-----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, OG5pZ7N8mCLrH9s/d6S24IW54uzcu0Cz4l9XVD5TO2reL1sOt3bDl6wPIaFPBTjo Dxk4BP3l6yYmufmj+kP2Xw== 0000922423-97-000961.txt : 19971119 0000922423-97-000961.hdr.sgml : 19971119 ACCESSION NUMBER: 0000922423-97-000961 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19971118 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOTOTE CORP CENTRAL INDEX KEY: 0000750004 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 810422894 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11693 FILM NUMBER: 97723651 BUSINESS ADDRESS: STREET 1: 100 BELLEVUE CITY: NEWARK STATE: DE ZIP: 19714 BUSINESS PHONE: 3027374300 MAIL ADDRESS: STREET 1: 100 BELLEVUE ROAD CITY: NEWARK STATE: NJ ZIP: 19714 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TOTE INC DATE OF NAME CHANGE: 19920317 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1996, 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 81-042289 (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: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value 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 report), 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. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant as of January 22, 1997, was approximately $45,029,178 (based on the last sale price of such stock on such date as reported by the American Stock Exchange). AS OF JANUARY 22, 1997, 34,437,214 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE ("CLASS A COMMON STOCK"), WERE ISSUED AND OUTSTANDING. EXHIBIT INDEX APPEARS ON PAGE 25 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report for the year ended October 31, 1996 on Form 10-K as set forth in the pages attached hereto: Item 1. Business. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13. Certain Relationships and Related Transactions. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - 2 - PART I When used herein, the words "believe," "anticipate," "think," "intend," "will be" and similar expressions identify forward-looking statements. Such statements are subject to certain risks and uncertainties discussed herein, which could cause actual results to differ materially from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements which speak only as of the date hereof. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." All references to a fiscal year are to the Company's fiscal year which ends October 31. The term "pari-mutuel" is a form of wagering in which all wagers are placed in a pool and the payoff is computed based on the total amount of the pool, as compared to casino gambling where the "house" sets the payoff. The pool of gross wagers is referred to as "Handle". ITEM 1. BUSINESS Autotote Corporation ("Autotote" or the "Company") designs, sells and operates computerized wagering systems and related equipment for thoroughbred, harness and greyhound racetracks, off-track betting establishments ("OTBs"), jai alai frontons, casino/sports betting facilities and government-sponsored lotteries in North America and abroad. The Company also is the exclusive licensed operator of substantially all off-track wagering in the State of Connecticut. Additionally, the Company provides simulcasting services nationwide and designs, sells and services video gaming machines ("VGMs") for use at racetracks. For the twelve months ended October 31, 1996, the Company generated operating revenues and EBITDA (earnings before income tax expense, interest expense, depreciation and amortization) of $176.2 million and $32.4 million, respectively. Pari-mutuel wagering is a form of wagering in which all wagers are placed in a pool and the payoff is computed based on the total amount of the pool, as compared to casino gambling where the 'house' sets the payoff. Pari-mutuel wagering is currently authorized in 43 states in the United States, all provinces in Canada, and approximately 100 other countries around the world. In North America, the market for wagering systems includes thoroughbred, harness and greyhound racetracks, OTBs, and jai alai frontons. The Company is the leading provider and operator of computerized pari-mutuel wagering systems to the Racing Industry and one of the leading providers of computerized pari-mutuel wagering systems worldwide. In 1996, the Company's pari-mutuel wagering systems processed approximately two-thirds of the estimated $20 billion total Racing Industry Handle. The Company's wagering systems and/or related equipment are installed at over 100 racetracks in North America, including 10 of the top 15 largest racetracks, and over 800 OTBs. The Company is also the largest provider of simulcasting services to the Racing Industry. Additionally, the Company has installed approximately 1,300 of its VGMs in racetracks in West Virginia and Manitoba. The Company's wagering systems are in use in many of the largest racetracks and OTBs in Europe, Central and South America, the Far East and New Zealand. The Company's lottery operations provide wagering equipment and services to operate the Connecticut State Lottery under an exclusive full-service facilities management contract and sell wagering systems and related equipment for on-line lotteries and other wagering applications worldwide. The Company also provides software and support services to the Massachusetts on-line lottery network. Internationally, the Company designs, sells and provides maintenance and support services to government lottery authorities in Austria, Germany, Israel, Italy, The Netherlands and Switzerland. The Company's pari-mutuel wagering systems receive information from ticket-issuing terminals, accumulate wagering data, calculate pari-mutuel odds, distribute information to display systems and provide management information and marketing services for its customers. The systems consist of high-volume, real time transaction and data processing networks managed by central computers, communications equipment, special purpose microcomputer- - 3 - based terminals, peripheral and display equipment and operations and applications software. Revenues received by the Company for providing and operating its pari-mutuel wagering systems in North America are generally based upon a percentage of the Handle. While total Racing Industry Handle has remained relatively stable over the past three years, there has been dramatic growth within the OTB and intertrack wagering segments. This growth has been driven by the expanded use of simulcasting in the Racing Industry, and by the liberalization of state pari-mutuel wagering regulations. The Company has benefited from this trend as it processes most of the OTB and intertrack Handle in North America and is the largest provider of simulcasting services to the Racing Industry. Further, the growth in the OTB and intertrack wagering segments has had the greatest impact at the largest racetracks in North America, which offer the most popular racing product and the largest pari-mutuel pools. The percentage of total Racing Industry Handle generated by the top 15 racetracks, as measured by annual aggregate Handle, increased from 31.7% in 1992 to 41.8% in 1995 and total Handle generated by these racetracks grew at a compound annual rate of approximately 9.4% from $6.2 billion in 1992 to $8.2 billion in 1995. The Company has particularly benefited from this growth because it operates pari-mutuel systems at a majority of the largest racetracks and OTBs in North America. For information on the Company's business and geographic segments, see Note 20 to Consolidated Financial Statements. PARI-MUTUEL GROUP North American Wagering Systems The Company's wagering systems and/or related equipment are installed at over 100 racetracks in North America, including 10 of the top 15 largest racetracks, and over 800 OTBs. In North America, each customer of the Company typically enters into a five-year service contract pursuant to which the Company provides the pari-mutuel wagering system, as well as the operations, maintenance and supervisory personnel necessary to operate the pari-mutuel wagering system. The Company maintains ownership of the equipment comprising the pari-mutuel wagering systems which enables it to employ such equipment in more than one racetrack. The Company's pari-mutuel customers include some of the largest North American pari-mutuel facilities, including Santa Anita, Belmont Park, Hollywood Park, Aqueduct, Del Mar, Saratoga, Golden Gate, Woodbine, Bay Meadows, Hawthorne, Philadelphia Park, Sportman's Park, Penn National, Hastings Park, and the Fair Grounds. The pari-mutuel wagering systems provided by the Company in North America typically include the terminals that issue the wagering tickets, the central processing unit which calculates the betting odds of a particular event and tabulates and accounts for the Handle, the display board which indicates the betting odds of a particular event and the communication equipment necessary for additional wagering from sources outside the wagering facility. The systems consist of high volume, real-time transaction and data processing networks managed by central computers, communications equipment, special purpose microcomputer-based terminals, peripheral and display equipment and operations and applications software. The type of central processing unit and the number of ticket issuing terminals used in a system are generally determined by the amount of wagering at, and physical layout of, the facility. Ticket issuing terminals are installed at several different racetracks or off-track facilities, respectively, and the central processing system communicates with the wagering systems at the on-track locations via telephone or data communication lines. The Company generally does not, however, employ the clerks who issue wagering tickets using the Company's teller-operated terminals. Additional software and other support functions are provided by the Company. Revenues received by the Company for providing and operating its pari-mutuel wagering systems in North America are generally based upon a percentage of the Handle, subject in many instances to minimum fees which are usually exceeded under normal operating conditions. Minimum fees under the Company's service contracts are - 4 - generally based on the number of days the facility operates, as well as other factors, including the type of system and number of teller operated terminals installed at the facility. The Company's larger contracts generally do not provide for minimum payments. The Company's extensive penetration of the North American pari-mutuel wagering market has enabled it to increase its revenue base through the transmission of wagers for intertrack wagering. The Company receives interface fees from facilities that transmit wagers to other facilities which use the Company's pari-mutuel wagering system. For example, if a customer at a small racetrack wagers on a race occurring at Belmont Park in New York (which uses a Company operated pari-mutuel wagering system), the Company charges an interface fee for such a bet. If the smaller racetrack's pari-mutuel wagering system is also operated by the Company, the Company receives a percentage of the wager because the wager is included in the Handle at the smaller racetrack. This situation allows the Company to receive fees at both racetracks from one wager. In recent years, the Company has focused on the creation of regional networks of large and medium sized racetracks, rather than single facilities at smaller racetracks. These networks allow the Company to achieve economies of scale by centralizing its service operations and more efficiently utilizing its installed base of computer hardware. Additionally, when linked to the Company's other regional and national pari-mutuel wagering networks, these networks provide the Company's customers with access to new markets and revenue sources by increasing the number and variety of wagering opportunities that customers can offer to their patrons. The Company believes the creation of these regional networks has, in part, been responsible for the Company's increase in market share from less than 30% in 1990 to approximately 65% in 1996. Additionally, the Company believes its established wagering networks will give the Company a competitive advantage in renewing existing contracts and winning new contracts because of its ability to offer customers greater services more efficiently than its competitors. The Company currently operates its regional pari-mutuel wagering networks in California, Florida, Illinois, Pennsylvania, West Virginia, Connecticut, New York, New Jersey, Washington, Oregon, Michigan, Ontario, Alberta, Puerto Rico and Mexico. An additional outlet for the Company's pari-mutuel wagering systems is the Atlantic City casino market. The Company operates pari-mutuel wagering systems for eight casinos located in Atlantic City. Services provided to these casinos are similar to those provided directly to racetracks. In its service contracts, the Company makes certain warranties regarding the operation, performance, implementation and reliability of its wagering systems, relating to, among other things, data accuracy, repairs and validation procedures. The Company's warranties in its wagering systems contracts are the subject of negotiation, and accordingly vary on a case-by-case basis. Simulcasting Systems The Company is a leading simulcaster of live horse and greyhound racing events to racing facilities, OTBs and casinos in North America. The Company simulcasts races from racetracks to numerous OTBs, casinos and racetracks throughout the United States and the Caribbean. The Company simulcasts racing events to approximately 50 racetracks and over 850 OTBs throughout North America. Simulcasting is the process of transmitting the audio and video signal of a live racing performance from one facility to a satellite for retransmission to wagering locations across the country. Simulcasting provides racetracks the opportunity to increase revenues by receiving transmissions from other racetracks and sending their signals to as many wagering locations as possible, such as racetracks, OTBs and casinos. Revenues are increased because simulcasting provides consumers access to distant racing events thereby increasing the consumer base, and it maximizes the number of events for wagering by utilizing idle time between races at racetracks. In its simulcasting operations, the Company leases satellite transponders and uses digital compression technology for its simulcasting operations, which has permitted it to increase the number of events which may be simulcasted at one time. The Company also owns vehicles which are used by certain racetracks to uplink the transmission of their events to the satellite containing the Company controlled transponder, and owns decoders which - 5 - are used by racetracks to unscramble the transmission signal from other racetracks. The Company receives fees as follows: (i) a daily fee charged to racetracks for use of satellite time controlled by the Company to transmit their racetrack events (ii) a fee charged to racetracks for use of the Company's vehicles to uplink their transmission of events and (iii) in some cases, a fee charged to racetracks for the use of the Company's decoders to unscramble the transmission feed of other racetracks. From time to time, satellite transponder capacity not used for providing simulcasting services to the racing industry may be sold to other users of satellite communications. Connecticut OTB In 1993, the Company purchased from the State of Connecticut the exclusive right to operate substantially all off-track betting within the state. The Company currently operates 11 Connecticut OTB locations state wide, including teletheaters in New Haven and Windsor Locks. Unlike most OTBs, the Connecticut OTB does not compete with horse racetracks within the state. During fiscal 1995, the Company opened its New Haven sports entertainment complex called Sports Haven(R) which features simulcasts of racing events, dining facilities, a sports bar and other services. Since the Company commenced operating the Connecticut OTB, it has implemented several important product and service enhancements, including expanded simulcasting of races from racetracks across the country, common pool wagering and expanded telephone account wagering. These improvements have helped increase Handle generated by Connecticut OTB from approximately $160 million in 1992 when the State of Connecticut last operated the Connecticut OTB to $198 million in 1996. The Company recently received legislative approval to expand its operations to seven days a week. The Company believes its expertise developed in operating the Connecticut OTB will provide it with a competitive advantage in obtaining future OTBs through privatization. The exclusive right to operate the Connecticut OTB is subject to state regulations such as the location of OTBs, hours of operation and certain financial and operational standards. The Company must pay liquidated damages to the state if these standards are not met. The Company is also subject to a pari-mutuel tax of 3 1/2% of all monies wagered. The percentage of total Handle which the Company may receive as the operating revenues from the Connecticut OTB is determined by law and ranges from 15% to 25%, depending on the type of wagers. Handle wagered on tracks from other locations can increase incremental revenue to the racetrack owners. Operation of the Connecticut OTB strengthens the Company's competitive position because most of the Company's pari-mutuel racetrack customers can be linked to the Connecticut OTB system, thereby increasing the potential size of a racetrack customer's pool. In 1996, the Company received legislative approval to expand its operations to seven days a week subject to local approval. International Pari-Mutuel Operations The Company operates all aspects of the pari-mutuel wagering systems at racetracks in France, Germany and Austria, including in some cases employing the agents that issue the wagering tickets. In fiscal 1996, the Company derived approximately $13.3 million in services and sales revenues from its French pari-mutuel wagering operations and $3.7 million in service and sales revenues from its German and Austrian pari-mutuel wagering operations. In its other international markets, the Company generally sells, delivers and installs pari-mutuel wagering systems in racetracks and OTBs rather than operating them pursuant to service contracts. The Company generally designs a customized system to meet the unique needs of each customer, including game designs, language preferences, network communications standards and other key elements. The Company also provides the customer with a royalty-free license for use of the Company's proprietary system software, as well as technical assistance, support, accessories and spare parts. The Company's personnel participate in the installation and then train the customer's personnel. The Company has sold its systems in approximately 25 countries. - 6 - Video Gaming The Company has developed a proprietary line of VGMs, which contain video gaming industry applications such as video poker, video blackjack and video keno. The Company's latest wagering terminal, the PROBE XLC, allows patrons to play card games, wager on horse races and watch simulcasted races or other types of televised programs unrelated to wagering on the picture-in-picture video monitor, while continuing to play the selected video games. The Company currently has installed approximately 1,300 PROBE XLC terminals in two racetracks in West Virginia, for which it receives a percentage of income generated by the terminals. The Company believes its penetration of the pari-mutuel wagering business positions it to become a significant provider of VGM terminals when and if video gaming is approved in more racetracks across the country. The Company has also sold VGMs to the Manitoba Lottery Commission. Casino/Sports Wagering In October 1996, the Company sold its casino/sports wagering service business. During fiscal 1996, 1995 and 1994, the Company provided sports wagering systems to 107 of the 113 casinos in Nevada and to the leading operator of sports wagering facilities in Mexico. Casinos and other sports wagering facilities generally purchased the computerized wagering system including teller-operated terminals from the Company and entered into an agreement with the Company for repair and maintenance of the system and software support. Under terms of the sale agreement, the Company expects to continue to provide wagering terminals to the casinos and sports wagering facilities, as needed. In connection with the sale of CBS, the Company has entered into an agreement not to compete anywhere in the world with respect to the purchaser's race and sports book business for a minimum of five years. In addition, the contract for the sale of CBS provides that the Company and CBS will offer each other certain rights of first refusal with respect to business opportunities in the race and sports book business. The Company does not believe that these agreements will have a material impact on its ability to conduct its business. LOTTERY OPERATIONS The Company designs, installs, operates and maintains on-line computer-based lottery systems and provides equipment for lottery systems both in the United States and internationally. A lottery system typically requires sophisticated software applications which necessitate expertise in software engineering and development. In the United States, the Company's primary focus is operating the Connecticut Lottery and providing services to the Massachusetts State Lottery. Internationally, the Company has sold central processing systems and/or terminals for lotteries in Austria, Switzerland, the Netherlands, and Israel. In six German states, the Company, together with its partner International des Jeux, has designed and installed computer-based lottery systems and will operate and maintain these lotteries. The Company provides terminals for Italy's TOTIP pari-mutuel lottery, a nationwide lottery based on horse racing. The Company has previously provided 14,000 terminals for TOTIP and continues to maintain and sell additional terminals to TOTIP. In connection with the Connecticut State Lottery, the Company provides all equipment, personnel and services necessary to operate the lottery network while retaining title to the equipment. The Company has installed its latest generation lottery system, utilizing the UNIX-based Aegis central system, which features open system architecture and symmetrical multiprocessors, at the Connecticut State Lottery. The Company's agreement to operate the Connecticut State Lottery expires in May 1998. Revenues received by the Company from its operation of the Connecticut State Lottery are based on a percentage of amounts wagered in the lottery. The Company also provides services to the Massachusetts State Lottery under a technical support contract which expires in June 1997 and has recently installed its Aegis central system for the processing of a new multi-state lottery game under a contract which also expires in June 1997. The Company is in the process of bidding for an extension for its Aegis central system in Connecticut and expects to participate in a competitive terminal procurement bid in early 1997. - 7 - Internationally, the Company maintains ownership of software used for lotteries and derives revenues from license fees for software. In addition, the Company derives revenues from maintenance contracts for equipment and periodically sells upgrades for lottery systems. The Company's lottery products consist primarily of central processing systems, including data communication networks, and on-line/off-line lottery terminals. The lottery management system portion of the product includes a client-server database. Lottery terminals are generally on-line to the central system via telephone lines connected to the system's communications front end processor. The Company's technology includes "open system" features, with central systems and software capable of operating with terminals and components from other suppliers. On January 14, 1997, the Company signed a letter of intent to sell its European lottery business for a price estimated to be between $25 million and $30 million, determined pursuant to a formula. Consummation of the proposed sale is subject to execution of a definitive purchase agreement and related documents and to satisfaction of certain customary conditions, including certain third party consents. This sale will not affect the Company's domestic lottery activity nor its other international lottery customers not served by the European lottery business. CONTRACT PROCUREMENT Contract awards from horse and greyhound racetracks, OTBs and casino/sports wagering facilities and from state and foreign governments often involve a lengthy competitive bid process, spanning from specification development to contract negotiation and award. Contracts have a high dollar value and are technically and commercially complex and may require substantial initial cash outlays. Start up costs associated with contract awards typically involve expenditures for items such as software development/customization, assembly of wagering systems, and installation costs including electrical and carpentry work, transportation and placement of equipment, and system implementation. Such costs are primarily comprised of labor related expenses due to the relative magnitude of software development and customization in the start up phase. In the United States, lottery authorities generally commence the contract award process by issuing a request for proposals inviting bids and proposals from various lottery vehicles. Internationally, lottery authorities do not typically utilize such a formal bidding process, but rather negotiate proposals with one or more potential vendors. SERVICE AND SUPPORT The Company's staff of approximately 465 persons, including regional and national managers and trained maintenance and field service personnel, supports the operation of the Company's systems and communications networks. The Company's personnel support its systems by performing routine system maintenance and repairs of systems and equipment when needed. RESEARCH AND PRODUCT DEVELOPMENT The Company believes that its ability to attract new wagering system customers and retain existing customers depends in part on its ability to continue to incorporate technological advances into and to improve its product lines. The Company maintains a development program directed toward systems development as well as toward the improvement and refinement of its present products and the expansion of their uses and applications. The Company employs approximately 105 people in connection with software, engineering and product development. INTELLECTUAL PROPERTY The Company maintains patent protection on two of its wagering products and four of its lottery products and has a number of registered trademarks and other common law trademark rights for certain of its products. The software and control systems for the Company's wagering systems are also protected by copyright and trade secret laws. The Company does not believe that patent protection is a vital competitive factor in the computerized wagering market. - 8 - PRODUCTION PROCESSES - SOURCES AND AVAILABILITY OF COMPONENTS Production of the Company's wagering systems and component products primarily involves the assembly of electronic components into more complex systems and products, generally through contracts with third parties. In 1995, the Company sold its Newark, Delaware manufacturing facility. The Company's production of certain product lines is now performed at the Company's manufacturing facility in Ballymahon, Ireland. All other manufacturing is contracted out to third party vendors. The Company normally has sufficient lead time between reaching an agreement to serve a wagering facility and commencing actual operations at such facility. In the event the current suppliers of central processing units were no longer available, the Company believes that it would be able to adapt its application software to hardware available from other sources within a time frame sufficient to allow it to meet new contractual obligations, although the price competitiveness of the Company's products might diminish. The lead time for obtaining most of the electronic components used by the Company is approximately 120 days. The Company believes that this is consistent with its competitors' lead times and is also consistent with the needs of its customers. COMPETITION The Company competes in North America on the basis of product design, performance, reliability, pricing, and customer service primarily with two companies. The Company's principal wagering system competitor in the pari-mutuel wagering systems business is Video Lottery Technologies, Inc. ("VLT") which operates its pari-mutuel business through its subsidiary United Wagering Systems, Inc. ("United"). Another competitor in the pari-mutuel business is AmTote International, Inc. ("AmTote"). Both AmTote and VLT offer video gaming industry terminals to the pari-mutuel wagering industry. Video gaming industry terminal suppliers include International Game Technology, WMS Industries Inc., Bally Gaming Industry International, Inc. and several smaller companies. A significant portion of the Company's revenues are generated from pari-mutuel wagering on racing at racetracks and OTBs. As new products are developed such as pari-mutuel sports betting and lotteries based on sporting events, the Racing Industry may experience increased competition for wagers. Competition for wagers also comes from casino gaming and other forms of legal and illegal gambling. The Company's competition outside of North America is more fragmented, with competition being provided by several international and regional companies. No single company maintains the leading market position internationally, although certain companies possess regional strengths. The on-line lottery business is highly competitive. State and foreign governments normally award contracts based on competitive bidding procedures. Significant factors which influence the award of lottery contracts include price; the ability to optimize lottery revenues through marketing capability and applications knowledge; the quality, dependability and upgrade capability of the network; the experience, financial condition and reputation of the vendor; and the satisfaction of other requirements and qualifications which the lottery authority may impose. The Company's major competitors in the on-line lottery business include GTECH, VLT, Essnet AB, and several other companies. Competition in the simulcasting business in North America currently is fragmented. No single company, other than the Company, has achieved a significant share of the market. REGULATION General Pari-mutuel wagering, video gaming and on-line lotteries may be conducted in jurisdictions that have enacted enabling legislation. In jurisdictions which currently permit various wagering activities, regulation is extensive and evolving. Regulators in such jurisdictions review many facets of an applicant/holder of a license including, among other items, financial stability, integrity and business experience. The Company believes that it is currently in - 9 - substantial compliance with all regulatory requirements in the jurisdictions where it operates. Any failure to receive a material license or the loss of a material license that the Company currently holds could have a material adverse effect on the overall operations of the Company. In 1996, the United States Congress passed legislation authorizing a comprehensive study of gaming, including segments of the gaming industry served by the Company. The Company is unable to predict whether this study will result in legislation that would impose regulations on gaming industry operators, including the Company, or whether such legislation, if any, would have a material adverse effect on the Company. The Company has developed and implemented an extensive internal compliance program in an effort to assure the Company's compliance with legal requirements imposed in connection with its wagering-related activities, as well as legal requirements generally applicable to all publicly traded corporations. The compliance program is run on a day-to-day basis by a full-time compliance officer, and is overseen by the Compliance Committee of the Company's Board of Directors. While the Company is firmly committed to full compliance with all applicable laws, there can be no assurance that such steps will prevent the violation of one or more laws or regulations, or that a violation by the Company or an employee of the Company will not result in the imposition of a monetary fine or suspension or revocation of one or more of the Company's licenses. Pari-Mutuel Wagering Forty three states, Puerto Rico and the Virgin Islands, all of the Canadian provinces and many foreign countries have authorized pari-mutuel wagering on horse races and 19 states and many foreign countries have authorized pari-mutuel wagering on dog races. In addition, Connecticut, Rhode Island, Nevada and Florida also allow pari-mutuel betting on jai alai matches. Companies which manufacture, distribute and operate pari-mutuel wagering systems in these jurisdictions are subject to the regulations of the applicable regulatory authorities there. These authorities generally require the Company, as well as its directors, officers, certain employees and holders of 5% or more of the Company's common stock, to obtain various licenses, permits and approvals. Regulatory authorities may also conduct background investigations of the Company and its key personnel and stockholders in order to insure the integrity of the wagering system. These authorities have the power to refuse, revoke or restrict a license for any cause they deem reasonable. The loss of a license in one jurisdiction may cause a Company's licensing status to come under review in other jurisdictions as well. A subsidiary of the Company that provides simulcast wagering equipment and/or services to certain casinos located in Atlantic City, New Jersey is licensed by the New Jersey Casino Control Commission ("New Jersey Commission") as a gaming industry-related casino service industry in accordance with the New Jersey Casino Control Act ("Casino Control Act") for an initial period of two years and then for renewable periods of four years thereafter. An applicant for a gaming industry-related casino service industry license is required to establish, by clear and convincing evidence, financial stability, integrity and responsibility; good character, honesty and integrity; and sufficient business ability and experience to conduct a successful operation. The Company must also qualify under the standards of the Casino Control Act. The Company and its licensed subsidiary may also be required to produce such information, documentation and assurances as required by the regulators to establish the integrity of all financial and other backers. The New Jersey Commission has broad discretion in licensing matters and may at any time condition a license or suspend or revoke a license or impose fines upon a finding of disqualification or non-compliance. The New Jersey Commission may require that persons holding five percent or more of the Class A Common Stock of the Company qualify under the Casino Control Act. Under the Casino Control Act, a security holder is rebuttably presumed to control a publicly-traded corporation if the holder owns at least five percent of such corporation's equity securities. Failure to qualify could jeopardize the Company's license. - 10 - The Company's rights to operate the Connecticut OTB system shall continue as long as the Company holds all licenses required for the operation of the system. In addition, the officers and directors and certain other employees of the Company must be licensed. Licensees are generally required to submit to background investigations and provide required disclosures. The Division of Special Revenue of the State of Connecticut (the "Division") may revoke the license to operate the system under certain circumstances, including a false statement in the licensing disclosure materials, a transfer of ownership of the licensed entity without Division approval and failure to meet financial obligations. The Company has also agreed to comply with regulations proposed by the Division which regulate certain aspects of the system's operation. 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. Casino/Sports Wagering Sports wagering is currently authorized in numerous foreign countries, including Mexico and as a permitted lottery scheme in Canada. The State of Nevada also permits sports wagering in casinos. In addition, the State of Oregon currently sponsors a lottery based on the outcome of sporting events; Montana authorizes betting on fantasy sports leagues; and North Dakota permits certain sports wagering pools. The Federal Professional and Amateur Sports Protection Act (the "Sports Protection Act") prohibits a governmental entity from sponsoring, operating, advertising, promoting, licensing or authorizing sports betting on professional or amateur athletic games, subject to several exceptions. The Sports Protection Act does not terminate state-authorized sports betting schemes which were already in operation prior to October 1991, such as those in Nevada, or which existed between January 1, 1976 and August 31, 1990. The Sports Protection Act is also inapplicable to pari-mutuel betting on horse and dog racing and jai alai. Companies which manufacture, sell or distribute sports wagering equipment are also subject to the various laws and regulations of the countries and states which permit sports wagering. These rules primarily concern the responsibility, financial stability and character of the sports wagering equipment companies, as well as the individuals financially interested or involved in the gaming industry operations. The rules generally resemble the regulations which govern the pari-mutuel wagering industry. Companies and individuals are required to be licensed before they may manufacture, distribute, own or operate sports wagering equipment; they are subject to background investigations designed to protect the integrity of the gaming industry; they may have their licenses denied, revoked or restricted for any cause deemed reasonable; and the loss of their license in one jurisdiction could adversely affect their licensing status in other jurisdictions. The Company believes that it is in substantial compliance with all regulations now governing sports wagering in the United States and the various foreign countries where the Company conducts business. There can be no assurance that subsequent regulations will not be burdensome to the Company, its personnel or its stockholders. Video Gaming Coin or voucher operated gambling devices offering electronic, video versions of slots, poker, black-jack and similar games are known as VGMs, VLTs or slot machines, depending on the jurisdiction. These devices represent a growing area in the wagering industry. The Company or its subsidiaries manufactures and supplies terminals and wagering systems designed for use as VGMs, VLTs or slot machines. Twenty four states and Puerto Rico authorize wagering on VGMs, VLTs or slot machines at casinos, riverboats, racetracks, Indian reservations, charitable events and/or other licensed facilities. Although some states, such as Rhode Island and West Virginia, currently restrict VGMs or VLTs to already existing wagering facilities, others permit these devices to be placed at bars and restaurants as well. Several Indian tribes throughout the United States are also authorized to operate these devices on reservation lands. In addition, several Canadian Provinces and various foreign countries have also authorized their use. - 11 - Government officials in other states are presently considering proposals to legalize video gaming, video lottery or slot machines in their states. Legislators have been enthusiastic about the potential of video gaming to raise significant additional revenues. Some officials, however, are reluctant to expand gaming industry opportunities or have expressed a desire to limit video gaming to established wagering facilities if video gaming is authorized in their jurisdiction at all. Companies that manufacture, sell or distribute VGMs, VLTs or slot machines are subject to various provincial, state, county and municipal laws and regulations. The primary purposes of these rules are (1) to insure the responsibility, financial stability and character of equipment manufacturers and their key personnel and stockholders through licensing requirements, (2) to insure the integrity and randomness of the machines, and (3) to prohibit the use of VGMs, VLTs or slot machines at unauthorized locations or for the benefit of undesirable individuals or entities. The regulations governing VGMs, VLTs and slot machines generally resemble the pari-mutuel and sports wagering regulations in all the basic elements described above. However, every jurisdiction has differing terminal design and operational requirements, and terminals generally must be certified by local regulatory authorities before being distributed in any particular jurisdiction. These requirements may require the Company or its subsidiaries to modify its terminals to some degree in order to achieve certification in particular locales. In addition, the intrastate movement of such devices in a jurisdiction where they will be used by the general public is usually allowed only upon prior notification and/or approval of the relevant regulatory authorities. West Virginia has licensed the Company or its subsidiaries to supply VLTs to authorized locations in that state. The Company may apply for licenses in other jurisdictions that may now or in the future authorize video gaming industry, video lottery or slot machine operations. The Company cannot predict the nature of the regulatory schemes or the terminal requirements that will be adopted in any of these jurisdictions, nor whether the Company or any subsidiaries can obtain any required licenses and equipment certifications or will be found suitable. Federal law also affects the Company's video gaming industry activities. The Federal Gambling Devices Act of 1962 (the "Devices Act") makes it unlawful for any person to manufacture, deliver or receive gambling devices, including VGMs, VLTs and slot machines, 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. The Company does not believe that the Devices Act applies to machines designed for pari-mutuel betting at a racetrack, such as the Company's pari-mutuel wagering terminal. The Company has registered under the Devices Act, and believes that it is in compliance with all of the Devices Act's record-keeping and equipment identification requirements. Lottery Operations At the present time, 37 states, the District of Columbia, Puerto Rico, the Virgin Islands, all the Canadian Provinces and many foreign countries authorize lotteries. Once authorized, the award of lottery contracts and ongoing operation of lotteries in the United States is highly regulated. Although certain of the features of a lottery, such as the percentage of gross revenues which must be paid back to players in prize money, are usually established by legislation, the lottery authorities generally exercise significant authority, including the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed, and the selection of the vendors of equipment and services. To ensure the integrity of the contract award and wagering process, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, the vendor, its subsidiaries and affiliates and its principal shareholders. Background investigations of the vendor's employees who - 12 - will be directly responsible for the operation of the system are also generally conducted, and most states reserve the right to require the removal of employees whom they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of the Company's securities. The failure of such beneficial owners to submit to such background checks and provide such disclosure could result in the imposition of penalties upon such beneficial owners and could jeopardize the award of a lottery contract to the Company or provide grounds for termination of an existing lottery contract. The international jurisdictions in which the Company markets its lottery systems also usually have legislation and regulations governing lottery operations. The regulation of lotteries in these international jurisdictions typically varies from the regulation of lotteries in the United States. In addition, restrictions are often imposed on foreign corporations seeking to do business in such jurisdictions. United States and international regulations affecting lotteries are subject to change. The Company cannot predict with certainty the impact on its business of changes in regulations. Simulcasting The Federal Communications Commission (the "FCC") regulates the use and transfer of earth station licenses used to operate the Company's simulcasting operations. To obtain an earth station license, the applicant must file an application with the FCC. The FCC then places the application on public notice and solicits comments for a thirty-day period, during which no action is taken on the application. At the expiration of the public notice period, assuming no objections are received from the public, the FCC usually will grant the application within two to three weeks if it determines that the granting of such applications is in the public interest. At present, 42 jurisdictions authorize inter and/or intra-state pari-mutuel wagering on horse races, which usually (though not always) involves the simulcasting of such races. Licensing and other regulatory requirements associated with such simulcasting activities are similar to those governing pari-mutuel wagering, and are generally enforced by pari-mutuel regulators. In addition, contracts with host tracks whose races are simulcast by the Company or its subsidiaries to other facilities within or outside the jurisdictions in which such races are held may be subject to approval by regulatory authorities in the jurisdictions from and/or to which the races are simulcast. The Company believes that it and/or its subsidiaries are in substantial compliance with applicable regulations and that the Company, its subsidiaries, and/or the appropriate third parties have entered into contracts and obtained the necessary regulatory approvals thereof to lawfully conduct current simulcast operations. EMPLOYEES As of October 31, 1996, the Company employed 935 persons. Of this total, 465 persons were engaged in full-time field operations, 225 in part-time tellering/cashiering, 105 in engineering and software product development, 35 in marketing and 105 in financial, administration and other positions. Most of the North American pari-mutuel employees of the Company involved in field operations and repairs are represented by the International Brotherhood of Electrical Workers (the "IBEW") under two separate contracts, both of which expire in 1997. The Company's former contracts with Local 3 of the IBEW expired on May 31, 1994, and on August 22, 1994, the Company's field service employees represented by the IBEW went on strike for a new collective bargaining agreement. On October 25, 1994, the employees ratified a new three year agreement and returned to work. This contract expires in May 1997. Certain of the persons employed by the Company in Austria and Germany are members of national workers councils. The Company considers its employee relations to be satisfactory. DIRECTORS AND EXECUTIVE OFFICERS Certain information concerning directors and executive officers of the Company as of October 31, 1996 is set forth below: - 13 -
DIRECTOR NAME AGE POSITION SINCE - ---- --- -------- ----- A. Lorne Weil........................ 50 Chairman of the Board and Chief Executive 1989 Officer Sir Brian Wolfson.................... 60 Vice Chairman of the Board(1) 1988 Alan J. Zakon........................ 61 Vice Chairman of the Board(1)(2)(3) 1993 Larry J. Lawrence.................... 54 Director (1)(2)(3) 1989 Marshall Bartlett.................... 71 Director(2)(3)(4) 1991 Thomas H. Lee........................ 52 Director(1)(4) 1991 William Luke......................... 49 Vice President, Chief Financial Officer -- Gerald Lawrence...................... 57 Vice President -- Martin E. Schloss.................... 50 Vice President, General Counsel and Secretary --
- ------------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee (4) Member of Stock Option Committee All directors hold office until the next annual meeting of stockholders and thereafter until their successors have been elected and qualified. Officers of the Company hold office for an indefinite term, subject to the discretion of the Board of Directors of the Company ("the Board"). Mr. A. Lorne Weil has been a director of the Company since December 1989, Chairman of the Board since October 31, 1991 and Chief Executive Officer since April 1992. From 1982 until 1989, Mr. Weil was a director and consultant to the holding company of ASI. From October 1990 until April 1992, Mr. Weil held various senior management positions at the Company and its subsidiaries. From 1979 to November 1992 he was the President of Lorne Weil, Inc., a firm providing strategic planning and corporate development services to the high technology industry. Mr. Weil is currently a director of Fruit of the Loom, Inc. and General Growth Properties, Inc. Sir Brian Wolfson has been a director of the Company since 1988 and a Vice Chairman of the Board since May 1995. He served as Acting President and Chief Executive Officer from June 1991 until October 31, 1991. From 1987 until May 1995 he was the Chairman, and from May 1995 to September 1995 was the Deputy Chairman, of Wembley plc, a United Kingdom corporation whose holdings include The Wembley Stadium, Arena and Conference Centre and Exhibition Halls in London. Sir Brian is currently a director of Kepner-Tregoe, Inc., Fruit of the Loom, Inc. and Playboy Enterprises, Inc. Mr. Alan J. Zakon has been a director of the Company since 1993 and a Vice Chairman of the Board since May 1995. From 1989 until April 1995, he served as a managing director of Bankers Trust Corporation. From 1989 until 1990, Mr. Zakon served as Chairman of the Strategic Policy Committee of Bankers Trust Corporation. From 1986 until 1989, Mr. Zakon served as Chairman of the Board of Boston Consulting Group. Mr. Zakon is currently a director of Arkansas Best Freight Corporation, Augat, Inc., Hechinger Corporation, and Boyle Leasing Technologies. Mr. Larry J. Lawrence has been a director of the Company since December 1989. He is co-founder and since 1985 has been managing partner of Lawrence Venture Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith, a private equity fund manager. Since 1990, he has been managing partner of LTOS II Partners, the general partner of Lawrence, Tyrrell, Ortale & Smith II and since May 1995 has been the general partner of LSH Partners III, L.P., the general partner of Lawrence, Smith & Horey III, L.P. Mr. Lawrence is currently a director of several private companies. Mr. Lawrence served as a director of Autotote Systems, Inc. from 1979 until it was acquired by the Company in 1989. Mr. Marshall Bartlett has been a director of the Company since December 1991. From June 1993 through May 1994, Mr. Bartlett was employed by the Company in various capacities. Mr. Bartlett was Executive Vice - 14 - President and Chief Operating Officer of Bourns Inc., an electronic component manufacturer from 1979 until his retirement in 1991. Mr. Thomas H. Lee has been a director of the Company since December 1991. Mr. Lee founded the Thomas H. Lee Company in 1974 and since that time has served as its President. Mr. Lee is currently a director of General Nutrition Companies, Inc., Health-o-Meter Products, Inc., Finlay Fine Jewelry Corporation, Playtex Family Products Inc., and Livent Inc. as well as several private companies. Mr. Lee is also a general partner of the ML-Lee Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and the ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. (the "ML-Lee Acquisition Funds"), Chairman and Trustee of Thomas H. Lee Advisors I, and a general partner of Thomas H. Lee Advisors II, L.P., the investment advisors to the ML-Lee Acquisition Funds. He is the general partner of THL Equity Advisors Limited Partnership, the general partner of and investment advisor to Thomas H. Lee Equity Partners, L.P. In February 1991, Hills Department Stores, Inc., of which Mr. Lee was Chairman of the Board, filed for protection under Chapter 11 of the United States Bankruptcy Code. Mr. Lee was a director of ASI from 1979 until it was acquired by the Company in 1989. Mr. William Luke has been Vice President and Chief Financial Officer of the Company since February 1996. Mr. Luke served as the Chief Financial Officer of Nashua Corporation from August 1984 through October 1995. Mr. Gerald Lawrence has been Vice President of the Company since November 1994 and President of North American Systems, a division of the Company, since March 1996. From April 1995 to March 1996, he served as President of Autotote Gaming Group, a division of the Company. From January 1991 to August 1994, he held the position of Executive Vice President of The New York Racing Association, Inc. From November 1984 through December 1990, he served as Executive Vice President and Chief Operating Officer of Churchill Downs Incorporated. Mr. Martin E. Schloss has been Vice President and General Counsel of the Company since December 1992 and Secretary since May 1995. From July 1992 until December 1992, Mr. Schloss provided consulting services to and was employed by the Company. 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. - 15 - PART III ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table shows the compensation awarded or paid by the Company for services rendered for fiscal 1994, 1995 and 1996 to the chief executive officer and the four highest paid executive officers of the Company who received more than $100,000 in salary and bonuses during fiscal 1996 and who served as executive officers during fiscal 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE ANNUAL LONG TERM COMPENSATION (1) COMPENSATION AWARDS ---------------- ------------------- (a) (b) (c) (d) (f) (g) (i) --- --- --- --- --- --- --- RESTRICTED SECURITIES STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS AWARD OPTIONS COMPENSATION AT FISCAL YEAR-END YEAR ($) ($) ($) (9) (#) ($) ------------------ ---- --- --- ------- --- --- A. Lorne Weil................... 1996 441,400(10) -- -- 273,000 17,200(6) Chief Executive Officer 1995 408,800 -- 534,001(3) -- 12,700(7) 1994 408,800 -- -- -- 13,500(8) William Luke.................... 1996 168,300 -- -- 150,000 -- Vice President and Chief Financial Officer Martin E. Schloss............... 1996 195,700 -- -- 100,000 7,500(6) Vice President, General 1995 175,000 13,000 70,272(4) -- 7,600(7) Counsel and Secretary 1994 135,600 115,000(2) -- 65,000(4) 6,200(8) Gerald Lawrence................. 1996 219,300 -- -- 150,000 11,100(6) Vice President 1995 184,600 50,000 137,000(5) 100,000(5) -- Thomas DeFazio (11) 1996 253,100 -- -- 140,000(12) 37,400(6) 1995 148,100 60,000 -- 200,000(12) 113,000(7)
(1) Amounts shown include cash and non-cash compensation earned by the Named Executive Officers. (2) Consists of fiscal 1994 bonus of $60,000 and special bonus of $55,000 to recognize contributions to the Company's longer-term strategic goals. These bonuses were initially payable in three equal installments in 1995, 1996 and 1997 as long as Mr. Schloss is employed by the Company. However, the Compensation Committee of the Board decided to pay out the second and third installments in 1996. (3) On May 26, 1995, Mr. Weil exchanged options received in 1993 to purchase 600,000 shares of Class A Common Stock, constituting all of his options having exercise prices in excess of $4.13 per share (the average of the bid and asked trading prices of the Class A Common Stock on May 26, 1995) ("Underwater Options"), for an award under the Company's 1992 Equity Incentive Plan as amended and restated (the "1992 Plan") of 129,298 deferred shares of Class A Common Stock ("Deferred Shares") which will be issued in the future. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of Class A Common Stock. (4) On May 26, 1995, Mr. Schloss exchanged all of his Underwater Options, constituting options to purchase 65,000 shares of Class A Common Stock, for an award of 17,015 Deferred Shares under the Company's - 16 - 1992 Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. (5) On May 26, 1995, Mr. G. Lawrence exchanged all of his Underwater Options, constituting options to purchase 100,000 shares of Class A Common Stock, for an award of 33,172 Deferred Shares under the Company's 1992 Plan. The vesting of such Deferred Shares will require either a lengthy period of future service or the achievement of certain performance goals for the Company as measured by the price of the Class A Common Stock. (6) Amounts of All Other Compensation for fiscal 1996 include the following: (i) Contributions to the Company's defined contribution retirement plan for salaried employees: Mr. Weil, $7,500; Mr. Schloss, $7,500; Mr. G. Lawrence, $7,500. (ii) Life insurance coverage: Mr. Weil $9,700. (iii) Automobile allowance: Mr. G. Lawrence $3,600. (iv) Relocation expenses: Mr. DeFazio $37,400. (7) Amounts of All Other Compensation for fiscal 1995 include the following: (i) Contributions to the Company's defined contribution retirement plan for salaried employees: Mr. Weil, $7,500; Mr. Schloss, $7,500. (ii) Life insurance coverage: Mr. Weil $5,200; Mr. Schloss, $100. (iii) COBRA medical coverage: Mr. DeFazio, $3,000. (iv) Relocation expenses: Mr. DeFazio, $110,000. (8) Amounts of All Other Compensation for fiscal 1994 include the following: (i) Contributions to the Company's defined contribution retirement plan for salaried employees: Mr. Weil, $7,500; Mr. Schloss, $5,800. (ii) Life insurance coverage: Mr. Weil, $6,000; Mr. Schloss, $400. (9) The number and value of the aggregate restricted stock holdings at October 31, 1996, is as follows: (i) Number of shares: Mr. Weil, 129,298; Mr. Schloss, 17,015; Mr. G. Lawrence, 33,172. (ii) Value of shares: Mr. Weil, $169,704; Mr. Schloss, $22,332; Mr. G. Lawrence, $43,535. (iii) In the event the Company declares a dividend on the Class A Common Stock, the restricted stocks listed above would receive dividend(s). (10) Mr. Weil's 1996 annual compensation consisted of $430,300 in base salary plus a CPI adjustment of $11,100 owed during fiscal year 1995. (11) Mr. DeFazio ceased as an officer and employee of the Company on August 5 and October 18, 1996, respectively. (12) Unexercisable options of 273,333 were cancelled on October 18, 1996 and exercisable options of 66,667 were cancelled on January 17, 1997. - 17 - STOCK OPTIONS The table below sets forth information with respect to stock options granted to the Named Executive Officers for fiscal 1996.
OPTIONS GRANTED IN LAST FISCAL YEAR POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM (1) ------------------------------------------------- ----------------- (A) (B) (C) (D) (E) (F) (G) ----- ----- ----- ----- ----- ----- --- NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES OR BASE GRANTED (2) IN PRICE EXPIRATION 5% 10% NAME (#) FISCAL YEAR ($/SH) DATE ($) ($) ------ ----- ----------- -------- ------ ----- ---- A. Lorne Weil.................. 273,000 12.26% $3.00 Dec-14-05 $ 515,065 $ 1,305,275 William Luke................... 150,000 6.73% $3.0625 Feb-26-06 $ 288,898 $ 732,125 Martin E. Schloss.............. 50,000 2.24% $2.8750 Nov-01-05 $ 90,404 $ 229,100 Martin E. Schloss.............. 50,000 2.24% $3.00 Dec-14-05 $ 94,334 $ 239,061 Gerald Lawrence ............... 75,000 3.37% $2.8750 Nov-01-05 $ 135,605 $ 343,651 Gerald Lawrence ............... 50,000 2.24% $3.00 Dec-14-05 $ 94,334 $ 239,061 Gerald Lawrence ............... 25,000 1.12% $3.3750 Mar-22-06 $ 53,063 $ 134,472 Thomas DeFazio (3)............. 140,000 6.29% $3.00 Dec-14-05 $ 264,136 $ 669,372
(1) Represents the product of (i) the difference between (A) the per share fair market price at the time of the grant compounded annually at the assumed rate of appreciation over the term of the option, and (B) the per-share exercise price of the option, and (ii) the number of shares underlying the grant at the fiscal year-end. (2) All options were granted under the Company's 1992 Plan. Options become exercisable in four equal installments on the first, second, third and fourth anniversaries of the date of grant. The options may, subject to certain requirements, be exercised through the delivery of cash and/or Class A Common Stock. The options permit the optionee to request that the Company withhold shares sufficient to satisfy withholding tax requirements. The options are not transferable otherwise than by will or the laws of descent and distribution, in which case, and in the case of disability, they are exercisable for the following 12 months or the term of the option, whichever is shorter, for the full number of shares the optionee was entitled to purchase at the time of his death or disability. In the event of a termination of employment by the Company other than for cause or death or disability, an optionee has the right to exercise his option at any time within the three months following such termination or the term of the option, whichever is shorter, for the full number of shares he was entitled to purchase at the time of termination. In the event of termination for cause, the options shall be terminated. (3) These options were cancelled on October 18, 1996. - 18 - The table below sets forth information for the Named Executive Officers with respect to fiscal 1996 year-end option values.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION VALUE (A) (B) (C) (D) (E) NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT OPTIONS AT ACQUIRED OCT. 31, 1996(#) OCT. 31, 1996($) ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- ------------- ------------- A. Lorne Weil........................... -0- -0- 1,125,000/273,000 $ -0-/-0- William Luke............................ -0- -0- -0-/150,000 -0-/-0- Martin E. Schloss....................... -0- -0- 40,000/100,000 -0-/-0- Gerald Lawrence......................... -0- -0- -0-/150,000 -0-/-0-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1996 the Compensation Committee of the Board consisted of Marshall Bartlett, Larry J. Lawrence and Alan J. Zakon. None of these individuals had any "interlock" relationship to report during 1996. CERTAIN ARRANGEMENTS BETWEEN THE COMPANY AND ITS DIRECTORS AND OFFICERS Employee Agreements Effective November 1, 1992, the Company and Mr. Weil entered into a five-year employment agreement (the "Weil Employment Agreement") that provides for a base salary of $400,000, subject to annual increases in accordance with the Consumer Price Index, a performance bonus of 25% of base salary if the Company meets its budgeted earnings per share, an additional performance bonus based on excess earnings per share, not to exceed an additional 25% of base salary, and a performance bonus of up to 50% of base salary at the discretion of the Board of Directors. If the Company terminates Mr. Weil's employment under the Weil Employment Agreement other than for cause, Mr. Weil is entitled to collect his base salary for twelve months following such termination, plus a portion of the annual earnings per share-based performance bonuses. In connection with the Weil Employment Agreement, Mr. Weil received a five-year option, exercisable in three equal annual installments, to purchase 600,000 shares of Class A Common Stock of the Company at an exercise price of $3.50 per share. In August 1993, the Stock Option Committee accelerated the vesting period of the option such that the option became exercisable in full; in June 1996, the Stock Option Committee extended the term of the option to ten years. By letter, dated January 3, 1995, the Company confirmed to Mr. Martin Schloss that in the event the Company terminates Mr. Schloss' employment, he will be entitled to receive severance pay, at the time of such termination, of not less than one year base salary plus all accrued but unpaid bonus installments earned by him, and Mr. Schloss will retain all unexercised options to purchase Class A Common Stock held by him at the time of such termination, which options will remain exercisable in accordance with their terms. Effective February 26, 1996, the Company and Mr. William Luke entered into an employment agreement (the "Luke Employment Agreement") to employ Mr. Luke as Vice President and Chief - 19 - Financial Officer. The Luke Employment Agreement provides for a base salary of $250,000 and a performance bonus of up to 45% of the base salary and for participation in the Company's stock option plan. Accordingly, Mr. Luke received options to purchase 150,000 shares of Class A Common Stock of the Company at a price of $3.0625 per share, which options become exercisable in four equal annual increments of 37,500 on each of February 26, 1997, 1998, 1999 and 2000. Mr. Luke's agreement provides for a relocation allowance for reimbursement of moving expenses and transaction costs incurred by Mr. Luke as well as a temporary housing allowance of up to $12,000. In the event that the Company terminates Mr. Luke's employment other than for cause, prior to the first anniversary of his employment, Mr. Luke is entitled to receive his base salary for six months, and thereafter, one year salary, following such termination. Mr. DeFazio's employment with the Company terminated on October 18, 1996. In connection therewith, the Company and Mr. DeFazio entered into an agreement pursuant to which the Company will pay Mr. DeFazio approximately $419,574 over a period of eighteen months. Directors' Compensation In June 1996 each director of the Company who is not an employee of the Company received an award of 10,000 shares of Class A Common Stock issuable in the future ("Non-Employee Director Deferred Stock"). The shares of Non-Employee Director Deferred Stock were awarded under the 1992 Plan and vest, on a cumulative basis, as to one-third of the shares, on each of the first three anniversaries of the date of grant or in full if the non-employee director ceases to serve as a director as a result of death, disability, retirement at or after the age of 65, the failure to be renominated or reelected, or in the event of a consolidation or merger of the Company or a sale of substantially all of the Company's assets. Effective as of May 25, 1995, each director who is not an employee of the Company is paid an annual retainer of $20,000, as well as $1,000 plus expenses for each Board meeting attended, $1,000 plus expenses for each committee meeting attended in person and held on a day other than on which a Board meeting is held and $500 plus expenses for each committee meeting attended held on the same day as a Board meeting or by telephone. Members of the Executive Committee do not receive fees for attending meetings thereof. In lieu of the foregoing compensation, Thomas H. Lee Company, of which Mr. Lee is president, receives $5,000 per month for his services as a director. - 20 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP The following table sets forth certain information as of October 31, 1996 as to the security ownership of those persons owning of record or known to the Company to be the beneficial owners of more than five percent of the outstanding Class A Common Stock of the Company, each of the Company's directors and executive officers and the Company's directors and executive officers as a group. Except as otherwise indicated, the stockholders listed on the table have sole voting and investment power with respect to the shares indicated. Share figures reflect (i) a three-for-two stock split in the form of a stock dividend of one share of Class A Common Stock for every two shares outstanding paid on June 30, 1993 and (ii) a two-for-one stock split in the form of a stock dividend of one share of Class A Common Stock for each share outstanding paid on October 25, 1993.
SHARES OF CLASS A COMMON STOCK NAME NUMBER PERCENT(1) A. Lorne Weil.................................................................... 2,496,392(2) 7.51% 750 Lexington Avenue 25th Floor New York, New York 10022 Thomas H. Lee.................................................................... 4,033,737(3) 12.60% c/o Thomas H. Lee Company 75 State Street Boston, MA 02109 Larry J. Lawrence................................................................ 2,431,207(4) 7.48% c/o Lawrence, Smith & Horey 515 Madison Avenue, 29th Floor New York, New York 10022 Marshall Bartlett................................................................ 33,333(5) * Gerald Lawrence.................................................................. 32,250(6) * William Luke..................................................................... 0 * Martin E. Schloss................................................................ 80,000(7) * Sir Brian Wolfson................................................................ 61,667(8) * Alan J. Zakon.................................................................... 63,667(9) * All directors and executive officers as a group (consisting of 9 persons) (2)(3)(4)(5)(6)(7)(8)(9)........................... 9,232,253(10) 26.31% State of Wisconsin Investment Board.............................................. 2,810,500(11) 8.93% P.O. Box 7842 Madison, WI 53707 Oaktree Capital Management, LLC.................................................. 2,000,000(12) 5.97% 550 South Hope Street Los Angeles, CA 90071 Lawrence, Tyrrell, Ortale & Smith................................................ 1,886,245(13) 5.81% 515 Madison Avenue New York, New York 10022
- --------- * Represents less than 1% of the outstanding shares of Class A Common Stock. (1) For purposes of determining beneficial ownership of the Company's Class A Common Stock, owners of Class A warrants and options exercisable within sixty days are considered to be the beneficial owners of the shares of Class A Common Stock into which such securities are convertible or for which such securities are exercisable. The percentage ownership of the outstanding Class A Common Stock reported herein is based - 21 - on the assumption (expressly required by the applicable rules of the Securities and Exchange Commission) that only the person whose ownership is being reported has exercised his warrants or options for Class A Common Stock. (2) Includes (a) 216,644 shares held in the name of the Lorne Weil 1989 Trust, of which Mr. Weil is Trustee, (b) 588,870 shares issuable upon exercise of warrants exercisable within 60 days some of which warrants are held in the name of the Lorne Weil 1989 Trust, which warrants were to expire in October 1996 and were extended by the Board of Directors to October 1999, and (c) 1,193,250 shares subject to stock options exercisable within 60 days, 525,000 and 600,000 of which were to expire in March 1997 and October 1997, respectively, and were extended by the Stock Option Committee to March 2002 and October 2002, respectively. Effective March 25, 1994, Mr. Weil entered into a swap transaction (the "Swap") with Bankers Trust Company ("BTC") in respect of 500,000 shares of the Class A Common Stock of the Company held by him (the "Swap Shares"). Mr. Weil continues to hold sole voting power over the Swap Shares which serve as collateral for the Swap transaction; however, Mr. Weil may substitute other collateral for the Swap Shares. Under the Swap arrangement (i) Mr. Weil is obligated to pay BTC (a) at the end of each quarter during the five (5) year term of the Swap (the "Term") the amount of any dividends declared during such quarter on the Swap and (b) at the end of the Term, any appreciation during the Term in the price of the Swap Shares above $26.7769 per share, (ii) BTC is obligated to pay Mr. Weil (x) at the end of each quarter during the Term, the amount equal to the three (3) month London Interbank Offered Rate less 2.125% of the Calculation Amount (as defined in the Swap documents) of $13,388,500, and (y) at the end of the Term, an amount equal to any depreciation during the Term in the price of the Swap Shares below $26.7769 per share. Mr. Weil will pay BTC an annual fee in consideration of its entering into the Swap. The Swap is for a five (5) year period, but will terminate if Mr. Weil dies or if certain other events occur during such period. (3) Includes (a) 1,535,100 shares and 552,381 shares issuable upon exercise of warrants exercisable within 60 days that were to expire in October 1996 and were extended by the Board of Directors to October 1999 owned by the 1989 Thomas H. Lee Nominee Trust, and (b) 1,946,256 shares owned by Thomas H. Lee Equity Partners, L.P., which are deemed to be beneficially owned by Mr. Lee. Mr. Lee is a general partner of THL Equity Advisors Limited Partnership, which is general partner of Thomas H. Lee Equity Partners, L.P. (4) Includes 42,533 shares issuable upon exercise of warrants exercisable within 60 days that were to expire in October 1996 and were extended by the Board of Directors to October 1999. Also includes (a) 902,483 shares, and (b) 983,762 shares issuable upon exercise of warrants exercisable within 60 days held by Lawrence, Tyrrell, Ortale & Smith. Mr. Lawrence is the general partner of Lawrence Venture Partners, the sole general partner of Lawrence, Tyrrell, Ortale & Smith. (5) Consists of 30,000 shares subject to stock options exercisable within 60 days, 7,500 and 22,500 of which were to expire in December 1996 and December 1997, respectively, and were extended by the Stock Option Committee to December 2001 and December 2002, respectively and 3,333 shares issuable within 60 days under the 1992 Plan. (6) Includes 31,250 shares subject to stock options exercisable within 60 days owned by Mr. Gerald Lawrence. (7) Includes 65,000 shares subject to stock options exercisable within 60 days, 40,000 of which were to expire in October 1997 and were extended by the Stock Option Committee to October 2002. (8) Includes (a) 45,000 shares subject to stock options exercisable within 60 days that were to expire in June 1998 and were extended by the Stock Option Committee to June 2003, and (b) 16,667 shares issuable within 60 days under the 1992 Plan. (9) Includes (a) 45,000 shares subject to stock options exercisable within 60 days that were to expire in July 1998 and were extended by the Stock Option Committee to July 2003 and (b) 16,667 shares issuable within 60 days under the 1992 Plan. (10) Includes (a) 2,167,546 shares issuable upon exercise of warrants and (b) 1,409,500 shares issuable upon exercise of stock options exercisable within 60 days and (c) 36,667 shares issuable within 60 days under the 1992 Plan. (11) Based upon a Schedule 13F filed with the Securities and Exchange Commission for quarter ended September 30, 1996. (12) Represents shares issuable upon conversion of $40,000,000 of debentures due 2001 convertible within 60 days owned by Oaktree Capital Management, LLC. - 22 - (13) Includes 983,762 shares issuable upon exercise of warrants exercisable within 60 days that were to expire in October 1996 and were extended by the Board of Directors to October 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On May 13, 1996, the Company extended a loan to A. Lorne Weil in the principal amount of $250,000. Such loan bears interest at the rate of 5.5% per annum and is payable on May 13, 2004. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Exhibits--The following is a list of additional exhibits: Exhibit Number Description 21 Amended List of Subsidiaries. (+) 99.6 Common Stock Purchase Warrant dated October 31, 1991 issued to Heller Financial Inc. (1) 99.7 Warrant to Purchase Class B Nonvoting Common Stock of Autotote Corporation dated October 30, 1992 issued to Heller Financial Inc. and other lenders. (2) 99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant Agreement"), as amended as of January 29, 1997. (3) 99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant Agreement"), as amended as of January 29, 1997. (3) 99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant Agreement and the 1996 Warrant Agreement. (3) (+) Filed herewith. (1) Incorporated by reference to the Company's Current Report on Form 8-K dated November 14, 1991. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992. (3) Incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-34465) which became effective September 12, 1997. - 23 - 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: November 18, 1997 By: /s/ A. Lorne Weil ------------------------------------- A. Lorne Weil, Chairman of the Board, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON NOVEMBER 18, 1997.
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. Lorne Weil Chairman of the Board, President and November 18, 1997 -------------------- Chief Executive Officer, and Director A. Lorne Weil (principal executive officer) /s/ William Luke Vice President and Chief Financial November 18, 1997 -------------------- Officer (principal financial officer) William Luke /s/ DeWayne E. Laird Corporate Controller November 18, 1997 -------------------- (principal accounting officer) DeWayne E. Laird /s/ Sir Brian Wolfson Director November 18, 1997 -------------------- Sir Brian Wolfson /s/ Larry J. Lawrence Director November 18, 1997 -------------------- Larry J. Lawrence /s/ Marshall Bartlett Director November 18, 1997 -------------------- Marshall Bartlett /s/ Alan J. Zakon Director November 18, 1997 -------------------- Alan J. Zakon
- 24 - EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE ----------- ----------- ---- 21 Amended List of Subsidiaries - 25 - EX-21 2 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 AUTOTOTE CORPORATION SUBSIDIARIES Autotote Management Corporation (Delaware) (100%) Newark Holdings, Inc. (Delaware) (100%) Autotote Systems, Inc. (Delaware) (100%) Autotote International, Inc. (Delaware) (100%) Autotote Canada Inc. (Ontario) (100%) Autotote Worldwide Limited (Non-Resident Ireland (Bermuda)) (99%, 1% NHI) Autotote Worldwide Services, Limited (Ireland) (100%) Autotote International, Ltd. (Ireland) (100%) (Inactive) Autotote Products, Inc. (Delaware) (100%) (Inactive) HTP, Inc. (Pennsylvania) (100%) (Inactive) Autotote Enterprises, Inc. (Connecticut) (100%) Autotote Keno Corporation (Nebraska) (100%) Big Red Lottery Services, Limited Partnership (Nebraska) (40%) Lincoln's Big Red Lottery Services, Limited Partnership (Nebraska) (40%) Gretna's Big Red Lottery Services, Limited Partnership (Nebraska) (40%) Autotote Lottery Corporation (Delaware) (100%) Autotote Lottery Canada Inc. (Ottawa) (100%) Autotote Israel Ltd. (Israel) (80%) ETAG Electronic Totalisator AG (Switzerland) (100%) TEK Tufelektronik GMBH (Germany) (100%) Datek Toto Dienstielstung GMBH (Germany) (50%) ETAG Electronic Totalisator GesMBH (Austria) (100%) Tele Control Kommunikations und Computersysteme GesMBH (Austria) (100%) Autotote Communication Services, Inc., formerly Autotote Simulcast Corporation (Delaware) (100%) Marvin H. Sugarman Productions, Inc. (New York) (100%) SJC Video Corporation (California) (66.67%) Racing Technology, Inc. (New York) (100%) SOFINAX (France) (100%) SEPMO (France) (100%) REALM (France) (78%) (22% held by SOFINAX directly) SASO (France) (100%) Microdyne Flocam (France) (54%) Autotote Mexico, Ltd. (Delaware) (100%) -----END PRIVACY-ENHANCED MESSAGE-----