL STATEMENTS; PRO FORMA BALANCE SHEET. Lenders shall have received (i) audited financial statements of Company and its Subsidiaries for the Fiscal Years ended October 31, 1999, 1998 and 1997, and of Scientific Games and its Subsidiaries for the Fiscal Years ended December 31, 1999, 1998 and 1997, consisting of balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Years, (ii) unaudited financial statements of Company and its Subsidiaries, for the Fiscal Quarters ended January 31, 2000 and April 30, 2000, and unaudited financial statements of Scientific Games and its Subsidiaries as of March 31, 2000 and June 30, 2000, consisting of a balance sheet and the related consolidated statements of income and cash flows for the three- and six-month periods ending on such dates, all in reasonable detail and certified by the chief financial officer of Company and Scientific Games, as the case may be, that they fairly present the financial condition of Company and its Subsidiaries and Scientific Games and its Subsidiaries, respectively, as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes from audit and normal year-end adjustments, (iii) unaudited pro forma consolidated balance sheets of Company and its Subsidiaries and of Scientific Games and its Subsidiaries as at July 31, 2000, prepared in accordance with GAAP and reflecting the estimated effects of the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, which pro forma financial statements shall be in form and substance satisfactory to Agents and Lenders, and (iv) projected financial statements (including balance sheets and related statements of operations and cash flows) of Company and its Subsidiaries through and including the last day of Company's Fiscal Year 92 ended on or about December 31, 2008, which projected financial statements shall be in form and substance satisfactory to Agents and Lenders (the "FINANCIAL PLAN"). o SOLVENCY ASSURANCES. On the Closing Date, Administrative Agent and Lenders shall have received a Financial Condition Certificate from the chief financial officer of Company, with appropriate attachments, in each case demonstrating that, after giving effect to the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements, Company and its Subsidiaries will be Solvent. o EVIDENCE OF INSURANCE. Administrative Agent shall have received a certificate from Company's insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4 is in full force and effect and that Administrative Agent on behalf of Lenders has been named as additional insured and/or loss payee thereunder to the extent required under subsection 6.4. o OPINIONS OF COUNSEL TO LOAN PARTIES; RELIANCE LETTERS. Lenders and their respective counsel shall have received originally executed copies of one or more favorable written opinions of Kramer Levin Naftalis & Frankel LLP, counsel for Company, dated as of the Closing Date, together with opinions from each of Martin E. Schloss, Esq., General Counsel of Company, C. Gray Bethea, Esq., General Counsel of Scientific Games, Smith, Gambrell & Russell, LLP, special Georgia counsel for Company, Sills, Cummis, Radin, Tischman, Epstein & Gross P.A., special New Jersey counsel for Company, Tobin, Carberry, O'Malley, Riley & Selinger, P.C., special Connecticut counsel for Company, and Schreck Morris, special Nevada counsel for Company, and substantially in the form of EXHIBIT VII-A, EXHIBIT VII-B, EXHIBIT VII-C, EXHIBIT VII-D, EXHIBIT VII-E, EXHIBIT VII-F and EXHIBIT VII-G, as the case may be, annexed hereto and as to such other matters as Administrative Agent acting on behalf of Lenders may reasonably request. Administrative Agent and its counsel shall have received copies of each of the opinions of counsel delivered to the parties under the Related Agreements on or prior to the Closing Date, together with a letter from each such counsel authorizing Lenders to rely upon such opinion to the same extent as though it were addressed to Lenders. o OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Administrative Agent, dated as of the Closing Date, substantially in the form of EXHIBIT VIII annexed hereto and as to such other matters as Administrative Agent acting on behalf of Lenders may reasonably request. o FEES. Company shall have paid to Arranger, Agents and Lenders the fees payable on the Closing Date. 93 o REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Administrative Agent an Officer's Certificate, in form and substance satisfactory to Administrative Agent, to the effect that the representations and warranties in Section 5 and in the other Loan Documents are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company and the other Loan Parties have performed in all material respects all agreements and satisfied all conditions which this Agreement and the other Loan Documents provide shall be performed or satisfied by them on or before the Closing Date except as otherwise disclosed to Lenders and agreed to in writing by Administrative Agent and Requisite Lenders. o ADDITIONAL INFORMATION. There shall have been no information relating to conditions or events not previously disclosed to Administrative Agent or any Lender or relating to new information or additional developments concerning conditions of events previously disclosed to Administrative Agent or any Lender which may have a Material Adverse Effect on the business, operations, properties, assets, liabilities, condition (financial or otherwise) or prospects of Company, Scientific Games and their respective Subsidiaries. The results of Administrative Agent's legal, tax, regulatory and environmental investigations with respect to Scientific Games and its Subsidiaries, the Merger, the related financings and the other transactions contemplated by the Loan Documents and the Related Agreements shall be reasonably satisfactory in all material respects to Administrative Agent. o COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Administrative Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Administrative Agent and such counsel, and Administrative Agent and such counsel shall have received all such counterpart originals or certified copies of such documents as Administrative Agent may reasonably request in writing. Each Lender hereby agrees that by its execution and delivery of its signature page hereto and by the funding of its Loans to be made on the Closing Date, such Lender approves of and consents to each of the matters set forth in this subsection 4.1 which must be approved by, or satisfactory to, Requisite Lenders; PROVIDED that, in the case of any agreement or document which must be approved by, or which must be satisfactory to, Requisite Lenders, a copy of such agreement or document shall have been delivered to such Lender on or prior to the Closing Date by Administrative Agent. 94 o CONDITIONS TO ALL LOANS. The obligations of Lenders to make Loans on each Funding Date are subject to the following further conditions precedent: o Administrative Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by an Authorized Representative. o As of that Funding Date: o The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; o No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; o Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before that Funding Date; o No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Loans to be made by it on that Funding Date; o The making of the Loans requested on such Funding Date shall not violate any law including Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; and o There shall not be pending or, to the knowledge of Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing pursuant to subsection 5.6 or 6.1(ix) prior to the making of the last preceding Loans (or, in the case of the initial Loans, prior to the execution of this Agreement), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the opinion of Administrative Agent or of Requisite Lenders, would be expected to have a Material Adverse Effect; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or 95 otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of the Loans hereunder. o CONDITIONS TO LETTERS OF CREDIT. The issuance of any Letter of Credit hereunder (whether or not the applicable Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: o On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Loans shall have been made. o On or before the date of issuance of such Letter of Credit, Administrative Agent and Issuing Lender shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Request for Issuance of Letter of Credit, in each case signed by an Authorized Representative, together with all other information specified in subsection 3.1B(i) and such other documents or information as the applicable Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. o On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.2B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date. o RESTATEMENT EFFECTIVE DATE CONDITIONS. The effectiveness of the Restatement Date Agreements is, in addition to the conditions precedent specified in subsection 4.1, subject to satisfaction of the following conditions precedent: o LOAN PARTY DOCUMENTS. On or before the Restatement Effective Date, Company shall, and shall cause each other Loan Party to, deliver to Administrative Agent for Lenders (with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to Company or such other Loan Party, as the case may be, each, unless otherwise noted, dated the Restatement Effective Date: o Signature and incumbency certificates of the officers of such Person executing the Restatement Date Agreements to which it is a party; o Executed originals of the Restatement Date Agreements, in each case to which such Person is a party; and o Such other documents as Administrative Agent may reasonably request in writing. 96 o RESTATEMENT EFFECTIVE DATE OPINIONS OF COUNSEL TO LOAN Parties. Lenders and their respective counsel shall have received originally executed copies of one or more favorable written opinions of (i) Kramer Levin Naftalis & Frankel LLP, counsel for Company, and (ii) Martin E. Schloss, Esq., General Counsel of Company, each dated as of the Restatement Effective Date, and substantially in the form of Exhibit XVII and Exhibit XVIII, respectively, annexed hereto and as to such other matters as Administrative Agent acting on behalf of Lenders may reasonably request. o RESTATEMENT EFFECTIVE DATE OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Administrative Agent, dated as of the Restatement Effective Date, substantially in the form of Exhibit XIX annexed hereto and as to such other matters as Administrative Agent acting on behalf of Lenders may reasonably request. o REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Administrative Agent an Officer's Certificate, in form and substance satisfactory to Administrative Agent, to the effect that the representations and warranties in Section 5 and in the other Loan Documents are true, correct and complete in all material respects on and as of the Restatement Effective Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company and the other Loan Parties have performed in all material respects all agreements and satisfied all conditions which this Agreement and the other Loan Documents provide shall be performed or satisfied by them on or before the Restatement Effective Date except as otherwise disclosed to Lenders and agreed to in writing by Administrative Agent and Requisite Lenders. Each Lender hereby agrees that by its execution and delivery of its signature page hereto and by the funding of its Loans to be made on the Restatement Effective Date, such Lender approves of and consents to each of the matters set forth in this subsection 4.4 which must be approved by, or satisfactory to, Requisite Lenders; PROVIDED that, in the case of any agreement or document which must be approved by, or which must be satisfactory to, Requisite Lenders, a copy of such agreement or document shall have been delivered to such Lender on or prior to the Restatement Effective Date by Administrative Agent. o COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders and the Agents to enter into this Agreement and to make the Loans, to induce Issuing Lenders to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender and the Agents, except to the extent that such statements specifically relate to an earlier date (in which case such representations and warranties shall have been true, correct and complete in all material respects as of such earlier date) are true complete and correct in all material respects, on 97 the date of this Agreement, (to the extent required by subsection 4.2B(i)) on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements are true, correct and complete: o ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND SUBSIDIARIES. o Organization and Powers. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization as specified in SCHEDULE 5.1 annexed hereto. Each Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents to which it is a party and to carry out the transactions contemplated thereby. o Qualification and Good Standing. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions, individually or in the aggregate for all such jurisdictions, where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect. o Conduct of Business. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.13. o Subsidiaries. All of the Subsidiaries of Company, including any Inactive Subsidiaries, are identified in SCHEDULE 5.1 annexed hereto, as said SCHEDULE 5.1 may be supplemented from time to time pursuant to the provisions of subsection 6.1(xvi). The capital stock of each of the Subsidiaries of Company identified in said SCHEDULE 5.1 is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock (other than the Scientific Games Common Stock) constitutes Margin Stock. Each of the Subsidiaries of Company identified in said SCHEDULE 5.1 is a corporation, limited liability company or other entity duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation or organization set forth therein, has all requisite corporation or limited liability company, as the case may be, power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporation or limited liability company, as the case may be, power and authority, individually or in the aggregate, has not had and will not have a Material Adverse Effect. Said SCHEDULE 5.1 correctly sets forth the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein. 98 o AUTHORIZATION OF BORROWING, ETC. o Authorization of Borrowing. The execution, delivery and performance of the Loan Documents and the consummation of the transactions consummated thereby have been duly authorized by all necessary actions on the part of each Loan Party that is a party thereto. o No Conflict. The execution, delivery and performance by Loan Parties of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents and the Related Agreements do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or the Articles of Incorporation or Bylaws of Company or any of Company's Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of Company's Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, except for such breaches, conflicts and defaults which could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of Company's Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of or consent of any Person under any Contractual Obligation of Company or any of Company's Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders or which the failure to obtain could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. o Governmental Consents. The execution, delivery and performance by Loan Parties of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body, except for filings required in connection with the perfection of security interests granted pursuant to the Loan Documents, and such other registrations, consents, approvals, notices or other actions which have been or will be made, obtained, given or taken on or before the Closing Date or which the failure to obtain or take could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. o Binding Obligation. Each of the Loan Documents has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, 99 insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. o Valid Issuance of Equity Securities. The capital stock of Acquisition Co. to be sold on or before the Closing Date, when issued and delivered, will be duly and validly issued, fully paid and nonassessable. No stockholder of Acquisition Co. has or will have any preemptive rights to subscribe for any additional equity Securities of Acquisition Co. The issuance and sale of such common equity Securities of Acquisition Co., upon such issuance and sale, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. o Senior Subordinated Notes. Company has the corporate power and authority to issue the Senior Subordinated Notes. The Senior Subordinated Notes are the legally valid and binding obligations of Company, enforceable against Company in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Senior Subordinated Notes are enforceable against the holders thereof in accordance with their terms and the Loans, Letters of Credit and all other monetary Obligations hereunder are within the definitions of "Senior Indebtedness" and "Designated Senior Indebtedness" included in such provisions. The issuance and sale by Company of Senior Subordinated Notes were either (a) registered or qualified under applicable federal and state securities laws or (b) are exempt therefrom. o Valid Issuance of Convertible Preferred Stock. The Convertible Preferred Stock, when issued and delivered, will be duly and validly issued, fully paid and nonassessable. The Convertible Preferred Stock is either (a) registered or qualified under applicable federal and state securities law or (b) is exempt therefrom. o FINANCIAL CONDITION. Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheets of Company and its Subsidiaries as at October 31, 1999, 1998 and 1997 and the audited consolidated balance sheets of Scientific Games and its Subsidiaries as at December 31, 1999, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows of Company, Scientific Games and their respective Subsidiaries for the Fiscal Years then ended and (ii) the unaudited consolidated balance sheet of Company and its Subsidiaries for the Fiscal Quarters ending on or about January 31, 2000 and April 30, 2000 and of Scientific Games and its Subsidiaries as of March 31, 2000 and June 30, 2000, and the related unaudited consolidated statements of income and cash flows of Company, Scientific Games and their respective Subsidiaries for the three months and six months then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial condition (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments. Company does not (and will not following the funding of the initial Loans) have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not required to be reflected in the foregoing financial statements or the notes 100 thereto and which in any such case is material in relation to the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries, taken as a whole. o NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS. Since October 31, 1999, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, and neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted under subsection 7.5. o TITLE TO PROPERTIES; LIENS; REAL PROPERTY. o Title to Properties; Liens. Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. With respect to those Liens set forth on SCHEDULE 5.5 annexed hereto, the debts secured thereby have been paid in full and are no longer outstanding. o Real Property. As of the Closing Date, SCHEDULE 5.5 annexed hereto contains a true, accurate and complete list of (i) all real property owned by Company or any Subsidiary and (ii) all material leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Property Asset of any Loan Party, regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or successor in interest) under such lease, sublease or assignment. Except as specified in SCHEDULE 5.5 annexed hereto, each agreement listed in clause (ii) of the immediately preceding sentence is in full force and effect and Company and each Loan Party do not have knowledge of any default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each applicable Loan Party, enforceable against such Loan Party in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles. o LITIGATION; ADVERSE FACTS. Except as set forth in SCHEDULE 5.6 annexed hereto, there are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or 101 instrumentality, domestic or foreign (including any Environmental Claims) that are pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect or could reasonably be expected to prevent or unduly delay the Merger. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. o PAYMENT OF TAXES. Except to the extent permitted by subsection 6.3, all tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all material taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable other than those being contested in good faith. Company knows of no proposed tax assessment against Company or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect and which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; PROVIDED that such reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. o PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS. o Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. o Neither Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. o GOVERNMENTAL REGULATION. Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 102 o SECURITIES ACTIVITIES. o Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. o Not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) that are subject to the restrictions on Liens or dispositions contained in subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock. o EMPLOYEE BENEFIT PLANS. o Company and each of its Subsidiaries are in material compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Company Employee Benefit Plan, and have performed all their obligations under each Company Employee Benefit Plan, except where a failure to comply or perform could not reasonably be expected to have a Material Adverse Effect. Each Company Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified. o No ERISA Event has occurred or is reasonably expected to occur that could reasonably be expected to have a Material Adverse Effect. o Except to the extent required under Section 4980B of the Internal Revenue Code or other applicable law or individual contract, no Company Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employee of Company, any of its Subsidiaries or any of their respective ERISA Affiliates. o As of the most recent valuation date for any Pension Plan, and excluding for purposes of such computation all Pension Plans with respect to which assets exceed benefit liabilities (as defined in Section 4001(a)(16) of ERISA), the sum of: o the unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) individually or in the aggregate for all Company Pension Plans; and o the liability that Company or its Subsidiaries could reasonably be expected to incur as the result of such unfunded benefit liabilities, individually or in the aggregate, for all Pension Plans other than Company Pension Plans (assuming amortization of such unfunded benefit liabilities over ten years); does not exceed $5 million. 103 o As of the most recent valuation date for which an actuarial report has been received and based on information available pursuant to Section 4221(e) of ERISA, the sum of: o the potential liability of Company and its Subsidiaries for a complete withdrawal from all Multiemployer Plans (within the meaning of Section 4203 of ERISA) to which Company or any of its Subsidiaries contribute; and o the liability that Company or its Subsidiaries could be reasonably be expected to incur as a result of the complete withdrawal from all Multiemployer Plans to which neither Company nor any of its Subsidiaries contribute, after considering the financial condition of all of the ERISA Affiliates most closely related to the contributing employer(s); does not exceed $5 million. o CERTAIN FEES. Other than as disclosed in the Merger Agreement, no broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. o ENVIRONMENTAL PROTECTION. Except as set forth in SCHEDULE 5.13 annexed hereto: o To the knowledge of the Company and its Subsidiaries, neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree or settlement agreement with any Person relating to (a) any Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity, except where such an order, consent, decree or settlement agreement, individually or in the aggregate, would not be reasonably expected to have a Material Adverse Effect; o Neither Company nor any of its Subsidiaries has received any letter or request for information under Section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. ss. 9604) or any comparable state law, except where such a letter or request, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; o To the knowledge of the Company and its Subsidiaries, there are and have been no conditions, occurrences, or Hazardous Materials Activities which could reasonably be expected to form the basis of an Environmental Claim against Company or any of its Subsidiaries, except where such a condition, 104 occurrence or Hazardous Materials Activity, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; o Neither Company nor any of its Subsidiaries nor, to Company's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Company's or any of its Subsidiaries' operations involves the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent, except where such treatment or generation, transportation, storage or disposal, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect; and o To the knowledge of the Company and its Subsidiaries, compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws will not, individually or in the aggregate, give rise to a Material Adverse Effect. To the knowledge of the Company and its Subsidiaries, notwithstanding anything in this subsection 5.13 to the contrary, no event or condition has occurred or is occurring with respect to Company or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity, including any matter disclosed on SCHEDULE 5.13 annexed hereto, which individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect. o EMPLOYEE MATTERS. There is no strike or work stoppage in existence or, to the best knowledge of the Company, threatened involving Company or any of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. o SOLVENCY. Each Loan Party is and, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent. o MATTERS RELATING TO COLLATERAL. o Creation, Perfection and Priority of Liens. Subject to the filing of UCC financing statements and the taking of possession by the Administrative Agent of all stock certificates and instruments, if any, constituting Collateral, the execution and delivery of the Collateral Documents by Loan Parties, together with actions taken pursuant to subsections 4.1G, 4.1H, 6.8 and 6.9 are effective, or in the case of subsections 6.8 and 6.9, will be effective at the time of the acquisition of such Subsidiaries, to create in favor of Administrative Agent for the benefit of Lenders, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on all of the Collateral. 105 o Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Administrative Agent pursuant to any of the Collateral Documents or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.16A and except as may be required, in connection with the disposition of any Pledged Collateral (as defined in the Security Agreement), by laws generally affecting the offering and sale of securities. o Absence of Third-Party Filings. Except such as may have been filed (x) in favor of Administrative Agent, (y) with respect to Permitted Encumbrances, and (z) as to which executed UCC termination statements have been delivered to the Administrative Agent for filing (i) no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the IP Collateral is on file in the PTO. o Margin Regulations. The pledge of the Pledged Collateral (as defined in the Security Agreement) pursuant to the Collateral Documents does not violate Regulation U or X of the Board of Governors of the Federal Reserve System. o Information Regarding Collateral. All written information supplied to Agents by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. o RELATED AGREEMENTS. o Delivery of Related Agreements. Company has delivered to Lenders complete and correct copies of each Related Agreement and of all exhibits and schedules thereto. o Warranties. Subject to the qualifications set forth therein, each of the representations and warranties given by Company, Acquisition Co. and Scientific Games in the Merger Agreement is true and correct in all material respects as of the Closing Date (or as of any earlier date to which such representation and warranty specifically relates). o Survival. Notwithstanding anything in the Merger Agreement to the contrary, the representations and warranties of Company set forth in subsection 5.17B shall, solely for purposes of this Agreement, survive the Closing Date for the benefit of Lenders. 106 o DISCLOSURE. No representation or warranty of any Loan Party contained in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by, or pursuant to, this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. o CERTAIN JURISDICTIONS. Company and its Subsidiaries do not have any assets located in any of (i) Trinidad and Tobago, St. Maarten, Barbados, Bermuda, Jamaica, Guyana, Dutch West Indies, St. Kitts West, Aruba or Virgin Islands and (ii) Panama and Mexico, except, in respect of each such jurisdiction, assets of Company and its Subsidiaries located in such jurisdiction with an aggregate market value of not more than (i) $10,000 and (ii) $350,000, respectively. o COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. o FINANCIAL STATEMENTS AND OTHER REPORTS. Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Agents and Lenders: o MONTHLY FINANCIALS: as soon as available and in any event within 30 days after the end of each calendar month (or, in the case of the calendar month of October, 2000, the last calendar month of each Fiscal Quarter and the last calendar month of each Fiscal Year, as soon as available and in any event within 45 days after the end of such calendar month) the consolidated and consolidating balance sheets of Company and its Subsidiaries as at the end of such calendar month and the related consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for such calendar month, all in reasonable detail and certified by the chief financial 107 officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; o QUARTERLY FINANCIALS: as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters, (a) the consolidated and consolidating balance sheets of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding dates and periods of the previous Fiscal Year and the corresponding figures from the Financial Plan or Revised Financial Plan, as the case may be, for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; PROVIDED that with respect to the Fiscal Quarters ending September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001, Company shall not be required to set forth in comparative form the corresponding figures for the corresponding dates and periods of the previous Fiscal Year; PROVIDED FURTHER that, with respect to the Fiscal Quarters ending September 30, 2000, December 31, 2000 and March 31, 2001, Company shall not be required to deliver the consolidated and consolidating balance sheets of Company and its Subsidiaries and the related consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter; PROVIDED STILL FURTHER, that is hereby acknowledged and agreed that any such financial statements delivered hereunder for any period that ends prior to the Closing Date or includes the Closing Date shall be prepared on a Pro Forma Basis as if the Merger had been consummated on the first day of the Fiscal Quarter ending on September 30, 2000 and the Merger was a Permitted Acquisition of Company and its Subsidiaries and (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter (it being understood and agreed that the "Management Discussion and Analysis" contained in the Company's quarterly report on Form 10-Q filed with the Securities and Exchange Commission for such period shall be deemed to comply with the foregoing requirement); o YEAR-END FINANCIALS: as soon as available and in any event within 90 days after the end of each Fiscal Year, (a) the consolidated and consolidating 108 balance sheets of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated and consolidating statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures as of the end of and for the previous Fiscal Year and the corresponding figures from the Revised Financial Plan or Financial Plan, as the case may be, for the Fiscal Year covered by such financial statements, all in reasonable detail and certified by the chief financial officer, chief accounting officer or controller of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated; PROVIDED that, with respect to the Fiscal Year ending December 31, 2000, Company shall not be required to set forth in comparative form the corresponding figures as of the end of and for the previous Fiscal Year, (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Year (it being understood and agreed that the "Management Discussion and Analysis" contained in the Company's annual report on Form 10-K or such similar report filed with the Securities and Exchange Commission shall be deemed to comply with the foregoing requirement), and (c) in the case of such consolidated financial statements, a report thereon of KPMG Peat Marwick or other independent certified public accountants of recognized national standing selected by Company and reasonably satisfactory to Administrative Agent, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; o OFFICER'S AND COMPLIANCE CERTIFICATES: together with each delivery of financial statements pursuant to subdivisions (ii) and (iii) above, (a) an Officer's Certificate (provided that such Officer's Certificate shall be executed on behalf of Company by its president or one of its vice-presidents and by its chief financial officer (or if there is no chief financial officer its chief accounting officer) or its treasurer) of Company stating that the signers have reviewed the terms of this Agreement and the other Loan Documents and have made, or caused to be made under their supervision, a review in reasonable detail of the material transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or 109 event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto and (b) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 7, in each case to the extent compliance with such restrictions is required to be tested at the end of the applicable accounting period; o RECONCILIATION STATEMENTS: if, as a result of the Company's adoption of any change in accounting principles, from those used in the preparation of the audited financial statements referred to in subsection 5.3, the consolidated financial statements of Company and its Subsidiaries delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this subsection 6.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles been made, then (a) together with the first delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, consolidated financial statements of Company and its Subsidiaries for (x) the current Fiscal Year to the effective date of such change and (y) the full Fiscal Year immediately preceding the Fiscal Year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, a written statement of the chief accounting officer or chief financial officer of Company setting forth the differences (including without limitation any differences that would affect any calculations relating to the financial covenants set forth in subsection 7.6) which would have resulted if such financial statements had been prepared without giving effect to such change; o ACCOUNTANTS' CERTIFICATION: together with each delivery of consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of Section 7 as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; PROVIDED that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (iv) above is not correct or that the matters set forth in the Compliance Certificates delivered 110 therewith pursuant to clause (c) of subdivision (iv) above for the applicable Fiscal Year are not stated in accordance with the terms of this Agreement; o ACCOUNTANTS' REPORTS: promptly upon receipt thereof (unless restricted by applicable professional standards), copies of all "Management Letters" submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including any comment letter submitted by such accountants to management in connection with their annual audit; o SEC FILINGS AND PRESS RELEASES: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (b) all regular and periodic financial reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission and (c) all press releases made by Company or any of its Subsidiaries to the public concerning material developments in the business of Company or any of its Subsidiaries; o EVENTS OF DEFAULT, ETC.: promptly upon any officer of Company obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) whether or not Company is required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officer's Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; o LITIGATION OR OTHER PROCEEDINGS: (a) promptly upon any officer of Company obtaining knowledge of (X) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any 111 of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case set forth in clause (x) or (y): o if adversely determined, could reasonably be expected to have a Material Adverse Effect; or o seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their respective counsel to evaluate such matters; and (b) within twenty days after the end of each Fiscal Quarter, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, Company or any of its Subsidiaries equal to or greater than $500,000, and promptly after request by Administrative Agent such other information as may be reasonably requested by Administrative Agent to enable Administrative Agent and its respective counsel to evaluate any of such Proceedings; o ERISA EVENTS: reasonably promptly upon Company becoming aware of the occurrence of or forthcoming occurrence of any ERISA Event, which would reasonably be expected to result in a liability to the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $500,000, a written notice specifying the nature thereof, what action Company, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; o ERISA NOTICES: with reasonable promptness, copies of (a) all notices received by Company, any of its Subsidiaries or (if obtained by Company) any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (b) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; o FINANCIAL PLANS: as soon as practicable and in any event no later than fifteen (15) days subsequent to the beginning of the Fiscal Year ending on or about December 31, 2001 and each subsequent Fiscal Year, a revised consolidated and consolidating plan and financial forecast for such Fiscal Year and the next four succeeding Fiscal Years (the "REVISED FINANCIAL PLAN" for such Fiscal Years, it being acknowledged and agreed that each succeeding Revised Financial Plan shall replace the immediately preceding Financial Plan or Revised Financial Plan, as the case may be (other than with respect to any representations, warranties, certifications or other statements previously made as of the date thereof with respect to such preceding Financial Plan or Revised Financial Plan, as the case may be)), including (a) a forecast consolidated and consolidating balance sheet and forecast consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for each 112 such Fiscal Year and an explanation of the assumptions on which such forecasts are based, (b) forecast consolidated and consolidating balance sheet and forecast consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for each quarter of the first such Fiscal Year, together with PRO FORMA financial covenant calculations for such Fiscal Year determined in a manner consistent with financial covenant calculations shown in a Compliance Certificate and (c) such other information and projections as Administrative Agent or any Lender may reasonably request in writing; o INSURANCE: as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and content satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the immediately succeeding Fiscal Year; o BOARD OF DIRECTORS: with reasonable promptness, written notice of any change in the Board of Directors of Company; o NEW SUBSIDIARIES: promptly upon any Person becoming a Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in SCHEDULE 5.1 annexed hereto with respect to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement SCHEDULE 5.1 annexed hereto for all purposes of this Agreement); o UCC SEARCH REPORT: As promptly as practicable after the date of delivery to Administrative Agent of any UCC financing statement executed by any Loan Party pursuant to subsection 4.1H, 4.2F or 6.8A, copies of completed UCC searches evidencing the proper filing, recording and indexing of all such UCC financing statements and listing all other effective financing statements that name such Loan Party as debtor, together with copies of all such other financing statements not previously delivered to Administrative Agent by or on behalf of Company or such Loan Party; o MARGIN DETERMINATION CERTIFICATE: together with each delivery of financial statements pursuant to subdivisions (ii) and (iii) above, a Margin Determination Certificate demonstrating in reasonable detail the calculation of the Consolidated Leverage Ratio for the four consecutive Fiscal Quarters ending on the last day of the accounting period covered by such financial statements; and o OTHER INFORMATION: with reasonable promptness, such other information and data with respect to Company or any of its Subsidiaries as from time to time 113 may be reasonably requested in writing by Administrative Agent or any Lender. o LEGAL EXISTENCE, ETC. Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its legal existence and all rights and franchises material to its business; PROVIDED, HOWEVER, that neither Company nor any of its Subsidiaries shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Company, such Subsidiary or Lenders. o PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION. o Company will, and will cause each of its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a material Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; PROVIDED that no such charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (1) such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor and (2) in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim. o Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). o MAINTENANCE OF PROPERTIES; INSURANCE; APPLICATION OF NET INSURANCE/CONDEMNATION PROCEEDS. o Maintenance of Properties. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including all Intellectual Property) and from time to time will make or cause to be made all repairs, renewals and replacements thereof which the Company deems appropriate. o Insurance. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, 114 properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (i) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (ii) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Administrative Agent in its commercially reasonable judgment. Each such policy of insurance shall (a) name Administrative Agent for the benefit of Lenders as an additional insured thereunder as its interests may appear and (b) in the case of each business interruption and casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Administrative Agent, that names Administrative Agent for the benefit of Lenders as the loss payee thereunder for any covered loss in excess of $2 million and provides for at least (x) in the case of any such policies with respect to Scientific Games and its Subsidiaries, 30 days and (y) in the case of any such policies with respect to Company and its Subsidiaries (other than Scientific Games and its Subsidiaries) 10 days, prior written notice to Administrative Agent of any modification or cancellation of such policy. Company will use its commercially reasonable efforts to cause its insurers to change the provisions of its existing insurance policies to provide for at least 30 days prior written notice to Administrative Agent of any modification or cancellation of such policy in connection with the October 31, 2000 renewal of Company's and its Subsidiaries' insurance policies. o Application of Net Insurance/Condemnation Proceeds. o BUSINESS INTERRUPTION INSURANCE. Upon receipt by Company or any of its Subsidiaries of any business interruption insurance proceeds constituting Net Insurance/Condemnation Proceeds, (a) so long as no Event of Default or Potential Event of Default shall have occurred and be continuing, Company or such Subsidiary may retain and apply such Net Insurance/Condemnation Proceeds for working capital purposes, and (b) if an Event of Default or Potential Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds (without any deduction for Proposed Reinvestment Proceeds) to prepay the Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4B(iii)(b); 115 o CASUALTY INSURANCE/CONDEMNATION PROCEEDS. Upon receipt by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds other than from business interruption insurance, (a) so long as no Event of Default or Potential Event of Default shall have occurred and be continuing, Company shall, or shall cause one or more of its Subsidiaries to, promptly and diligently apply such Net Insurance/Condemnation Proceeds to pay or reimburse the costs of repairing, restoring or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received or, to the extent not so applied, to prepay the Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4B(iii)(b) (it being acknowledged and agreed that, in the event that the Company fully repairs, restores or replaces, as the case may be, the assets in respect of which such Net Insurance/Condemnation Proceeds were received for less than the amount of such Net Insurance/Condemnation Proceeds, Company may retain such excess Net Insurance/Condemnation Proceeds; PROVIDED that the amount of such excess Net Insurance/Condemnation Proceeds retained by Company shall not exceed $10 million in any Fiscal Year) and (b) if an Event of Default or Potential Event of Default shall have occurred and be continuing, Company shall apply an amount equal to such Net Insurance/Condemnation Proceeds (without any deduction for Proposed Reinvestment Proceeds) to prepay the Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4B(iii)(b); PROVIDED that the aggregate amount applied by Company to pay or reimburse the costs of repairing, restoring or replacing such assets pursuant to the foregoing clause (a) shall not exceed $35 million for any Fiscal Year. o NET INSURANCE/CONDEMNATION PROCEEDS RECEIVED BY ADMINISTRATIVE AGENT. Upon receipt by Administrative Agent of any Net Insurance/Condemnation Proceeds as loss payee, if and to the extent Company would have been required to apply such Net Insurance/Condemnation Proceeds (if it had received them directly) to prepay the Loans and/or reduce the Revolving Loan Commitments, Administrative Agent shall, and Company hereby authorizes Administrative Agent to, apply such Net Insurance/Condemnation Proceeds to prepay the Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4B(iii)(b), and (b) to the extent the foregoing clause (a) does not apply and (1) the aggregate amount of such Net Insurance/Condemnation Proceeds received (and reasonably expected to be received) by Administrative Agent in respect of any covered loss does not exceed $20 million, Administrative Agent shall deliver such Net Insurance/Condemnation Proceeds to Company, and Company shall, or shall cause one or more of its Subsidiaries to, promptly apply such Net Insurance/Condemnation Proceeds to the costs of repairing, restoring, or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received, and (2) if the aggregate amount of Net Insurance/Condemnation Proceeds received (and reasonably expected to be received) by Administrative Agent in respect of any covered loss exceeds $20 million, Administrative Agent shall hold such Net Insurance/Condemnation 116 Proceeds in the Collateral Account established under the Security Agreement and, so long as Company or any of its Subsidiaries proceeds diligently to repair, restore or replace the assets of Company or such Subsidiary in respect of which such Net Insurance/Condemnation Proceeds were received, Administrative Agent shall from time to time disburse to Company or such Subsidiary from the Collateral Account established under the Security Agreement, to the extent of any such Net Insurance/Condemnation Proceeds remaining therein in respect of the applicable covered loss, amounts necessary to pay the cost of such repair, restoration or replacement after the receipt by Administrative Agent of invoices or other documentation relating to the amount of costs so incurred and the work performed (including, if required by Administrative Agent, lien releases and architects' certificates); PROVIDED, HOWEVER that if at any time Administrative Agent reasonably determines after discussion with Company (A) that Company or such Subsidiary is not proceeding diligently with such repair, restoration or replacement or (B) that such repair, restoration or replacement cannot be completed with the Net Insurance/Condemnation Proceeds then held by Administrative Agent for such purpose, together with funds otherwise available to Company for such purpose, or that such repair, restoration or replacement cannot be completed within 360 days after the receipt by Administrative Agent of such Net Insurance/Condemnation Proceeds, Administrative Agent shall, and Company hereby authorizes Administrative Agent, one Business Day following Administrative Agent's sending of written notice to Company, to apply such Net Insurance/ Condemnation Proceeds to prepay the Loans (and/or the Revolving Loan Commitments shall be reduced) as provided in subsection 2.4B(iii)(b); PROVIDED that Administrative Agent's failure to provide such written notice will not affect the right of Administrative Agent to apply such Net Insurance/Condemnation Proceeds to prepay the Loans (and to reduce the Revolving Loan Commitments) pursuant to this subsection,. o INSPECTION RIGHTS; LENDER MEETING. o INSPECTION RIGHTS. Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Administrative Agent or any Lender to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested. o LENDER MEETING. Company will, upon at least thirty (30) days prior written notice from Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each Fiscal Year to be held at Company's corporate offices (or at such other location as may be 117 agreed to by Company, Administrative Agent and Requisite Lenders) at such time as may be agreed to by Company and Administrative Agent. o COMPLIANCE WITH LAWS, ETC. Company shall comply, and shall cause each of its Subsidiaries and all other Persons on or occupying any Facilities to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which could reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. o ENVIRONMENTAL REVIEW AND INVESTIGATION, DISCLOSURE, ETC.; COMPANY'S ACTIONS REGARDING HAZARDOUS MATERIALS ACTIVITIES, ENVIRONMENTAL CLAIMS AND VIOLATIONS OF ENVIRONMENTAL LAWS. o ENVIRONMENTAL REVIEW AND INVESTIGATION. Company agrees that Administrative Agent may, from time to time and in its reasonable discretion, at Company's expense, (i) retain an independent professional consultant to review any environmental audits, investigations, analyses and reports relating to Hazardous Materials prepared by or for Company and (ii) upon receipt of information that there may exist at any Facility an environmental matter which, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect or there may exist at any Facility any Environmental Claims which, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect, or upon the occurrence of any Event of Default, conduct its own investigation of any Facility; PROVIDED that, in the case of any Facility no longer owned, leased, operated or used by Company or any of its Subsidiaries, Company shall only be obligated to use its reasonable good faith efforts to obtain permission for Administrative Agent's professional consultant to conduct an investigation of such Facility. For purposes of conducting such a review and/or investigation, Company hereby grants to Administrative Agent and its respective agents, employees, consultants and contractors the right to enter into or onto any Facilities currently owned, leased, operated or used by Company or any of its Subsidiaries and to perform such tests on such property (including taking samples of soil, groundwater and suspected asbestos-containing materials) as are reasonably necessary in connection therewith. Any such investigation of any Facility shall be conducted, unless otherwise agreed to by Company and Administrative Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at such Facility or to cause any damage or loss to any property at such Facility. So long as no Event of Default or Potential Event of Default has occurred and is continuing, Administrative Agent shall provide reasonable notice to Company prior to the inspection of any Facility. Company and Administrative Agent hereby acknowledge and agree that any report of any investigation conducted at the request of Administrative Agent pursuant to this subsection 6.7A will be obtained and shall be used by Administrative Agent and Lenders for the purposes of Lenders' internal credit decisions, to monitor and police the Loans and to protect Lenders' security 118 interests, if any, created by the Loan Documents. Administrative Agent agrees to deliver a copy of any such report to Company with the understanding that Company acknowledges and agrees that (x) it will indemnify and hold harmless Administrative Agent and each Lender from any costs, losses or liabilities relating to Company's use of or reliance on such report, (y) none of the Administrative Agent or any Lender makes any representation or warranty with respect to such report, and (z) by delivering such report to Company, none of the Administrative Agent or any Lender is requiring or recommending the implementation of any suggestions or recommendations contained in such report. o Environmental Disclosure. Company will deliver to Administrative Agent and Lenders: o ENVIRONMENTAL AUDITS AND REPORTS. As soon as practicable following receipt thereof, copies of material environmental audits, investigations, analyses and reports of any kind or character, whether prepared by personnel of Company or any of its Subsidiaries or by independent consultants, governmental authorities or any other Persons, with respect to significant environmental matters at any Facility which, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect or with respect to any Environmental Claims which, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect; o NOTICE OF CERTAIN RELEASES, REMEDIAL ACTIONS, ETC. Promptly upon the occurrence thereof, written notice describing in reasonable detail (a) any Release required to be reported to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (b) any remedial action taken by Company or any other Person of which Company has knowledge in response to (1) any Hazardous Materials Activities the existence of which has a reasonable possibility of resulting in one or more Environmental Claims having, individually or in the aggregate, a Material Adverse Effect, or (2) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of resulting in a Material Adverse Effect, and (c) Company's discovery of any occurrence or condition on any real property adjoining any Facility that could cause such Facility or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws. o WRITTEN COMMUNICATIONS REGARDING ENVIRONMENTAL CLAIMS, RELEASES, ETC. As soon as practicable following the sending or receipt thereof by Company or any of its Subsidiaries, a copy of any and all written communications with respect to (a) any Environmental Claims that, individually or in the aggregate, have a reasonable possibility of giving rise to a Material Adverse Effect, (b) any Release required to be reported to any federal, state or local governmental or regulatory agency, and (c) any request for information from any governmental agency that suggests such agency is investigating whether 119 Company or any of its Subsidiaries may be potentially responsible for any Environmental Claim. o NOTICE OF CERTAIN PROPOSED ACTIONS HAVING ENVIRONMENTAL IMPACT. Prompt written notice describing in reasonable detail (a) any proposed acquisition of stock, assets, or property by Company or any of its Subsidiaries that could reasonably be expected to (1) expose Company or any of its Subsidiaries to, or result in, Environmental Claims that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or (2) affect the ability of Company or any of its Subsidiaries to maintain in full force and effect all material Governmental Authorizations required under any Environmental Laws for their respective operations and (b) any proposed action to be taken by Company or any of its Subsidiaries to commence manufacturing or other industrial operations or to modify current operations in a manner that could reasonably be expected to subject Company or any of its Subsidiaries to any additional obligations or requirements under any Environmental Laws that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. o OTHER INFORMATION. With reasonable promptness, such other documents and information as from time to time may be reasonably requested by Administrative Agent in relation to any matters disclosed pursuant to this subsection 6.7. o Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws. o REMEDIAL ACTIONS RELATING TO HAZARDOUS MATERIALS ACTIVITIES. Company shall promptly undertake, and shall cause each of its Subsidiaries promptly to undertake, any and all investigations, studies, sampling, testing, abatement, cleanup, removal, remediation or other response actions necessary to remove, remediate, clean up or abate any Hazardous Materials Activity on, under or about any Facility that is required by any Governmental Authority or that is in violation of any Environmental Laws or that presents a material risk of giving rise to an Environmental Claim that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. In the event Company or any of its Subsidiaries undertakes any such action with respect to any Hazardous Materials, Company or such Subsidiary shall conduct and complete such action in compliance with all applicable Environmental Laws and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability with respect to such Hazardous Materials Activity is being contested in good faith by Company or such Subsidiary. o ACTIONS WITH RESPECT TO ENVIRONMENTAL CLAIMS AND VIOLATIONS OF ENVIRONMENTAL LAWS. Company shall promptly take, and shall cause each of 120 its Subsidiaries promptly to take, any and all actions necessary to (a) cure any violation of applicable Environmental Laws by Company or its Subsidiaries that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and (b) make an appropriate response to any Environmental Claim against Company or any of its Subsidiaries and discharge any obligations it may have to any Person thereunder where failure to do so would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. o EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS BY CERTAIN SUBSIDIARIES AND FUTURE SUBSIDIARIES; IP COLLATERAL. o Execution of Subsidiary Guaranty and Personal Property Collateral Documents. In the event that any Person (other than an Inactive Subsidiary) becomes a wholly-owned Domestic Subsidiary after the Closing Date, Company will promptly notify Administrative Agent of that fact and (i) Company or the applicable Subsidiary Guarantor shall execute and deliver to Administrative Agent a Pledge Amendment (as defined in the Security Agreement) to the Security Agreement pledging all of the stock of such wholly-owned Domestic Subsidiary owned by Company or such Subsidiary Guarantor and (ii) cause such wholly-owned Domestic Subsidiary to execute and deliver to Administrative Agent a counterpart of the Subsidiary Guaranty and, as applicable, a Pledge Amendment and Additional Mortgages (as defined in subsection 6.9) and to take all such further actions and execute all such further documents and instruments (including actions, documents and instruments comparable to those described in subsection 4.1H) as may be necessary or, in the reasonable opinion of Administrative Agent, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on all of the personal and mixed property assets of such wholly-owned Domestic Subsidiary described in the applicable forms of Collateral Documents. o Execution of Future Foreign Subsidiary Guaranty and Collateral Documents. In the event that any Person (other than an Inactive Subsidiary) becomes a Foreign Subsidiary that is directly owned by Company after the Closing Date, Company will promptly notify Administrative Agent of that fact and Company or the applicable Subsidiary Guarantor will execute a Pledge Amendment (as defined in the Security Agreement) to the Security Agreement pledging not less than 65% (66% in the case of any Foreign Subsidiary organized under the laws of France or any political subdivision thereof) of the stock of such Foreign Subsidiary. In the event that U.S. tax laws and/or any other applicable laws in foreign jurisdictions, as the case may be, are amended to permit a Foreign Subsidiary to guarantee the Loans without the incurrence of an investment in U.S. property or other deemed dividends for U.S. tax purposes or without otherwise resulting in U.S. taxable income or without otherwise violating any other applicable laws in foreign jurisdictions, 121 Company will promptly notify Administrative Agent of that fact and Company or the applicable Subsidiary Guarantor will execute Pledge Amendments to the Security Agreement pledging not less than 100% of the stock of its wholly-owned Foreign Subsidiaries (other than Inactive Subsidiaries) and Company will cause its Foreign Subsidiaries (other than Inactive Subsidiaries) to execute and deliver to Administrative Agent a counterpart of the Subsidiary Guaranty and the Security Agreement and Additional Mortgages, as applicable, and to take all such further action and execute all such further documents and instruments as may be reasonably required to grant and perfect in favor of Administrative Agent, for the benefit of Lenders, a First Priority security interest in all of the personal and mixed property assets of such Subsidiary described in the applicable Collateral Documents. o Subsidiary Charter Documents, Legal Opinions, Etc. Company shall deliver to Administrative Agent, together with such Loan Documents, (i) certified copies of the applicable Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws certified by its secretary or an assistant secretary as of a recent date prior to their delivery to Administrative Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Loan Documents, and (iv) if required by the Administrative Agent, a favorable opinion of counsel to such Subsidiary, in form and substance satisfactory to Administrative Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of such Loan Documents against such Subsidiary, (d) such other matters (including matters relating to the creation and perfection of Liens in any Collateral pursuant to such Loan Documents) as Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Administrative Agent and its counsel. o Pledge of Foreign Subsidiary Stock. To the extent not otherwise satisfied on the Closing Date with respect to Company's Foreign Subsidiaries, no later than 120 days after the Closing Date, Company shall, and shall cause each of its Subsidiary Guarantors owning direct Foreign Subsidiaries to, deliver to Administrative Agent such Pledge Amendments or other similar documents 122 executed with respect to the capital stock of each such Foreign Subsidiary (other than Inactive Subsidiaries) and to deliver such stock certificates or such other related documents or instruments as shall grant to Administrative Agent a perfected First Priority Lien on such capital stock, all in form and substance reasonably satisfactory to Administrative Agent. o LEASEHOLD PROPERTIES; MATTERS RELATING TO ADDITIONAL REAL PROPERTY COLLATERAL; CERTAIN OPINIONS; REMOVAL OF LIENS. o LEASEHOLD PROPERTIES. To the extent not otherwise satisfied on the Closing Date with respect to Company and its Subsidiaries, each of Company and each applicable Subsidiary Guarantor shall use its reasonable good faith best efforts (without requiring Company or such Subsidiary Guarantor to relinquish any material rights or incur any material obligations or to expend more than a nominal amount of money as well as reasonable attorneys' fees incurred by (x) the landlord under the applicable lease, (y) Administrative Agent and (z) Company or such Subsidiary Guarantor) to: o LANDLORD CONSENTS AND ESTOPPELS; RECORDED LEASEHOLD INTERESTS. Deliver to Administrative Agent no later than 45 days after the Closing Date, in the case of each Material Leasehold Property of Company or its Subsidiary Guarantors existing as of the Closing Date, (a) a Landlord Consent and Estoppel with respect thereto and (b) evidence that such Material Leasehold Property is a Recorded Leasehold Interest; (ii) COLLATERAL ACCESS AGREEMENTS. Deliver to Administrative Agent no later than 45 days after the Closing Date, in the case of each Leasehold Property of Company or its Subsidiary Guarantors existing as of the Closing Date designated by Administrative Agent, a Collateral Access Agreement with respect thereto and in the event that any landlord party to a Collateral Access Agreement requests an estoppel certificate regarding such Leasehold Property, Company or the applicable Subsidiary Guarantor will include a description of such Collateral Access Agreement in such estoppel certificate; and (iii) CONFORMING LEASEHOLD INTERESTS. If Company or any of its Subsidiary Guarantors acquires any Material Leasehold Property after the Closing Date, Company shall, or shall cause such Subsidiary to, use its reasonable good faith best efforts (without requiring Company or such Subsidiary to relinquish any material rights or incur any material obligations or to expend more than a nominal amount of money as well as reasonable attorneys' fees incurred by (x) the landlord under the applicable lease, (y) Administrative Agent and (z) Company or such Subsidiary) to cause such Material Leasehold Property to be a Conforming Leasehold Interest. o ADDITIONAL MORTGAGES, ETC. From and after the Closing Date, in the event that (i) Company or any Subsidiary Guarantor acquires any fee interest in real property having a fair market value in excess of $1 million or any Material Leasehold Property or (ii) at the time any Person becomes a Subsidiary Guarantor, such Person owns or holds any fee interest in real property or any Material Leasehold Property, in either case excluding any such Real Property 123 Asset the encumbrancing of which requires the consent of any applicable lessor or (in the case of clause (ii) above) then-existing senior lienholder, where Company and its Subsidiaries are unable to obtain such lessor's or senior lienholder's consent or (iii) Company or any Subsidiary Guarantor acquires a leasehold interest in the property presently occupied by Company or any Subsidiary and located at 100 Bellevue Road, Newark, Delaware (any such non-excluded Real Property Asset described in the foregoing clause (i) or (ii) or (iii) being an "ADDITIONAL MORTGAGED PROPERTY"), Company or such Subsidiary Guarantor shall deliver to Administrative Agent, as soon as practicable after such Person acquires such Additional Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be, the following: o ADDITIONAL MORTGAGE. A fully executed and notarized Mortgage (an "ADDITIONAL MORTGAGE"), duly recorded in all appropriate places in all applicable jurisdictions, encumbering the interest of such Loan Party in such Additional Mortgaged Property; o OPINIONS OF COUNSEL. If reasonably required by Administrative Agent, (a) a favorable opinion of counsel to such Loan Party, in form and substance satisfactory to Administrative Agent and its counsel, as to the due authorization, execution and delivery by such Loan Party of such Additional Mortgage and such other matters as Administrative Agent may reasonably request, and (b) an opinion of counsel (which counsel shall be reasonably satisfactory to Administrative Agent) in the state in which such Additional Mortgaged Property is located with respect to the enforceability of the form of Additional Mortgage recorded in such state and such other matters (including any matters governed by the laws of such state regarding personal property security interests in respect of any Collateral) as Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Administrative Agent; o LANDLORD CONSENT AND ESTOPPEL; RECORDED LEASEHOLD INTEREST. In the case of an Additional Mortgaged Property consisting of a Material Leasehold Property, after using reasonable good faith best efforts (without requiring Company or such Subsidiary Guarantor to relinquish any material rights or incur any material obligations or to expend more than a nominal amount of money as well as reasonable attorneys' fees incurred by (i) the landlord under the applicable lease, (ii) Administrative Agent and (iii) Company or such Subsidiary Guarantor) to obtain the following: (a) a Landlord Consent and Estoppel, unless Company or such Subsidiary Guarantor is unable to obtain the Landlord Consent and Estoppel and (b) evidence that such Material Leasehold Property is a Recorded Leasehold Interest, and in the case of the property located at 100 Bellevue Road, Newark, Delaware, (c) a Landlord Consent and Estoppel and (d) evidence that such Material Leasehold Property is a Recorded Leasehold Interest; 124 o TITLE INSURANCE. (a) If required by Administrative Agent, an ALTA mortgagee title insurance policy or an unconditional commitment therefor (an "ADDITIONAL MORTGAGE POLICY") issued by the Title Company with respect to such Additional Mortgaged Property, in an amount reasonably satisfactory to Administrative Agent, insuring fee simple title to, or a valid leasehold interest in, such Additional Mortgaged Property vested in such Loan Party and assuring Administrative Agent that such Additional Mortgage creates a valid and enforceable First Priority mortgage Lien on such Additional Mortgaged Property, which Additional Mortgage Policy (1) shall include, if available in the state in which such Mortgaged Property is located, a lender's aggregation endorsement, an endorsement for future advances under this Agreement and for any other matters reasonably requested by Administrative Agent and (2) shall provide for affirmative insurance and such reinsurance as Administrative Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Administrative Agent; and (b) evidence reasonably satisfactory to Administrative Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits required by the Title Company in connection with the issuance of the Additional Mortgage Policy and (ii) paid to the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Additional Mortgage Policy and all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Additional Mortgage in the appropriate real estate records; o TITLE REPORT. If no Additional Mortgage Policy is required with respect to such Additional Mortgaged Property, a title report issued by the Title Company with respect thereto, dated not more than 30 days prior to the date such Additional Mortgage is to be recorded and reasonably satisfactory in form and substance to Administrative Agent; o COPIES OF DOCUMENTS RELATING TO TITLE EXCEPTIONS. Copies of all recorded documents listed as exceptions to title or otherwise referred to in the Additional Mortgage Policy or title report delivered pursuant to clause (iv) or (v) above; o MATTERS RELATING TO FLOOD HAZARD PROPERTIES. (a) Evidence, which may be in the form of a letter from an insurance broker or a municipal engineer, as to (1) whether such Additional Mortgaged Property is a Flood Hazard Property and (2) if so, whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if such Additional Mortgaged Property is a Flood Hazard Property, such Loan Party's written acknowledgement of receipt of written notification from Administrative Agent (1) that such Additional Mortgaged Property is a Flood Hazard Property and (2) as to whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event such Additional Mortgaged Property is a Flood 125 Hazard Property that is located in a community that participates in the National Flood Insurance Program, evidence that Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System; and o SURVEYS. ALTA surveys of each Additional Mortgaged Property satisfactory in form and substance to the Administrative Agent and the Title Company reasonably current and certified to Administrative Agent and Title Company by a licensed surveyor. o ENVIRONMENTAL AUDIT. If required by Administrative Agent, reports and other information, in form, scope and substance satisfactory to Administrative Agent and prepared by environmental consultants satisfactory to Administrative Agent, concerning any environmental hazards or liabilities to which Company or any of its Subsidiaries may be subject with respect to such Additional Mortgaged Property. o REAL ESTATE APPRAISALS. Company shall, and shall cause each of its Subsidiary Guarantors to, permit an independent real estate appraiser satisfactory to Administrative Agent, upon reasonable notice, to visit and inspect any Additional Mortgaged Property for the purpose of preparing an appraisal of such Additional Mortgaged Property satisfying the requirements of any applicable laws and regulations (in each case to the extent required under such laws and regulations as determined by Administrative Agent in its discretion). Any such inspection of any Additional Mortgaged Property shall be conducted, unless otherwise agreed to by Company and Administrative Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing business operations at such Additional Mortgaged Property. o SURVEYS. To the extent not otherwise satisfied on the Closing Date with respect to Company and its Subsidiaries, Company and each Subsidiary Guarantor, as applicable, shall (a) no later than forty-five (45) days after the Closing Date, deliver or cause to be delivered to Administrative Agent a survey for each of the Mortgaged Properties, in the form more specifically described in subsection 4.1G(vi), (b) no later than fifteen (15) days after the delivery of such surveys to Administrative Agent, cause the Title Company to issue endorsements removing the standard survey exception (the "SURVEY ENDORSEMENTS") from the appropriate Closing Date Mortgage Policies, (c) pay to the Title Company all costs associated with the issuance of such Survey Endorsements and (d) in the event Administrative Agent determined not to record a Mortgage against one or more Mortgaged Properties on the Closing Date, because the survey for such Mortgaged Property was not available, Company shall deliver such Mortgage no later than forty-five (45) days after the Closing Date. 126 o REMOVAL OF LIENS. With respect to those Liens set forth on SCHEDULE 5.5 annexed hereto, Company shall cause such Liens to be released of record within 15 days of the Closing Date for Closing Date Mortgaged Properties (as such term is defined in subsection 4.1G); PROVIDED that Company may satisfy such requirement by causing Title Company to issue an endorsement to the Closing Date Mortgage Policy (as such term is defined in subsection 4.1G) removing the Liens set forth on said SCHEDULE 5.5 as an exception to such title policies within the periods set forth herein for removal of such Liens. o ADDITIONAL COLLATERAL ACCESS AGREEMENTS. From and after the Closing Date, in the event that Company or any Subsidiary Guarantor acquires a Leasehold Property in which Collateral is located, Company shall inform Administrative Agent and, upon Administrative Agent's request, shall use its commercially reasonable efforts to promptly deliver to Administrative Agent a Collateral Access Agreement for such Leasehold Property. o INTEREST RATE PROTECTION. Within 120 days after the Closing Date, Company shall obtain and shall thereafter maintain in effect for a period of not less than two years after the Merger Date one or more Interest Rate Agreements with respect to the Term Loans, in an aggregate notional principal amount of not less than 50% of the Term Loans outstanding on the Closing Date, each such Interest Agreement to be in form and substance reasonably satisfactory to Administrative Agent. o FISCAL YEAR. On or before December 31, 2000, Company shall change its Fiscal Year-end from October 31 of each calendar year to December 31 of each calendar year. o CONNECTICUT LOTTERY CORPORATION. Company hereby agrees to use its commercially reasonable efforts to procure within 60 days of the Restatement Effective Date an agreement by and among Company, the Connecticut Lottery Corporation ("CLC") and Administrative Agent substantially similar to that certain Agreement dated as of May 22, 1998 by and among CLC, Company, Autotote Lottery Corporation and Heller Financial Inc. and otherwise reasonably satisfactory in form and substance to Administrative Agent. o DELISTING. On or before the second Business Day following the Closing Date, Company shall cause appropriate documents to delist the Scientific Games Common Stock to be filed with the New York Stock Exchange and the SEC. o COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other 127 Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7. o INDEBTEDNESS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: o Company may become and remain liable with respect to the Obligations; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent Obligations so extinguished; o Company and its Subsidiaries may become and remain liable with respect to (x) Purchase Money Indebtedness and (y) Indebtedness in respect of Capital Leases entered into after the Closing Date and incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or its Subsidiaries; PROVIDED that the aggregate amount of such Purchase Money Indebtedness and Indebtedness incurred in respect of such Capital Leases, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or its Subsidiaries, does not exceed $20 million at any time outstanding; o Company may become and remain liable with respect to Indebtedness to any of its Subsidiary Guarantors and any of its Foreign Subsidiaries, and any Subsidiary Guarantor may become and remain liable with respect to Indebtedness to Company or any other Subsidiary Guarantor or any Foreign Subsidiary and any Foreign Subsidiary may become and remain liable with respect to Indebtedness (A) to Company or any Subsidiary Guarantor to the extent that such Indebtedness is a permitted Investment by Company or such Subsidiary Guarantor under subsection 7.3(viii) or subsection 7.3(v) and (B) to any other Foreign Subsidiary to the extent that such Indebtedness is a permitted Investment by such Foreign Subsidiary under subsection 7.3(viii); PROVIDED that (a) all such intercompany Indebtedness shall be evidenced by promissory notes; (b) all such intercompany Indebtedness owed by Company to any of its Subsidiaries shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement, and (c) any payment by any Subsidiary of Company under any guaranty of the Obligations shall result in a PRO TANTO reduction of the amount of any 128 intercompany Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; o Company and its Subsidiaries, as applicable, may remain liable with respect to Indebtedness and Indebtedness in respect of Capital Leases, in each case, existing as of the Closing Date and described in SCHEDULE 7.1 annexed hereto; PROVIDED that the aggregate amount of such Indebtedness does not exceed $2.5 million at any time outstanding; o Company may become and remain liable with respect to Indebtedness evidenced by the Senior Subordinated Notes in an aggregate principal amount which does not exceed $150 million on the Closing Date; o Intentionally Omitted o Intentionally Omitted o Company and its Domestic Subsidiaries may become and remain liable with respect to other Indebtedness, and Contingent Obligations permitted under subsection 7.4(x), in an aggregate amount not to exceed $20 million at any time outstanding; o Scientific Games International Limited ("SGIL") may become and remain liable with respect to Indebtedness in respect of mortgage financing of the land and improvements comprising the UK Property and any equipment located at the UK Property, including costs, fees and expenses related to such mortgage financing; PROVIDED that the aggregate amount of such Indebtedness shall not exceed $20 million at any time outstanding; PROVIDED, FURTHER that (x) the recourse of the lenders with respect to such Indebtedness is limited solely to the land and improvements comprising the U.K. Property and any equipment located at the UK Property without further recourse to any of Company or any of its Subsidiaries (including SGIL) or any other asset of any of Company or any of its Subsidiaries (including SGIL), and (y) Company shall make prepayments pursuant to subsection 2.4B(iii)(d) in an amount equal to the Net Debt Securities Proceeds received by Company and its Subsidiaries in connection with the incurrence of such Indebtedness, which shall be applied to prepay the Loans as provided in subsection 2.4B(iii)(d); o Company's Foreign Subsidiaries may become and remain liable with respect to other Indebtedness, and Contingent Obligations permitted under subsection 7.4(xi), in an aggregate amount not to exceed $10 million at any time outstanding; PROVIDED that, other than the Company's guarantee of the obligations of Scientific Games International Limited, any such Indebtedness is non-recourse to Company and its Domestic Subsidiaries; and o Company and its Subsidiaries, as applicable, may become and remain liable with respect to Indebtedness which refinances the Indebtedness described in clause (v) of this subsection 7.1; PROVIDED that (x) such refinancing 129 Indebtedness shall be incurred by Company or the applicable Subsidiary, as the case may be, that incurred the Indebtedness described in clause (v) of this subsection 7.1 that is being refinanced, (y) the maturity date of such refinancing Indebtedness shall be later than the maturity date of the Indebtedness described in clause (v) of this subsection 7.1 that is being refinanced and (z) the aggregate principal amount of such refinancing Indebtedness shall be less than the lesser of (1) the sum of the aggregate principal amount of Indebtedness being refinanced as of the date of such refinancing PLUS all related costs, fees and expenses related to the refinancing and (2) the aggregate principal amount of such Indebtedness as of the Closing Date. o LIENS AND RELATED MATTERS. o Prohibition on Liens. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the UCC of any State or under any similar recording or notice statute, except: o Permitted Encumbrances; o Liens granted pursuant to the Collateral Documents; o Liens described in SCHEDULE 7.2 annexed hereto; o Liens securing Indebtedness permitted under subsection 7.1(iii) with respect to the property or assets (and the proceeds thereof) financed by such Indebtedness; o Liens securing Indebtedness incurred by a Foreign Subsidiary under (X) subsection 7.1(xi) and encumbering only the assets of such Foreign Subsidiary and (Y) subsection 7.1(x) and encumbering only the UK Property and any equipment located at the UK Property; o Liens securing Indebtedness permitted by subsection 7.1(ix) in an aggregate amount not to exceed $10 million at any time outstanding; and o Liens securing Indebtedness permitted by subsection 7.1(xii), solely to the extent such Liens replace Liens set forth in SCHEDULE 7.2 annexed hereto with respect to the Indebtedness permitted by subsection 7.1(v) that is being refinanced by the Indebtedness permitted by subsection 7.1(xii). 130 o Equitable Lien in Favor of Lenders. If Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; PROVIDED that, notwithstanding the foregoing, this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A or as a waiver of any Event of Default or Potential Event of Default; and PROVIDED FURTHER that Company shall under no circumstances be required to make or cause to be made effective provision whereby the Obligations will be secured, directly or indirectly, by Margin Stock. o No Further Negative Pledges. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale or held in respect of Capital Leases permitted pursuant to subsection 7.1(iii), neither Company nor any of its Subsidiaries shall enter into any agreement (other than (x) the Senior Subordinated Note Indenture and (y) an agreement prohibiting only the creation of Liens securing Subordinated Indebtedness) prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired; provided that the foregoing shall not preclude Company and its Subsidiaries from entering into: o agreements with governmental authorities prohibiting the creation or assumption of any Lien on assets located in the jurisdiction of any such governmental authority and utilized pursuant to the applicable agreement, (i) to the extent existing on the Closing Date, as set forth in SCHEDULE 7.2C(A), and (ii) to the extent such agreements are entered into after the Closing Date, at the time any such agreement is entered into, the aggregate value of such assets subject to such prohibitions, together with the aggregate value of any such assets subject to the encumbrances and restrictions permitted by subsection 7.2D(a)(ii), in each case as set forth on the most recent consolidated balance sheet of Company and its Subsidiaries in accordance with GAAP, shall not exceed 5% of the aggregate value of all assets set forth on the most recent consolidated balance sheet of Company and its Subsidiaries in accordance with GAAP; o (A) agreements containing customary provisions restricting (1) the subletting or assignment of any lease or (2) the transfer of copyrighted or patented materials, (B) agreements containing provisions that restrict the assignment of such agreements or rights thereunder; PROVIDED that payments received or to be received pursuant to such agreements shall be subject to the Liens securing the Obligations or (C) customary provisions contained in the terms of any shares, interests, participations or other equivalents of corporate stock of any Subsidiary of Company that is a corporation or any partnership, limited liability company or other equity interests of any Subsidiary of Company that is not a corporation (hereinafter "EQUITY INTERESTS") restricting the payment of dividends and the making of distributions on 131 Equity Interests, in each case described in this clause (C) solely to the extent set forth in SCHEDULE 7.2D(C); o agreements or instruments governing Indebtedness permitted by subsection 7.1(xi) prohibiting the creation or assumption of any Lien on assets or properties of the Foreign Subsidiary incurring such Indebtedness; PROVIDED that the projected Consolidated EBITDA attributable to the Foreign Subsidiary incurring such Indebtedness and any of its Subsidiaries in any Fiscal Year (as set forth in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year) shall not exceed 5% of the aggregate projected Consolidated EBITDA of Company and its Subsidiaries in such Fiscal Year (as set forth in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year); PROVIDED FURTHER that, in the event that the Foreign Subsidiary incurring such Indebtedness was not included in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year because such Foreign Subsidiary was not a Subsidiary of Company at the time such Financial Plan or Revised Financial Plan, as the case may be, was prepared, for purposes of the preceding proviso the projected Consolidated EBITDA attributable to such Foreign Subsidiary and its Subsidiaries for such Fiscal Year shall be deemed to be the projected Consolidated EBITDA of such Foreign Subsidiary and its Subsidiaries for the twelve months immediately succeeding the incurrence of such Indebtedness as detailed in an Officer's Certificate in form and substance reasonably acceptable to Administrative Agent delivered to Administrative Agent prior to the incurrence of such Indebtedness; o restrictions on the transfer of assets subject to any Lien permitted under this subsection 7.2 to the extent imposed by the agreements creating such Liens; o agreements containing customary rights of first refusal with respect to Company's and its Subsidiaries' interests in their respective non wholly-owned Subsidiaries and Joint Ventures; provided that any such agreements existing on the Closing Date are set forth in SCHEDULE 7.2C(E); o applicable law to the extent restricting the transfer of assets; and o agreements (other than agreements referred to in clause (a) above) prohibiting the creation or assumption of any Lien on assets utilized pursuant to such agreement solely to the extent set forth in Schedule 7.2C(g). o No Restrictions on Subsidiary Distributions to Company or Other Subsidiaries. Except as provided herein, Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company (other than any such restrictions imposed by applicable law), (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company (other than any such restrictions imposed by applicable foreign law with respect to the repayment or prepayment of Indebtedness owed to or by a Foreign 132 Subsidiary), (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company, except for such consensual encumbrances or restrictions to the extent arising pursuant to: o agreements with governmental authorities containing a consensual encumbrance or restriction on the ability of any Subsidiary of Company to transfer any of its assets located in the jurisdiction of any such governmental authority and utilized pursuant to the applicable agreement to Company or any other Subsidiary of Company (i) to the extent existing on the Closing Date, as set forth on SCHEDULE 7.2D(A), and (ii) to the extent such agreements are entered into after the Closing Date, at the time any such agreement is entered into, the aggregate value of such assets subject to such encumbrances or restrictions, together with the aggregate value of any such assets subject to the prohibitions permitted by subsection 7.2C(a)(ii), in each case as set forth on the most recent consolidated balance sheet of Company and its Subsidiaries in accordance with GAAP, shall not exceed 5% of the aggregate value of all assets set forth on the most recent consolidated balance sheet of Company and its Subsidiaries in accordance with GAAP; o the Senior Subordinated Notes, the Senior Subordinated Note Indenture or any guarantee thereof; o (A) solely with respect to clause (iv) above, agreements containing customary provisions restricting (1) the subletting or assignment of any lease or (2) the transfer of copyrighted or patented materials, (B) solely with respect to clause (iv) above, provisions in agreements that restrict the assignment of such agreements or rights thereunder; PROVIDED that payments received or to be received pursuant to such agreements shall be subject to the Liens securing the Obligations or (C) solely with respect to clause (i) above, customary provisions contained in the terms of any equity interests restricting the payment of dividends and the making of distributions on Equity Interests, in each case solely to the extent set forth in SCHEDULE 7.2D(C); o any agreement or instrument governing Indebtedness permitted by subsection 7.1(xi) containing any consensual encumbrance or restriction on the ability of the Foreign Subsidiary incurring such Indebtedness to (i) pay dividends or make any other distributions on any of such Foreign Subsidiary's capital stock or (ii) transfer any of its property or assets to Company or any other Subsidiary of Company; PROVIDED that the projected Consolidated EBITDA attributable to the Foreign Subsidiary incurring such Indebtedness and any of its Subsidiaries in any Fiscal Year (as set forth in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year) shall not exceed 5% of the aggregate projected Consolidated EBITDA of Company and its Subsidiaries in such Fiscal Year (as set forth in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year); PROVIDED FURTHER that, in the event that the Foreign Subsidiary incurring such Indebtedness was not included in the Financial Plan or Revised Financial Plan, as the case may be, for such Fiscal Year because such Foreign Subsidiary was not a Subsidiary of Company at the time such Financial Plan or Revised Financial Plan, as the case may be, was prepared, for purposes of the preceding proviso the projected Consolidated EBITDA attributable to such Foreign Subsidiary and its Subsidiaries for such Fiscal Year shall be deemed to be the projected Consolidated 133 EBITDA of such Foreign Subsidiary and its Subsidiaries for the twelve months immediately succeeding the incurrence of such Indebtedness as detailed in an Officer's Certificate in form and substance reasonably acceptable to Administrative Agent delivered to Administrative Agent prior to the incurrence of such Indebtedness; o solely with respect to clause (iv) above, restrictions on the transfer of assets subject to any Liens permitted under this subsection 7.2 to the extent imposed by the agreements creating such Liens; o solely with respect to clause (iv) above, restrictions imposed by any executed agreement with respect to an Asset Sale not in violation of this Agreement with respect to the transfer of the assets to be sold in such Asset Sale; and o customary rights of first refusal with respect to Company's and its Subsidiaries' interests in their respective non-wholly owned Subsidiaries and Joint Ventures; provided that any such agreements existing on the Closing Date are set forth in SCHEDULE 7.2C(E). o INVESTMENTS; JOINT VENTURES. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: o Company and its Subsidiaries may make and own Investments in Cash Equivalents; o Company and its Subsidiaries may continue to own the Investments owned by them as of the Closing Date in any Subsidiaries of Company; o Company and Subsidiary Guarantors may make Investments in Subsidiary Guarantors and Subsidiaries of Company may make Investments in Company; o Company and its Subsidiaries may make (x) Consolidated Capital Expenditures permitted by subsection 7.8 and (y) Consolidated Capital Software Expenditures permitted by subsection 7.16; o Company and its Subsidiaries may continue to own the Investments owned by them as of the Closing Date and described in SCHEDULE 7.3 annexed hereto; o Company and its Subsidiaries may make and own Investments in Permitted Acquisitions permitted under subsection 7.7(vii); o Company and its Subsidiaries may hold non-cash consideration consisting of promissory notes received in connection with Asset Sales permitted under subsection 7.7(viii) so long as the aggregate principal amount of all such promissory notes does not exceed $15 million at any time outstanding (determined without regard to any write-downs or write-offs thereof); 134 o Company and its Subsidiaries may make and own Investments in Foreign Subsidiaries in an aggregate amount not to exceed $15 million at any time outstanding; provided that in the event that any of Company or any of its Subsidiaries has an Investment in a Foreign Subsidiary that is solely a holding company with no material assets, liabilities or operations ("FOREIGN HOLDCO") other than an equity Investment in another Foreign Subsidiary that is a direct subsidiary of Foreign Holdco, Company's or such Subsidiary's equity Investment in Foreign Holdco will not be counted for purposes of the $15 million amount permitted by this subsection 7.3(viii) to the extent such equity Investment in Foreign Holdco is equal to or less than the equity Investment of Foreign Holdco in such other Foreign Subsidiary; o Company and its Subsidiaries may make and own Investments in Joint Ventures and non-wholly owned Subsidiaries in an aggregate amount not to exceed $15 million at any time outstanding; o Company and its Subsidiaries may make and own other Investments in an aggregate amount not to exceed $5 million at any time outstanding; and o So long as no Event of Default or Potential Event of Default has occurred and is continuing, Company may make Investments as required to be made by the Company pursuant to and in accordance with the terms of the Consulting Agreement. o CONTINGENT OBLIGATIONS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: o Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Subsidiary Guaranty; o Company may become and remain liable with respect to Contingent Obligations in respect of (x) Letters of Credit and (y) surety bonds incurred in the ordinary course of business; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations under (x) Interest Rate Agreements with Lenders or with any other party acceptable to Administrative Agent with respect to Indebtedness in an aggregate notional principal amount not to exceed at any time the aggregate amount of the Commitments and (y) Currency Agreements with Lenders entered into in the ordinary course of business for hedging purposes only; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of customary indemnification and purchase price adjustment obligations incurred in connection with Asset Sales or other sales of assets; 135 o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of the performance by the Subsidiaries of Company of obligations (other than obligations for the payment of money) of such Subsidiaries incurred in the ordinary course of business; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of Company or any of its wholly-owned Domestic Subsidiaries permitted by subsection 7.1 (other than subsection 7.1(vi)); o Company and its Subsidiaries, as applicable, may remain liable with respect to Contingent Obligations described in SCHEDULE 7.4 annexed hereto; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in connection with Operating Leases; o Subsidiary Guarantors may become and remain liable with respect to Contingent Obligations arising under subordinated guaranties of the Senior Subordinated Notes as set forth in and to the extent required under the Senior Subordinated Note Indenture as in effect on the Closing Date; o Company and its Domestic Subsidiaries may become and remain liable with respect to other Contingent Obligations; PROVIDED that the maximum aggregate liability, contingent or otherwise, of Company and its Domestic Subsidiaries in respect of all such Contingent Obligations, together with the aggregate principal amount of all Indebtedness permitted under subsection 7.1(ix), shall at no time exceed $20 million; o Foreign Subsidiaries may become and remain liable with respect to other Contingent Obligations; PROVIDED that the Contingent Obligations are non-recourse to Company and its Domestic Subsidiaries and the maximum aggregate liability, contingent or otherwise, of Foreign Subsidiaries in respect of all such Contingent Obligations, together with the aggregate principal amount of all Indebtedness permitted under subsection 7.1(xi), shall at no time exceed $10 million; o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of the contingent deferred purchase price of any Permitted Acquisitions in an aggregate amount not to exceed $5 million at any time outstanding; and o Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of SGIL permitted under subsection 7.1(x). 136 o RESTRICTED JUNIOR PAYMENTS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment, except: o Company may make Restricted Junior Payments consisting of payment-in-kind dividends paid on the Convertible Preferred Stock; o Company may make payments of regularly scheduled interest in respect of the Senior Subordinated Notes in accordance with the terms of and to the extent required by, and subject to the subordination provisions contained in, the Senior Subordinated Note Indenture; o Company may repurchase (x) shares of its common stock and/or warrants, rights or options to purchase such common stock to the extent such repurchase is deemed to occur upon the exercise of stock options to acquire common stock or similar arrangements to acquire common stock; PROVIDED that such repurchased common stock and/or warrants, rights or options to acquire shares of such common stock represent a portion of the exercise price thereof; PROVIDED FURTHER that no cash is expended (or obligation to expend cash is incurred) by Company or any of its Subsidiaries pursuant to this clause (iii)(x) and (y) shares of its common stock and/or warrants, rights or options to purchase such common stock held by directors, executive officers, members of management or employees of Company or any of its Subsidiaries upon the death, disability, retirement or termination of employment of such directors, executive officers, members of management or employees, so long as (1) no Potential Event of Default or Event of Default then exists or would result therefrom and (2) the aggregate amount of cash expended by Company pursuant to this clause (iii) (y) does not exceed $2 million in any Fiscal Year of Company; and o Company may make withholding tax payments on behalf of the holders of the Convertible Preferred Stock solely to the extent required in connection with the payment by Company of payment-in-kind dividends on the Convertible Preferred Stock; PROVIDED that the aggregate amount of such withholding tax payments made by Company in any Fiscal Year shall not exceed $1 million; PROVIDED, FURTHER, that the aggregate amount of such withholding tax payments made by Company shall not exceed $5 million for the period from the Closing Date through and including December 31, 2005; PROVIDED, FURTHER, still, that prior to Company making any such withholding tax payments in any Fiscal Year, the holders of the Convertible Preferred Stock shall have previously made, or transferred to Company adequate funds so that Company may make on behalf of the holders of the Convertible Preferred Stock, withholding tax payments in an amount equal to 10% of the fair market value of such payment-in-kind dividends. 137 o FINANCIAL COVENANTS o MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the Consolidated Fixed Charge Coverage Ratio, calculated on a Pro Forma Basis, for any four-Fiscal Quarter period ending during any of the periods set forth below to be less than the correlative ratio indicated:
MINIMUM FIXED CHARGE PERIOD COVERAGE RATIO -------------------------------------------- ------------------------- Closing Date through September 30, 2000 1.35:1.00 October 1, 2000 through June 30, 2002 1.40:1.00 July 1, 2002 and thereafter 1.45:1.00
o MAXIMUM CONSOLIDATED LEVERAGE RATIO. Company shall not permit the Consolidated Leverage Ratio, calculated on a Pro Forma Basis, for any four-Fiscal Quarter period ending during any of the periods set forth below to exceed the correlative ratio indicated:
MAXIMUM CONSOLIDATED PERIOD LEVERAGE RATIO ---------------------------------------- --------------------- Closing Date through December 31, 2000 5.25:1.00 January 1, 2001 through March 31, 2001 5.00:1.00 April 1, 2001 through June 30, 2001 4.75:1.00 July 1, 2001 through September 30, 2001 4.50:1.00 October 1, 2001 through December 31, 2001 4.35:1.00 January 1, 2002 through March 31, 2002 4.15:1.00 April 1, 2002 through June 30, 2002 4.10:1.00 July 1, 2002 through September 30, 2002 3.95:1.00 October 1, 2002 through December 31, 2002 3.80:1.00 January 1, 2003 through March 31, 2003 3.65:1.00 April 1, 2003 through June 30, 2003 3.55:1.00 July 1, 2003 through September 30, 2003 3.40:1.00 October 1, 2003 through December 31, 2003 3.30:1.00 January 1, 2004 through March 31, 2004 3.25:1.00 April 1, 2004 through June 30, 2004 3.15:1.00 July 1, 2004 through September 30, 2004 3.05:1.00 October 1, 2004 through December 31, 2004 2.95:1.00 January 1, 2005 through March 31, 2005 2.85:1.00 April 1, 2005 through June 30, 2005 2.75:1.00 July 1, 2005 through September 30, 2005 2.70:1.00
138 October 1, 2005 through December 31, 2005 2.60:1.00 January 1, 2006 through March 31, 2006 2.50:1.00 April 1, 2006 through June 30, 2006 2.45:1.00 July 1, 2006 through September 30, 2006 2.35:1.00 October 1, 2006 through December 31, 2006 2.25:1.00 January 1, 2007 and thereafter 2.00:1.00
o MINIMUM INTEREST COVERAGE RATIO. Company shall not permit the Consolidated Interest Coverage Ratio, calculated on a Pro Forma Basis, during any of the periods set forth below to be less than the correlative ratio indicated:
MINIMUM INTEREST PERIOD COVERAGE RATIO --------------------------------------- --------------------- Closing Date through December 31, 2000 1.70:1.00 January 1, 2001 through March 31, 2001 1.75:1.00 April 1, 2001 through June 30, 2001 1.85:1.00 July 1, 2001 through September 30, 2001 1.90:1.00 October 1, 2001 through December 31, 2001 1.95:1.00 January 1, 2002 through March 31, 2002 2.05:1.00 April 1, 2002 through June 30, 2002 2.10:1.00 July 1, 2002 through September 30, 2002 2.20:1.00 October 1, 2002 through December 31, 2002 2.25:1.00 January 1, 2003 through March 31, 2003 2.35:1.00 April 1, 2003 through June 30, 2003 2.45:1.00 July 1, 2003 through September 30, 2003 2.50:1.00 October 1, 2003 through December 31, 2003 2.60:1.00 January 1, 2004 through March 31, 2004 2.65:1.00 April 1, 2004 through June 30, 2004 2.75:1.00 July 1, 2004 through September 30, 2004 2.80:1.00 October 1, 2004 through December 31, 2004 2.90:1.00 January 1, 2005 through March 31, 2005 2.95:1.00 April 1, 2005 through June 30, 2005 3.05:1.00 July 1, 2005 through September 30, 2005 3.15:1.00 October 1, 2005 through December 31, 2005 3.25:1.00 January 1, 2006 through March 31, 2006 3.35:1.00 April 1, 2006 through June 30, 2006 3.45:1:00
139 July 1, 2006 and thereafter 3.50:1.00
o MINIMUM CONSOLIDATED NET WORTH. Company shall not permit Consolidated Net Worth at any time to be less than the sum of (i) $38.7 million ("Base Amount") PLUS (ii) (a) the sum of Adjusted Consolidated Net Income for each Fiscal Quarter ending after the Closing Date and ending on or before such date of determination in which Adjusted Consolidated Net Income was positive MULTIPLIED by (b) 75%; PROVIDED that for purposes of calculating Adjusted Consolidated Net Income for the Fiscal Quarter ending on September 30, 2000, such Fiscal Quarter shall be deemed to commence on the first day after the Closing Date and end on September 30, 2000; PROVIDED FURTHER, that the Base Amount shall be increased to reflect 75% of any increase in the Consolidated Net Worth of Company and its Subsidiaries as a result of any Merger-related accounting adjustments made on or after the Closing Date. o RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. Company shall not, and shall not permit any of Company's Subsidiaries to, alter the corporate, capital or legal structure of Company or any of Company's Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: o any Domestic Subsidiary may be merged with or into Company or any Subsidiary Guarantor, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any Subsidiary Guarantor; PROVIDED that, in the case of such a merger, Company or such Subsidiary Guarantor shall be the continuing or surviving corporation; o Company and its Subsidiaries may make (x) Consolidated Capital Expenditures permitted under subsection 7.8 and (y) Consolidated Capital Software Expenditures permitted under subsection 7.16; o Company and its Subsidiaries may dispose of obsolete, worn out or surplus property in the ordinary course of business; o Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; PROVIDED that the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; 140 o Acquisition Co. and Scientific Games may consummate the Merger; o Company or any of its Subsidiaries may convey, sell, transfer or otherwise dispose of for Cash any Margin Stock, whether now owned or hereafter acquired; PROVIDED that such disposition is for fair value and the proceeds are held in Cash or Cash Equivalents; o Company and its Subsidiaries may consummate Permitted Acquisitions; PROVIDED that each of the following conditions is satisfied: o the Acquired Business is engaged in a line of business that Company and its Subsidiaries are permitted to engage in under subsection 7.13A; o the Acquired Business becomes a Subsidiary Guarantor or is acquired by a Subsidiary Guarantor in such Permitted Acquisition; o the aggregate amount of Cash consideration paid by Company and its Subsidiaries (x) for any Permitted Acquisition or series of related Permitted Acquisitions made after the Closing Date shall not exceed $20 million and (y) for all Permitted Acquisitions made after the Closing Date shall not exceed $60 million; o the excess of the Revolving Loan Commitments over the Total Utilization of Revolving Loan Commitments immediately after giving effect to such Permitted Acquisition will be not less than $15 million; o concurrently with the consummation of such Permitted Acquisition, Company shall, and shall cause its Subsidiaries to, comply with the requirements of subsections 6.8 and 6.9 with respect to such Permitted Acquisition; o Company shall deliver to Administrative Agent an Officer's Certificate (1) certifying that no Potential Event of Default or Event of Default shall then exist or shall occur as a result of such Permitted Acquisition and (2) demonstrating that after giving effect to such Permitted Acquisition and to all Indebtedness to be incurred or assumed or repaid in connection with or as consideration for such Permitted Acquisition, Company will be in compliance with the financial covenants set forth in subsection 7.6, calculated on a Pro Forma Basis, as of the last day of the four Fiscal Quarter period most recently ended prior to the date of the proposed Permitted Acquisition for which the relevant financial information is available; o prior to the consummation of any Permitted Acquisition having a purchase price in excess of $10 million, Company shall deliver to Administrative Agent a copy, prepared in conformity with GAAP (subject to year-end adjustments and the absence of footnotes), of (i) financial statements of the Person or business so acquired for the immediately preceding four consecutive Fiscal Quarter period corresponding to the calculation period for the financial covenants in the immediately preceding clause and (ii) to the extent available 141 from the applicable seller of the Acquired Business or the Acquired Business, audited or reviewed financial statements of the Person or business to be so acquired for the fiscal year ended within such period of such Person; o prior to the consummation of any Permitted Acquisition having a purchase price in excess of $15 million, Company shall deliver to Administrative Agent revised financial projections (in a form substantially consistent with previously provided projections) for Company, on a Pro Forma Basis, for such proposed Permitted Acquisition for the succeeding four Fiscal Quarters; o the aggregate purchase price of all Permitted Acquisitions that result in a new Foreign Subsidiary or result in the Acquired Business being owned by a Foreign Subsidiary shall not exceed $10 million; and o Company and its Subsidiaries may make Asset Sales of assets having a fair market value of not in excess of $20 million in any Fiscal Year or of $60 million in the aggregate for all such Asset Sales during the term of this Agreement; provided that in each case (x) the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (y) 80% of the consideration received therefor shall be Cash; and (z) the proceeds of any such Asset Sale are applied as required by subsection 2.4B(iii)(a). o CONSOLIDATED CAPITAL EXPENDITURES. Company shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Expenditures, in any Fiscal Year indicated below, in an aggregate amount in excess of the corresponding amount (the "MAXIMUM CONSOLIDATED CAPITAL EXPENDITURES AMOUNT") set forth below opposite such Fiscal Year; PROVIDED that the Maximum Consolidated Capital Expenditures Amount for any Fiscal Year shall be increased by an amount equal to the excess, if any, of the Maximum Consolidated Capital Expenditures Amount for the previous Fiscal Year only (prior to any adjustment in accordance with this proviso) over the actual amount of Consolidated Capital Expenditures for such previous Fiscal Year; PROVIDED, FURTHER that in no event shall the amount of such increase exceed 50% of the Maximum Consolidated Capital Expenditures Amount for such previous Fiscal Year (prior to any adjustment in accordance with this proviso): 142
FISCAL YEAR MAXIMUM CONSOLIDATED CAPITAL EXPENDITURES ----------------------------------------------------------------------- Fiscal Year 2000 $80.0 million Fiscal Year 2001 $45.0 million Fiscal Year 2002 $35.0 million Fiscal Year 2003 $28.0 million Fiscal Year 2004 $28.0 million Fiscal Year 2005 $25.0 million Fiscal Year 2006 $25.0 million Fiscal Year 2007 $18.75 million
o SALES AND LEASE-BACKS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease; PROVIDED that Company and its Subsidiaries may become and remain liable as lessee, guarantor or other surety with respect to any such lease to the extent that (i) such lease, if a Capital Lease, is permitted pursuant to subsection 7.1(iii), (ii) the consideration received is at least equal to the fair market value of the property sold as determined in good faith by Company's Board of Directors; PROVIDED prior consent of the Board of Directors was obtained if such fair market value was determined to be in excess of $1 million and (iii) the Net Asset Sale Proceeds derived from the sale/leaseback of such sold properties or assets owned by the Company or its Subsidiaries shall be applied to prepay Loans and/or reduce commitments pursuant to subsection 2.4B(iii)(a) without regard to any reinvestment of such Net Asset Sale Proceeds otherwise permitted under such subsection. o SALE OR DISCOUNT OF RECEIVABLES. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable; PROVIDED that Company may discount accounts receivable arising under letters of credit with respect to deferred customer financing in the ordinary course 143 of business so long as the aggregate amount of such discount does not exceed $2 million in any Fiscal Year. o TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity Securities of Company or with any Affiliate of Company or of any such holder, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; PROVIDED that the foregoing restriction shall not apply to (i) any transaction between Company and any of its wholly-owned Subsidiaries or between any of its wholly-owned Subsidiaries, (ii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries, (iii) reasonable fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Company or any Subsidiary as determined in good faith by Company's Board of Directors or its senior management, (iv) Investments and Restricted Junior Payments permitted hereunder, (v) transactions between the Company and any of its Subsidiaries or between Subsidiaries, in each case, so long as no portion of the minority interest in such Subsidiary is owned by an Affiliate of Company (other than a wholly-owned Subsidiary or directors or officers of such Subsidiary that hold capital stock of such Subsidiary to the extent that local law requires a resident of such jurisdiction to own capital stock of such Subsidiary); PROVIDED such transactions are not otherwise prohibited hereunder and the Board of Directors of (x) Company, in the case of a transaction between Company and any of its non-wholly owned Subsidiaries, or (y) the applicable wholly-owned Subsidiary in the case of a transaction between a non-wholly owned Subsidiary and such wholly-owned Subsidiary, in each case shall determine in good faith that such transaction is fair to Company or such wholly-owned Subsidiary, as the case may be, or (vi) any agreement as in effect as of the Closing Date (as amended by any amendment thereto or any transaction contemplated thereby, in each case solely to the extent such agreement and such transactions are set forth in SCHEDULE 7.11; PROVIDED that (a) any such amended agreement thereto is not more disadvantageous to Company or any Subsidiary, as applicable, in any material respect than such original agreement and (b) such amendment is not materially adverse to Lenders. o DISPOSAL OF SUBSIDIARY EQUITY. Except pursuant to the Collateral Documents and except for any sale of 100% of the capital stock or other equity Securities of any its Subsidiaries in compliance with the provisions of subsection 7.7(i) or 7.7(viii), Company shall not: o directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law; or o permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries (including such Subsidiary), except to 144 Company or a Domestic Subsidiary, or to qualify directors if required by applicable law. o CONDUCT OF BUSINESS. o From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company and its Subsidiaries on the Closing Date and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders. o Company will not permit Acquisition Co. to engage in any activities other than those that are necessary or advisable to effect the Merger, and to effect the transaction contemplated by this Agreement. o AMENDMENTS OR WAIVERS OF RELATED AGREEMENTS. o None of Company or any of its Subsidiaries will agree to any material amendment to, or waive any of its material rights under, any Related Agreement or the Consulting Agreement, as the case may be, or terminate or agree to terminate any Related Agreement or the Consulting Agreement, as the case may be, without in each case obtaining the prior written consent of Requisite Lenders to such amendment, waiver or termination, other than any amendment, waiver or termination of any Related Agreement or the Consulting Agreement, as the case may be, which is neither material nor adverse to Lenders. o Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions thereof (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which would be adverse to Company or Lenders. o Company shall not, and shall not permit any of its Subsidiaries to, designate any Indebtedness as "Designated Senior Debt" (as defined in the Senior 145 Subordinated Note Indenture) for purposes of the Senior Subordinated Note Indenture without the prior written consent of Requisite Lenders. o Company shall not make any payment on the Convertible Preferred Stock in cash which could be made by the issuance of additional shares of Convertible Preferred Stock. o FISCAL YEAR. Other than in compliance with subsection 6.11, Company shall not change its Fiscal Year-end from October 31 of each calendar year, and, once such change has been effected in compliance with subsection 6.11, Company shall not change its Fiscal Year-end from December 31 of each calendar year. o CONSOLIDATED CAPITAL SOFTWARE EXPENDITURES. Company shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Software Expenditures, in any Fiscal Year indicated below, in an aggregate amount in excess of the corresponding amount (the "MAXIMUM CONSOLIDATED CAPITAL SOFTWARE EXPENDITURES AMOUNT") set forth below opposite such Fiscal Year; PROVIDED that the Maximum Consolidated Capital Software Expenditures Amount for any Fiscal Year shall be increased by an amount equal to the excess, if any, of the Maximum Consolidated Capital Software Expenditures Amount for the previous Fiscal Year only (prior to any adjustment in accordance with this proviso) over the actual amount of Consolidated Capital Software Expenditures for such previous Fiscal Year; PROVIDED, FURTHER that in no event shall the amount of such increase exceed 50% of the Maximum Consolidated Capital Software Expenditures Amount for such previous Fiscal Year (prior to any adjustment in accordance with this proviso):
FISCAL YEAR MAXIMUM CONSOLIDATED CAPITAL SOFTWARE EXPENDITURES ----------------------------------------------------------------------- Fiscal Year 2000 $6.0 million Fiscal Year 2001 $5.0 million Fiscal Year 2002 $4.5 million Fiscal Year 2003 $4.0 million Fiscal Year 2004 $4.0 million Fiscal Year 2005 $4.0 million Fiscal Year 2006 $4.0 million Fiscal Year 2007 $3.0 million
146 o MARGIN STOCK. Notwithstanding anything to the contrary contained herein, Company and its Subsidiaries shall not own Margin Stock with an aggregate value in excess of $5,000,000. o EVENTS OF DEFAULT If any of the following conditions or events ("EVENTS OF DEFAULT") shall occur: o FAILURE TO MAKE PAYMENTS WHEN DUE. Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within five days after the date due; or o DEFAULT IN OTHER AGREEMENTS. (i) Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations in an aggregate principal amount of $5 million or more beyond the end of any grace period provided therefor; or (ii) breach or default by Company or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Contingent Obligations in the aggregate principal amount referred to in clause (i) above or (b) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or o BREACH OF CERTAIN COVENANTS. Failure of Company to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7; or o BREACH OF WARRANTY. Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant thereto or in connection therewith shall be false in any material respect on the date as of which made; or o OTHER DEFAULTS UNDER LOAN DOCUMENTS. Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within thirty (30) days after the earlier of (i) an officer of Company or such 147 Loan Party becoming aware of such default or (ii) receipt by Company and such Loan Party of notice from Administrative Agent or any Lender of such default; or o INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Company or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any of its Subsidiaries, and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded or discharged; or o VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) Company or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Company or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Company or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or o JUDGMENTS AND ATTACHMENTS. Any money judgment, writ or warrant of attachment or similar process involving either in any individual case or in the aggregate at any time an amount in excess of $5 million (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale thereunder); or 148 o DISSOLUTION. Any order, judgment or decree shall be entered against Company or any of its Subsidiaries decreeing the dissolution or split up of Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or o EMPLOYEE BENEFIT PLANS. There shall occur one or more ERISA Events which individually or in the aggregate results in, or, excluding any event described in clause (x) of the definition of ERISA Event, would reasonably be expected to result in, liability to Company, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $5 million during the term of this Agreement; or there shall exist an amount of unfunded benefit liability calculated in accordance with the provisions of subsection 5.11D which exceeds $5 million; or o CHANGE IN CONTROL. Any Change in Control shall occur; or o INVALIDITY OF GUARANTIES; FAILURE OF SECURITY; REPUDIATION OF OBLIGATIONS. At any time after the execution and delivery thereof, (i) any Subsidiary Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void, (ii) any Collateral Document shall cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or Administrative Agent for the benefit of Lenders shall not have or shall cease to have a valid and perfected First Priority Lien on any Collateral purported to be covered thereby, in each case for any reason other than the failure of any Agent or any Lender to take any action within its control, or (iii) any Loan Party shall contest the validity or enforceability of any Loan Document in writing or deny in writing that it has any further liability, including with respect to future advances by Lenders, under any Loan Document to which it is a party; THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan, the obligation of the Person which is Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request, or may, with the written consent, of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan, the obligation of the Person which is Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate; PROVIDED that the foregoing shall not affect in any way the obligations of Revolving Lenders under subsection 3.3C(i) or the obligations of Revolving Lenders to purchase participations in any unpaid Swing Line Loans as provided in subsection 2.1A(iv). 149 Any amounts described in clause (b) above, when received by Administrative Agent, shall be held by Administrative Agent in the Collateral Account established pursuant to the Security Agreement and shall be applied as provided therein. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the Loan Documents, even if the conditions set forth in this paragraph are met. o THE AGENTS o APPOINTMENT. o Appointment of Agents. DLJ is hereby appointed Administrative Agent and Syndication Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Administrative Agent and Syndication Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. LCPI is hereby appointed Documentation Agent. Each of Administrative Agent and Syndication Agent agrees to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The Documentation Agent shall have no duties or responsibilities under this Agreement and the other Loan Documents. The provisions of this Section 9 are solely for the benefit of each of Agents and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, each of Administrative Agent and Syndication Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. o Appointment of Supplemental Collateral Agents. It is the purpose of this Agreement and the other Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such 150 jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Loan Documents, and in particular in case of the enforcement of any of the Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "Supplemental Collateral Agent" and collectively as "Supplemental Collateral Agents"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Administrative Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such other Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. o POWERS AND DUTIES; GENERAL IMMUNITY. o Powers; Duties Specified. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Loan Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified in this Agreement and the other Loan Documents. Each Agent may exercise such powers, rights and remedies 151 and perform such duties by or through its agents or employees. No Agent shall have, by reason of this Agreement or any of the other Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement or any of the other Loan Documents except as expressly set forth herein or therein. Notwithstanding anything herein to the contrary, Agent shall not be responsible for notifying any Federal banking authority of its activities hereunder (including pursuant to the Bank Service Company Act (12 U.S.C. 1867)). o No Responsibility for Certain Matters. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by such Agent to Lenders or by or on behalf of Company to such Agent or any Lender in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall such Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. o Exculpatory Provisions. None of the Agents nor any of their respective officers, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any such Agent under or in connection with any of the Loan Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, 152 upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6). o Agents Entitled to Act as Lender. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Person which is an Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Letters of Credit, each Person which is an Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include such Person in its individual capacity. Any Person which is an Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. o REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF CREDITWORTHINESS. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Loans and the issuance of Letters of Credit hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. o RIGHT TO INDEMNITY. Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, 153 costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Loan Documents or otherwise in its capacity as Administrative Agent or Syndication Agent, as the case may be, in any way relating to or arising out of this Agreement or the other Loan Documents; PROVIDED that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from any Agent's gross negligence or willful misconduct. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity except against gross negligence or willful misconduct and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. o SUCCESSOR AGENTS AND SWING LINE LENDER. o Successor Agents. Each Agent may resign at any time by giving 30 days' prior written notice thereof to the other Agents, Lenders and Company, and any Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and the Agents and signed by Requisite Lenders. Upon any notice of resignation or removal of Administrative Agent, Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Administrative Agent. If for any reason Requisite Lenders cannot agree on a successor Administrative Agent, the resigning Administrative Agent shall have the right to designate a successor Administrative Agent, after consulting with Company. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent, and the retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. o Successor Swing Line Lender. Any resignation or removal of Administrative Agent pursuant to subsection 9.5A shall also constitute the resignation or removal of DLJ or its successor as Swing Line Lender, and any successor Administrative Agent appointed pursuant to subsection 9.5A shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (i) Company shall prepay any outstanding Swing Line Loans made by the retiring or removed Administrative Agent in its capacity as Swing Line Lender, (ii) upon such prepayment, the retiring or removed Administrative Agent and Swing Line Lender shall surrender the Swing Line Note held by it to Company for cancellation, and (iii) Company shall issue a new Swing Line Note to the 154 successor Administrative Agent and Swing Line Lender substantially in the form of EXHIBIT IV-D annexed hereto, in the principal amount of the Swing Line Loan Commitment then in effect and with other appropriate insertions. o COLLATERAL DOCUMENTS AND GUARANTIES. o Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to enter into each Collateral Document as secured party and to be the agent for and representative of Lenders under each Subsidiary Guaranty, and each Lender agrees to be bound by the terms of each Collateral Document and Subsidiary Guaranty; PROVIDED that Administrative Agent shall not (i) enter into or consent to any material amendment, modification, termination or waiver of any provision contained in any Collateral Document or Subsidiary Guaranty or (ii) release any Collateral (except as otherwise expressly permitted or required pursuant to the terms of this Agreement or the applicable Collateral Document), in each case without the prior consent of Requisite Lenders (or, if required pursuant to subsection 10.6, all Lenders); PROVIDED FURTHER, HOWEVER, that, without further written consent or authorization from Lenders, Administrative Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented or (b) release any Subsidiary Guarantor from the Subsidiary Guaranty if all of the equity Securities of such Subsidiary Guarantor are sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders have otherwise consented. Anything contained in any of the Loan Documents to the contrary notwithstanding, Company, each Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce any Subsidiary Guaranty, it being understood and agreed that all rights and remedies under the Collateral Documents and the Subsidiary Guaranties may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms thereof, and (Y) in the event of a foreclosure by Administrative Agent on any of the Collateral pursuant to a public or private sale, any Agent or any Lender may be the purchaser of any or all of such Collateral at any such sale and Administrative Agent, as agent for and representative of all Lenders (but not any Lender or Lenders in its or their respective individual capacities) if Requisite Lenders shall agree in writing shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale. o Each Lender hereby authorizes Administrative Agent to execute any and all powers of attorney or other instruments on behalf of such Lender necessary to 155 affect the pledge of any Subsidiary's shares of capital stock under the laws of a jurisdiction outside of the United States of America. o MISCELLANEOUS o SUCCESSORS AND ASSIGNS. o The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that Company may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by Company without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Affiliates of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. o Any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it) and the other Loan Documents; provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitments and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Revolving Loan Commitment (which for this purpose includes Loans outstanding thereunder) or principal outstanding balance of the Term Loan of the assigning Lender subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to Administrative Agent) shall not be less than $5 million, in the case of any assignment of a Revolving Loan, or $1 million, in the case of any assignment of a Term Loan, unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, Company otherwise consent (each such consent not to be unreasonably withheld or delayed), (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate Commitments or Loans on a non-PRO RATA basis, and (iii) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment Agreement, together with a processing and recordation fee of $1500, and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an administrative questionnaire. Subject to acceptance and recording thereof by Administrative Agent in the Register, from and after the effective date specified in each Assignment Agreement, the Eligible Assignee thereunder 156 shall be a party hereto and, to the extent of the interest assigned by such Assignment Agreement, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment Agreement, be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of subsections 2.6, 2.7, 3.6, 10.2 and 10.3. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection 10.1B shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection 10.1C. o Any Lender may, without the consent of, or notice to, Company or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitments and/or the Loans owing to it); PROVIDED that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) Company, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such agreement or instrument may provide that such Lender will not, without the consent of the Participant agree to any amendment, modification or waiver described in clauses (a), (b), (c), (d) or (e) of subsection 10.6A that affects such Participant. Subject to subsection 10.1D, Company agrees that each Participant shall be entitled to the benefits of subsections 3.6, 2.6D and 2.7 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection 10.1B. To the extent permitted by law, each Participant also shall be entitled to the benefits of subsection 10.4 as though it were a Lender, provided such Participant agrees to be subject to subsection 10.5 as though it were a Lender. o A Participant shall not be entitled to receive any greater payment under subsection 2.7 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Company's prior written consent. A Participant that would be a foreign Lender if it were a Lender shall not be entitled to the benefits of subsection 2.7 unless Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of Company, to comply with Section 2.7B(iii)(a) as though it were a Lender. 157 o Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank; PROVIDED that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. o Information. Each Lender may furnish any information concerning any Loan Party in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. o Representations of Lenders. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee or, upon the approval of Administrative Agent and such other Persons, if any, required under the definition of Eligible Assignee, will be an Eligible Assignee; (ii) that it has experience and expertise in the making or acquiring of loans such as the Loans; and (iii) that it will make or acquire its Loans for its own account in the ordinary course of its business and without a view to distribution of such Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement will be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. o EXPENSES. Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual out of pocket and reasonable costs and expenses of preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including any opinions requested by Administrative Agent or Lenders as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents including with respect to confirming compliance with environmental, insurance and solvency requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Arranger and Administrative Agent in connection with the negotiation, preparation, execution and administration of the Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all the actual costs and reasonable expenses of creating and perfecting Liens in favor of Administrative Agent on behalf of Lenders pursuant to any Collateral Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Administrative Agent and of counsel 158 providing any opinions that Administrative Agent or Requisite Lenders may request in respect of the Collateral Documents or the Liens created pursuant thereto; (v) all the actual out of pocket costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any auditors, accountants or appraisers and any environmental or other consultants, advisors and agents employed or retained by Administrative Agent or their respective counsel) of obtaining and reviewing any appraisals, environmental audits or reports and any audits or reports provided for under subsection 4.1I, 6.9B or 6.9C; (vi) the custody or preservation of any of the Collateral; (vii) all other actual and reasonable costs and expenses incurred by Arranger or Administrative Agent in connection with the syndication of the Commitments and the negotiation, preparation and execution of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (viii) after the occurrence and during the continuation of an Event of Default, all costs and expenses, including reasonable attorneys' fees and costs of settlement, incurred by Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Loan Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranties or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings). o INDEMNITY. In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitees' selection of counsel), indemnify, pay and hold harmless Arranger, Agents and Lenders, and the officers, directors, trustees, employees, agents and affiliates of Arranger, Agents and Lenders (collectively called the "INDEMNITEES"), from and against any and all Indemnified Liabilities (as hereinafter defined); PROVIDED that Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction. As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including without limitation the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity not caused solely by the gross negligence or willful misconduct of Administrative Agent or the Lenders), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in 159 any manner relating to or arising out of (i) this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof), or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranties), (ii) the statements contained in the commitment letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. No Lenders shall have any liability for special, incidental, consequential or punitive damages arising out of such Lender's breach of this Agreement or any other Loan Document to the extent such liability did not arise solely from the gross negligence or willful misconduct of such Lender as determined by a final judgment of a court of competent jurisdiction. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. o SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuation of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, without notice to Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Nothing in this subsection 10.4 or in subsection 10.5 shall limit any Lender's rights to make a set-off against other obligations owed such Lender prior to or instead of setting off against the Aggregate Amounts Due (as defined below) to such Lender. Company hereby further grants to each Agent and each Lender a security interest in all deposits and accounts maintained with such Agent or such Lender as security for the Obligations. 160 o RATABLE SHARING. Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise (except pursuant to subsections 2.4B, 2.8B or 10.1), or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; PROVIDED that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. o AMENDMENTS AND WAIVERS. o No amendment, modification, termination or waiver of any provision of this Agreement or of the other Loan Documents, and no consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; PROVIDED that any amendment, modification, termination, waiver or consent which: o extends, postpones or waives the final scheduled maturity of any Loan or Note, or extends the stated maturity of any Letter of Credit beyond the Revolving Loan Commitment Termination Date, or reduces the rate or extends the time of payment of interest or fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates), or reduces the principal amount thereof (except to the extent repaid in cash), or increases the amount or extends the expiration date of any Lender's Commitments; or o releases all or substantially all of (x) the Collateral (except as expressly provided in the Loan Documents) under all the Collateral Documents (it being 161 understood that an increase in the amount of Indebtedness of the Company secured ratably by the Collateral shall not be deemed a release of Collateral), or (y) the Subsidiary Guarantors (except as expressly provided in the Loan Documents) from their obligations under the Subsidiary Guaranty, or subordinates the rights of any Lender in right of payment, or to any Collateral, to the prior payment or priority of any other Person (including, without limitation, any future Loans under this Agreement); or o amends, modifies or waives any provision of this subsection 10.6; or o reduces the percentage specified in the definition "Requisite Lenders" or "Requisite Class Lenders" (it being understood that, with the consent of Requisite Lenders, holders of additional extensions of credit pursuant to this Agreement may be included in the determination of Requisite Lenders on substantially the same basis as the holders of extensions of Term Loans and Revolving Loan Commitments are included on the Closing Date); or o consents to the assignment or transfer by any Loan Party of any of its rights and obligations under this Agreement or any other Loan Document or amends, modifies or waives any provision of any Loan Document that, by its terms, requires the consent, approval or satisfaction of all of the Lenders; shall be effective only if evidenced in a writing signed by or on behalf of all Lenders (with Obligations being directly affected in the case of clause (a) above). In addition, (i) no amendment, modification, termination or waiver of any provision of any Note held by a Lender or which increases the Commitments of any Lender over the amount thereof then in effect shall be effective without the written concurrence of such Lender, (ii) no amendment, modification, termination or waiver of any provision of subsection 2.1A(iv) or any other provision of this Agreement relating to the Swing Line Lender shall be effective without the written concurrence of Swing Line Lender, (iii) no amendment, modification, termination or waiver of any provision of Section 9 or of any other provision of this Agreement which, by its terms, expressly requires the approval or concurrence of Administrative Agent shall be effective without the written concurrence of Administrative Agent, (iv) no amendment, modification, termination or waiver of any provision of subsection 2.3C or subsection 2.4 or any Collateral Document or Subsidiary Guaranty that has the effect of changing any voluntary or mandatory prepayments or Commitment reductions or voluntary prepayment fees or application of proceeds of Collateral or payments pursuant to the Subsidiary Guaranty applicable to any Class (the "AFFECTED CLASS") in a manner that disproportionately disadvantages such Class relative to the other Classes shall be effective without the written concurrence of Requisite Class Lenders of the Affected Class (it being understood and agreed that any amendment, modification, termination or waiver of any such provision that only postpones or reduces any voluntary or mandatory prepayment or Commitment reduction set forth in subsection 2.4 with respect to one Class but not the other Classes shall be deemed to disproportionately disadvantage one Class but not to disproportionately disadvantage such other Classes for purposes of this clause (iv), and it being further understood that any amendment covered by clause (v) or clause (vi) shall be deemed not to disproportionately disadvantage any 162 Class), (v) any increase in the Tranche A Term Loan Commitments, Tranche B Term Loan Commitments or Revolving Loan Commitments (and any appropriate conforming and supplemental modifications to this Agreement) shall require the approval of Supermajority Lenders and each Lender increasing its Tranche A Term Loan Commitment, Tranche B Term Loan Commitment or Revolving Loan Commitment, as the case may be (provided that increases pursuant to subsection 2.1A(v) do not require the consent of either Requisite Lenders or Supermajority Lenders), (vi) the creation of an additional Class of commitments and loans made thereunder (and any appropriate conforming and supplemental modifications to this Agreement) shall require the approval of Supermajority Lenders and each Lender providing a commitment under such additional Class, and (vii) no amendment, modification, waiver or consent in respect of any provision of this Agreement or any other Loan Document shall be effective without the consent of all of the Tranche B Term Loan Lenders if such amendment, modification, termination, waiver or consent amends, modifies, terminates or waives subsection 2.3C. o If, in connection with any proposed amendment, modification, termination or waiver of any of the provisions of this Agreement or the Notes which requires the consent of all Lenders, the consent of Requisite Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then Company shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described in either clause (i) or (ii) below, to either (i) replace each such non-consenting Lender or Lenders with one or more Replacement Lenders pursuant to subsection 2.8 so long as at the time of such replacement, each such Replacement Lender consents to the proposed amendment, modification, termination or waiver, or (ii) terminate such non-consenting Lender's Commitments and repay in full its outstanding Loans in accordance with subsections 2.4B(i)(b) and 2.4B(ii)(b); PROVIDED that unless the Commitments that are terminated and the Loans that are repaid pursuant to the preceding clause (ii) are immediately replaced in full at such time through the addition of new Lenders or the increase of the Commitments and/or outstanding Loans of existing Lenders (who in each case must specifically consent thereto), then in the case of any action pursuant to the preceding clause (ii), the Requisite Lenders (determined before giving effect to the proposed action) shall specifically consent thereto; PROVIDED FURTHER that Company shall not have the right to terminate such non-consenting Lender's Commitment and repay in full its outstanding Loans pursuant to clause (ii) of this subsection 10.6B if, immediately after the termination of such Lender's Revolving Loan Commitment in accordance with subsection 2.4B(ii)(b), the Revolving Loan Exposure of all Lenders would exceed the Revolving Loan Commitments of all Lenders; PROVIDED STILL FURTHER that Company shall not have the right to replace a Lender solely as a result of the exercise of such Lender's rights (and the withholding of any required consent by such Lender) pursuant to the second paragraph of subsection 10.6A. o Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective 163 only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, on Company. o INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. o NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; PROVIDED that notices to Administrative Agent shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent. o SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. o All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder. o Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 5.12, 6.7A, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, the foreclosure (including by the exercise of power of sale) of any Mortgage or any deed given in lieu of foreclosure, and the termination of this Agreement. 164 o FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. o MARSHALLING; PAYMENTS SET ASIDE. None of Agents or Lenders shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or any of Agents or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. o SEVERABILITY. In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. o OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. o HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 165 o APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. o CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY OBJECTION TO VENUE AND ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. o WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM 166 RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. o CONFIDENTIALITY. Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates and professional advisors of such Lender or disclosures reasonably required by (a) any bona fide assignee, transferee or participant in connection with the contemplated or actual assignment or transfer by such Lender of any Loans or any participations therein or (b) by any direct or indirect contractual counterparties in swap agreements or such contractual counterparties' professional advisors provided that such contractual counterparty or professional advisor to such contractual counterparty agrees to keep such information confidential to the same extent required of the Lenders hereunder, or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; PROVIDED that, unless specifically prohibited (or requested not to do so) by applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, or disclosure of information in connection with any litigation to which such Lender is a party, or disclosure of information which is or becomes publicly available other than as a result of a breach by such Lender of this subsection 10.19, or disclosure of information which is received by such Lender without restriction as to its disclosure or use from a Person who, to such Lender's knowledge or reasonable belief, was not prohibited from disclosing it by any duty of confidentiality; and PROVIDED FURTHER that in no event shall Administrative Agent or any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 167 o COUNTERPARTS; EFFECTIVENESS. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 168 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: AUTOTOTE CORPORATION By:_________________________________ Name: Title: Notice Address: [ ] Tel.: [ ] Fax: [ ] S-1 LENDERS: DLJ CAPITAL FUNDING, INC., individually and as Administrative Agent and Syndication Agent By:_________________________________ Name: Title: Notice Address: 277 Park Avenue New York, NY 10172 Attention: [ ] Tel.: 212-892-2903 Fax: 212-892-6031 LEHMAN COMMERCIAL PAPER INC., individually and as Documentation Agent By:_________________________________ Name: Title: Notice Address: ____________________________________ ____________________________________ Attention:__________________________ Tel.:_______________________________ Fax:________________________________ S-2 LEHMAN BROTHERS INC., as Co-Arranger By:_________________________________ Name: Title: Notice Address: ____________________________________ ____________________________________ Attention:__________________________ Tel.:_______________________________ Fax:________________________________ S-3 $345,000,000 AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF OCTOBER 6, 2000 AMONG AUTOTOTE CORPORATION, AS BORROWER, THE LENDERS LISTED HEREIN, AS LENDERS, DLJ CAPITAL FUNDING, INC., AS SYNDICATION AGENT, LEHMAN COMMERCIAL PAPER INC., AS DOCUMENTATION AGENT, AND DLJ CAPITAL FUNDING, INC., AS ADMINISTRATIVE AGENT LEAD ARRANGER AND SOLE BOOK RUNNING MANAGER: DLJ CAPITAL FUNDING, INC. CO-ARRANGER: LEHMAN BROTHERS INC. $345,000,000 AUTOTOTE CORPORATION AMENDED AND RESTATED CREDIT AGREEMENT TABLE OF CONTENTS PAGE Section 1. DEFINITIONS......................................................2 1.1 Defined Terms....................................................2 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement....................................35 1.3 Other Definitional Provisions and Rules of Construction.........36 Section 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS......................36 2.1 Commitments; Making of Loans; Notes.............................36 2.2 Interest on the Loans...........................................45 2.3 Fees............................................................49 2.4 Repayments, Prepayments and Reductions in Loan Commitments; General Provisions Regarding Payments...........................50 2.5 Use of Proceeds.................................................60 2.6 Special Provisions Governing LIBO Rate Loans....................61 2.7 Increased Costs; Taxes; Capital Adequacy........................63 2.8 Obligation of Lenders and Issuing Lenders to Mitigate; Replacement of Lender...........................................67 Section 3. LETTERS OF CREDIT...............................................69 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein..........................................69 3.2 Letter of Credit Fees...........................................72 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit..........................................................73 3.4 Obligations Absolute............................................75 3.5 Indemnification; Nature of Issuing Lenders' Duties..............76 3.6 Increased Costs and Taxes Relating to Letters of Credit.........77 Section 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT.......................78 4.1 Conditions to Initial Loans.....................................78 4.2 Conditions to All Loans.........................................89 4.3 Conditions to Letters of Credit.................................90 4.4 Restatement Effective Date Conditions...........................90 Section 5. COMPANY'S REPRESENTATIONS AND WARRANTIES........................93 5.1 Organization, Powers, Qualification, Good Standing, PAGE Business and Subsidiaries.......................................93 5.2 Authorization of Borrowing, etc.................................94 5.3 Financial Condition.............................................96 5.4 No Material Adverse Change; No Restricted Junior Payments.......96 5.5 Title to Properties; Liens; Real Property.......................96 5.6 Litigation; Adverse Facts.......................................97 5.7 Payment of Taxes................................................97 5.8 Performance of Agreements; Materially Adverse Agreements........98 5.9 Governmental Regulation.........................................98 5.10 Securities Activities...........................................98 5.11 Employee Benefit Plans..........................................98 5.12 Certain Fees....................................................99 5.13 Environmental Protection.......................................100 5.14 Employee Matters...............................................101 5.15 Solvency.......................................................101 5.16 Matters Relating to Collateral.................................101 5.17 Related Agreements.............................................102 5.18 Disclosure.....................................................102 5.19 Certain Jurisdictions..........................................102 Section 6. COMPANY'S AFFIRMATIVE COVENANTS................................102 6.1 Financial Statements and Other Reports.........................103 6.2 Legal Existence, etc...........................................108 6.3 Payment of Taxes and Claims; Tax Consolidation.................109 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds................................109 6.5 Inspection Rights; Lender Meeting..............................112 6.6 Compliance with Laws, etc......................................112 6.7 Environmental Review and Investigation, Disclosure, Etc.; Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws......112 6.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries; IP Collateral....................................115 6.9 Leasehold Properties; Matters Relating to Additional Real Property Collateral; Certain Opinions; Removal of Liens........116 6.10 Interest Rate Protection.......................................120 6.11 Fiscal Year....................................................120 6.12 Connecticut Lottery Corporation................................120 6.13 Delisting......................................................120 ii Section 7. COMPANY'S NEGATIVE COVENANTS...................................121 7.1 Indebtedness...................................................121 7.2 Liens and Related Matters......................................123 7.3 Investments; Joint Ventures....................................127 7.4 Contingent Obligations.........................................128 7.5 Restricted Junior Payments.....................................129 7.6 Financial Covenants............................................130 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions...................................................132 7.8 Consolidated Capital Expenditures..............................135 7.9 Sales and Lease-Backs..........................................135 7.10 Sale or Discount of Receivables................................136 7.11 Transactions with Stockholders and Affiliates..................136 7.12 Disposal of Subsidiary Equity..................................137 7.13 Conduct of Business............................................137 7.14 Amendments or Waivers of Related Agreements....................137 7.15 Fiscal Year....................................................138 7.16 Consolidated Capital Software Expenditures.....................138 7.17 Margin Stock...................................................139 Section 8. EVENTS OF DEFAULT..............................................139 8.1 Failure to Make Payments When Due..............................139 8.2 Default in Other Agreements....................................139 8.3 Breach of Certain Covenants....................................139 8.4 Breach of Warranty.............................................140 8.5 Other Defaults Under Loan Documents............................140 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc...........140 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc.............140 8.8 Judgments and Attachments......................................141 8.9 Dissolution....................................................141 8.10 Employee Benefit Plans.........................................141 8.11 Change in Control..............................................141 8.12 Invalidity of Guaranties; Failure of Security; Repudiation of Obligations.................................................141 Section 9. THE AGENTS.....................................................142 9.1 Appointment....................................................142 9.2 Powers and Duties; General Immunity............................144 9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness..................................145 9.4 Right to Indemnity.............................................145 9.5 Successor Agents and Swing Line Lender.........................146 9.6 Collateral Documents and Guaranties............................146 iii Section 10. MISCELLANEOUS..................................................147 10.1 Successors and Assigns.........................................147 10.2 Expenses.......................................................149 10.3 Indemnity......................................................150 10.4 Set-Off; Security Interest in Deposit Accounts.................151 10.5 Ratable Sharing................................................152 10.6 Amendments and Waivers.........................................152 10.7 Independence of Covenants......................................155 10.8 Notices........................................................155 10.9 Survival of Representations, Warranties and Agreements.........155 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative..........155 10.11 Marshalling; Payments Set Aside................................156 10.12 Severability...................................................156 10.13 Obligations Several; Independent Nature of Lenders' Rights.....156 10.14 Headings.......................................................156 10.15 Applicable Law.................................................156 10.17 Consent to Jurisdiction and Service of Process.................157 10.18 Waiver of Jury Trial...........................................158 10.19 Confidentiality................................................158 10.20 Counterparts; Effectiveness....................................159 Signature pages......................................................S-1 iv EXHIBITS I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF REQUEST FOR ISSUANCE OF LETTER OF CREDIT IV-A FORM OF TRANCHE A TERM NOTE IV-B FORM OF TRANCHE B TERM NOTE IV-C FORM OF REVOLVING NOTE IV-D FORM OF SWING LINE NOTE V FORM OF COMPLIANCE CERTIFICATE VI FORM OF FINANCIAL CONDITION CERTIFICATE VII-A FORM OF CLOSING DATE OPINION OF KRAMER LEVIN NAFTALIS & FRANKEL L.L.P VII-B FORM OF CLOSING DATE OPINION OF SMITH, GAMBRELL & RUSSELL, LLP VII-C FORM OF CLOSING DATE OPINION OF SILLS, CUMMIS, RADIN, TISCHMAN, EPSTEIN & GROSS P.A. VII-D FORM OF CLOSING DATE OPINION OF TOBIN, CARBERRY, O'MALLEY, RILEY & SELINGER, P.C. VII-E FORM OF CLOSING DATE OPINION OF SHRECK MORRIS VII-F FORM OF CLOSING DATE OPINION OF MARTIN E. SCHLOSS, ESQ. VII-G FORM OF CLOSING DATE OPINION OF C. GRAY BETHEA, ESQ. VIII FORM OF OPINION OF O'MELVENY & MYERS LLP IX FORM OF ASSIGNMENT AGREEMENT X FORM OF CERTIFICATE RE NON-BANK STATUS XI INTENTIONALLY OMITTED XII FORM OF SECURITY AGREEMENT XIII FORM OF SUBSIDIARY GUARANTY XIV FORM OF AGREEMENT OF JOINDER v XV FORM OF COLLATERAL ACCESS AGREEMENT XVI MASTER RESTATEMENT CONFIRMATION XVII FORM OF RESTATEMENT EFFECTIVE DATE OPINION OF KRAMER LEVIN NAFTALIS & FRANKEL L.L.P XVIII FORM OF RESTATEMENT EFFECTIVE DATE OPINION OF MARTIN E. SCHLOSS, ESQ. XIX FORM OF RESTATEMENT EFFECTIVE DATE OPINION OF O'MELVENY & MYERS LLP vi SCHEDULES 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 5.1 SUBSIDIARIES OF COMPANY 5.5 REAL PROPERTY 5.6 LITIGATION 5.13 ENVIRONMENTAL MATTERS 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.2C(a) CERTAIN EXISTING AGREEMENTS WITH GOVERNMENTAL AUTHORITIES PROHIBITING THE ASSUMPTION OR CREATION OF LIENS 7.2C(e) EXISTING RIGHTS OF FIRST REFUSAL WITH RESPECT TO INTERESTS IN CERTAIN SUBSIDIARIES AND JOINT VENTURES 7.2C(g) CERTAIN AGREEMENTS PROHIBITING THE CREATION OR ASSUMPTION OF ANY LIEN ON ASSETS 7.2D(a) CERTAIN EXISTING AGREEMENTS WITH GOVERNMENTAL AUTHORITIES RESTRICTING THE ABILITY TO TRANSFER ASSETS 7.2D(c) CERTAIN AGREEMENTS RESTRICTING THE PAYMENT OF DIVIDENDS AND THE MAKING OF DISTRIBUTIONS ON EQUITY INTERESTS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.11(vi) TRANSACTIONS WITH AFFILIATES vii EX-10.25 9 a2036456zex-10_25.txt EXHIBIT 10.25 Exhibit 10.25 SECURITY AGREEMENT This AMENDED AND RESTATED SECURITY AGREEMENT (this "AGREEMENT") is dated as of October 6, 2000 and entered into by and among Autotote Corporation, a Delaware corporation ("COMPANY"), each of THE UNDERSIGNED SUBSIDIARIES of Company (each of such undersigned Subsidiaries being a "SUBSIDIARY GRANTOR" and collectively "SUBSIDIARY GRANTORS") and each ADDITIONAL GRANTOR that may become a party hereto after the date hereof in accordance with Section 22 (each of the Company, each Subsidiary Grantor, and each Additional Grantor being a "GRANTOR" and collectively the "GRANTORS") and DLJ CAPITAL FUNDING, INC., as Administrative Agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Hedge Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Pursuant to the Amended and Restated Credit Agreement dated as of October 6, 2000 (said Credit Agreement, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among Company, the financial institutions party thereto as Lenders, DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager, Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Grantors agree that their existing pledge and grant of a security interest in substantially all of their present and future real and personal property pursuant to the Security Agreement dated as of September 6, 2000 ("the "CLOSING DATE SECURITY AGREEMENT") by and among the Grantors and Secured Party shall be continued without interruption and shall be amended and restated in its entirety. C. Company and the Subsidiary Guarantors, as the case may be, may from time to time enter, or may from time to time have entered, into one or more Hedge Agreements (collectively, the "LENDER HEDGE AGREEMENTS") with one or more Persons that are Lenders or Affiliates of Lenders at the time such Hedge Agreements are entered into (in such capacity, collectively, "HEDGE EXCHANGERS") in accordance with the terms of the Credit Agreement, and it is desired that the obligations of Company and the Subsidiary Guarantors, under the Lender Hedge Agreements, including without limitation the obligation of Company and the Subsidiary Guarantors, as the case may be, to make payments thereunder in the event of early termination thereof or other termination payments, together with all obligations of Company under the Credit Agreement and the other Loan Documents, be secured hereunder. D. Subsidiary Grantors have executed and delivered that certain Amended and Restated Subsidiary Guaranty dated the date hereof (said Amended and Restated Subsidiary Guaranty, as it may hereafter be amended, restated, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers, pursuant to which each Subsidiary Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and all obligations of Company under the Lender Hedge Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof or other termination payments. E. As contemplated by the Credit Agreement, the Grantors and the Secured Party desire to amended and restate the Closing Date Security Agreement in its entirety. NOW, THEREFORE, in consideration of the premises and agreements contained the Credit Agreement and the Loan Documents, the Grantors and the Secured Party agree that the Closing Date Security Agreement shall be amended and restated, without novation, as follows: SECTION 1. GRANT OF SECURITY. Each Grantor hereby assigns to Secured Party for the benefit of Lenders and any Hedge Exchangers, and hereby grants to Secured Party for the benefit of Lenders and any Hedge Exchangers a security interest in, all of such Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing, whether tangible or intangible, or in which such Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "EQUIPMENT"); (b) all inventory in all of its forms, including but not limited to (i) all goods held by such Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in such Grantor's business, (iii) all goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by such 2 Grantor and all accessions thereto and products thereof (collectively the "INVENTORY") and all negotiable and non-negotiable documents of title (including without limitation warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "NEGOTIABLE DOCUMENT OF TITLE"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind owned by or owing to such Grantor and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "ACCOUNTS", and any and all such security agreements, leases and other contracts being the "RELATED CONTRACTS"); (d) all deposit accounts ("DEPOSIT ACCOUNTS") including the restricted deposit account established and maintained by Secured Party pursuant to Section 12 (the "COLLATERAL ACCOUNT"), together with (i) all amounts on deposit from time to time in such deposit accounts and (ii) all interest, cash, instruments, securities and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; (e) the "SECURITIES COLLATERAL", which term means: (i) the shares of stock, partnership interests, interests in joint ventures, limited liability company interests and all other equity interests in a Person that is, or becomes, a direct Subsidiary or direct Joint Venture, as the case may be, of such Grantor, including all securities convertible into, and rights, warrants, options and other rights to purchase or otherwise acquire, any of the foregoing now or hereafter owned by such Grantor, including those owned on the date hereof and described on Schedule 1(e)(i), and the certificates or other instruments representing any of the foregoing and any interest of such Grantor in the entries on the books of any securities intermediary pertaining thereto (the "PLEDGED SHARES"), and all dividends, distributions, returns of capital, cash, warrants, options, rights, instruments, rights to vote or manage the business of such Person pursuant to organizational documents governing the rights and obligations of the stockholders, partners, members or other owners thereof and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Pledged Shares; provided, that if the issuer of any of such Pledged Shares is a controlled foreign corporation (used hereinafter as such term is defined in Section 975(a) or a successor provision of the Internal Revenue Code), the Pledged Shares shall not include any shares of stock of such issuer in excess of the number of shares of such issuer possessing up to but not exceeding 65% (66% in the case of any issuer organized under the laws of France or any political subdivision thereof) of the voting power of all classes of capital stock entitled to vote of such issuer, and all dividends, cash, warrants, rights, instruments and other property or proceeds from 3 time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Pledged Shares; (ii) the indebtedness from time to time owed to such Grantor by any obligor that is, or becomes, a direct or indirect Subsidiary or a direct or indirect Joint Venture, as the case may be, of such Grantor, including the indebtedness described on Schedule 1(e)(ii) and issued by the obligors named therein, and the instruments evidencing such indebtedness (the "PLEDGED DEBT"), and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; and (iii) all other investment property, as that term is defined in Article 9 of the Uniform Commercial Code as in effect in the State of New York (the "UCC"), of such Grantor; (f) the "INTELLECTUAL PROPERTY COLLATERAL", which term means: (i) all rights, title and interest (including rights acquired pursuant to a license or otherwise) in and to all trademarks, service marks, designs, logos, indicia, tradenames, trade dress, corporate names, company names, business names, fictitious business names, trade styles, domain names and/or other source and/or business identifiers and applications pertaining thereto, owned by such Grantor, or hereafter adopted and used, in its business (including, without limitation, the trademarks specifically identified in Schedule 1(f)(i), as the same may be amended pursuant hereto from time to time) (collectively, the "TRADEMARKS"), all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (including, without limitation, the registrations and applications specifically identified in Schedule 1(f)(i), but excluding all applications which are filed based on an intent to use, until such time as use is established and the appropriate affidavit filed, as the same may be amended pursuant hereto from time to time) (the "TRADEMARK REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS"), and all goodwill of such Grantor's business symbolized by the Trademarks and associated therewith (the "ASSOCIATED GOODWILL"); (ii) all rights, title and interest (including rights acquired pursuant to a license or otherwise) in and to all patents and patent applications and rights and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned or held by such Grantor and all patents and patent applications and rights, title and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned by such Grantor in whole or in part (including, without limitation, the patents and patent applications listed in Schedule 1(f)(ii), as the same may be amended pursuant hereto from time to time), all rights corresponding thereto (including, without limitation, the right, exercisable only upon the occurrence and during the continuation of an Event of Default, to sue for past, present and future infringements in the name of such Grantor or in the name of Secured Party or Lenders), and all re-issues, divisions, continuations, renewals, 4 extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interests included in the Intellectual Property Collateral hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of such Grantor pertaining to patent applications and patents presently or in the future owned or used by third parties but, in the case of third parties which are not Affiliates of such Grantor, only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third parties; and (iii) all rights, title and interest (including rights acquired pursuant to a license or otherwise) under copyright in various published and unpublished works of authorship including, without limitation, computer programs, computer data bases, other computer software, layouts, trade dress, drawings, designs, writings, and formulas owned by such Grantor (including, without limitation, the works listed on Schedule 1(f)(iii), as the same may be amended pursuant hereto from time to time) (collectively, the "COPYRIGHTS"), all copyright registrations issued to such Grantor and applications for copyright registration that have been or may hereafter be issued or applied for thereon by such Grantor in the United States and any state thereof and in foreign countries (including, without limitation, the registrations listed on Schedule 1(f)(iii), as the same may be amended pursuant hereto from time to time) (collectively, the "COPYRIGHT REGISTRATIONS"), all common law and other rights in and to the Copyrights in the United States and any state thereof and in foreign countries including all copyright licenses (but with respect to such copyright licenses, only to the extent permitted by such licensing arrangements) (the "COPYRIGHT RIGHTS"), including, without limitation, each of the Copyrights, rights, titles and interests in and to the Copyrights, all derivative works and other works protectable by copyright, which are presently, or in the future may be, owned, created (as a work for hire for the benefit of such Grantor), authored (as a work for hire for the benefit of such Grantor), or acquired by such Grantor, in whole or in part, and all Copyright Rights with respect thereto and all Copyright Registrations therefor, heretofore or hereafter granted or applied for, and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right to renew and extend such Copyright Registrations and Copyright Rights and to register works protectable by copyright and the right to sue for past, present and future infringements of the Copyrights and Copyright Rights; (g) all information used or useful or arising from the business including all goodwill, trade secrets, trade secret rights, know-how, customer lists, processes of production, ideas, confidential business information, techniques, processes, formulas, and all other proprietary information; (h) the agreements listed in Schedule 1(h), as each such agreement may be amended, restated, supplemented or otherwise modified from time to time (said agreements, as so amended, restated, supplemented or otherwise modified, being referred to herein individually as an "ASSIGNED AGREEMENT" and collectively as the "ASSIGNED AGREEMENTS"), including, without limitation, (i) all rights of such Grantor to receive moneys due or to become due 5 under or pursuant to the Assigned Agreements, (ii) all rights of such Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of such Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of such Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (i) to the extent not included in any other paragraph of this Section 1, all other general intangibles (including without limitation tax refunds, rights to payment or performance, CHOSES IN ACTION and judgments taken on any rights or claims included in the Collateral); (j) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (k) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (l) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything to the contrary contained herein, the Collateral shall not include any Margin Stock for so long as it constitutes Margin Stock. Notwithstanding anything herein to the contrary, in no event shall the Collateral include, and no Grantor shall be deemed to have granted a security interest in (i) any of such Grantor's rights or interests in any Governmental Authorization, license, contract or agreement to which such Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such Governmental Authorization, license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under, any Governmental Authorization, license, contract or agreement to which such Grantor is a party (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-318(4) of the UCC or any other applicable law (including the Bankruptcy Code) or principles of equity); PROVIDED, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Collateral shall include, and such Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect, or (ii) any real property leasehold, unless such Grantor has executed a leasehold mortgage or leasehold deed of trust covering such real property leasehold or (iii) such Grantor's 6 rights or interest in any agreements with governmental authorities prohibiting the creation or assumption of any Lien on assets located in the jurisdiction of any such governmental authority and utilized pursuant to the applicable agreement, (x) to the extent existing on the Closing Date, as set forth in SCHEDULE 7.2C(A) of the Credit Agreement and (y) to the extent such agreements are entered into after the Closing Date, at the time any such agreement is entered into, the aggregate value of such assets subject to such prohibitions, together with the aggregate value of any such assets subject to the encumbrances and restrictions permitted by subsection 7.2D(a)(ii) of the Credit Agreement, in each case as set forth on the most recent consolidated balance sheet of Grantor and its Subsidiaries in accordance with GAAP, shall not exceed 5% of the aggregate value of all assets set forth on the most recent consolidated balance sheet of Grantor and its Subsidiaries in accordance with GAAP. In the event that any asset of Grantor is excluded from the Collateral by virtue of the foregoing paragraph, such Grantor agrees to use all reasonable efforts to obtain all requisite consents to enable such Grantor to provide a security interest in such asset pursuant hereto as promptly as practicable. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the Collateral assigned by each Grantor is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including without limitation the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code), of all Secured Obligations of such Grantor. "SECURED OBLIGATIONS" means: (a) with respect to Company, all obligations and liabilities of every nature of Company now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and any Lender Hedge Agreement, and (b) with respect to each Subsidiary Grantor and Additional Grantor, all obligations and liabilities of every nature of such Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty and any Lender Hedge Agreement; in each case together with all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company or any other Grantor, would accrue on such obligations, whether or not a claim is allowed against Company or such Grantor for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of or other termination payments with respect to Lender Hedge Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or 7 Hedge Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Grantors now or hereafter existing under this Agreement. SECTION 3. GRANTORS REMAIN LIABLE. Anything contained herein to the contrary notwithstanding, (a) each Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party and Lenders shall not have any obligation or liability under any contracts, licenses, and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party or any Lender be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and warrants that except to the extent that the following statements specifically relate to an earlier date (in which case such representations and warranties shall have been true, correct and complete in all material respects as of such earlier date), such statements are true, complete and correct in all material respects on the date of this Agreement: (a) OWNERSHIP OF COLLATERAL. Except as expressly permitted by the Credit Agreement and for the security interest created by this Agreement, such Grantor owns the Collateral owned by such Grantor free and clear of any Lien. Except as expressly permitted by the Credit Agreement (including any financing statements with respect to which Grantors have delivered UCC termination statements on the Closing Date) and such as may have been filed in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers relating to this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. (b) LOCATIONS OF EQUIPMENT AND INVENTORY. All of the Equipment and Inventory is, as of the Closing Date, or in the case of an Additional Grantor, the date of the applicable counterpart entered into pursuant to Section 22 (each, a "COUNTERPART") located at the places specified in Schedule 4(b), except for Inventory which, in the ordinary course of business, is in transit either (i) from a supplier to a Grantor, (ii) between the locations specified in Schedule 4(b), or (iii) to customers of a Grantor. (c) NEGOTIABLE DOCUMENTS OF TITLE. No Negotiable Documents of Title are outstanding with respect to any of the Inventory. (d) OFFICE LOCATIONS. The chief place of business, the chief executive office and the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts are, as of the Closing Date, and have been for the four month period preceding the Closing 8 Date, or, in the case of an Additional Grantor, the date of the applicable Counterpart, located at the locations set forth on Schedule 4(d). (e) NAMES. No Grantor (or predecessor by merger or otherwise of such Grantor) has, within the four month period preceding the date hereof, or, in the case of an Additional Grantor, the date of the applicable Counterpart, had a different name from the name of such Grantor listed or the signature pages hereof, except the names listed in Schedule 4(e). (f) DELIVERY OF CERTAIN COLLATERAL. All certificates or instruments (excluding checks or other instruments of payment for an aggregate amount of less than $5,000 at any time) evidencing, comprising or representing the Collateral (including, without limitation, the Securities Collateral) have been delivered to Secured Party duly endorsed or accompanied by duly executed undated instruments of transfer or assignment in blank. (g) SECURITIES COLLATERAL. (i) All of the Pledged Shares described on Schedule 1(e)(i) have been duly authorized and validly issued and are fully paid and non-assessable; (ii) all of the Pledged Debt described on Schedule 1(e)(ii) has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default; (iii) except as set forth on Schedule 1(e)(i), the Pledged Shares constitute all of the issued and outstanding shares of stock or other equity interests of each issuer thereof (subject to the proviso to Section 1(e)(i) with respect to shares of a foreign controlled corporation), and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares; (iv) the Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to such Grantor; (v) Schedule 1(e)(i) sets forth all of the Pledged Shares owned by each Grantor on the date hereof; (vi) Schedule 1(e)(ii) sets forth all of the Pledged Debt in existence on the Closing Date; and (vii) there does not exist, in favor of any maker of any Pledged Debt, any defense, offset or counterclaim to payment of any of the Pledged Debt. (h) INTELLECTUAL PROPERTY COLLATERAL. (i) a true and complete list of all Trademark Registrations and Trademark applications owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part, is set forth in Schedule 1(f)(i); (ii) a true and complete list of all Patents owned, held (whether pursuant to a license or otherwise) or used by such Grantor, in whole or in part, is set forth in Schedule 1(f)(ii); (iii) a true and complete list of all Copyright Registrations and applications for Copyright Registrations held (whether pursuant to a license or otherwise) by such Grantor, in whole or in part, is set forth in Schedule 1(f)(iii); 9 (iv) after reasonable inquiry, such Grantor is not aware of any pending or threatened claim by any third party that any of the Intellectual Property Collateral owned, held or used by such Grantor is invalid or unenforceable; and (v) no effective security interest or other Lien covering all or any part of the Intellectual Property Collateral is on file in the United States Patent and Trademark Office or the United States Copyright Office, other than the Liens with respect to Intellectual Property Collateral with respect to which Grantors have delivered releases on the date of this Agreement. (i) PERFECTION. The security interests in the Collateral granted to Secured Party for the ratable benefit of the Lenders and Hedge Exchangers hereunder constitute valid security interests in the Collateral, securing the payment of the Secured Obligations. Upon (i) the filing of UCC financing statements naming each Grantor as "debtor", naming Secured Party for the benefit of the Lenders and any Hedge Exchangers as "secured party" and describing the Collateral in the filing offices with respect to such Grantor set forth on Schedule 4(i), (ii) in the case of the Securities Collateral consisting of certificated securities or evidenced by instruments, delivery of the certificates representing such certificated securities and delivery of such instruments to Secured Party, in each case duly endorsed or accompanied by duly executed undated instruments of assignment or transfer in blank, (iii) in the case of the Intellectual Property Collateral, in addition to the filing of such UCC financing statements, the filing of a Grant of Trademark Security Interest, substantially in the form of Exhibit I, and a Grant of Patent Security Interest, substantially in the form of Exhibit II, with the United States Patent and Trademark Office and the filing of a Grant of Copyright Security Interest, substantially in the form of Exhibit III, with the United States Copyright Office (each such Grant of Trademark Security Interest, Grant of Patent Security Interest and Grant of Copyright Security Interest being referred to herein as a "GRANT"), and (iv) in the case of Equipment that is covered by a certificate of title, the filing with the registrar of motor vehicles or other appropriate authority in the applicable jurisdiction of an application requesting the notation of the security interest created hereunder on such certificate of title, the security interests in the Collateral granted to Secured Party for the ratable benefit of the Lenders and Hedge Exchangers will constitute perfected security interests therein prior to all other Liens (except for Permitted Encumbrances), and all filings and other actions necessary or desirable to perfect and protect such security interests will have been duly made or taken. SECTION 5. FURTHER ASSURANCES. (a) GENERALLY. Each Grantor agrees that from time to time, at the expense of Grantors, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the 10 foregoing, each Grantor will: (i) at the request of Secured Party, mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the request of Secured Party, each of its records pertaining to the Collateral, with a legend, in form and substance reasonably satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) at the reasonable request of Secured Party, deliver and pledge to Secured Party for the benefit of Lenders and any Hedge Exchangers hereunder all promissory notes and other instruments (and, upon an Event of Default, including checks) and all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed undated instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail, (v) promptly after the acquisition by such Grantor of any item of Equipment that is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (vi) within 30 days after the end of each calendar quarter, deliver to Secured Party copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, (vii) at any reasonable time, upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, (viii) at Secured Party's request, appear in and defend any action or proceeding that may affect such Grantor's title to or Secured Party's security interest for the benefit of Lenders and any Hedge Exchangers in all or any part of the Collateral, and (ix) upon any Event of Default, use commercially reasonable efforts to obtain any necessary consents of third parties to the assignment and perfection of a security interest to Secured Party for the benefit of Lenders and any Hedge Exchangers with respect to any Collateral. Each Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of any Grantor. Each Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (b) SECURITIES COLLATERAL. Without limiting the generality of the foregoing Section 5(a), each Grantor agrees that it will, upon obtaining any 11 additional shares of stock or other securities required to be pledged hereunder, promptly (and in any event within five Business Days for the pledge of all shares of stock or other securities of any domestic Person, and as soon as possible, but in any event within twenty (20) Business Days for the pledge of all shares of stock or other securities of any foreign controlled corporation) deliver to Secured Party a Pledge Supplement, duly executed by such Grantor, in substantially the form of Exhibit IV (a "PLEDGE SUPPLEMENT"), in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Upon each delivery of a Pledge Supplement to Secured Party, the representations and warranties contained in clauses (i)-(iv) of Section 4(g) shall be deemed to have been made by such Grantor as to the Securities Collateral described in such Pledge Supplement as of the date thereof. Each Grantor hereby authorizes Secured Party to attach each Pledge Supplement to this Agreement and agrees that all Pledged Shares or Pledged Debt of such Grantor listed on any Pledge Supplement shall for all purposes hereunder be considered Collateral of such Grantor; provided, the failure of any Grantor to execute a Pledge Supplement with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party for the benefit of Lenders and any Hedge Exchangers therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. (c) INTELLECTUAL PROPERTY COLLATERAL. Without limiting the generality of the foregoing Section 5(a), if any Grantor shall hereafter obtain rights to any new Intellectual Property Collateral or become entitled to the benefit of (i) any patent application or patent or any reissue, division, continuation, renewal, extension or continuation-in-part of any Patent or any improvement of any Patent or (ii) any Copyright Registration, application for Copyright Registration or renewal or extension of any Copyright, then in any such case, the provisions of this Agreement shall automatically apply thereto. Each Grantor shall promptly notify Secured Party in writing of any of the foregoing rights acquired by such Grantor after the date hereof and of (i) any Trademark Registrations issued or application for a Trademark Registration or application for a Patent made, and (ii) any Copyright Registrations issued or applications for Copyright Registration made, in any such case, after the date hereof. Promptly after the filing of an application for any (1) Trademark Registration; (2) Patent; or (3) Copyright Registration, each Grantor shall execute and deliver to Secured Party and record in all places where a Grant is recorded an IP Supplement, substantially in the form of Exhibit V (an "IP SUPPLEMENT"), pursuant to which such Grantor shall grant to Secured Party for the benefit of Lenders and any Hedge Exchangers a security interest to the extent of its interest in such Intellectual Property Collateral; provided, if, in the reasonable judgment of such Grantor, after due inquiry, granting such interest would result in the grant of a Trademark Registration or Copyright Registration in the name of Secured Party, such Grantor shall give written notice to Secured Party as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the applicable Trademark Registration or Copyright Registration, as the case may be. Upon delivery to 12 Secured Party of an IP Supplement, Schedules 1(f)(i), 1(f)(ii), and 1(f)(iii) and Schedule A to each Grant, as applicable, shall be deemed modified to include reference to any right, title or interest in any existing Intellectual Property Collateral or any Intellectual Property Collateral included on Schedule A to such IP Supplement. Each Grantor hereby authorizes Secured Party to modify this Agreement without the signature or consent of any Grantor by attaching Schedules 1(f)(i), 1(f)(ii), and 1(f)(iii), as applicable, that have been modified to include such Intellectual Property Collateral or to delete any reference to any right, title or interest in any Intellectual Property Collateral in which any Grantor no longer has or claims any right, title or interest; provided, the failure of any Grantor to execute an IP Supplement with respect to any additional Intellectual Property Collateral pledged pursuant to this Agreement shall not impair the security interest of Secured Party for the benefit of Lenders and any Hedge Exchangers therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. SECTION 6. CERTAIN COVENANTS OF GRANTORS. Each Grantor shall: (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or material ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in such Grantor's name, identity or corporate structure within 15 days of such change; (c) give Secured Party 30 days' prior written notice of any change in such Grantor's chief place of business, chief executive office or residence or the office where such Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (d) if Secured Party or any Lender gives value to enable such Grantor to acquire rights in or the use of any Collateral, use such value for such purposes; and (e) except as expressly permitted by the Credit Agreement, pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, services, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith; provided that such Grantor shall in any event pay such taxes, assessments, charges, levies or claims not later than five days prior to the date of any proposed sale under any judgment, writ or warrant of attachment entered or filed against such Grantor or any of the Collateral as a result of the failure to make such payment. 13 SECTION 7. SPECIAL COVENANTS WITH RESPECT TO EQUIPMENT AND INVENTORY. Each Grantor shall: (a) keep the Equipment and Inventory owned by such Grantor at the places therefor specified on Schedule 4(b) or, upon 30 days' prior written notice to Secured Party, at such other places in jurisdictions where all action that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment owned by such Grantor to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with such Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable to such end. Each Grantor shall promptly furnish to Secured Party a statement respecting any material loss or damage to any of the Equipment owned by such Grantor; (c) keep correct and accurate records of Inventory owned by such Grantor, itemizing and describing the kind, type and quantity of such Inventory, such Grantor's cost therefor and (where applicable) the current list prices for such Inventory; (d) if any Inventory is in possession or control of any of such Grantor's agents or processors, if the aggregate book value of all such Inventory exceeds $100,000, and in any event, if so requested by the Secured Party by written notice given upon or after the occurrence of an Event of Default (as defined in Section 16(a)), instruct such agent or processor to hold all such Inventory for the account of Secured Party and subject to the instructions of Secured Party; (e) promptly upon the issuance and delivery to such Grantor of any Negotiable Document of Title, deliver such Negotiable Document of Title to Secured Party; and (f) at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Credit Agreement. SECTION 8. SPECIAL COVENANTS WITH RESPECT TO ACCOUNTS AND RELATED CONTRACTS. (a) Each Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the locations therefor set forth on Schedule 4(d), upon 30 14 days' prior written notice to Secured Party, at such other location in a jurisdiction where all action that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Each Grantor will hold and preserve such records and chattel paper and will permit representatives of Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper, and each Grantor agrees to render to Secured Party, at Grantor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. Promptly upon the request of Secured Party, each Grantor shall deliver to Secured Party complete and correct copies of each Related Contract. (b) Each Grantor shall, for not less than three (3) years from the date on which each Account of such Grantor arose, maintain (i) records complete in all material respects of such Account, including records of all payments received, credits granted and merchandise returned, and (ii) all material documentation relating thereto. (c) Except as otherwise provided in this subsection (c), each Grantor shall continue to collect, at its own expense, all amounts due or to become due such Grantor under the Accounts and Related Contracts. In connection with such collections, each Grantor may take (and, upon the occurrence and during the continuance of an Event of Default at Secured Party's direction, shall take) such action as such Grantor or Secured Party may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Secured Party and to direct such account debtors or obligors to make payment of all amounts due or to become due such Grantor thereunder directly to Secured Party, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Secured Party and, upon such notification and at the expense of Grantors, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by such Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Secured Party, Lenders and Hedge Exhchangers hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and 15 applied as provided by Section 18, and (ii) such Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 9. SPECIAL COVENANTS WITH RESPECT TO THE SECURITIES COLLATERAL. (a) DELIVERY. Each Grantor agrees that all certificates or instruments representing or evidencing the Securities Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by such Grantor's endorsement, where necessary, or duly executed undated instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Securities Collateral for certificates or instruments of smaller or larger denominations. (b) COVENANTS. Each Grantor shall (i) not, except as expressly permitted by the Credit Agreement, permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock or other equity interests of the surviving or resulting Person is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided, if the surviving or resulting Person upon any such merger or consolidation involving an issuer of Pledged Shares which is a controlled foreign corporation is a controlled foreign corporation, then such Grantor shall only be required to pledge outstanding capital stock of such surviving or resulting Person possessing up to but not exceeding 65% (66% in the case of any issuer organized under the laws of France or any political subdivision thereof) of the voting power of all classes of capital stock of such issuer entitled to vote; (ii) cause each issuer of Pledged Shares not to issue any stock, other equity interests or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to such Grantor; (iii) pledge hereunder, promptly upon its acquisition (directly or indirectly) thereof (and in any event within five Business Days for the pledge of all shares of stock, other equity interests or other securities of any domestic issuer, and as soon as possible, but in any event within twenty (20) Business Days for the pledge of all shares of stock, other equity interests or other securities of any foreign controlled corporation) any and all additional shares of stock, other equity interests or other securities of each issuer of Pledged Shares; (iv) pledge hereunder, promptly upon its acquisition (directly or indirectly) thereof (and in any event within five Business Days for the pledge of all shares of stock, other equity interests or other securities of any domestic Person, and as soon as possible, but in any event within twenty (20) Business Days for the pledge of all shares of stock, other equity interests or other securities of any foreign controlled corporation), any and all shares of stock or other equity interests of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of such Grantor; provided, notwithstanding anything contained in this clause (iv) to the contrary, such Grantor shall only be required to pledge the outstanding capital 16 stock of a controlled foreign corporation possessing up to but not exceeding 65% (66% in the case of any issuer organized under the laws of France or any political subdivision thereof) of the voting power of all classes of capital stock of such controlled foreign corporation entitled to vote; (v) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to such Grantor by any obligor on the Pledged Debt; (vi) pledge hereunder, immediately upon their issuance, any and all instruments or other evidences of indebtedness from time to time owed to such Grantor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary or Joint Venture, as the case may be, of such Grantor; (vii) upon an Event of Default, promptly notify Secured Party of any event of which such Grantor becomes aware causing loss or depreciation in the value of the Securities Collateral; (viii) upon an Event of Default, promptly deliver to Secured Party all written notices received by it with respect to the Securities Collateral; and (ix), at the request of Secured Party, promptly execute and deliver to Secured Party an agreement providing for the control, as that term is defined in the UCC, by Secured Party of all securities entitlements and securities accounts of such Grantor. (c) VOTING AND DISTRIBUTIONS. So long as no Event of Default shall have occurred and be continuing, (i) each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Securities Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; provided, no Grantor shall exercise or refrain from exercising any such right if Secured Party shall have notified such Grantor in writing that, in Secured Party's judgment, such action would have a material adverse effect on the value of the Securities Collateral or any part thereof; and provided further, such Grantor shall give Secured Party at least five Business Days' prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right (it being understood, however, that neither (A) the voting by such Grantor of any Pledged Shares for or such Grantor's consent to the election of directors or other members of a governing body of an issuer of Pledged Shares at a regularly scheduled annual or other meeting of stockholders or holders of equity interests or with respect to incidental matters at any such meeting, nor (B) Grantor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section, and no notice of any such voting or consent need be given to Secured Party); (ii) each Grantor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends, other distributions and interest paid in respect of the Securities Collateral; PROVIDED, -------- any and all (A) dividends, distributions and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Securities Collateral, (B) during the continuance of an Event of Default, dividends and other distributions paid or payable in cash in respect of any Securities Collateral in connection with a partial or total liquidation or dissolution or in 17 connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) during the continuance of an Event of Default, cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Securities Collateral, shall be, and shall forthwith be delivered to Secured Party to hold as, Securities Collateral and shall, if received by such Grantor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of such Grantor and be forthwith delivered to Secured Party as Securities Collateral in the same form as so received (with all necessary endorsements); provided that, if no Event of Default shall have occurred, to the extent any of the property described in the foregoing clause (B) or (C) shall constitute Net Asset Sale Proceeds or Net Insurance/Condemnation Proceeds (or proceeds thereof), it shall be applied as required by the Credit Agreement; and (iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to such Grantor all such proxies, dividend payment orders and other instruments as Grantor may from time to time reasonably request for the purpose of enabling Grantor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to clause (i) above and to receive the dividends, distributions, principal or interest payments which it is authorized to receive and retain pursuant to clause (ii) above. Upon the occurrence and during the continuation of an Event of Default, (x) upon written notice from Secured Party to any Grantor, all rights of such Grantor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant hereto shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; (y) all rights of such Grantor to receive the dividends, other distributions and interest payments which it would otherwise be authorized to receive and retain pursuant hereto shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Securities Collateral such dividends, other distributions and interest payments; and (z) all dividends, principal, interest payments and other distributions which are received by Grantor contrary to the provisions of clause (ii) of the immediately preceding paragraph or clause (y) above shall be received in trust for the benefit of Secured Party and Lenders, shall be segregated from other funds of Grantor and shall forthwith be paid over to Secured Party as Securities Collateral in the same form as so received (with any necessary endorsements). In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder, (I) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request, and (II) without limiting the effect of clause (I) above, each Grantor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including giving or withholding written consents of shareholders or other holders of equity interests, calling special meetings of shareholders or other holders of equity interests and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by 18 any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the occurrence of an Event of Default and which proxy shall only terminate upon the payment in full of the Secured Obligations. SECTION 10. SPECIAL COVENANTS WITH RESPECT TO THE INTELLECTUAL PROPERTY COLLATERAL. (a) Each Grantor shall: (i) diligently keep reasonable records respecting the Intellectual Property Collateral and at all times keep at least one complete set of its records concerning such Collateral at its chief executive office or principal place of business; (ii) use commercially reasonable efforts so as not to permit the inclusion in any contract to which it hereafter becomes a party of any provision that could or might in any way impair or prevent the creation of a security interest in, or the assignment of, such Grantor's rights and interests in any property included within the definitions of any Intellectual Property Collateral acquired under such contracts; (iii) take any and all reasonable steps to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Intellectual Property Collateral, including, without limitation, where appropriate entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (iv) use proper statutory notice in connection with its use of any of the Intellectual Property Collateral; (v) use a commercially appropriate standard of quality (consistent with such Grantor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks; and (vi) furnish to Secured Party from time to time at Secured Party's reasonable written request statements and schedules further identifying and describing any Intellectual Property Collateral and such other reports in connection with such Collateral, all in reasonable detail. (b) Except as otherwise provided in this Section 10, each Grantor shall continue to collect, at its own expense, all amounts due or to become due such Grantor in respect of the Intellectual Property Collateral or any portion thereof. In connection with such collections, each Grantor may take (and, after the occurrence and during the continuance of any Event of Default, at Secured Party's reasonable direction, shall take) such action as such Grantor or Secured Party may deem reasonably necessary or advisable to enforce collection of such amounts; provided, Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to such Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest created 19 hereby and to direct such obligors to make payment of all such amounts directly to Secured Party, and, upon such notification and at the expense of such Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by any Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence and during the continuation of any Event of Default, (i) all amounts and proceeds (including checks and other instruments) received by each Grantor in respect of amounts due to such Grantor in respect of the Intellectual Property Collateral or any portion thereof shall be received in trust for the benefit of Secured Party, Lenders and Hedge Exchangers hereunder, shall be segregated from other funds of such Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 18, and (ii) such Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. (c) Each Grantor shall have the duty diligently, through appropriate counsel, to prosecute, file and/or make, unless and until such Grantor, in its commercially reasonable judgment, decides otherwise, (i) any application relating to any of the Intellectual Property Collateral owned, held or used by such Grantor and identified on Schedule 1(f)(i), 1(f)(ii) or 1(f)(iii), as applicable, that is pending as of the date of this Agreement, (ii) any Copyright Registration on any existing or future unregistered but copyrightable works (except for works of nominal commercial value or with respect to which such Grantor has determined in the exercise of its commercially reasonable judgment that it shall not seek registration), (iii) any application on any future patentable but unpatented innovation or invention comprising Intellectual Property Collateral (except where, in its commercially reasonable judgment, such Grantor decides to attempt to maintain the information as know-how or a trade secret), and (iv) any Trademark opposition and cancellation proceedings, renew Trademark Registrations and Copyright Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Intellectual Property Collateral. Any expenses incurred in connection therewith shall be borne solely by Grantors. Subject to the foregoing, each Grantor shall give Secured Party prior written notice of any abandonment of any Intellectual Property Collateral or any pending patent application or any Patent. (d) Except as provided herein, each Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution, misappropriation or other damage, or reexamination or reissue proceedings as are necessary to protect the Intellectual Property Collateral. Secured Party shall provide, at such Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. 20 Each Grantor shall promptly, following its becoming aware thereof, notify Secured Party of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office, the United States Copyright Office or any federal, state, local or foreign court) or regarding such Grantor's ownership, right to use, or interest in any Intellectual Property Collateral. Each Grantor shall provide to Secured Party any information with respect thereto reasonably requested by Secured Party. (e) In addition to, and not by way of limitation of, the granting of a security interest in the Collateral pursuant hereto, each Grantor, effective upon the occurrence and during the continuation of an Event of Default, hereby assigns, transfers and conveys to Secured Party the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes (including, without limitation, the Intellectual Property Collateral) owned or used by such Grantor that relate to the Collateral and any other collateral granted by such Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Secured Party to realize on the Collateral in accordance with this Agreement and to enable any transferee or assignee of the Collateral to enjoy the benefits of the Collateral. This right shall inure to the benefit of Secured Party and its respective successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license shall be granted free of charge, without requirement that any monetary payment whatsoever be made to such Grantor. In addition, each Grantor hereby grants to Secured Party and its employees, representatives and agents the right to visit such Grantor's and any of its Affiliates' or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Intellectual Property Collateral (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable advance written notice to such Grantor and at reasonable dates and times and as often as may be reasonably requested. If and to the extent that any Grantor is permitted to license the Intellectual Property Collateral, Secured Party shall promptly enter into a non-disturbance agreement or other similar arrangement, at such Grantor's request and expense, with such Grantor and any licensee of any Intellectual Property Collateral permitted hereunder in form and substance reasonably satisfactory to Secured Party pursuant to which (i) Secured Party shall agree not to disturb or interfere with such licensee's rights under its license agreement with such Grantor so long as such licensee is not in default thereunder, and (ii) such licensee shall acknowledge and agree that the Intellectual Property Collateral licensed to it is subject to the security interest created in favor of Secured Party for the benefit of the Lenders and any Hedge Exchangers and the other terms of this Agreement. SECTION 11. SPECIAL PROVISIONS WITH RESPECT TO THE ASSIGNED AGREEMENTS. (a) Each Grantor shall at its expense: 21 (i) if consistent with sound business practices, perform and observe all material terms and provisions of the Assigned Agreements to be performed or observed by it, maintain the Assigned Agreements in full force and effect, enforce the Assigned Agreements in accordance with their terms, and take all such action to such end as may be from time to time reasonably requested by Secured Party; and (ii) upon the reasonable request of Secured Party, furnish to Secured Party, promptly upon receipt thereof, copies of all notices, requests and other documents received by such Grantor under or pursuant to the Assigned Agreements, and from time to time (A) furnish to Secured Party such information and reports regarding the Assigned Agreements as Secured Party may reasonably request and (B) upon request of Secured Party make to the parties to such Assigned Agreements such demands and requests for information and reports or for action as such Grantor is entitled to make under the Assigned Agreements. (b) Upon the occurrence and during the continuance of an Event of Default, no Grantor shall: (i) cancel or terminate any of the Assigned Agreements or consent to or accept any cancellation or termination thereof; (ii) amend or otherwise modify the Assigned Agreements or give any consent, waiver or approval thereunder that would, in any case, be material or adverse to Lenders; (iii) waive any default under or breach of the Assigned Agreements; (iv) consent to or permit or accept any prepayment of amounts to become due under or in connection with the Assigned Agreements, except as expressly provided therein; or (v) take any other action in connection with the Assigned Agreements that could reasonably be expected to materially impair the value of the interest or rights of such Grantor thereunder or that could reasonably be expected to materially impair the interest or rights of Secured Party. SECTION 12. COLLATERAL ACCOUNT. Secured Party is hereby authorized to establish and maintain at or at the direction of Secured Party as a blocked account in the name of Company and under the sole dominion and control of Secured Party, a restricted deposit account designated as "Autotote Corporation Collateral Account". All amounts at any time held in the Collateral Account shall be beneficially owned by Grantors but shall be held in the name of Secured Party hereunder, for the benefit of Lenders, as collateral security for the Secured Obligations upon the terms and conditions set forth herein. Grantors shall have no right to withdraw, transfer or, except as expressly set forth herein, otherwise receive any funds deposited into the Collateral Account. Anything contained herein to the contrary notwithstanding, the Collateral Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System 22 and of any other appropriate banking or governmental authority, as may now or hereafter be in effect. All deposits of funds in the Collateral Account shall be made by wire transfer (or, if applicable, by intra-bank transfer from another account of a Grantor) of immediately available funds, in each case addressed in accordance with instructions of Secured Party. Each Grantor shall, promptly after initiating a transfer of funds to the Collateral Account, give notice to Secured Party by telefacsimile of the date, amount and method of delivery of such deposit. Cash held by Secured Party in the Collateral Account shall not be invested by Secured Party but instead shall be maintained as a cash deposit in the Collateral Account pending application thereof as elsewhere provided in this Agreement. To the extent permitted under Regulation Q of the Board of Governors of the Federal Reserve System, any cash held in the Collateral Account shall bear interest at the standard rate paid by Secured Party to its customers for deposits of like amounts and terms. Subject to Secured Party's rights hereunder, any interest earned on deposits of cash in the Collateral Account shall be deposited directly in, and held in, the Collateral Account. SECTION 13. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Each Grantor hereby irrevocably appoints Secured Party as such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) upon the occurrence and during the continuance of an Event of Default, to obtain and adjust insurance required to be maintained by such Grantor or paid to Secured Party pursuant to Section 7; (b) upon the occurrence and during the continuance of an Event of Default, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) upon the occurrence and during the continuance of an Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) upon the occurrence and during the continuance of an Event of Default, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (e) to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of such Grantor to Secured Party, due and payable immediately without demand; 23 (f) upon the occurrence and during the continuance of an Event of Default, to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantors' expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein for the benefit of Lenders and Hedge Exchangers in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. SECTION 14. SECURED PARTY MAY PERFORM. If any Grantor fails to perform any agreement contained herein, Secured Party, upon notice to Grantor, may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantors under Section 19(b). SECTION 15. STANDARD OF CARE. The powers conferred on Secured Party hereunder are solely to protect its, Lenders' and Hedge Exchangers' interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 16. REMEDIES. (a) GENERALLY. If any Event of Default (as defined in the Credit Agreement), or the occurrence of an Early Termination Date (as defined in a Master Agreement in the form prepared by the International Swap and Derivatives Association, Inc. or a similar event under any similar swap agreement or Currency Agreement) under any Lender Hedge Agreement which is not immediately paid (either such occurrence being an "EVENT OF DEFAULT" for purposes of this Agreement) shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral), and also may (i) require each Grantor to, and 24 each Grantor hereby agrees that it will at its expense and upon request of Secured Party, forthwith assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (iv) take possession of any Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of such Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery (without assumption of any credit risk), at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, (vi) exercise dominion and control over and refuse to permit further withdrawals from any Deposit Account maintained with Secured Party or any Lender constituting a part of the Collateral and (vii) without notice to any Grantor, transfer to or register in the name of Secured Party or any of its nominees any or all of the Securities Collateral. Secured Party or any Lender or Hedge Exchanger may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as agent for and representative of Lenders and Hedge Exchangers (but not any Lender or Hedge Exchanger in its individual capacity if Requisite Obligees (as defined in Section 21(a)) agree in writing, shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor hereby waives any claims against Secured Party, Lenders and Hedge Exchangers arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the 25 Collateral are insufficient to pay all the Secured Obligations, Grantors shall be jointly and severally liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. Each Grantor further agrees that a breach of any of the covenants contained in this Section will cause irreparable injury to Secured Party, Lenders and Hedge Exchangers, that Secured Party have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against such Grantor, and each Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. (b) SECURITIES COLLATERAL. (i) Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Securities Collateral conducted without prior registration or qualification of such Securities Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Securities Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances and the registration rights granted to Secured Party by such Grantor pursuant hereto, each Grantor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Securities Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. If Secured Party determines to exercise its right to sell any or all of the Securities Collateral, upon written request, each Grantor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may request in order to determine the number of shares and other instruments included in the Securities Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. (ii) If Secured Party shall determine to exercise its right to sell all or any of the Securities Collateral pursuant to this Section, each Grantor agrees that, upon request of Secured Party (which request may be made by Secured Party in its sole discretion), Grantor will, at its own expense (A) execute and deliver, and cause each issuer of the Securities Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Secured 26 Party, advisable to register such Securities Collateral under the provisions of the Securities Act and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of Secured Party, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (B) use its best efforts to qualify the Securities Collateral under all applicable state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Securities Collateral, as requested by Secured Party; (C) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (D) do or cause to be done all such other acts and things as may be necessary to make such sale of the Securities Collateral or any part thereof valid and binding and in compliance with applicable law; and (E) bear all costs and expenses, including reasonable attorneys' fees, of carrying out its obligations under this Section. (iii) Without limiting the generality of subsections 10.2 and 10.3 of the Credit Agreement, in the event of any public sale described herein, each Grantor agrees to indemnify and hold harmless Secured Party, and each Lender and each Hedge Exchanger and each of their respective directors, officers, employees and agents from and against any loss, fee, cost, expense, damage, liability or claim, joint or several, to which any such Persons may become subject or for which any of them may be liable, under the Securities Act or otherwise, insofar as such losses, fees, costs, expenses, damages, liabilities or claims (or any litigation commenced or threatened in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement, prospectus or other such document published or filed in connection with such public sale, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse Secured Party and such other Persons for any legal or other expenses reasonably incurred by Secured Party and such other Persons in connection with any litigation, of any nature whatsoever, commenced or threatened in respect thereof (including any and all fees, costs and expenses whatsoever reasonably incurred by Secured Party and such other Persons and counsel for Secured Party and such other Persons in investigating, preparing for, defending against or providing evidence, producing documents or taking any other action in respect of, any such commenced or threatened litigation or any claims asserted). This indemnity shall be in addition to any liability which any Grantor may otherwise have and shall extend upon the same terms and conditions to each Person, if any, that controls Secured Party or such Persons within the meaning of the Securities Act. Notwithstanding anything in this Agreement to the contrary, the obligations of each party set forth in this Section 16(b)(iii) shall survive the payment of the Secured Obligations and the termination of this Agreement. (c) COLLATERAL ACCOUNT. If an Event of Default has occurred and is continuing and, in accordance with Section 8 of the Credit Agreement, 27 Company is required to pay to Secured Party an amount (the "AGGREGATE AVAILABLE AMOUNT") equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding under the Credit Agreement, Company shall deliver funds in such an amount for deposit in the Collateral Account. If for any reason the aggregate amount delivered by Company for deposit in the Collateral Account as aforesaid is less than the Aggregate Available Amount, the aggregate amount so delivered by Company shall be apportioned among all outstanding Letters of Credit for purposes of this Section in accordance with the ratio of the maximum amount available for drawing under each such Letter of Credit (as to such Letter of Credit, the "MAXIMUM AVAILABLE AMOUNT") to the Aggregate Available Amount. Upon any drawing under any outstanding Letter of Credit in respect of which Company has deposited in the Collateral Account any amounts described above, Secured Party shall apply such amounts to reimburse the Issuing Lender for the amount of such drawing. In the event of cancellation or expiration of any Letter of Credit in respect of which Company has deposited in the Collateral Account any amounts described above, or in the event of any reduction in the Maximum Available Amount under such Letter of Credit, Secured Party shall apply the amount then on deposit in the Collateral Account in respect of such Letter of Credit (less, in the case of such a reduction, the Maximum Available Amount under such Letter of Credit immediately after such reduction) first, to the payment of any amounts payable to Secured Party pursuant to Section 18, second, to the extent of any excess, to the cash collateralization pursuant to the terms of this Agreement of any outstanding Letters of Credit in respect of which Company has failed to pay all or a portion of the amounts described above (such cash collateralization to be apportioned among all such Letters of Credit in the manner described above), third, to the extent of any further excess, to the payment of any other outstanding Secured Obligations in such order as Secured Party shall elect, and fourth, to the extent of any further excess, to the payment to whomsoever shall be lawfully entitled to receive such funds. SECTION 17. ADDITIONAL REMEDIES FOR INTELLECTUAL PROPERTY COLLATERAL. (a) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, (i) Secured Party shall have the right (but not the obligation) to bring suit, in the name of any Grantor, Secured Party or otherwise, to enforce any Intellectual Property Collateral, in which event each Grantor shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement and each Grantor shall promptly, upon demand, reimburse and indemnify Secured Party as provided in subsections 10.2 and 10.3 of the Credit Agreement and Section 19 hereof, as applicable, in connection with the exercise of its rights under this Section, and, to the extent that Secured Party shall elect not to bring suit to enforce any Intellectual Property Collateral as provided in this Section, each Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Intellectual Property Collateral by others and for that 28 purpose agrees to use its commercially reasonable judgment in maintaining any action, suit or proceeding against any Person so infringing reasonably necessary to prevent such infringement; (ii) upon written demand from Secured Party, each Grantor shall execute and deliver to Secured Party an assignment or assignments of the Intellectual Property Collateral and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; (iii) each Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Secured Party (or any Lender) receives cash proceeds in respect of the sale of, or other realization upon, the Intellectual Property Collateral; and (iv) within five Business Days after written notice from Secured Party, each Grantor shall make available to Secured Party, to the extent within such Grantor's power and authority, such personnel in such Grantor's employ on the date of such Event of Default as Secured Party may reasonably designate, by name, title or job responsibility, to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such Grantor under or in connection with the Trademarks, Trademark Registrations and Trademark Rights, such persons to be available to perform their prior functions on Secured Party's behalf and to be compensated by Secured Party at such Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. (b) If (i) an Event of Default shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (ii) no other Event of Default shall have occurred and be continuing, (iii) an assignment to Secured Party of any rights, title and interests in and to the Intellectual Property Collateral shall have been previously made, and (iv) the Secured Obligations shall not have become immediately due and payable, upon the written request of any Grantor, Secured Party shall promptly execute and deliver to such Grantor such assignments as may be necessary or desirable to reassign to such Grantor any such rights, title and interests as may have been assigned to Secured Party as aforesaid, subject to any disposition thereof that may have been made by Secured Party; provided, after giving effect to such reassignment, Secured Party's security interest granted pursuant hereto, as well as all other rights and remedies of Secured Party granted hereunder, shall continue to be in full force and effect; and provided further, the rights, title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Secured Party and Permitted Encumbrances. SECTION 18. APPLICATION OF PROCEEDS. Except as expressly provided elsewhere in this Agreement, all proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in the Credit Agreement. 29 SECTION 19. INDEMNITY AND EXPENSES. (a) Grantors jointly and severally agree to indemnify Secured Party, each Lender and each Hedge Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including without limitation enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's or Hedge Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantors jointly and severally agree to pay to Secured Party and Lenders upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party or any Lender may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party or Lenders hereunder, or (iv) the failure by any Grantor to perform or observe any of the provisions hereof. (c) The obligations of Grantors in this Section 19 shall survive the termination of this Agreement and the discharge of Grantors' other obligations under this Agreement, the Lender Hedge Agreements, the Credit Agreement and the other Loan Documents. SECTION 20. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantors and their respective successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party, Lenders, Hedge Exchangers and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), (i) but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise and (ii) any Hedge Exchanger may assign or otherwise transfer any Lender Hedge Agreement to which it is a party to any other Person in accordance with the terms of such Lender Hedge Agreement, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Hedge Exchangers herein or otherwise. Upon the indefeasible payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the applicable Grantors. Upon any such termination Secured Party will, at Grantors' expense, execute and deliver to Grantors such documents as Grantors shall reasonably request to evidence such termination. In addition, upon the proposed sale, transfer or other disposition of any Collateral 30 by a Grantor in accordance with the Credit Agreement for which such Grantor desires to obtain a security interest release from Secured Party, such Grantor shall deliver an Officer's Certificate (x) stating that the Collateral subject to such disposition is being sold, transferred or otherwise disposed of in compliance with the terms of the Credit Agreement and (y) specifying the Collateral being sold, transferred or otherwise disposed of in the proposed transaction. Upon the receipt of such Officer's Certificate, Secured Party shall, at Grantor's expense, so long as Secured Party has no reason to believe that the Officer's Certificate delivered by such Grantor with respect to such sale is not true and correct, execute and deliver such releases of its security interest in such Collateral which is to be so sold, transferred or disposed of, as may be reasonably requested by such Grantor. SECTION 21. SECURED PARTY AS AGENT. (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Hedge Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including without limitation the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 16 in accordance with the instructions of (i) Requisite Lenders or all Lenders, as provided in the Credit Agreement or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the cancellation or expiration of all Letters of Credit and the termination of the Commitments, (A) the holders of a majority of the aggregate notional amount under all Lender Hedge Agreements (including Lender Hedge Agreements that have been terminated) or (B) if all Lender Hedge Agreements have been terminated in accordance with their terms, the aggregate amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Hedge Agreements (Requisite Lenders, all Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 21(a), each Hedge Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Hedge Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Hedge Exchangers in accordance with the terms of this Section 21(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured 31 Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. (c) Secured Party shall not be deemed to have any duty whatsoever with respect to any Hedge Exchanger until it shall have received written notice in form and substance satisfactory to Secured Party from a Grantor or such Hedge Exchanger as to the existence and terms of the applicable Lender Hedge Agreement. SECTION 22. ADDITIONAL GRANTORS. The initial Subsidiary Grantors hereunder shall be such of the wholly-owned Domestic Subsidiaries as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional wholly-owned Domestic Subsidiaries may become parties hereto as additional Grantors (each an "ADDITIONAL GRANTOR"), by executing a Counterpart substantially in the form of EXHIBIT VI. Upon delivery of any such Counterpart to Secured Party, notice of which is hereby waived by Grantors, each such Additional Grantor shall be a Grantor and shall be as fully a party hereto as if such Additional Grantor were an original signatory hereto. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Administrative Agent not to cause any wholly-owned Domestic Subsidiary to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder. SECTION 23. AMENDMENTS; ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by any Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party (acting with the requisite consent of Lenders as provided in the Credit Agreement) and, in the case of any such 32 amendment or modification, by Grantors; PROVIDED this Agreement may be modified by the execution of a Counterpart by an Additional Grantor in accordance with Section 22 and Grantors hereby waive any requirement of notice of or consent to any such amendment. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 24. NOTICES. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; PROVIDED that notices to Secured Party shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as provided in subsection 10.8 of the Credit Agreement or as set forth under such party's name on the signature pages hereof or such other address as shall be designated by such party in a written notice delivered to the other parties hereto. SECTION 25. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 26. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 27. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 28. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE UCC 33 PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement MUTATIS MUTANDIS. SECTION 29. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE , COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY OBJECTIONS TO VENUE AND ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO SUCH GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 24; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 29 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 30. WAIVER OF JURY TRIAL. GRANTORS AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each Grantor and Secured Party acknowledge that this waiver is a material inducement for Grantors and Secured Party to enter into a business relationship, that Grantors and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Each Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN 34 WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 30 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 31. COUNTERPARTS. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. SECTION 32. SCHEDULES. Notwithstanding anything to the contrary stated or implied in this Agreement, no Schedule to the Closing Date Security Agreement delivered to the Administrative Agent on the Closing Date shall be amended and restated as of the date hereof and such Schedules shall be attached to this Agreement in the form thereof delivered to the Administrative Agent on such Closing Date. SECTION 33. SURETYSHIP WAIVERS BY GRANTORS, ETC. (a) Each Grantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Secured Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Grantor agrees as follows: (i) Secured Party or any Lender or any Hedge Exchanger may from time to time, without notice or demand and without affecting the validity or enforceability of this Agreement or giving rise to any limitation, impairment or discharge of such Grantor's liability hereunder, (A) renew, extend, accelerate or otherwise change the time, place, manner or terms of payment of the Secured Obligations, (B) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Secured Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations, (C) request and accept guaranties of the Secured Obligations and take and hold other security for the payment of the Secured Obligations, (D) release, exchange, compromise, subordinate or modify, with or without consideration, any other security for payment of the Secured Obligations, any guaranties of the Secured Obligations, or any other obligation of any Person with respect to the Secured Obligations, (E) enforce and apply any other security now or hereafter held by or for the benefit of Secured Party, any Lender or any Hedge Exchanger in respect of the Secured Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that Secured Party, Lenders or Hedge Exchangers, or any of them, may have against any such security, as Secured Party in its discretion may determine consistent 35 with the Credit Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and (F) exercise any other rights available to Secured Party, Lenders or Hedge Exchangers, or any of them, under the Loan Documents and the Lender Hedge Agreements, at law or in equity; and (ii) this Agreement and the obligations of each Grantor hereunder shall be valid and enforceable and shall not be subject to any limitation, impairment or discharge for any reason (other than payment in full of the Secured Obligations), including without limitation the occurrence of any of the following, whether or not such Grantor shall have had notice or knowledge of any of them: (A) any failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy with respect to the Secured Obligations or any agreement relating thereto, or with respect to any guaranty of or other security for the payment of the Secured Obligations, (B) any waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, any of the Lender Hedge Agreements or any agreement or instrument executed pursuant thereto, or of any guaranty or other security for the Secured Obligations, (C) the Secured Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect, (D) the application of payments received from any source to the payment of indebtedness other than the Secured Obligations, even though Secured Party, Lenders or Hedge Exchangers or any of them, might have elected to apply such payment to any part or all of the Secured Obligations, (E) any failure to perfect or continue perfection of a security interest in any other collateral which secures any of the Secured Obligations, (F) any defenses, set-offs or counterclaims which Company may allege or assert against Secured Party, any Lender or any Hedge Exchanger in respect of the Secured Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury, and (G) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Grantor as an obligor in respect of the Secured Obligations. (b) Each Grantor hereby waives, for the benefit of Lenders, Hedge Exchangers and Secured Party: (i) any right to require Secured Party, Lenders or Hedge Exchangers, as a condition of payment or performance by such Grantor, to (A) proceed against Company, any guarantor of the Secured Obligations or any other Person, (B) proceed against or exhaust any other security held from Company, any guarantor of the Secured Obligations or any other Person, (C) proceed against or have resort to any balance of any deposit account or credit on the books of Secured Party, any Lender or any Hedge Exchanger in favor of Company or any other Person, or (D) pursue any other remedy in the power of Secured Party or any Lender or any Hedge Exchanger whatsoever; (ii) any defense arising by reason of the incapacity, lack of authority or any 36 disability or other defense of Company or any other Grantor including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Secured Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company or any other Grantor from any cause other than payment in full of the Secured Obligations; (iii) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (iv) any defense based upon Secured Party's, any Lender's or any Hedge Exchanger's errors or omissions in the administration of the Secured Obligations, except behavior which amounts to bad faith; (v) (A) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Agreement and any legal or equitable discharge of such Grantor's obligations hereunder, (B) the benefit of any statute of limitations affecting such Grantor's liability hereunder or the enforcement hereof, (C) any rights to set-offs, recoupments and counterclaims, and (D) promptness, diligence and any requirement that Secured Party, any Lender or any Hedge Exchanger protect, secure, perfect or insure any other security interest or lien or any property subject thereto; (vi) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, notices of default under the Credit Agreement or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Secured Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in the preceding paragraph and any right to consent to any thereof; and (vii) to the fullest extent permitted by law, any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Agreement. (c) As used in this Section 32(c), any reference to "the principal" includes Company, and any reference to "the creditor" includes Secured Party, each Lender and each Hedge Exchanger. In accordance with Section 2856 of the California Civil Code (a) each Grantor waives any and all rights and defenses available to Grantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses such Grantor may have by reason of protection afforded to the principal with respect to any of the Secured Obligations, or to any guarantor of any of the Secured Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including without limitation Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure; and (b) each Grantor waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any of the Secured Obligations, has destroyed such Grantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the 37 creditor, such as nonjudicial foreclosure with respect to security for an obligation of any guarantor of any of the Secured Obligations, has destroyed such Grantor's rights of contribution against such guarantor. No other provision of this Agreement shall be construed as limiting the generality of any of the covenants and waivers set forth in this Section 32(c). As provided in Section 28, this Agreement shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This Section 32(c) is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Agreement or to any of the Secured Obligations. (d) Until the Secured Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Grantor shall withhold exercise of (i) any claim, right or remedy, direct or indirect, that such Grantor now has or may hereafter have against Company or any of its assets in connection with this Agreement or the performance by such Grantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including without limitation under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including without limitation (A) any right of subrogation, reimbursement or indemnification that Grantor now has or may hereafter have against Company, (B) any right to enforce, or to participate in, any claim, right or remedy that Secured Party, any Lender or any Hedge Exchanger now has or may hereafter have against Company, and (C) any benefit of, and any right to participate in, any other collateral or security now or hereafter held by Secured Party, any Lender or any Hedge Exchanger, and (ii) any right of contribution such Grantor may have against any guarantor of the Secured Obligations. Each Grantor further agrees that, to the extent the waiver of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Grantor may have against Company or against any other collateral or security, and any rights of contribution such Grantor may have against any such guarantor, shall be junior and subordinate to any rights Secured Party, Lenders or Hedge Exchangers may have against Company, to all right, title and interest Secured Party, Lenders or Hedge Exchangers may have in any such other collateral or security, and to any right Secured Party, Lenders or Hedge Exchangers may have against any such guarantor. (e) Lenders, Hedge Exchangers and Secured Party shall have no obligation to disclose or discuss with any Grantor their assessment, or such Grantor's assessment, of the financial condition of Company. Each Grantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and Lender Hedge Agreements, and such Grantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Secured Obligations. Each Grantor hereby waives and relinquishes any duty on the part of Secured Party, any Lender or any Hedge Exchanger to disclose any matter, fact or thing relating to the business, operations or condition of Company now known or hereafter known by Secured Party, any Lender or any Hedge Exchanger. 38 [Remainder of page intentionally left blank] 39 IN WITNESS WHEREOF, Grantors and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: AUTOTOTE CORPORATION By: -------------------------------------- Name: Title: SUBSIDIARY GRANTORS: AUTOTOTE MANAGEMENT CORPORATION By: -------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 AUTOTOTE SYSTEMS, INC. By: -------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 S-1 AUTOTOTE INTERNATIONAL, INC. By: ----------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 AUTOTOTE ENTERPRISES, INC. By: ----------------------------------------- Name: Title: Address: 600 Long Wharf Drive New Haven, CT 06511 AUTOTOTE KENO CORPORATION By: ----------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 AUTOTOTE LOTTERY CORPORATION S-2 By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 ACRA ACQUISITION CORP. By: ----------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 MARVIN H. SUGARMAN PRODUCTIONS, INC. By: ----------------------------------------- Name: Title: Address: 750 Lexington Avenue New York, NY 10022 AUTOTOTE GAMING, INC. By: ----------------------------------------- Name: Title: Address: S-3 100 Bellevue Road Newark , DE 19714 AUTOTOTE DOMINICANA, INC. By: ----------------------------------------- Name: Title: Address: 100 Bellevue Road Newark , DE 19714 SCIENTIFIC GAMES HOLDING CORP. By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 SCIENTIFIC GAMES INC. By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 SCIENTIFIC GAMES (GREECE), INC. S-4 By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 SCIENTIFIC GAMES ACQUISITION INC. By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 SCIENTIFIC GAMES FINANCE CORPORATION By: ----------------------------------------- Name: Title: Address: 900 Market Street, Suite 200 Wilmington, DE 19801 SCIENTIFIC GAMES ROYALTY CORPORATION By: ----------------------------------------- Name: Title: Address: S-5 900 Market Street, Suite 200 Wilmington, DE 19801 SCIGAMES FRANCE INC. By: ----------------------------------------- Name: Title: Address: 1500 Bluegrass Lakes Parkway Alpharetta, GA 30004 S-6 DLJ CAPITAL FUNDING, INC., as Secured Party By: ----------------------------------------- Name: Title: S-7 SCHEDULE 1(E)(I) TO SECURITY AGREEMENT - -------------------------------------------------------------------------------- PERCENTAGE OF CLASS OUTSTANDING OF STOCK PAR NUMBER OF SHARES STOCK ISSUER STOCK CERTIFICATE NOS. VALUE SHARES PLEDGED ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1(e)(i)-1 SCHEDULE 1(E)(II) TO SECURITY AGREEMENT - -------------------------------------------------------------------------------- AMOUNT OF DEBT ISSUER INDEBTEDNESS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ 1(e)(ii)-1 SCHEDULE 1(F)(I) TO SECURITY AGREEMENT U.S. TRADEMARKS: - ---------------- TRADEMARK REGISTRATION REGISTRATION REGISTERED OWNER DESCRIPTION NUMBER DATE ---------------- ----------- ------ ---- FOREIGN TRADEMARKS: - ------------------- TRADEMARK REGISTRATION REGISTRATION REGISTERED OWNER DESCRIPTION NUMBER DATE ---------------- ----------- ------ ---- 1(f)(i)-1 SCHEDULE 1(F)(II) TO SECURITY AGREEMENT U.S. PATENTS ISSUED: - -------------------- PATENT NO. ISSUE DATE INVENTION INVENTOR ---------- ---------- --------- -------- U.S. PATENTS PENDING: - --------------------- APPLICANT'S DATE APPLICATION NAME FILED NUMBER INVENTION INVENTOR ---- ----- ------ --------- -------- FOREIGN PATENTS ISSUED: - ----------------------- PATENT NO. ISSUE DATE INVENTION INVENTOR ---------- ---------- --------- -------- 1(f)(ii)-1 FOREIGN PATENTS PENDING: - ----------------------- APPLICANT'S DATE APPLICATION NAME FILED NUMBER INVENTION INVENTOR ---- ----- ------ --------- -------- 1(f)(ii)-2 SCHEDULE 1(F)(III) TO SECURITY AGREEMENT U.S. COPYRIGHTS: - ---------------- TITLE REGISTRATION NO. DATE OF ISSUE REGISTERED OWNER - ----- ---------------- ------------- ---------------- FOREIGN COPYRIGHT REGISTRATIONS: - -------------------------------- COUNTRY TITLE REGISTRATION NO. DATE OF ISSUE - ------- ---------------------- ------------- PENDING U.S. COPYRIGHT REGISTRATIONS & APPLICATIONS: - --------------------------------------------------- TITLE REFERENCE NO. DATE OF APPLICATION COPYRIGHT CLAIMANT - ----- ------------- ------------------- --------- --------- PENDING FOREIGN COPYRIGHT REGISTRATIONS & APPLICATIONS: - ------------------------------------------------------- COUNTRY TITLE REGISTRATION NO. DATE OF ISSUE - ------- ---------------------- ------------- 1(f)(iii)-1 SCHEDULE 1(H) TO SECURITY AGREEMENT ASSIGNED AGREEMENTS ------------------- 1(h)-1 SCHEDULE 1(M) TO SECURITY AGREEMENT 1(m)-1 SCHEDULE 4(B) TO SECURITY AGREEMENT LOCATIONS OF EQUIPMENT AND INVENTORY ------------------------------------ NAME OF GRANTOR LOCATIONS OF EQUIPMENT AND INVENTORY - --------------- ------------------------------------ 4(b)-1 SCHEDULE 4(D) TO SECURITY AGREEMENT OFFICE LOCATIONS ---------------- NAME OF GRANTOR OFFICE LOCATIONS - --------------- ---------------- 4(d)-1 SCHEDULE 4(E) TO SECURITY AGREEMENT OTHER NAMES ----------- NAME OF GRANTOR OTHER NAMES - --------------- ----------- 4(e)-1 SCHEDULE 4(I) TO SECURITY AGREEMENT FILING OFFICES -------------- GRANTOR FILING OFFICES ------- -------------- 4(i)-1 EXHIBIT I TO SECURITY AGREEMENT [FORM OF GRANT OF TRADEMARK SECURITY INTEREST] GRANT OF TRADEMARK SECURITY INTEREST WHEREAS, [NAME OF GRANTOR], a ___________ corporation ("Grantor"), owns and uses in its business, and will in the future adopt and so use, various intangible assets, including the Trademark Collateral (as defined below); and WHEREAS, Autotote Corporation, a Delaware corporation ("COMPANY"), has entered into an Amended and Restated Credit Agreement dated as of October 6, 2000 (said Credit Agreement, as it may heretofore have been and as it may hereafter be amended, supplemented, restated or otherwise modified from time to time, being the "CREDIT AGREEMENT", with capitalized terms used herein and not defined herein being used herein as defined therein) with the financial institutions named therein (collectively, together with their respective successors and assigns party to the Credit Agreement from time to time, the "LENDERS"), DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager ("SECURED PARTY"), Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company; and WHEREAS, Company [and Subsidiary Guarantors, as the case may be,] may from time to time enter, or may from time to time have entered, into one or more Hedge Agreements (collectively, the "LENDER HEDGE AGREEMENTS") with one or more Persons that are Lenders or Affiliates of Lenders at the time such Lender Hedge Agreements are entered into (in such capacity, collectively, "HEDGE EXCHANGERS"); and [Insert if Grantor is a Subsidiary:] [WHEREAS, Grantor has executed and delivered that certain Amended and Restated Subsidiary Guaranty dated as of October 6, 2000 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and the other Loan Documents and all obligations of Company under the Lender Hedge Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof; and] WHEREAS, pursuant to the terms of an Amended and Restated Security Agreement dated as of October 6, 2000 (as amended, supplemented or otherwise modified from time to time, the "SECURITY AGREEMENT"), among Grantor, Secured Party and the other grantors named therein, Grantor has agreed to create in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers a secured and protected interest in, and Secured Party has agreed to become a secured creditor with respect to, the Trademark Collateral (as hereinafter defined); I-1 NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, subject to the terms and conditions of the Security Agreement, Grantor hereby grants to Secured Party for the benefit of Lenders and any Hedge Exchangers a security interest in all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "TRADEMARK COLLATERAL"): (i) all rights, title and interest (including rights acquired pursuant to a license or otherwise but only to the extent permitted by agreements governing such license or other use) in and to all trademarks, service marks, designs, logos, indicia, tradenames, trade dress, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto, owned by Grantor, or hereafter adopted and used, in its business (including, without limitation, the trademarks specifically identified in Schedule A) (collectively, the "TRADEMARKS"), all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (including, without limitation, the registrations and applications specifically identified in Schedule A) (the "TRADEMARK REGISTRATIONS"), all common law and other rights (but in no event any of the obligations) in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS"), and all goodwill of Grantor's business symbolized by the Trademarks and associated therewith (the "ASSOCIATED GOODWILL"); and (ii) all proceeds, products, rents and profits of or from any and all of the foregoing Trademark Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Trademark Collateral. For purposes of this Grant of Trademark Security Interest, the term "PROCEEDS" includes whatever is receivable or received when Trademark Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Trademark Collateral include, and Grantor shall be not deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which Grantor is a party; PROVIDED, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Trademark Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. Grantor does hereby further acknowledge and affirm that the rights and remedies of Secured Party with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. I-2 [The remainder of this page is intentionally left blank.] I-3 IN WITNESS WHEREOF, Grantor has caused this Grant of Trademark Security Interest to be duly executed and delivered by its officer thereunto duly authorized as of the __ day of _______, _____. [NAME OF GRANTOR] By: -------------------------------- Name: ---------------------------- Title: --------------------------- I-4 SCHEDULE A TO GRANT OF TRADEMARK SECURITY INTEREST UNITED STATES TRADEMARK REGISTRATION REGISTRATION REGISTERED OWNER DESCRIPTION NUMBER DATE - ---------------- ----------- ------ ---- I-A-1 EXHIBIT II TO SECURITY AGREEMENT [FORM OF GRANT OF PATENT SECURITY INTEREST] GRANT OF PATENT SECURITY INTEREST WHEREAS, [NAME OF GRANTOR], a ___________ corporation ("Grantor"), owns and uses in its business, and will in the future adopt and so use, various intangible assets, including the Patent Collateral (as defined below); and WHEREAS, Autotote Corporation, a Delaware corporation ("Company"), has entered into an Amended and Restated Credit Agreement dated as of October 6, 2000 (said Credit Agreement, as it may heretofore have been and as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", with capitalized terms used herein and defined herein being used herein as defined therein) with the financial institutions named therein (collectively, together with their respective successors and assigns party to the Credit Agreement from time to time, the "LENDERS"), DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager ("SECURED PARTY"), Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company; and WHEREAS, Company [and Subsidiary Guarantors, as the case may be,] may from time to time enter, or may from time to time have entered, into one or more Hedge Agreements (collectively, the "LENDER HEDGE AGREEMENTS") with one or more Persons that are Lenders or Affiliates of Lenders at the time such Lender Hedge Agreements are entered into (in such capacity, collectively, "HEDGE EXCHANGERS"); and [Insert if Grantor is a Subsidiary:] [WHEREAS, Grantor has executed and delivered that certain Amended and Restated Subsidiary Guaranty dated as of October 6, 2000 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and the other Loan Documents and all obligations of Company under the Lender Hedge Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof; and] WHEREAS, pursuant to the terms of an Amended and Restated Security Agreement dated as of October 6, 2000 (as amended, supplemented or otherwise modified from time to time, the "SECURITY AGREEMENT"), among Grantor, Secured Party and the other grantors named therein, Grantor has agreed to create in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers a secured and protected interest in, and Secured Party has agreed to become a secured creditor with respect to, the Patent Collateral (as hereinafter defined); II-1 NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, subject to the terms and conditions of the Security Agreement, Grantor hereby grants to Secured Party for the benefit of Lenders and any Hedge Exchangers a security interest in all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "PATENT COLLATERAL"): (i) all rights, title and interest (including rights acquired pursuant to a license or otherwise but only to the extent permitted by agreements governing such license or other use) in and to all patents and patent applications and rights and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned or held by Grantor and all patents and patent applications and rights, title and interests in patents and patent applications under any domestic or foreign law that are presently, or in the future may be, owned by Grantor in whole or in part (including, without limitation, the patents and patent applications listed in SCHEDULE A), all rights (but not obligations) corresponding thereto to sue for past, present and future infringements and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); and (ii) all proceeds, products, rents and profits of or from any and all of the foregoing Patent Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Patent Collateral. For purposes of this Grant of Patent Security Interest, the term "PROCEEDS" includes whatever is receivable or received when Patent Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Patent Collateral include, and Grantor shall be not deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which Grantor is a party; PROVIDED, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Patent Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. Grantor does hereby further acknowledge and affirm that the rights and remedies of Secured Party with respect to the security interest in the Patent Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. [The remainder of this page intentionally left blank.] II-2 IN WITNESS WHEREOF, Grantor has caused this Grant of Patent Security Interest to be duly executed and delivered by its officer thereunto duly authorized as of the ___ day of ____________, _____. [NAME OF GRANTOR] By: ------------------------------------ Name: -------------------------------- Title: ------------------------------- II-3 SCHEDULE A TO GRANT OF PATENT SECURITY INTEREST PATENTS ISSUED: - --------------- PATENT NO. ISSUE DATE INVENTION INVENTOR ---------- ---------- --------- -------- PATENTS PENDING: - ---------------- APPLICANT'S DATE APPLICATION NAME FILED NUMBER INVENTION INVENTOR ---- ----- ------ --------- -------- II-A-1 EXHIBIT III TO SECURITY AGREEMENT [FORM OF GRANT OF COPYRIGHT SECURITY INTEREST] GRANT OF COPYRIGHT SECURITY INTEREST WHEREAS, [NAME OF GRANTOR], a ___________ corporation ("Grantor"), owns and uses in its business, and will in the future adopt and so use, various intangible assets, including the Copyright Collateral (as defined below); and WHEREAS, Autotote Corporation, a Delaware corporation ("Company"), has entered into an Amended and Restated Credit Agreement dated as of October 6, 2000 (said Credit Agreement, as it may heretofore have been and as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", with capitalized terms used herein and not defined herein being used herein as defined therein) with the financial institutions named therein (collectively, together with their respective successors and assigns party to the Credit Agreement from time to time, the "LENDERS"), DLJ Capital Funding, Inc., as Administrative Agent, Syndication Agent, Lead Arranger and Sole Book Running Manager ("SECURED PARTY"), Lehman Commercial Paper Inc., as Documentation Agent, and Lehman Brothers Inc., as Co-Arranger, pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company; and WHEREAS, Company [and Subsidiary Guarantors, as the case may be,] may from time to time enter, or may from time to time have entered, into one or more Hedge Agreements (collectively, the "LENDER HEDGE AGREEMENTS") with one or more Persons that are Lenders or Affiliates of Lenders at the time such Lender Hedge Agreements are entered into (in such capacity, collectively, "HEDGE EXCHANGERS"); and [Insert if Grantor is a Subsidiary:] [WHEREAS, Grantor has executed and delivered that certain Amended and Restated Subsidiary Guaranty dated as of October 6, 2000 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "GUARANTY") in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and the other Loan Documents and all obligations of Company under the Lender Hedge Agreements, including without limitation the obligation of Company to make payments thereunder in the event of early termination thereof; and] WHEREAS, pursuant to the terms of an Amended and Restated Security Agreement dated as of October 6, 2000 (as amended, supplemented or otherwise modified from time to time, the "SECURITY AGREEMENT"), among Grantor, Secured Party and the other grantors named therein, Grantor has agreed to create in favor of Secured Party for the benefit of Lenders and any Hedge Exchangers a secured and protected interest in, and Secured Party has agreed to become a secured creditor with respect to, the Copyright Collateral (as hereinafter defined); III-1 NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, subject to the terms and conditions of the Security Agreement, Grantor hereby grants to Secured Party for the benefit of Lenders and any Hedge Exchangers a security interest in all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COPYRIGHT COLLATERAL"): (i) all rights, title and interest (including rights acquired pursuant to a license or otherwise but only to the extent permitted by agreements governing such license or other use) under copyright in various published and unpublished works of authorship including, without limitation, computer programs, computer data bases, other computer software layouts, trade dress, drawings, designs, writings, and formulas (including, without limitation, the works listed on SCHEDULE A, as the same may be amended pursuant hereto from time to time) (collectively, the "COPYRIGHTS"), all copyright registrations issued to Grantor and applications for copyright registration that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (including, without limitation, the registrations listed on SCHEDULE A, as the same may be amended pursuant hereto from time to time) (collectively, the "COPYRIGHT REGISTRATIONS"), all common law and other rights in and to the Copyrights in the United States and any state thereof and in foreign countries including all copyright licenses (but with respect to such copyright licenses, only to the extent permitted by such licensing arrangements) (the "COPYRIGHT RIGHTS"), including, without limitation, each of the Copyrights, rights, titles and interests in and to the Copyrights, all derivative works and other works protectable by copyright, which are presently, or in the future may be, owned, created (as a work for hire for the benefit of Grantor), authored (as a work for hire for the benefit of Grantor), or acquired by Grantor, in whole or in part, and all Copyright Rights with respect thereto and all Copyright Registrations therefor, heretofore or hereafter granted or applied for, and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyright Registrations and Copyright Rights and to register works protectable by copyright and the right (but not the obligation) to sue in the name of Grantor or in the name of Secured Party or Lenders for past, present and future infringements of the Copyrights and Copyright Rights; and (ii) all proceeds, products, rents and profits of or from any and all of the foregoing Copyright Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Copyright Collateral. For purposes of this Grant of Copyright Security Interest, the term "PROCEEDS" includes whatever is receivable or received when Copyright Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding anything herein to the contrary, in no event shall the Copyright Collateral include, and Grantor shall be not deemed to have granted a security interest in, any of Grantor's rights or interests in any license, contract or agreement to which Grantor is a party or any of its rights or interests thereunder to the extent, but only to the extent, that such a grant would, under the terms of such license, contract or agreement or otherwise, result in a breach of the terms of, or constitute a default under, any license, contract or agreement to which Grantor is a party; PROVIDED, that immediately upon the ineffectiveness, lapse or termination of any such provision, the Copyright Collateral shall include, and Grantor shall be deemed to have granted a security interest in, all such rights and interests as if such provision had never been in effect. Grantor does hereby further acknowledge and affirm that the rights and remedies of Secured Party with respect to the security interest in the Copyright Collateral granted hereby III-2 are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. [The remainder of this page intentionally left blank.] III-3 IN WITNESS WHEREOF, Grantor has caused this Grant of Copyright Security Interest to be duly executed and delivered by its officer thereunto duly authorized as of the ___ day of ___________, _____. [NAME OF GRANTOR] By: ---------------------------------- Name: ------------------------------ Title: ----------------------------- III-4 EXECUTION SECURITY AGREEMENT SCHEDULE A TO GRANT OF COPYRIGHT SECURITY INTEREST U.S. COPYRIGHTS: - ---------------- TITLE REGISTRATION NO. DATE OF ISSUE REGISTERED OWNER - ----- ---------------- ------------- ---------------- PENDING U.S. COPYRIGHT REGISTRATIONS & APPLICATIONS: - --------------------------------------------------- TITLE REFERENCE NO. DATE OF APPLICATION COPYRIGHT CLAIMANT - ----- ------------- ------------------- --------- --------- III-A-1 EXHIBIT IV TO SECURITY AGREEMENT PLEDGE SUPPLEMENT This Pledge Supplement, dated __________________, is delivered pursuant to the Amended and Restated Security Agreement, dated October 6, 2000, between ____________________, a _______________ ("GRANTOR"), the other Grantors named therein, and __________________ (as it may be from time to time amended, modified or supplemented, the "SECURITY AGREEMENT"). Capitalized terms used herein not otherwise defined herein shall have the meanings ascribed thereto in the Security Agreement. Grantor hereby agrees that the [Pledged Shares] [Pledged Debt] listed on the schedule attached hereto shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Securities Collateral and shall secure all Secured Obligations. IN WITNESS WHEREOF, Grantor has caused this Pledge Supplement to be duly executed and delivered by its duly authorized officer as of ______________. [GRANTOR] By: ----------------------------------------- Title: IV-1 EXHIBIT V TO SECURITY AGREEMENT IP SUPPLEMENT This IP SUPPLEMENT, dated _______, is delivered pursuant to and supplements (i) the Security Agreement, dated as of September 6, 2000 (as it has been or it may be from time to time amended, modified or supplemented, the "SECURITY AGREEMENT"), among Autotote Corporation, [Insert Name of Grantor] (the "GRANTOR"), the other Grantors named therein, and DLJ Capital Funding, Inc., as Secured Party, and (ii) the [Grant of Trademark Security Interest] [Grant of Patent Security Interest] [Grant of Copyright Security Interest] dated as of ___________, _____ (the "GRANT") executed by Grantor. Capitalized terms used herein not otherwise defined herein shall have the meanings ascribed thereto in the Grant. Grantor grants to Secured Party a security interest in all of Grantor's right, title and interest in and to the [Trademark Collateral] [Patent Collateral] [Copyright Collateral] listed on Schedule A attached hereto. All such [Trademark Collateral] [Patent Collateral] [Copyright Collateral] shall be deemed to be part of the [Trademark Collateral] [Patent Collateral] [Copyright Collateral] and shall be hereafter subject to each of the terms and conditions of the Security Agreement and the Grant. IN WITNESS WHEREOF, Grantor has caused this Supplement to be duly executed and delivered by its duly authorized officer as of ______________. [GRANTOR] By: ------------------------------------ Name: Title: V- EXHIBIT VI TO SECURITY AGREEMENT [FORM OF COUNTERPART] COUNTERPART (this "COUNTERPART"), dated _______, is delivered pursuant to Section 22 of the Security Agreement referred to below. The undersigned hereby agrees that this Counterpart may be attached to the Amended and Restated Security Agreement, dated as of October 6, 2000 (as it may be from time to time amended, modified or supplemented, the "SECURITY AGREEMENT"; capitalized terms used herein not otherwise defined herein shall have the meanings ascribed therein), among Autotote Corporation, the other Grantors named therein, and DLJ Capital Funding, Inc., as Secured Party. The undersigned by executing and delivering this Counterpart hereby becomes a Grantor under the Security Agreement in accordance with Section 22 thereof and assumes and agrees to be bound by all of the terms thereof. Without limiting the generality of the foregoing, the undersigned hereby: (i) authorizes the Secured Party to add the information set forth on the Schedules to this Agreement to the correlative Schedules attached to the Security Agreement; (ii) agrees that all Collateral of the undersigned, including the items of property described on the Schedules hereto, shall become part of the Collateral and shall secure all Secured Obligations; and (iii) makes the representations and warranties set forth in the Security Agreement, as amended hereby, to the extent relating to the undersigned. [NAME OF ADDITIONAL GRANTOR] By: -------------------------------- Name: Title: EX-21.1 10 a2036456zex-21_1.txt EXHIBIT 21.1 Exhibit 21.1 AUTOTOTE CORPORATION SUBSIDIARIES Autotote Management Corporation (Delaware) (100%) Scientific Games Holdings Corp. (Delaware) 100% Scientific Games Foreign Sales Corporation (Barbados) 100% Scientific Games (Greece), Inc. (Delaware) 100% Scientific Games Acquisition, Inc. (Delaware) 100% Scientific Games Finance Corporation (Delaware) 100% Scientific Games Inc. (Delaware) 100% Scientific Games International GmbH (Austria) 100% Scientific Games Royalty Corporation (Delaware) 100% Daily Race Game Joint Venture (70% interest) Scientific Games International Limited (UK) 100% Scientific Connections SDN BHD (Malaysia) 100% Knightway Promotions Limited (UK) 100% Norton & Wright Limited (UK) 99% / 1% SGIL Scientific Connections Limited (UK) 100% OPAX Lotteries International Limited (UK) 100% SciGames France Inc. (Delaware) 100% SciGames France S.A.S. (France) 55% SciGames Germany GmbH (Germany) 100% Autotote Systems, Inc. (Delaware) (100%) Autotote International, Inc. (Delaware) (100%) Autotote Canada Inc. (Ontario) (100%) NASRIN Services LLC (Delaware) (70%) Autotote Worldwide Services Limited (Ireland) (100%) Autotote Enterprises, Inc. (Connecticut) (100%) Autotote Keno Corporation (Nebraska) (100%) Autotote Lottery Corporation (Delaware) (100%) Autotote Lottery Canada Inc. (Ottawa) (100%) Autotote Europe GmbH (Germany) (100%) AUTOTOTE Deutschland GmbH (Germany) (100%) DATEK Toto Dienstleistung GmbH (Germany) (100%) TEK Totalisatorservice GmbH (Germany) (50%) GTS Galopp Totalisator Service GmbH (Germany) (50%) AUTOTOTE GmbH Oesterreich (Austria) (100%) Autotote Europe Communications Services GmbH (Germany) (100%) Sisal Autotote Betriebsgesellschaft GmbH (Germany) 50% Vertreibsgesellschaft fur Trag und Galopp GmbH (Germany) 40% Marvin H. Sugarman Productions, Inc. (New York) (100%) ACRA Acquisition Corp. (New Jersey) (100%) AUTOTOTE France S.A. (France) (99.96%) SASO S.A.R.L. (France) (99.6%) Autotote Panama, Inc. (Panama) (100%) Autotote Nederland B.V. (the Netherlands) (100%) Autotote Banen B.V. (the Netherlands) (100%) Autotote Gaming, Inc. (Nevada) (100%) Autotote Dominicana Inc. (Delaware) (100%) Autotote Interactive, Inc. (Delaware) (100%) EX-23 11 a2036456zex-23.txt EXHIBIT 23 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 and registration statement on Form S-4 (No. 333-51000) of Autotote Corporation of our report dated December 15, 2000, relating to the consolidated balance sheets of Autotote Corporation and subsidiaries as of October 31, 1999, and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss, cash flows, and financial statement schedule for each of the years in the three-year period ended October 31, 2000, which report appears in the Form 10-K of Autotote Corporation for the year ended October 31, 2000. KPMG LLP Short Hills, New Jersey January 29, 2001 EX-27 12 a2036456zex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AUTOTOTE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-31-2000 NOV-01-1999 OCT-31-2000 15,308 0 58,571 4,308 24,678 112,427 317,549 130,895 647,215 106,570 0 1,132 0 371 32,816 647,215 233,348 233,348 155,900 155,900 63,034 0 31,231 (16,817) 1,603 (18,420) 0 12,567 0 (30,987) (0.84) (0.84)
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