<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AUTOTOTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 81-0422894
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(212) 754-2233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
A. LORNE WEIL
CHAIRMAN
750 LEXINGTON AVENUE, 25TH FLOOR
NEW YORK, NEW YORK 10022
(212) 754-2233
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
SEE TABLE OF ADDITIONAL REGISTRANTS
Copy to:
HOWARD J. ROTHMAN, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE (1) OFFERING PRICE FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 7/8% Series B Senior Notes due
2004................................. $110,000,000 100% $110,000,000 $33,333
- -----------------------------------------------------------------------------------------------------------
Subsidiary Guarantees(2)............... $110,000,000 -- -- --
===========================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(f) solely for purposes of calculating the
registration fee.
(2) The 10 7/8% Series B Senior Notes due 2004 are jointly and severally
guaranteed by the Guarantors (as defined) on a senior unsecured basis. No
separate consideration will be paid in respect of these guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
OTHER REGISTRANTS
<TABLE>
<CAPTION>
IRS EMPLOYER
JURISDICTION OF IDENTIFICATION
NAME OF CORPORATION INCORPORATION NUMBER
- --------------------------------------- --------------- ------------
<S> <C> <C>
Autotote Lottery Corporation DE 52-1808020
Autotote Enterprises, Inc. CT 06-1370549
Autotote Communication Services, Inc. DE 13-3804001
Marvin H. Sugarman Productions, Inc. NY 13-1951915
Racing Technology, Inc. NY 13-3651353
Autotote Keno Corporation NE 51-0354751
Autotote Systems, Inc. DE 51-0258091
Autotote International, Inc. DE 51-0213540
Autotote Management Corporation DE 51-0354754
Autotote Mexico, Ltd. DE 51-0354752
Newark Holdings, Inc. DE 51-0247549
</TABLE>
<PAGE> 3
AUTOTOTE CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(a) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF
THE INFORMATION REQUIRED BY PART 1 OF S-4
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- ------------------------------------------ -------------------------------------------------
<S> <C>
Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Forepart of Registration Statement; Outside Front
Cover Page
Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover Page; Outside Back Cover Pages
Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........... Prospectus Summary; Risk Factors; The Exchange
Offer; Selected Historical Consolidated Financial
Data; Selected Unaudited Pro Forma Consolidated
Financial Data
Terms of the Transaction.................. Prospectus Summary; The Exchange Offer;
Description of Notes; Certain Federal Income Tax
Consequences; Plan of Distribution
Pro Forma Financial Information........... Prospectus Summary; Selected Unaudited Pro Forma
Consolidated Financial Data
Material Contacts with Company Being
Acquired................................ Not Applicable
Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters...................... Not Applicable
Interests of Named Experts and Counsel.... Not Applicable
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
Information With Respect to S-3
Registrants............................. Not Applicable
Incorporation of Certain Information by
Reference............................... Not Applicable
Information with Respect to S-2 or S-3
Registrants............................. Not Applicable
Incorporation of Certain Information by
Reference............................... Not Applicable
Information with Respect to Registrants
Other than S-2 or S-3 Registrants....... Available Information; Prospectus Summary; Risk
Factors; The Exchange Offer; Use of Proceeds;
Capitalization; Selected Historical Consolidated
Financial Data; Selected Unaudited Pro Forma
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Management;
Description of Certain Indebtedness; Description
of New Credit Agreement; Description of Notes;
Plan of Distribution; Legal Matters; Accountants
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- ------------------------------------------ -------------------------------------------------
<S> <C>
Information with Respect to S-3
Companies............................... Not Applicable
Information with Respect to S-2 or S-3
Companies............................... Not Applicable
Information with Respect to Companies
Other than S-2 or S-3 Companies......... Not Applicable
Information if Proxies, Consents or
Authorizations are to be Solicited...... Not Applicable
Information if Proxies, Consents or
Authorizations are Not to be Solicited,
or in an Exchange Offer................. The Exchange Offer; Management; Executive
Compensation; Certain Arrangements; Security
Ownership; Description of Notes
</TABLE>
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 27, 1997
PROSPECTUS
AUTOTOTE LOGO
AUTOTOTE CORPORATION
OFFER TO EXCHANGE ITS
10 7/8% SERIES B SENIOR NOTES DUE 2004
FOR ANY AND ALL OF ITS OUTSTANDING
10 7/8% SERIES A SENIOR NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1997,
UNLESS EXTENDED.
Autotote Corporation, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange $1,000 principal amount of 10 7/8% Series B
Senior Notes due 2004 (the "New Notes") of the Company for each $1,000 principal
amount of its issued and outstanding 10 7/8% Series A Senior Notes due 2004 (the
"Old Notes" and, together with the New Notes, the "Notes") of the Company held
by the holders (the "Holders") thereof. The terms of the New Notes are identical
in all material respects to the Old Notes, except that (i) the New Notes have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and, therefore, will not bear legends restricting their transfer and (ii)
Holders of New Notes will not be entitled to certain rights under the
Registration Rights Agreement (as defined) intended for the benefit of Holders
of unregistered securities, including the terms providing for Additional
Interest, all of which rights terminate when the Exchange Offer is consummated.
The New Notes will be issued pursuant to, and be entitled to the benefits of,
the Indenture (as defined) governing the Old Notes. See "The Exchange Offer."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on , 1997 (the
"Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of the Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain customary
conditions, which may be waived by the Company, and to the terms and provisions
of the Registration Rights Agreement, dated as of July 28, 1997 (the
"Registration Rights Agreement") among the Company, the Guarantors (each of
which has guaranteed the Old Notes and has agreed to guarantee the New Notes),
and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial
Purchaser"). The Old Notes may be tendered only in multiples of $1,000. See "The
Exchange Offer."
The New Notes will bear interest from and including the date of
consummation of the Exchange Offer. Interest on the New Notes will be payable
semi-annually on February 1 and August 1 of each year, commencing February 1,
1998. The New Notes will mature on August 1, 2004. Interest on the New Notes
will accrue from the last interest payment date on which interest was paid on
the Old Notes surrendered in exchange therefor or, if no interest has been paid
on the Old Notes, from the date of original issuance of the Old Notes. The Notes
will be redeemable, in whole or in part, on or after August 1, 2001, at the
option of the Company, at the redemption prices set forth herein plus accrued
and unpaid interest, if any, to the date of redemption. In addition, at any time
on or prior to August 1, 2000, the Company, at its option, may redeem up to 35%
of the aggregate principal amount of the Notes originally issued with the net
cash proceeds of one or more Public Equity Offerings (as defined), at a
redemption price equal to 110.875% of the principal amount to be redeemed, plus
accrued and unpaid interest, if any, to the date of redemption; provided,
however, that at least 65% of the original aggregate principal amount of the
Notes remains outstanding after any such redemption. In the event of a Change of
Control (as defined), the Company is required to offer to repurchase all
outstanding Notes at a price equal to 101% of their principal amount plus
accrued and unpaid interest, if any, to the date of repurchase. See "Description
of Notes."
(continued on next page)
SEE "RISK FACTORS," BEGINNING ON PAGE 15, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES
IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE SECURITIES COMMISSION OR
REGULATORY AUTHORITY, NOR HAS ANY SUCH COMMISSION OR REGULATORY AUTHORITY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE> 6
The New Notes will represent senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all Indebtedness (as defined)
of the Company that by its terms is expressly subordinated to the Notes. Without
limiting the generality of the foregoing, the New Notes will rank senior in
right and priority of payment to the Indebtedness represented by the Company's
5 1/2% Convertible Subordinated Debentures due 2001 (the "Subordinated
Debentures"), and the New Notes will rank pari passu in right and priority of
payment with the Indebtedness under the New Credit Agreement (as defined). The
Old Notes are, and the New Notes will be, jointly and severally guaranteed on a
senior, unsecured basis (the "Subsidiary Guarantees") by substantially all of
the Company's existing U.S. Subsidiaries (as defined) and certain future U.S.
Subsidiaries (collectively, the "Guarantors"). The New Notes, however, will be
effectively subordinated to secured Indebtedness of the Company and the
Guarantors (including Indebtedness under the New Credit Agreement) with respect
to the assets securing such Indebtedness. The New Notes will also be effectively
subordinated to claims of creditors of the Company's subsidiaries, except to the
extent that Holders of the New Notes may be creditors of such subsidiaries
pursuant to a Subsidiary Guarantee. See "Risk Factors."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guarantors contained in the Registration
Rights Agreement. Based on positions of the staff of the Securities and Exchange
Commission (the "SEC") enunciated in Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1988), and interpreted in the SEC's letters to Shearman & Sterling
(available July 2, 1993) and K-III Communications Corporation (available May 14,
1993), and similar no-action or interpretive letters issued to third parties,
the Company believes that the New Notes issued pursuant to the Exchange Offer to
a Holder in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any Holder thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such Holder's business and such Holder is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that (i) Old Notes tendered by it in the
Exchange Offer were acquired in the ordinary course of its business as a result
of market-making or other trading activities and (ii) it will deliver a
prospectus in connection with any resale of New Notes received in the Exchange
Offer. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of the New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities (other than Old Notes
acquired directly from the Company). The Company has agreed that, for a period
of 180 days following the consummation of the Exchange Offer, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "The Exchange Offer" and "Plan of Distribution."
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. The
Company has been advised by the Initial Purchaser (as defined) that it intends
to make a market for the New Notes; however, the Initial Purchaser is not
obligated to do so, and the Company does not currently intend to list the New
Notes on any securities exchange. Any market-making may be discontinued at any
time, and there is no assurance that an active public market for the New Notes
will develop or, that if such a market develops, that it will continue. This
Prospectus may be used by the Initial Purchaser in connection with offers and
sales of the New Notes which may be made by it from time to time in
market-making transactions at negotiated prices relating to prevailing market
prices at the time of sale. The Initial Purchaser may act as principal or agent
in such transaction.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer (which shall
not include the expenses of any Holder or Initial Purchaser, if any, in
connection with resales of the New Notes). Tenders of Old Notes pursuant to the
i
<PAGE> 7
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is subject to certain customary conditions and to the terms and
provisions of the Registration Rights Agreement. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes,
the Company will promptly return the Old Notes to the Holders thereof. The
Company will give oral or written notice of any extension, amendment,
non-acceptance or termination of the Exchange Offer to the Holders of the Old
Notes as promptly as practicable, such notice in the case of any extension to be
issued by means of a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. The Company can, in its sole discretion, extend the
Exchange Offer indefinitely, subject to the Company's obligation to pay
Additional Interest if the Exchange Offer is not consummated by January 24, 1998
and, under certain circumstances, file a shelf registration statement with
respect to the Notes. See "The Exchange Offer."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
Old Notes in the aggregate principal amount of $110.0 million were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, DTC, as the initial depository with respect to
the Old Notes (in such capacity, the "Depository"). The Global Old Note is
registered in the name of Cede, as nominee of DTC, and beneficial interests in
the Global Old Note are shown on, and transfers thereof are effected only
through, records maintained by the Depository and its participants. The use of
the Global Old Note to represent certain of the Old Notes permits the
Depository's participants, and anyone holding a beneficial interest in an Old
Note registered in the name of such a participant, to transfer interests in the
Old Notes electronically in accordance with the Depository's established
procedures without the need to transfer a physical certificate. Except as
provided below, the New Notes will also be issued initially as a note in global
form (the "Global New Note", and together with the Global Old Note, the "Global
Notes") and deposited with, or on behalf of, the Depository.
ii
<PAGE> 8
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM INTERNAL
COMPANY SURVEYS AND INDUSTRY PUBLICATIONS. INDUSTRY PUBLICATIONS GENERALLY STATE
THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED
TO BE RELIABLE, BUT THAT THE ACCURACY AND COMPLETENESS OF SUCH INFORMATION IS
NOT GUARANTEED. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED THIS MARKET DATA.
SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-4
(the "Exchange Offer Registration Statement") under the Securities Act with
respect to the New Notes being offered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Exchange Offer Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the SEC. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed or incorporated by reference as an exhibit to
the Exchange Offer Registration Statement, reference is made to such exhibit for
a more complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
The Company is currently subject to the periodic reporting and other
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has agreed that, whether or not it is required to
do so by the rules and regulations of the SEC, for so long as any of the Notes
remain outstanding, it will furnish to the Holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the SEC (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were
required to file such Forms, including for each a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereof by the Company's independent
certified public accountants and (ii) all reports that would be required to be
filed with the SEC on Form 8-K if the Company were required to file such
reports. Copies of such reports, proxy statements and information may be
inspected and copied at the Public Reference Section of the SEC's office at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices in New York (7 World Trade Center, 13th Floor, New York, New York 10048)
and Chicago (Citicorp Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661). Copies of such reports, proxy statements and information may be
obtained at prescribed rates from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC maintains a Web
site that contains reports, proxy statements and other information regarding
registrants (such as the Company) that file electronically with the SEC. The
address of such site is http://www.sec.gov.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY GUARANTOR, THE INITIAL PURCHASER OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION WITH
RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY OR AN OFFER TO
OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
------------------------
iii
<PAGE> 9
The Company's Class A Common Stock is traded on the American Stock Exchange
under the symbol "TTE." The Company's principal executive office is located at
750 Lexington Avenue, 25th Floor, New York, New York 10022, and its telephone
number is (212) 754-2233.
iv
<PAGE> 10
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Consolidated Financial Statements and notes thereto, appearing elsewhere in
this Prospectus. As used in this Prospectus, all references to the "Company" and
"Autotote" include Autotote Corporation and its subsidiaries, unless the context
requires otherwise. 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. The pool of gross wagers is referred to as the
"Handle." The term "Racing Industry" includes thoroughbred, harness and
greyhound racetracks, off-track betting establishments ("OTBs") and jai alai
frontons. References to the estimated $20 billion in total North American Racing
Industry Handle in 1996 are based on published industry data for total North
American Racing Industry Handle of approximately $20 billion in 1995, the last
year such industry data was available, and the Company's belief that total North
American Racing Industry Handle in 1996 remained relatively stable. The term
"Pro Forma" does not give effect to the results of operations of Autotote CBS,
Inc. ("CBS") and Tele Control Kommunikations und Computersysteme Aktien
Gesellschaft ("Tele Control"), two former wholly owned subsidiaries of the
Company which were sold by the Company in October 1996 and April 1997,
respectively.
THE COMPANY
The Company is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is the exclusive licensed
operator of substantially all OTBs in the State of Connecticut. The Company is
also a leading provider of computerized pari-mutuel wagering systems worldwide,
with systems in racetracks and OTBs in Europe, Central and South America, and
Asia-Pacific. The Company believes its pari-mutuel wagering systems processed
approximately 65% of the estimated $20 billion of North American Racing Industry
Handle in 1996. The Company owns over 22,000 pari-mutuel wagering terminals in
use throughout North America. In addition, the Company is the leading provider
of Racing Industry simulcasting services in the United States through its
broadcasting of live racing events via satellite to other racetracks and OTBs.
The Company also currently provides technologically advanced video gaming
machines ("VGMs") to the North American Racing Industry for use at racetracks.
Further, the Company provides lottery systems and equipment both in the United
States and internationally. For the twelve months ended April 30, 1997, the
Company generated Pro Forma operating revenues and Pro Forma Adjusted EBITDA (as
defined herein) of $148.8 million and $28.3 million, respectively.
The Company's proprietary pari-mutuel wagering systems process the sale and
cashing of wagers through ticket-issuing terminals, accumulate wagering data,
calculate pari-mutuel odds, distribute information to display systems and
provide management information and marketing services for its customers. The
wagering systems utilize high-volume, real-time transaction and data processing
networks, managed by central computers, communications equipment, special
purpose microcomputer-based terminals, peripheral and display equipment, and
operations and applications software. Revenues received by the Company for
providing and operating its pari-mutuel wagering systems in North America
generally range up to approximately 0.55% of the Handle on a particular event
with a weighted average of approximately 0.35% of the Handle. In Connecticut,
where the Company owns and operates the Connecticut OTB, it retains from 15% to
25% of the Handle. In addition, the Company receives daily or monthly fees from
its Racing Industry customers for the provision of simulcasting services and the
use of certain Company-owned pari-mutuel equipment.
Favorable changes in pari-mutuel wagering and simulcasting laws in various
states and the expanded use of simulcasting and telecommunications technology in
the North American Racing Industry have contributed significantly to the growth
in OTB, telephone and "intertrack" wagering (wagering on location at one
racetrack on races held at other racetracks). The Company's systems process
wagers at approximately 100 racetracks in North America, including 10 of the 15
largest racetracks, and at over 800 OTBs. The Company believes that racing
events held at the largest racetracks in North America, most of which utilize
the Company's pari-mutuel wagering systems, have generated the most significant
growth in OTB and intertrack wagering. The percentage of total Racing Industry
Handle in North America generated by the top 15
1
<PAGE> 11
racetracks, as measured by annual aggregate Handle, increased from approximately
32% in 1992 to approximately 42% in 1995 and total Handle generated by these
racetracks grew at a compound annual growth rate of approximately 9% from $6.2
billion in 1992 to $8.2 billion in 1995.
The growth in OTB, telephone and intertrack wagering, together with the
Company's extensive penetration of the North American pari-mutuel wagering
market, have enabled the Company to generate increased revenues. The Company has
achieved this because it (i) is the leading provider of pari-mutuel wagering
systems to the leading racetracks whose live racing events are in the greatest
demand for off-track wagering, (ii) is a leading provider of computerized
pari-mutuel wagering systems and automated telephone betting equipment to OTBs
and racetracks accepting wagers on simulcasted racing events, (iii) is the
leading simulcaster of live horse and greyhound racing and jai alai events to
racing facilities, OTBs and casinos in North America, and (iv) owns the
Connecticut OTB, including the Bradley Teletheater and Sports Haven(R)
entertainment complexes and nine other OTB locations, which accepts wagers on
racing events at more than 30 racetracks throughout North America and which
processed approximately $197 million in Handle in fiscal 1996. The Company
believes that it will realize additional benefits to the extent that states
enact further legislation which facilitates growth in OTB, telephone and
intertrack wagering.
The Company's lottery operations (i) provide wagering equipment and
services to operate the Connecticut State Lottery under an exclusive
full-service facilities management contract, (ii) provide support and
maintenance services for on-line lotteries, including government authorized
lotteries in Israel and Italy and (iii) market new wagering systems and
equipment to other on-line lotteries. The Company's ten year contract to operate
the Connecticut State Lottery is scheduled to expire in May 1998. The Company
plans to participate in the bidding process with respect to the renewal of such
contract. The Company's Connecticut lottery operations represented approximately
5% of the Company's Pro Forma Adjusted EBITDA for the twelve months ended April
30, 1997.
OPERATING STRENGTHS
The Company believes its principal operating strengths are:
- SUBSTANTIAL MARKET PRESENCE. The Company is the leading provider and
operator of computerized pari-mutuel wagering systems, simulcasting
services and related services and equipment to the North American Racing
Industry and is one of the leading providers of computerized pari-mutuel
wagering systems worldwide. The Company believes that its share of the
estimated total North American Racing Industry Handle increased to
approximately 65% in 1996, from less than 30% in 1990. Moreover, the
Company's market presence is concentrated in the larger racetracks and
OTBs which have experienced, and which the Company believes will continue
to experience, the largest growth in Handle. The Company believes it is
well positioned to participate in the continued growth of OTB, telephone
and intertrack wagering and race simulcasting.
- SUBSTANTIAL RECURRING REVENUES. The Company typically provides its
computerized pari-mutuel wagering systems and simulcasting services to
its Racing Industry customers pursuant to long-term contracts. In
addition, the Company owns and operates the Connecticut OTB.
Historically, these businesses have contributed a significant portion to
the Company's total annual operating revenues and cash flow and accounted
for approximately 80% of Pro Forma operating revenues and approximately
84% of Pro Forma Adjusted EBITDA for the twelve months ended April 30,
1997. In such period, the Company's pari-mutuel wagering systems and
simulcasting services and the Company's Connecticut OTB operations
generated approximately 51% and 29%, respectively, of Pro Forma operating
revenues and approximately 57% and 27%, respectively, of Pro Forma
Adjusted EBITDA. The Pro Forma Adjusted EBITDA contribution of these
businesses has grown significantly from $10.7 million in fiscal 1994 to
$24.0 million in the twelve months ended April 30, 1997. As a result of
its contractual arrangements and the relative historic stability of the
North American Racing Industry Handle, the Company believes that these
revenues can be characterized as recurring.
- FULL-SERVICE SUPPLIER OF SYSTEMS AND SERVICES TO THE RACING
INDUSTRY. The Company's pari-mutuel wagering systems process, account
for and display all of a racetrack customer's wagering activity and
2
<PAGE> 12
disseminate that information on a real-time basis to other racetracks and
OTBs. The Company's simulcasting services provide the satellite
technology and broadcast transmissions which enable racetracks to
distribute their product to other wagering locations, thereby expanding
the racetrack's access to potential wagers. Further, operating the
Connecticut OTB, with 11 locations (including two simulcasting and
entertainment complexes), provides a captive end-use market into which
the Company can offer broadcast transmissions from racetrack customers.
The Company believes that its ability to provide its customers with these
integrated services and its experience in installing and operating large
scale pari-mutuel wagering systems and networks represent a significant
competitive advantage.
- ESTABLISHED PARI-MUTUEL WAGERING NETWORKS. The Company has invested over
$100 million since 1993 to develop, build and install state-of-the-art,
pari-mutuel wagering networks and simulcasting systems throughout North
America. These networks link multiple racetracks and OTBs to one another
via dedicated, high-speed communications channels, using centralized
processing centers to provide services for the entire network. Further,
the Company's systems enable multiple networks to communicate with each
other and with stand-alone facilities, thereby increasing wagering
opportunities at racetracks and OTBs. The Company believes that these
established networks afford the Company a competitive advantage in
maintaining and expanding its customer base by (i) creating operating
efficiencies for its customers who benefit from the cost-effective
centralized nature of the network systems and (ii) increasing OTB and
intertrack wagering which generates increased Handle for the Company's
racetrack customers. These networks provide an additional competitive
advantage to the Company by enabling the Company to spread the cost of
its terminals and centralized processing centers among many of its
customers thereby creating significant economies of scale. The Company
believes a competitor of the Company seeking to provide substitute
services to an individual customer would need to (i) incur significant
expenditures in providing the necessary terminals to such customer and
(ii) have a significant base of existing customers over which to spread
its processing costs in order to provide such services on a
cost-effective basis. The Company currently operates regional networks in
California, Connecticut, Florida, Illinois, Louisiana, Michigan, New
Jersey, New York, Oregon, Pennsylvania, Washington, West Virginia, Puerto
Rico, Alberta, British Columbia and Ontario, including a network in
Southern California linking approximately 2,700 terminals at 5 racetracks
and 13 OTBs and a network linking all of the casinos in Atlantic City
that accept pari-mutuel wagers. In addition, as a result of the Company's
substantial investment, the Company believes its future capital
expenditures in support of these networks will be significantly lower
than they have been in the past.
- SUPERIOR PRODUCT TECHNOLOGY. The Company believes that it is the
technological leader in introducing computerized pari-mutuel wagering
systems and related equipment, including (i) the Probe terminal product
line, which was the first to offer the versatility of teller operation
and self-service capabilities in the same unit, and when combined with
the Company's stand-alone self-service units results in increased
percentages of racetrack Handle being generated by self-service (at some
tracks over 50%), thereby resulting in substantial labor savings for the
Company's customers; (ii) phone betting and interactive voice response
wagering products, which provide end-users the ability to wager from
remote locations; (iii) VGMs which combine full gaming functionality,
such as video poker, blackjack, spinning reels and keno, with full race
betting functionality and picture-in-picture capabilities, providing
multiple opportunities for revenue generation at racetracks where VGM
wagering is permitted; (iv) digital compression in Racing Industry
simulcasting which enables more efficient use of transponder capacity and
improved picture; and (v) hand held mobile terminals which allow a
racetrack representative to bring the terminal to the patron, thereby
facilitating wagering throughout a racetrack or fronton. The Company
believes that these technological innovations afford it with a
competitive advantage and have contributed to the increase in the amount
of North American Racing Industry Handle the Company processes.
3
<PAGE> 13
BUSINESS STRATEGY
The Company's business strategy over the past several years has been to
refocus its activities on its core businesses, which generate recurring revenues
rather than one-time equipment sales, and to reduce its operating expenses.
- FOCUS ON CORE BUSINESSES. The Company's strategy is to focus its efforts
on its core businesses which include its pari-mutuel wagering operations,
the Connecticut OTB operations, its simulcasting services, and its
domestic lottery business. To achieve more stable operating performance,
the Company has, among other things, de-emphasized its reliance on
one-time equipment sales and emphasized long-term international service
contracts generating recurring revenues. To reduce operating costs, the
Company closed its Delaware terminal manufacturing operations and
substantially decreased its terminal manufacturing operations in its
Irish manufacturing plant. Consistent with this strategy, the Company
also (i) in October 1996, sold CBS, a company engaged primarily in the
sale of equipment for casino/race and sports wagering in Nevada, for
approximately $3.0 million, and (ii) in April 1997, sold Tele Control, a
company principally engaged in the provision of lottery systems software
and equipment in Europe, for approximately $26.6 million. The proceeds
from the sale of these businesses were used to reduce the Company's
outstanding indebtedness.
- REDUCE OPERATING EXPENSES. The Company intends to continue its strategy
of reducing operating costs, enhancing operating efficiency and improving
profitability. Over the last three years, the Company has decreased its
reliance on equipment sales and realigned its cost structure to reflect
its recurring revenues business strategy, including the elimination of
143 employees relating to the reduction of manufacturing operations in
Delaware and Ireland. In addition, the Company substantially reduced its
marketing and development activities for its domestic lottery business,
eliminating an additional 51 employees. Other initiatives taken by the
Company include a program to substantially reduce its consumption of
paper, the second largest expense item in its pari-mutuel wagering
operations. As a result of its refocused business strategy and reductions
in operating expenses, the Company has experienced substantial
improvement in operating cash flow and margins as depicted in the table
below:
<TABLE>
<CAPTION>
FISCAL YEARS TWELVE
ENDED MONTHS ENDED
OCTOBER 31, APRIL 30,
----------------- ------------
1995 1996 1997
------ ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Pro Forma Operating Revenues................... $133.3 $144.9 $148.8
Pro Forma Adjusted EBITDA...................... 16.7 25.4 28.3
Pro Forma Adjusted EBITDA Margin............... 12.5% 17.6% 19.0%
</TABLE>
- CAPITALIZE ON THE STRENGTH OF PARI-MUTUEL OPERATIONS. The Company seeks
to increase its share of the North American Racing Industry Handle and
enhance its position with the major racetracks and OTBs by continuing to
develop or introduce a complement of innovative and value-added products
and services, such as (i) sophisticated networking, information and
communication systems, (ii) simulcasting services, and (iii) advanced
integrated VGM applications. The Company is the only participant in the
North American Racing Industry which offers all of these services. The
Company also intends to pursue opportunities to manage additional
wagering venues such as OTBs and racetracks.
- PURSUE INTERNATIONAL GROWTH OPPORTUNITIES. The Company believes
significant opportunities exist for it to provide its pari-mutuel systems
in international markets that have substantial volumes of legalized
wagering but lack sophisticated automated wagering technology. The
Company intends to market its systems and services under long-term
contracts designed to increase recurring revenue. In addition, the
Company is engaged in discussions with racetracks in more established
international markets to (i) introduce simulcasting services within those
markets and (ii) broadcast North American racing events internationally.
The Company believes these initiatives should increase the Racing
Industry Handle and strengthen the Company's position as a leading
provider of pari-mutuel wagering systems and simulcasting services to the
Racing Industry.
4
<PAGE> 14
RECENT DEVELOPMENTS
On August 25, 1997, the Company announced its results for its third fiscal
quarter and nine months ended July 31, 1997. Revenues were $35.8 million for the
third quarter of fiscal 1997 compared to $41.8 million in the third quarter of
fiscal 1996. The decrease is primarily a result of the sales of the CBS and Tele
Control businesses in October 1996 and April 1997, respectively. The Company
reported a net loss of $2.1 million for the third quarter of fiscal 1997
(including a $1.6 million gain from the sale of Tele Control) compared to a net
loss of $7.8 million for the third quarter of fiscal 1996. For the nine months
ended July 31, 1997, the Company reported revenues of $113.3 million compared to
$130.9 million for the same period of fiscal 1996. The Company reduced its net
loss for the nine months ended July 31, 1997 to $14.3 million (including a $1.8
million gain from the sale of Tele Control) from a net loss of $27.5 million for
the same period of fiscal 1996.
THE EXCHANGE OFFER
PURPOSE AND EFFECT.................. The Old Notes were sold by the Company
on July 28, 1997 to Donaldson, Lufkin &
Jenrette Securities Corporation (the
"Initial Purchaser"), who placed the
Old Notes with certain institutional
investors. In connection therewith, the
Company and the Guarantors executed and
delivered for the benefit of the
Holders of the Old Notes a registration
rights agreement (the "Registration
Rights Agreement") providing for, among
other things, the Exchange Offer. See
"The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
TERMS OF THE EXCHANGE OFFER......... New Notes are being offered in exchange
for a like principal amount of Old
Notes. Old Notes may be exchanged only
in integral multiples of $1,000. The
Company will issue the New Notes to
Holders promptly following the
Expiration Date. See "Risk
Factors -- Consequences of Failure to
Exchange." Holders of the Old Notes do
not have appraisal or dissenters'
rights in connection with the Exchange
Offer under the Delaware General
Corporation Law, the governing law of
the state of incorporation of the
Company. See "The Exchange
Offer -- Terms of the Exchange Offer."
MINIMUM CONDITION................... The Exchange Offer is not conditioned
upon any minimum aggregate principal
amount of Old Notes being tendered or
accepted for exchange. See "The
Exchange Offer -- Conditions."
EXPIRATION DATE..................... 5:00 p.m., New York City time, on
, 1997, unless the Exchange
Offer is extended, in which case the
term "Expiration Date" means the latest
date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
CONDITIONS.......................... The Exchange Offer is subject to
certain customary conditions, which may
be waived by the Company. See "The
Exchange Offer -- Conditions." The
Company reserves the right to terminate
or amend the Exchange Offer at any time
prior to the Expiration Date upon the
occurrence of any such condition. The
Exchange Offer
5
<PAGE> 15
is also subject to the terms and
provisions of the Registration Rights
Agreement. NO VOTE OF THE COMPANY'S
SECURITY HOLDERS IS REQUIRED TO EFFECT
THE EXCHANGE OFFER AND NO SUCH VOTE (OR
PROXY THEREFOR) IS BEING SOUGHT HEREBY.
See "The Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING OLD
NOTES............................... Each Holder of Old Notes wishing to
accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions
contained herein and therein, and mail
or otherwise deliver such Letter of
Transmittal, or such facsimile,
together with the Old Notes, or a
Book-Entry Confirmation (as defined),
as the case may be, and any other
required documentation to the exchange
agent (the "Exchange Agent") at the
address set forth herein. The method of
delivery of such documentation is at
the election and risk of the Holder. By
executing the Letter of Transmittal,
each Holder will represent to the
Company, among other things, that (i)
the New Notes acquired pursuant to the
Exchange Offer by the Holder and any
beneficial owners of Old Notes are
being obtained in the ordinary course
of business of the person receiving
such New Notes, (ii) neither the Holder
nor such beneficial owner is
participating in, intends to
participate in or has an arrangement or
understanding with any person to
participate in, the distribution of
such New Notes and (iii) neither the
Holder nor such beneficial owner is an
"affiliate," as defined under Rule 405
of the Securities Act, of the Company.
Each broker-dealer that receives New
Notes for its own account in exchange
for Old Notes, where such Old Notes
were acquired by such broker or dealer
as a result of market-making activities
or other trading activities (other than
Old Notes acquired directly from the
Company), must acknowledge in the
Letter of Transmittal that it will
deliver a prospectus in connection with
any resale of such New Notes. See "The
Exchange Offer -- Procedures for
Tendering Old Notes" and "Plan of
Distribution."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.............................. Any beneficial owner whose Old Notes
are registered in the name of a broker,
dealer, commercial bank, trust company
or other nominee and who wishes to
tender should contact such registered
Holder promptly and instruct such
registered Holder to tender on such
beneficial owner's behalf. If such
beneficial owner wishes to tender on
such owner's own behalf, such owner
must, prior to completing and executing
the Letter of Transmittal and
delivering his or her Old Notes, either
make appropriate arrangements to
register ownership of the Old Notes in
such owner's name or obtain a properly
completed bond power from the
registered Holder. The
6
<PAGE> 16
transfer of registered ownership may
take considerable time. See "The
Exchange Offer -- Procedures for
Tendering Old Notes."
BOOK-ENTRY TRANSFER................. Any financial institution that is a
participant in the Book-Entry Transfer
Facility's (as defined) system may make
book-entry delivery of Old Notes by
causing the Book-Entry Transfer
Facility to transfer such Old Notes
into the Exchange Agent's account at
the Book-Entry Transfer Facility in
accordance with such Book-Entry
Transfer Facility's procedures for
transfer. See "The Exchange
Offer -- Book-Entry Transfer."
GUARANTEED DELIVERY PROCEDURES...... Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes
are not immediately available, (ii) who
cannot deliver their Old Notes, the
Letter of Transmittal or any other
documents required by the Letter of
Transmittal to the Exchange Agent prior
to the Expiration Date or (iii) who
cannot complete the procedure for
book-entry transfer on a timely basis,
must tender their Old Notes according
to the guaranteed delivery procedures
set forth in the Letter of Transmittal.
See "The Exchange Offer -- Guaranteed
Delivery Procedures."
WITHDRAWAL RIGHTS................... Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date. See "The
Exchange Offer -- Withdrawal of
Tenders."
ACCEPTANCE OF OLD NOTES AND DELIVERY
OF NEW NOTES........................ Upon satisfaction or waiver of all
conditions of the Exchange Offer, the
Company will accept for exchange any
and all Old Notes which are properly
tendered and not withdrawn prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered promptly following the
Expiration Date. See "The Exchange
Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
FEDERAL INCOME TAX CONSEQUENCES..... The exchange of Old Notes for New Notes
by tendering Holders will not be a
taxable exchange for federal income tax
purposes, and such Holders will not
recognize any taxable gain or loss or
any interest income for federal income
tax purposes as a result of such
exchange. See "Certain Federal Income
Tax Consequences."
REGULATORY APPROVALS................ The Company does not believe that the
receipt of any material federal or
state regulatory approvals will be
necessary in connection with the
Exchange Offer. See "The Exchange
Offer -- Regulatory Approvals."
USE OF PROCEEDS..................... The Company will not receive any
proceeds from the exchange pursuant to
the Exchange Offer. See "Use of
Proceeds."
7
<PAGE> 17
EXCHANGE AGENT...................... IBJ Schroder Bank & Trust Company is
serving as Exchange Agent in connection
with the Exchange Offer. See "The
Exchange Offer -- Exchange Agent."
RESALES OF THE NEW NOTES............ The New Notes are being offered
hereunder in order to satisfy certain
obligations of the Company and the
Guarantors contained in the
Registration Rights Agreement. Based on
positions of the SEC set forth in
Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Exxon
Capital Holdings Corporation (available
May 13, 1988), and interpreted in the
SEC's letters to Shearman & Sterling
(available July 2, 1993) and K-III
Communications Corporation (available
May 14, 1993), and similar no-action or
interpretive letters issued to third
parties, the Company believes that the
New Notes issued pursuant to the
Exchange Offer to a Holder in exchange
for Old Notes may be offered for
resale, resold and otherwise
transferred by any Holder thereof
(other than any such Holder which is an
"affiliate" of the Company within the
meaning of Rule 405 under the
Securities Act), without compliance
with the registration and prospectus
delivery provisions of the Securities
Act, provided that such New Notes are
acquired in the ordinary course of such
Holder's business and such Holder is
not participating, does not intend to
participate and has no arrangement or
understanding with any person to
participate in the distribution of such
New Notes. If any Holder acquires New
Notes in the Exchange Offer for the
purpose of distributing or
participating in a distribution of the
New Notes, such Holder cannot rely on
the position of the staff of the SEC
set forth in the above no-action and
interpretive letters and must comply
with the registration and prospectus
delivery requirements of the Securities
Act in connection with a secondary
resale transaction, unless an exemption
from registration is otherwise
available. Each broker-dealer that
receives New Notes for its own account
pursuant to the Exchange Offer must
acknowledge that (i) Old Notes tendered
by it in the Exchange Offer were
acquired in the ordinary course of its
business as a result of market-making
or other trading activities and (ii) it
will deliver a prospectus in connection
with any resale of New Notes received
in the Exchange Offer. This Prospectus,
as it may be amended or supplemented
from time to time, may be used by a
broker-dealer in connection with any
resale of the New Notes received in
exchange for Old Notes where such Old
Notes were acquired by such
broker-dealer as a result of
market-making or other trading
activities (other than Old Notes
acquired directly from the Company).
The Company has agreed that, for a
period of 180 days following the
consummation of the Exchange Offer, it
will make this Prospectus
8
<PAGE> 18
available to any broker-dealer for use
in connection with any such resale. See
"The Exchange Offer -- Resales of the
New Notes" and "Plan of Distribution."
SUMMARY DESCRIPTION OF NEW NOTES
NOTES OFFERED....................... $110.0 million aggregate principal
amount of 10 7/8% Series B Senior Notes
due 2004.
MATURITY DATE....................... August 1, 2004.
INTEREST RATE AND PAYMENT DATES..... The New Notes will bear interest at a
rate of 10 7/8% per annum. Interest on
the New Notes will accrue from the last
interest payment date on which interest
was paid on the Old Notes surrendered
in exchange therefor or, if no interest
has been paid on the Old Notes, from
the date of original issuance of the
Old Notes and will be payable
semi-annually on each February 1 and
August 1, commencing February 1, 1998.
OPTIONAL REDEMPTION................. The New Notes will be redeemable, in
whole or in part, at the option of the
Company at any time on or after August
1, 2001, at the redemption prices set
forth herein plus accrued and unpaid
interest, if any, to the date of
redemption. In addition, at any time on
or prior to August 1, 2000 the Company
at its option may redeem up to 35% of
the aggregate principal amount of the
Notes originally issued with the net
cash proceeds of one or more Public
Equity Offerings, at a redemption price
equal to 110.875% of the principal
amount to be redeemed plus accrued and
unpaid interest, if any, to the date of
redemption; provided, however, that at
least 65% of the original aggregate
principal amount of Notes remains
outstanding immediately after any such
redemption. See "Description of
Notes -- Redemption -- Optional
Redemption."
CHANGE OF CONTROL................... In the event of a Change of Control,
the Company will be obligated to make
an offer to repurchase all outstanding
New Notes at a price equal to 101% of
their principal amount plus accrued and
unpaid interest, if any, to the date of
repurchase. See "Description of
Notes--Change of Control."
RANKING............................. The New Notes will represent senior,
unsecured obligations of the Company,
ranking senior in right and priority of
payment to all Indebtedness of the
Company that by its terms is expressly
subordinated to the New Notes. Without
limiting the generality of the
foregoing, the New Notes will rank
senior in right and priority of payment
to the Indebtedness represented by the
Subordinated Debentures and will rank
pari passu in right and priority of
payment with the Indebtedness under the
New Credit Agreement. The New Notes,
however, will be effectively
subordinated to secured indebtedness of
the Company and the Guarantors
(including the Indebtedness under the
New Credit Agreement) with
9
<PAGE> 19
respect to the assets securing such
indebtedness. In addition, the
Subordinated Debentures are scheduled
to mature in August 2001, prior to the
maturity of the New Notes. As of April
30, 1997, after giving effect to the
issuance of the Old Notes and the
application of the net proceeds
therefrom, the Company's total
consolidated indebtedness, other than
the Notes, would have been
approximately $39.3 million (of which
$35.0 million would have been expressly
subordinated in right and priority of
payment to the New Notes) and
approximately $20.6 million of
additional borrowing capacity (after
giving effect to $4.4 million of
outstanding letters of credit) would
have been available for use under the
New Credit Agreement. See "Risk
Factors -- Holding Company Structure,
Ranking and Subordination."
SUBSIDIARY GUARANTEES............... The New Notes will be jointly and
severally guaranteed on a senior,
unsecured basis (the "Subsidiary
Guarantees") by substantially all of
the Company's existing wholly owned
subsidiaries organized in the United
States (the "U.S. Subsidiaries") and
certain future U.S. Subsidiaries
(collectively, the "Guarantors"). Any
indebtedness that is incurred by the
Company's subsidiaries will be
effectively senior to the claims of the
Holders of the New Notes with respect
to the assets of such subsidiaries,
except to the extent that the Holders
of the Notes may be creditors of a
subsidiary pursuant to a Subsidiary
Guarantee. Any such claim by the
Holders of the New Notes with respect
to the assets of any Guarantor will be
effectively subordinated to secured
indebtedness of such Guarantor
(including the Indebtedness under the
New Credit Agreement) with respect to
the assets securing such indebtedness.
See "Risk Factors -- Holding Company
Structure, Ranking and Subordination."
CERTAIN COVENANTS................... The Indenture governing the New Notes
(the "Indenture") will contain certain
covenants that, among other things,
will limit the ability of the Company
and its Restricted Subsidiaries (as
defined) to incur additional
Indebtedness, create certain liens, pay
dividends or make certain other
restricted payments, consummate certain
asset sales, enter into certain
transactions with affiliates and merge
or consolidate with any other person or
sell, assign, transfer, lease, convey
or otherwise dispose of all or
substantially all of the assets of the
Company. See "Description of
Notes -- Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by Holders prior to tendering their Old Notes in the Exchange Offer.
10
<PAGE> 20
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data as of and for
the five years ended October 31, 1992, 1993, 1994, 1995 and 1996 have been
derived from the audited consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The summary historical consolidated unaudited
financial data set forth below for the six month periods ended April 30, 1996
and 1997 and the twelve month period ended April 30, 1997 have been derived
from, and are qualified by reference to, the Company's unaudited financial
statements included elsewhere herein and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of the Company for such periods. The unaudited consolidated
financial data for the six month and twelve month periods ended April 30, 1997
are not necessarily indicative of the results to be achieved for the year ending
October 31, 1997. Summary historical financial data reflect the acquisitions and
dispositions of certain businesses during the period 1992 through 1997 and
should be read in conjunction with "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 elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS
MONTHS ENDED
ENDED APRIL
YEARS ENDED OCTOBER 31, APRIL 30, 30,
---------------------------------------------------------- ------------------- --------
1992 1993 1994 1995 1996 1996 1997 1997
------- ------- -------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues........... $48,364 $84,862 $149,050 $153,184 $176,235 $89,047 $77,436 $164,624
Gross profit................. 23,045 36,670 45,358 58,954 64,629 31,836 30,674 63,467
Selling, general and
administrative expenses.... 6,419 10,956 25,298 36,540 32,853 16,548 15,205 31,510
Depreciation and
amortization............... 7,840 11,809 25,418 35,463 40,853 18,994 19,852 41,711
Operating income (loss)...... 8,786 13,905 (13,934) (31,290) (8,428) (3,706) (4,383) (9,105)
Interest expense............. 5,903 3,473 6,408 16,362 14,837 7,332 7,314 14,819
Net earnings (loss).......... 5,727 9,438 (22,150) (49,889) (34,195) (19,695) (12,114) (26,614)
Ratio of earnings to fixed
charges(1)................. 2.14x 3.77x -- -- -- -- -- --
OTHER DATA:
EBITDA(2).................... $16,626 $25,714 $ 11,484 $ 4,173 $ 32,425 $15,288 $15,469 $ 32,606
Adjusted EBITDA(3)........... 16,626 25,714 26,841(3) 25,114(3) 32,345(3) 15,288 15,469 32,526
Cash interest expense(4)..... 5,598 3,817 6,987 13,309 13,504 6,715 6,607 13,396
Capital expenditures......... 628 3,277 19,533 9,990 2,103 1,075 701 1,729
Wagering systems
expenditures(5)............ -- 46,500 39,932 8,150 7,138 4,051 2,721 5,808
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................................... $ 3,599
Total assets.................................................................................. 147,797
Total debt.................................................................................... 141,659
Stockholders' equity (deficit)................................................................ (29,433)
</TABLE>
11
<PAGE> 21
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary unaudited pro forma consolidated financial data have
been prepared by the Company's management from the historical financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus. The unaudited pro forma consolidated income statement and other data
set forth below reflect adjustments (a) to exclude historical data relating to
CBS (which was sold in October 1996 for approximately $3.0 million) and Tele
Control (which was acquired by the Company in September 1993 and sold in April
1997 for approximately $26.6 million), and to give effect to the application of
the proceeds from the sales of CBS and Tele Control, and (b) to give effect to
the issuance of the Old Notes and the application of the net proceeds therefrom
as reflected under "Capitalization," as if all such transactions had been
consummated or were effective at the beginning of the periods presented (in the
case of CBS and Tele Control for the periods in which such companies were owned
by the Company). The unaudited consolidated balance sheet data as of April 30,
1997 is presented on a historical basis and as adjusted to give effect to the
issuance of the Old Notes and the application of the proceeds therefrom as if
such transaction had occurred on such date.
The financial effects of such transactions as presented in the pro forma
financial data are not necessarily indicative of either the Company's financial
position or the results of its operations which would have been obtained had
such transactions actually occurred on the dates described above, nor are they
necessarily indicative of the results of future operations. The pro forma
financial data should be read in conjunction with the notes thereto, which are
an integral part thereof, and with the consolidated financial statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS
MONTHS ENDED
ENDED APRIL
YEARS ENDED OCTOBER 31, APRIL 30, 30,
-------------------------------------------------------- ------------------- --------
1992 1993 1994 1995 1996 1996 1997 1997
------- ------- -------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues............. $46,133 $79,298 $126,910 $133,309 $144,946 $67,454 $71,317 $148,809
Gross profit................... 21,960 33,605 37,731 47,624 53,528 24,634 27,374 56,268
Selling, general and
administrative expenses...... 6,146 10,583 23,655 33,656 28,722 14,936 14,745 28,531
Depreciation and
amortization................. 7,617 11,470 21,852 30,589 35,024 16,422 16,950 35,552
Operating income (loss)........ 8,197 11,552 (16,352) (34,188) (9,569) (6,724) (4,321) (7,166)
Ratio of earnings to fixed
charges(1)................... 1.87x 3.43x -- -- -- -- -- --
OTHER DATA:
EBITDA(2)...................... $15,814 $23,022 $ 5,500 $ (3,599) $ 25,455 $ 9,698 $12,629 $ 28,386
Adjusted EBITDA(3)............. 15,814 23,022 20,857(3) 16,668(3) 25,375(3) 9,698 12,629 28,306
Cash interest expense(4)....... 14,065 7,101 6,816 13,780
Ratio of Adjusted EBITDA to
cash interest expense........ 1.80x 1.37x 1.85x 2.05x
Capital expenditures........... $ 628 $ 3,156 $ 16,222 $ 6,182 $ 1,720 $ 865 $ 649 $ 1,504
Wagering systems
expenditures(5).............. -- 46,500 39,132 8,150 7,138 4,051 2,721 5,808
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1997
------------------------------
ACTUAL AS ADJUSTED(6)
-------- ----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 3,599 $ 7,196
Total assets.................................................................... 147,797 154,556
Total debt...................................................................... 141,659 149,269
Stockholders' equity (deficit).................................................. (29,433) (30,259)
</TABLE>
12
<PAGE> 22
- ---------------
(1) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consists of earnings (loss) before income tax expense (benefit)
and extraordinary item, plus fixed charges. "Fixed charges" consists of
interest expense, including amortization of deferred financing costs, plus
one-third of rental expense (this portion is considered to be representative
of the interest factor). Earnings were insufficient to cover fixed charges
for the fiscal years ended October 31, 1994, 1995 and 1996 and for the six
months ended April 30, 1996 and 1997 and for the twelve months ended April
30, 1997 in the amounts of $19,390, $47,216, $31,752, $17,891, $11,572 and
$25,343, respectively. For the purpose of determining the pro forma ratio of
earnings to fixed charges, "earnings" consist of pro forma earnings (loss)
before income tax expense (benefit) and extraordinary item, plus fixed
charges. "Fixed charges" consist of pro forma interest expense, including
amortization of deferred financing costs, plus one-third of rental expense
(this portion is considered to be representative of the interest factor).
Pro forma interest expense reflects an adjustment, in applicable years, to
give effect to the application of the net proceeds from the sales of CBS and
Tele Control and to give effect to the net proceeds from the issuance of the
Old Notes. No funds were deemed borrowed under the New Credit Agreement.
Earnings were insufficient to cover fixed charges on a pro forma basis for
the fiscal years ended October 31, 1994, 1995 and 1996 and for the six
months ended April 30, 1996 and 1997 and for the twelve months ended April
30, 1997 in the amounts of $21,478, $48,192, $31,674, $13,931, $10,966 and
$28,709, respectively.
(2) "EBITDA" represents earnings (loss) before income tax expense (benefit) and
extraordinary item, interest income and expense, other income and expense,
and depreciation and amortization. Management has included information
concerning EBITDA as it provides useful information regarding the Company's
ability to service its debt. However, EBITDA should not be considered in
isolation or as a substitute for net earnings (loss), cash flow from
continuing operations or other data prepared in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity.
(3) "Adjusted EBITDA" represents EBITDA (see footnote 2 above) before the
unusual charges referred to in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Unusual Charges." Unusual
charges were $15,357, $20,941 and ($80) for the years ended October 31,
1994, 1995 and 1996, respectively, and Pro Forma $20,267 for the year ended
October 31, 1995. Adjusted EBITDA for the fiscal year ended October 31, 1994
is before $15,357 of unusual charges, consisting of: $3,939 of inventory,
equipment and contract adjustments principally relating to acquisitions (see
Note 3 of the Company's Consolidated Financial Statements); $2,842 for costs
incurred as a result of a strike by field service employees; $4,737 for the
write-off of certain assets principally related to domestic and overseas
projects; and $3,839 resulting from closing the Company's Newark, Delaware
manufacturing facility and the discontinuation of certain product lines. See
Note 2 of the Company's Consolidated Financial Statements. Adjusted EBITDA
for the fiscal year ended October 31, 1995 is before $20,941 of unusual
charges, consisting of: $11,601 attributable to the closure of the Company's
Owings Mills, Maryland lottery support facility and the scaling back of
certain international activities, including the planned closure of the
Company's manufacturing facility in Ballymahon, Ireland; $6,640 related to
the write-off of investments and other assets ($2,750 of which is
attributable to the Company's Mexican VGM contracts, $2,576 of which is
attributable to European wagering terminals and $1,314 (Pro Forma $640) of
which is attributable to other assets); and $2,700 of miscellaneous charges.
See Note 2 of the Company's Consolidated Financial Statements. Adjusted
EBITDA for the fiscal year ended October 31, 1996 is before $649 of unusual
credit and $569 of unusual expense. This credit represents a partial
reversal of the fiscal 1995 restructuring cost accrual because of the
Company's plan to continue limited manufacturing of wagering terminals at
its Ireland manufacturing facility. The $569 in expense was incurred for
contractual payments related to the departure of the former President of the
Company.
(4) For the purpose of Other Data, cash interest expense excludes the
amortization of deferred financing costs, other amortization costs and bank
waiver fees and includes capitalized interest costs of $819, $1,113 and $81
in fiscal years ended 1993, 1994 and 1995, respectively. Cash interest
expense includes the issuance of common stock in lieu of cash for interest
payments of $1,100 due in each of August 1995 and February 1996 on the
Subordinated Debentures. See Note 13 of the Company's Consolidated Financial
Statements.
13
<PAGE> 23
(5) Prior to the fiscal year ended October 31, 1993, the Company did not
separately identify expenditures for equipment under long-term wagering
system agreements.
(6) The As Adjusted balance sheet data at April 30, 1997 gives effect to the
issuance of the Old Notes and the application of the proceeds therefrom to
repay the Company's then existing credit agreement in full, including
accrued interest and fees, to repurchase $5.0 million aggregate principal
amount of Subordinated Debentures at a discount and to pay approximately
$4.2 million of fees and expenses related to the issuance of the Old Notes,
and gives effect to a $0.9 million gain on the repurchase of Subordinated
Debentures at a discount and the write-off of $1.7 million of previously
deferred financing fees.
14
<PAGE> 24
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by Holders in evaluating the Company and
its business before exchanging Old Notes for the New Notes offered hereby. This
Prospectus contains statements which constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers primarily with respect to the future operating
performance of the Company. Prospective investors in the New Notes are cautioned
that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward looking statements as a result of
various factors. The accompanying information contained in this Prospectus,
including the information set forth below, identifies important factors that
could cause such differences.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Except under certain limited circumstances,
the Company does not currently anticipate that it will register the Old Notes
under the Securities Act. Based on interpretations by the staff of the SEC set
forth in no-action letters issued to third parties, the Company believes that
the New Notes issued pursuant to the Exchange Offer to a Holder in exchange for
Old Notes may be offered for resale, resold or otherwise transferred by any
Holder thereof (other than any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such Holder's business and such Holder is not participating, does not intend
to participate and has no arrangement or understanding with any person to
participate in the distribution of such New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities (other than Old
Notes acquired directly from the Company). The Company has agreed that, for a
period of 180 days following the consummation of the Exchange Offer, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. However, the ability of any Holder to resell the New Notes is
subject to applicable state securities laws as described in " -- Blue Sky
Restrictions on Resale of New Notes" below. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Old Notes not so tendered could be adversely affected. See "The Exchange Offer"
and "Plan of Distribution."
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and avoid the restrictions on transfer
of the Old Notes, Holders of Old Notes must transmit a properly completed Letter
of Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at one of the addresses set forth below under
"The Exchange Offer-Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer of such Old Notes, if such procedure is
available, into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedure for book-entry transfer
15
<PAGE> 25
described herein, must be received by the Exchange Agent prior to the Expiration
Date, or (iii) the Holder must comply with the guaranteed delivery procedures
described herein and in the Letter of Transmittal. The method of delivery of the
Old Notes and the Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the Holder. See "The Exchange
Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the New Notes in any such jurisdictions. However, an
exemption is generally available for sales to registered broker-dealers and
certain institutional buyers. Other exemptions under applicable state securities
laws may also be available.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company is highly leveraged, with total consolidated indebtedness of
$141.7 million at April 30, 1997. As of April 30, 1997, after giving effect to
the issuance of the Old Notes and the application of the net proceeds therefrom,
the Company's total consolidated indebtedness, other than the Notes, would have
been approximately $39.3 million (of which $35.0 million would have been
expressly subordinated by its terms in right and priority of payment to the
Notes) and approximately $20.6 million of additional borrowing capacity, after
giving effect to $4.4 million of outstanding letters of credit, would have been
available for use under the New Credit Agreement. The Company's earnings would
have been insufficient to cover fixed charges by $46.2 million for the year
ended October 31, 1995, $32.0 million for the year ended October 31, 1996, and
$11.7 million for the six months ended April 30, 1997.
The Company in each of the last three fiscal years has violated certain
financial covenants under its existing credit agreement. In order to obtain
necessary amendments and waivers, the Company agreed to additional financial
restrictions, sell equity and assets, issue warrants to purchase shares of its
Class A Common Stock and pay certain fees to its lending banks. See Note 7 of
the Company's Consolidated Financial Statements. While the Company believes it
will have sufficient financial flexibility under the New Credit Agreement, any
similar violations of covenants under the New Credit Agreement may have a
material adverse effect on the Company.
The level of the Company's indebtedness has important consequences to
Holders of the Notes, because: (i) a significant portion of the Company's cash
flow from operations must be dedicated to debt service, including the Notes, the
New Credit Agreement and the Subordinated Debentures, and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures on existing
equipment or to pursue possible expansion of its pari-mutuel wagering systems
business or acquisitions may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in reacting to changes in the gaming
industry and economic conditions generally, thereby limiting its ability to
withstand competitive pressures or take advantage of business opportunities and
making it more vulnerable to adverse economic conditions. Certain of the
Company's competitors currently operate on a less leveraged basis, and are
likely to have significantly greater operating and financing flexibility than
the Company following consummation of the Offering.
The Company believes that, based upon current levels of operations, it
should be able to meet its interest obligations on the Notes, the New Credit
Agreement and the Subordinated Debentures when due. However, if the Company
cannot generate sufficient cash flow from operations to meet its debt service
obligations, including principal payments under the Notes, the New Credit
Agreement and the Subordinated Debentures when due, the Company will be required
to restructure or refinance its Indebtedness. There is no assurance that any
such restructuring or refinancing could be effected on satisfactory terms or
would be permitted by the terms of the New Credit Agreement or the Indenture.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
16
<PAGE> 26
RECENT HISTORY OF OPERATING LOSSES
The Company realized a net loss of $49.9 million in fiscal year 1995, a net
loss of $34.2 million in fiscal year 1996 and a net loss of $12.1 million for
the six months ended April 30, 1997. While the Company has refocused its
operations on its core businesses and has engaged in a cost cutting program, the
Company anticipates that it will realize a net loss in fiscal years 1997 and
1998. There can be no assurance that the Company will not experience additional
net losses in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts, among other things, the Company's and its
Restricted Subsidiaries' (including the Guarantors) ability to incur additional
Indebtedness, create certain liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates and merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. In addition, in connection with
the issuance of the Old Notes, the Company entered into a $25.0 million, 3.5
year revolving credit facility (the "New Credit Agreement"), the terms of which
are more fully described elsewhere in this Prospectus. The New Credit Agreement
contains other and more restrictive covenants. The borrowings under the New
Credit Agreement, as well as the incurrence of other Indebtedness of the
Company, will be subject to compliance with certain conditions, including the
maintenance of certain financial ratios, set forth in the New Credit Agreement.
The New Credit Agreement requires the Company to maintain specified financial
ratios and satisfy certain financial condition tests. The Company's ability to
meet those financial ratios and financial condition tests can be affected by
events beyond its control, and there can be no assurance that the Company will
meet those tests or that the lenders will waive any failure to meet those tests.
A breach of any of these covenants could result in a default under the New
Credit Agreement and the Indenture. If an "Event of Default" under the New
Credit Agreement (as that term is defined therein) occurs, the lender could
elect to declare all amounts outstanding under the New Credit Agreement,
together with accrued interest, to be immediately due and payable. If the
Company were unable to repay those amounts, the lenders could proceed against
the collateral granted to the lenders by the Company to secure the Indebtedness
under the New Credit Agreement. Such collateral includes (i) substantially all
tangible and intangible assets of the Company and its U.S. Subsidiaries and (ii)
all of the capital stock of the Company's U.S. Subsidiaries and 65% of the
capital stock of the Company's Foreign Subsidiaries (as defined). If the
Indebtedness under the New Credit Agreement were to be accelerated, there can be
no assurance that the collateral pledged to secure the New Credit Agreement
would be sufficient to repay in full such Indebtedness. See "Description of New
Credit Agreement" and "Description of Notes."
HOLDING COMPANY STRUCTURE, RANKING AND SUBORDINATION
The Company is a holding company whereby all of the Company's assets and
operations are located in its subsidiaries. The Company must rely on dividends
and other advances and transfers of funds from its subsidiaries to generate the
funds necessary to meet the Company's debt service obligations, including
payment of principal and interest on the Notes. The ability of the Company's
subsidiaries to pay such dividends and make such advances and transfers is
subject to applicable state law regulating the payment of dividends and the
terms of the New Credit Agreement and the Indenture.
The New Notes will represent senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all Indebtedness of the
Company that by its terms is expressly subordinated to the New Notes. Without
limiting the generality of the foregoing, the New Notes will rank senior in
right and priority of payment to the Indebtedness represented by the
Subordinated Debentures ($40.0 million aggregate principal amount outstanding as
of April 30, 1997, of which $5.0 million aggregate principal amount was
repurchased by the Company on July 31, 1997), and the Notes will rank pari passu
in right and priority of payment with the Indebtedness under the New Credit
Agreement. The New Notes, however, will be effectively subordinated to secured
Indebtedness of the Company (including the Indebtedness under the New Credit
Agreement) with respect to the assets securing such Indebtedness. In addition,
the Subordinated Debentures, which are
17
<PAGE> 27
convertible into 1,750,000 shares of Class A Common Stock at a conversion price
of $20.00 per share, are scheduled to mature in August 2001, prior to the
maturity of the Notes. On August 25, 1997, the closing price of the Company's
Class A Common Stock on the American Stock Exchange was approximately $1.8125
per share.
The obligations of the Company with respect to the New Notes will be
jointly and severally guaranteed on a senior, unsecured basis by the Guarantors.
Any indebtedness that is incurred by the Company's subsidiaries will be
effectively senior to the claims of the Holders of the New Notes with respect to
the assets of such subsidiaries, except to the extent that the Holders of the
New Notes may be creditors of a subsidiary pursuant to a Subsidiary Guarantee.
Any such claim by the Holders of the New Notes with respect to the assets of any
Guarantor will be effectively subordinated to secured indebtedness (including
Indebtedness under the New Credit Agreement) of such Guarantor with respect to
the assets securing such indebtedness. The rights of the Company and its
creditors, including Holders of the New Notes, to realize the assets of any
subsidiary upon such subsidiary's liquidation or reorganization (and the
consequent rights of Holders of the New Notes to participate in those assets)
will be subject to the prior claims of such subsidiary's creditors, except to
the extent that the Company may itself be a creditor with recognized claims
against such subsidiary or to the extent that the Holders of the New Notes may
be creditors with recognized claims against such subsidiary pursuant to the
terms of a Subsidiary Guarantee (subject, however, to the prior claims of
creditors holding secured indebtedness of any such subsidiary with respect to
the assets securing such indebtedness). The New Credit Agreement will be secured
by, among other things, (i) substantially all tangible and intangible assets of
the Company and its U.S. Subsidiaries and (ii) all of the capital stock of the
Company's U.S. Subsidiaries and 65% of the capital stock of the Company's
Foreign Subsidiaries. In addition, the Company's subsidiaries in the future may
incur additional indebtedness, subject to the restrictions of the New Credit
Agreement and the Indenture. A Guarantor can be sold or disposed of in certain
circumstances under the Indenture, in which case such Guarantor will be released
from its obligations under its Subsidiary Guarantee. See "Description of New
Credit Agreement" and "Description of Notes--Guarantees."
COMPETITION
A significant portion of the Company's revenues are generated from
pari-mutuel wagering on racing at racetracks and OTBs. The market for
pari-mutuel wagering is competitive, and certain of the Company's competitors
may have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of the design, performance,
reliability and pricing of its products as well as customer service. To
effectively compete, the Company expects to make continued investments in
product development and/or acquisitions of technology. As new wagering products
are developed, 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 on-line lottery business is also highly competitive. State and foreign
governments normally award contracts based on competitive bidding procedures.
Significant factors which influence the award of lottery contracts include
price, the ability to optimize lottery revenues through marketing capability and
applications, 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. There can be no assurance that the Company will achieve
the technological advances necessary, have the financial resources or otherwise
have the ability, to effectively compete in this market. See
"Business--Competition," "Business--Pari-Mutuel Operations--Casino/Race and
Sports Wagering" and "Business--Lottery Operations--Sale of Tele Control."
The market for the Company's products is affected by changing technology,
new legislation and evolving industry standards. The Company's ability to
anticipate such changes and to develop and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
expand, remain competitive, attract new customers and retain existing contracts.
There can be no assurance that the Company will have the financial or other
resources to respond to such changes or to develop and introduce new products on
a timely basis.
18
<PAGE> 28
UNCERTAINTY OF CONTRACT RENEWALS
The Company's contracts for the provision of pari-mutuel services are
typically for terms of five years. Contracts representing 1%, 22%, 21%, and 8%
of the Company's annual pari-mutuel service revenues are scheduled to expire in
fiscal years 1997, 1998, 1999 and 2000, respectively. The Company currently has
signed letters of intent with certain of its customers (subject to certain
conditions) with respect to the renewal of their contracts. If these letters of
intent result in definitive agreements, the percentage of revenues represented
by expiring contracts in fiscal year 1998 would decrease from 22% to 14%. In
addition, the Company's ten year contract to operate the Connecticut State
Lottery expires in May 1998. The Company historically has been successful in
renewing its largest contracts as they have come due for renewal. However, there
can be no assurance that the Company will be able to renew a substantial number
of pari-mutuel systems operating contracts with its largest customers or its
lottery contract with the State of Connecticut, and, if it is unable to do so,
there would be a material adverse effect on the Company.
IMPACT OF GOVERNMENT REGULATION
In the United States and many other countries, wagering must be expressly
authorized by law. Once authorized, the wagering industry is subject to
extensive and evolving governmental regulation. There can be no assurance that
the operation of pari-mutuel wagering facilities, lotteries, video gaming
industry machines or other forms of wagering systems will be approved by
additional jurisdictions or that those jurisdictions in which these wagering
activities are currently permitted will continue to permit such activities. The
Company is required to obtain and maintain licenses from various state and local
jurisdictions in order to operate certain aspects of its business. In addition,
jurisdictions generally require background investigations of the Company and
certain of its employees, directors and stockholders and licensing under
applicable laws and regulations. The failure of such persons to submit to
background checks and provide required disclosure could result in the imposition
of penalties upon such persons and could jeopardize the award of contracts to
the Company or provide grounds for termination of existing contracts. In the
past, regulatory requirements for pari-mutuel wagering activities in the United
States were adopted and administered primarily on the state or local level. 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.
In connection with the previously planned expansion of its sports wagering
business, the Company applied for a gaming license in the State of Nevada. In
response to questions raised by the Nevada Gaming Control Board relating to such
application, the Company established an internal compliance program and has
decided to discontinue the provision of services to one of its racetrack
customers. Although the Company is seeking to terminate its existing contract
with, and sell its pari-mutuel system to, such customer, there can be no
assurance that such arrangements will be satisfactorily concluded. The Company
has requested permission to withdraw its application without prejudice which, if
granted, would permit the Company to reapply at any time. The Company believes
the ability to successfully conclude its arrangements with such customer will be
a material factor in the consideration of the Company's request to withdraw
without prejudice. To the extent the Company's application is withdrawn with
prejudice or rejected, the Company believes such action by the State of Nevada
may have a material adverse effect on the Company's ability to retain existing,
or obtain new, licenses in other jurisdictions. See "Business--Regulation" and
"Business--Pari-Mutuel Operations--Casino/Race and Sports Wagering."
RELIANCE ON SUPPLIERS, CONTRACT MANUFACTURERS AND SIMULCAST SYSTEMS
The Company depends on its suppliers and from time to time contract
manufacturers to provide the Company with products and components in adequate
supply and on a timely basis and to assemble certain of its wagering systems and
component products. Although the Company believes that the availability of
products and components is consistent with the needs of its customers, and that
its business is not dependent on any single supplier or subcontractor, the
failure of certain suppliers and contract manufacturers to meet the
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Company's performance specifications, quality standards or delivery schedules
could have a material adverse effect on the Company's operations.
The Company simulcasts live racing events by transmitting audio and/or
video signals from one facility to a satellite for reception by wagering
locations across the country. The Company's access to satellite service is
provided pursuant to long-term contracts under which the Company's usage is
subject to pre-emptive rights of the satellite owner. The exercise of these
pre-emptive rights or a technical failure of the satellite through which the
Company transmits substantially all of its racing events would require the
Company to obtain other satellite access. There can be no assurance that such
other satellite access would be available to the Company, or if available,
whether the use of such other satellites could be obtained on favorable terms or
in a timely manner. In January 1997, a satellite on which the Company leased a
transponder suffered complete communication failure which did not have a
material adverse effect on the Company. While satellite failures are infrequent,
the operation of the satellite is outside the control of the Company and a
disruption of the transmissions could have a material adverse effect on the
Company. See "Business--Pari-Mutuel Operations--Simulcasting Systems."
FOREIGN SALES AND OPERATIONS RISKS
The Company's business in foreign markets is subject to the risks
customarily associated with such activities, including currency fluctuations,
and other economic, tax and regulatory policies of local governments as well as
the laws and policies of the United States affecting foreign trade and
investment. Earnings of the Company's foreign subsidiaries are subject to
foreign income taxes that could reduce cash flow available to meet required debt
service and other obligations of the Company. In addition, certain foreign
contracts are subject to foreign government validation as to which no assurance
can be given.
EFFECT OF SEASONALITY
The Company's pari-mutuel wagering systems revenues are generally more
predictable than revenues from equipment sales contracts and are typically based
upon a percentage of the Handle at the facility serviced. Nevertheless, as a
result of inclement weather during the winter months, a number of racetracks do
not operate and those that do operate experience missed racing days, which
adversely affects the Handle and the Company's corresponding wagering systems
revenues. Wagering systems revenues for the first fiscal quarter and a portion
of the second fiscal quarter are generally lower than other periods of the
Company's fiscal year as a result of such seasonal factors.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on its executive officers. The Company's
Chairman and Chief Executive Officer, A. Lorne Weil, and certain of the
Company's other executive officers have extensive experience in the wagering
industry. Loss of the services of any of these individuals could have a material
adverse effect on the Company's operations. Additionally, within the gaming
industry, there is intense competition for key personnel. There can be no
assurance that the Company will be able to attract and retain qualified
personnel.
PURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon a Change of Control (such as, for example, the acquisition of a
majority of the outstanding voting stock of the Company by a third party), the
Company is required to offer to repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase. The source of funds for any such purchase will be the Company's
available cash or cash generated from operating or other sources, including
borrowing, sales of assets, sales of equity or funds provided by a new
controlling person. However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of Notes tendered, or that, if applicable, restrictions in the New
Credit Agreement will allow the Company to make such required repurchases. See
"Description of Notes--Change of Control."
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FRAUDULENT CONVEYANCE CONSIDERATIONS
The Company's obligations under the Old Notes are, and under the New Notes
will be, jointly and severally guaranteed on a senior, unsecured basis by the
Guarantors. In connection with the issuance of the Old Notes, the Guarantors
incurred Indebtedness under the Subsidiary Guarantees and the guarantee of the
obligations under the New Credit Agreement. If, under relevant federal or state
fraudulent conveyance statutes in a bankruptcy, reorganization or rehabilitation
case or similar proceeding or a lawsuit by or on behalf of unpaid creditors of
the Company or the Guarantors, a court were to find that, at the time the
Subsidiary Guarantees were issued, (i) the Guarantors issued the Subsidiary
Guarantees with the intent of hindering, delaying or defrauding current or
future creditors or (ii) the Guarantors received less than reasonably equivalent
value or fair consideration for issuing the Subsidiary Guarantees and a
Guarantor (A) was insolvent or was rendered insolvent by reason of incurring
Indebtedness under the Subsidiary Guarantees and the guarantee of the
obligations under the New Credit Agreement and/or such related transactions, (B)
was engaged, or about to engage, in a business or transaction for which its
assets constituted unreasonably small capital, (C) intended to incur, or
believed that it would incur, debts beyond its ability to pay as such debts
matured (as all of the foregoing terms are defined in or interpreted under such
fraudulent conveyance statutes) or (D) was a defendant in an action for money
damages, or had a judgment for money damages docketed against it (if, in either
case, after final judgment, the judgment is unsatisfied), such court could avoid
or subordinate the Subsidiary Guarantees to presently existing and future
Indebtedness of the Guarantors and take other action detrimental to the rights
of the Holders of the Notes and the Subsidiary Guarantees, including, under
certain circumstances, invalidating the Subsidiary Guarantees. Among other
things, a legal challenge of a Subsidiary Guarantee on fraudulent conveyance
grounds may focus on the benefits, if any, realized by such Guarantor as a
result of the issuance by the Company of the Notes. To the extent any Subsidiary
Guarantee is voided as a fraudulent conveyance, subordinated or held
unenforceable for any other reason, the Holders of the Notes may cease to have
any claim in respect of such Guarantor and would be creditors solely of the
Company and any remaining Guarantors.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or state law that is being applied in any such
proceeding. Generally, however, the Company or the Guarantors would be
considered insolvent if, at the time of, or as a result of, the incurrence of
the Indebtedness constituting the Notes or the Subsidiary Guarantees, either (i)
the fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute and
matured or (ii) it is incurring debts beyond its ability to pay as such debts
mature.
The Company's Board of Directors and management believe that at the time of
the issuance of the Notes and the Subsidiary Guarantees, the Company and the
Guarantors (i) will (A) be neither insolvent nor rendered insolvent thereby, (B)
have sufficient capital to operate their respective businesses effectively and
(C) be incurring debts within their respective abilities to pay as the same
mature or become due and (ii) will have sufficient resources to satisfy any
probable money judgment against them in any pending action. There can be no
assurance, however, that such beliefs will prove to be correct or that a court
passing on such questions would reach the same conclusions.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The New Notes are a new issue of securities, have no
established trading market, and may not be widely distributed. The Company does
not intend to list the New Notes on any national securities exchange or the
Nasdaq Stock Market or to seek the admission thereof to trading on any automated
quotation system. No assurance can be given that an active public or other
market will develop for the New Notes or as to the liquidity of or the trading
market for the New Notes. If a trading market does not develop or is not
maintained, Holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a market for the New Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the New Notes, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the
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<PAGE> 31
market for similar securities, and the price at which the Holders of New Notes
will be able to sell such New Notes is not assured and the New Notes could trade
at a premium or discount to their purchase price or face value. Depending on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition of the Company, the New Notes may trade at a
discount from their principal amount. The Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes. However,
the Initial Purchaser is not obligated to do so and any market-making may be
discontinued at any time without notice.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on July 28, 1997 to the Initial
Purchaser, who placed the Old Notes with certain institutional investors. In
connection therewith, the Company, the Guarantors and the Initial Purchaser
entered into the Registration Rights Agreement, pursuant to which the Company
and the Guarantors agreed, for the benefit of the Holders of the Old Notes, that
the Company and the Guarantors would, at their sole cost, (i) within 30 days
following the original issuance of the Old Notes, file with the SEC the Exchange
Offer Registration Statement (of which this Prospectus is a part) under the
Securities Act with respect to an issue of a series of new notes of the Company
identical in all material respects to the series of Old Notes and (ii) use its
commercially reasonable best efforts to cause such Exchange Offer Registration
Statement to become effective under the Securities Act within 120 days following
the original issuance of the Old Notes. Upon the effectiveness of the Exchange
Offer Registration Statement (of which this Prospectus is a part), the Company
will offer to the Holders of the Old Notes the opportunity to exchange their Old
Notes for a like principal amount of New Notes, to be issued without a
restrictive legend and which may be reoffered and resold by the Holder without
restrictions or limitations under the Securities Act. The term "Holder" with
respect to any Note means any person in whose name such Note is registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered Holder.
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or SEC policy or if for any reason the
Exchange Offer is not consummated within 180 days after the original issuance of
the Old Notes or (ii) any Holder of Transfer Restricted Securities (as defined)
notifies the Company within a specified time period that (A) it is prohibited by
law or SEC policy from participating in the Exchange Offer, (B) it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (C)
it is a broker-dealer and owns Old Notes acquired directly from the Company or
an affiliate of the Company, the Company and the Guarantors will file with the
SEC a shelf registration statement (the "Shelf Registration Statement") to cover
resales of Transfer Restricted Securities by the Holder thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its commercially
reasonable best efforts to cause the Shelf Registration Statement to be declared
effective within 90 days after the date on which the Company becomes obligated
to file such Shelf Registration Statement and, except under certain
circumstances, use its commercially reasonable best efforts to keep effective
such Shelf Registration Statement until the earlier of two years after its
effective date and such time as all of the applicable New Notes have been sold
thereunder. For purposes of the foregoing, "Transfer Restricted Securities"
means each Note until (i) the date on which such Old Note has been exchanged by
a person other than a broker-dealer for a New Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of an Old Note
for a New Note, the date on which such New Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy of
the Prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Note has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144 under
the Securities Act. The Company will, in the event of the filing of the Shelf
Registration Statement, provide to each Holder of Transfer Restricted Securities
covered by the Shelf Registration Statement copies of the prospectus which is a
part of the Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of Transfer Restricted Securities. A
Holder of Transfer Restricted Securities that sells such Transfer Restricted
Securities pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to the purchaser, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
which are applicable to such Holder (including certain indemnification
obligations). In addition, Holders of Transfer Restricted Securities will be
required to deliver information to be used in
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<PAGE> 33
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Transfer Restricted
Securities included in the Shelf Registration Statement and benefit from the
provisions regarding Additional Interest, if any, set forth in the following
paragraph.
Additional Interest
If the Company fails to comply with the above provisions or if such
registration statements fail to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable with
respect to the Notes as follows:
(i) if neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement is filed within 30 days following the original
issuance of the Old Notes, then, commencing on the 31st day after such
date, Additional Interest shall be accrued on the Notes over and above the
stated interest at a rate of 0.50% per annum for the first 90 days
immediately following the 30th day after the original issuance of the Old
Notes, such Additional Interest rate increasing by an additional 0.50% per
annum at the beginning of each subsequent 90-day period;
(ii) if the Exchange Offer Registration Statement or Shelf
Registration Statement is not declared effective within 120 days following
the original issuance of the Old Notes, then, commencing on the 121st day
after such date, Additional Interest shall be accrued on the Notes over and
above the stated interest at a rate of 0.50% per annum for the first 90
days immediately following the 120th day after such date, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 90-day period; or
(iii) if (A) the Company has not delivered New Notes in exchange for
all Old Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 180th day after the original issuance of the Old
Notes, (B) the Exchange Offer Registration Statement has been declared
effective and thereafter ceases to be effective at any time prior to the
time that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement thereafter ceases to be effective at any time prior
to the second anniversary of its effective date or earlier under certain
circumstances, then Additional Interest shall be accrued on the Notes over
and above the stated interest at a rate of 0.50% per annum for the first 90
days commencing on (x) the 181st day after the original issuance of the Old
Notes with respect to the Notes validly tendered and not exchanged by the
Company, in the case of (A) above, or (y) the day following the date the
Exchange Offer Registration Statement ceases to be effective in the case of
(B) above, or (z) the day following the date such Shelf Registration
Statement ceases to be effective in the case of (C) above, such Additional
Interest rate increasing by an additional 0.50% per annum at the beginning
of each subsequent 90-day period;
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.0% per annum; and provided, further, that (1) upon the filing
of the Exchange Offer Registration Statement or a Shelf Registration Statement
(in the case of clause (i) above), (2) upon the effectiveness of the Exchange
Offer Registration Statement or a Shelf Registration Statement (in the case of
clause (ii) above), or (3) upon the exchange of New Notes for all Old Notes
tendered (in the case of clause (iii)(A) above), or upon the effectiveness of
the Exchange Offer Registration Statement which has ceased to remain effective
(in the case of clause (iii)(B) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(C) above), Additional Interest on the Notes as a result of such
clause (or the relevant subclause thereof), as the case may be, shall
immediately cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment dates
as the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes, multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was applicable during such period (determined
on the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
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<PAGE> 34
Payment of Additional Interest is the sole remedy available to the Holders
of Transfer Restricted Securities in the event that the Company does not comply
with the deadlines set forth in the Registration Rights Agreement with respect
to the registration of Transfer Restricted Securities for resale under the Shelf
Registration Statement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
will have been registered under the Securities Act and therefore will not bear
legends restricting their transfer and (ii) the Holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement
intended for the benefit of Holders of unregistered securities, including the
terms providing for Additional Interest, all of which rights will terminate when
the Exchange Offer is consummated. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture under which
the Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $110 million aggregate principal amount
of the Old Notes was outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer solely for purposes
of determining the persons to whom this Prospectus, together with the Letter of
Transmittal, will initially be sent. As of such date, there were
registered Holders of the Old Notes. There will be no fixed record date for
determining Holders of Old Notes entitled to participate in the Exchange Offer.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the SEC thereunder.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m. New York City time, on the next business
day after each previously scheduled Expiration Date. Such notice and public
announcement shall set forth the new Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer, or, if any of the
conditions set forth below under the caption "-- Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by a public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus
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supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of no less than five business days,
depending upon the significance of the amendment and the manner of disclosure to
the registered Holders, after the then applicable Expiration Date.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING OLD NOTES
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
A Holder who wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent prior to the Expiration Date along with a properly
completed and duly executed Letter of Transmittal, (ii) a timely confirmation of
a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date or (iii) the Holder must comply with the guaranteed
delivery procedures described below. To be tendered effectively, the Old Notes,
or Book-Entry Confirmation, as the case may be, a properly completed and duly
executed Letter of Transmittal and other required documents must be received by
the Exchange Agent at the address set forth below under "--Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF THE OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING DELIVERY THROUGH
THE BOOK-ENTRY TRANSFER FACILITY OF AN AGENT'S MESSAGE (AS DEFINED), IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES, OR BOOK-ENTRY
CONFIRMATION, AS THE CASE MAY BE, SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Old Notes in the Exchange Offer should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such beneficial
owner's own behalf, such owner must, prior to completing and executing the
Letter of Transmittal and delivering such beneficial owner's Old Notes, either
make appropriate arrangements to register ownership of the Old Notes in such
owner's name or obtain a properly completed bond power from the registered
Holder. The transfer of registered ownership may take considerable time.
Signatures on the Letter of Transmittal must be guaranteed by a firm which
is a member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States (each of the foregoing
being referred to herein as an "Eligible Institution") or by any other "Eligible
Guarantor Institution" as such term is defined in Rule 17Ad-15(a)(2) under the
Exchange Act (which includes brokers, dealers, municipal securities dealers,
municipal security brokers, government securities dealers, government securities
brokers, national
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<PAGE> 36
securities exchanges, registered securities associations and clearing agencies,
as those terms are defined or used under the Exchange Act, banks and savings
associations, as defined under the Federal Deposit Insurance Act, and saving
associations, as defined under the Federal Reserve Act) unless (a) the Letter of
Transmittal is signed by the registered Holder of the Old Notes tendered
therewith (or by a participant in the Book-Entry Transfer Facility whose name
appears on a security position listing it as the owner of such Old Notes) and
neither the "Special Exchange Instructions" box nor the "Special Delivery
Instructions" box on the Letter of Transmittal has been completed, or (b) such
Old Notes are tendered for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power and signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder represents to the Company, among other things,
that (i) the New Notes to be acquired by the Holder and any beneficial owners of
Old Notes pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii) the Holder and
each such beneficial owner are not participating, does not intend to participate
and have no arrangement or understanding with any person to participate in the
distribution of such New Notes, (iii) neither the Holder nor any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Company, (iv) the Holder and each beneficial owner acknowledge and agree
that any person participating in the Exchange Offer for the purpose of
distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction of the New Notes acquired by such person and cannot rely on
the position of the staff of the SEC enunciated in Morgan Stanley & Co.
Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), and interpreted in the SEC's letters to Shearman &
Sterling (available July 2, 1993) and K-III Communications Corporation
(available May 14, 1993), and similar no-action or interpretive letters issued
to third parties, and (v) that a secondary resale transaction described in
clause (iv) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the SEC. In connection with a book-entry transfer, each
participant will confirm that it makes the representations and warranties
contained in the Letter of Transmittal. Each broker or dealer that receives New
Notes for its own account in exchange for Old Notes, where such tendered Old
Notes were acquired by such broker or dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company), must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
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ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. For each Old Note accepted for
exchange, the Holder of such Old Note will receive a New Note having a principal
amount equal to that of the surrendered Old Note. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes (or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering Holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such unaccepted or non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the Expiration Date.
BOOK-ENTRY TRANSFER
To effectively tender Old Notes that are held through the Book-Entry
Transfer Facility, participants in the Book-Entry Transfer Facility should
transmit their acceptance through the Book-Entry Transfer Facility's Automated
Tender Offer Program, for which the transaction will be eligible, and the
Book-Entry Transfer Facility will then edit and verify the acceptance and send
an Agent's Message to the Exchange Agent for its acceptance.
Any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees, or an Agent's Message in connection with
a book-entry transfer, and any other required documents must, in any case, be
transmitted to and received by the Exchange Agent at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be followed. The term
"Agent's Message" means a message transmitted by the Book-Entry Transfer
Facility to, and received by, the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has
received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering the Old Notes that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date or (iii) who cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
and the
28
<PAGE> 38
principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange
trading days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the Old
Notes, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
fascimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person that deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number(s) and
principal amount of such Old Notes ), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the name of the
person withdrawing the tender and (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
Holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of the Book-Entry Transfer Facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "-- Procedures for Tendering Old Notes" at any time prior
to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer to the Holder thereof without cost
to such Holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for
such Old Notes).
CONDITIONS
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. Notwithstanding any other term of the
Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as
provided herein before the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company,
29
<PAGE> 39
might materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of its subsidiaries;
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company;
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering Holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Holders to withdraw such Old Notes (see
"-- Withdrawal of Tenders" above) or (iii) waive such unsatisfied conditions
with respect to the Exchange Offer and accept all properly tendered Old Notes
which have not been withdrawn. If such waiver constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of no less than five
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered Holders, after the then applicable Expiration Date.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
TO: IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand/Overnight Delivery:
P.O. Box 84 IBJ Schroder Bank & Trust Company
New York, New York 10274-0084 One State Street
Attn: Reorganization New York, New York 10004
Operations Department Attn: Securities Processing
Window, Subcellar One (SC-1)
</TABLE>
Facsimile Transmission:
(for Eligible Institutions Only)
(212) 858-2611
Facsimile Confirmation:
(212) 858-2103
For Information by Telephone:
(212) 858-2103
30
<PAGE> 40
RESALES OF THE NEW NOTES
Based on positions of the SEC set forth in Morgan Stanley & Co.
Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), and interpreted in the SEC's letters to Shearman &
Sterling (available July 2, 1993) and K-III Communications Corporation
(available May 14, 1993), and similar no-action letters issued to third parties,
the Company believes that the New Notes issued pursuant to the Exchange Offer to
a Holder in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any Holder thereof (other than any such Holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and such Holder is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. The Company has not requested or obtained, and does not intend to seek,
an interpretive letter from the staff of the SEC with respect to this Exchange
Offer, and the Company and the Holders are not entitled to rely on interpretive
advice provided by the staff of the SEC to other persons, which advice was based
on the facts and conditions represented in such letters. Although there can be
no assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer, the Exchange Offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any Holder acquires New Notes in the Exchange Offer for the purpose
of distributing or participating in a distribution of the New Notes, such Holder
cannot rely on the position of the staff of the SEC set forth in the above
no-action and interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days
following the consummation of the Exchange Offer, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." Under the Registration Rights Agreement, the Company is
required to allow such broker-dealers and other persons, if any, subject to
similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such New Notes.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such
31
<PAGE> 41
transfer taxes (whether imposed on the registered Holder or any other persons)
will be payable by the tendering Holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes must accompany the tender of Old
Notes.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
and the unamortized expenses related to the issuance of the Old Notes will be
amortized over the term of the New Notes.
REGULATORY APPROVALS
The Company does not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer.
OTHER
Participation in the Exchange Offer is voluntary and Holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of the Exchange Offer, the
Company will have fulfilled a covenant contained in the terms of the Old Notes
and the Registration Rights Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights, and limitations applicable
thereto, under the Indenture, except for any such rights under the Registration
Rights Agreement (including rights to receive Additional Interest) which by
their terms terminate or cease to have further effect as a result of the making
and consummation of the Exchange Offer. All untendered Old Notes will continue
to be subject to the restrictions on transfer set forth in the Indenture and the
Company does not currently anticipate that it will register the Old Notes under
the Securities Act. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market, if any, for any remaining Old Notes
could be adversely affected. See "Risk Factors -- Consequences of Failure to
Exchange."
32
<PAGE> 42
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the New Notes in the Exchange Offer.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
April 30, 1997 as adjusted to give effect to the issuance of the Old Notes (net
of discounts and commissions to the Initial Purchaser and estimated expenses of
the issuance of the Old Notes) and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto, the "Selected Unaudited
Pro Forma Consolidated Financial Data" and the notes thereto, and other
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................. $ 3,599 $ 7,196
======== ========
Total debt:
Existing credit agreement(1)........................................ $ 97,390 $ --
New Credit Agreement(1)............................................. -- --
Issuance of Old Notes............................................... -- 110,000
5 1/2% Convertible Subordinated Debentures due 2001(2).............. 40,000 35,000
Other long-term debt................................................ 4,269 4,269
-------- --------
Total debt....................................................... 141,659 149,269
Stockholders' equity (deficit)(3)..................................... (29,433) (30,259)
-------- --------
Total capitalization................................................ $112,226 $ 119,010
======== ========
</TABLE>
- ---------------
(1) Does not include $4.4 million in outstanding letters of credit as of April
30, 1997. For a description of the terms of the New Credit Agreement, see
"Description of New Credit Agreement."
(2) Reflects the repurchase of $5.0 million aggregate principal amount of
Subordinated Debentures, at a discount. For a description of the terms of
the Subordinated Debentures, see "Description of Certain Indebtedness."
(3) The change in stockholders' equity (deficit) results from a $0.9 million
gain on the repurchase of Subordinated Debentures at a discount and the
write-off of $1.7 million of previously deferred financing fees relating to
the Company's existing credit agreement.
33
<PAGE> 43
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data as of and for
each of the five years ended October 31, 1992, 1993, 1994, 1995 and 1996 have
been derived from the audited consolidated financial statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The summary historical consolidated
unaudited financial data set forth below for the six month periods ended April
30, 1996 and 1997 have been derived from, and are qualified by reference to, the
Company's unaudited financial statements included elsewhere herein and include
all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation of the results of the
Company for such periods. The consolidated unaudited financial data for the six
month period ended April 30, 1997 is not necessarily indicative of the results
to be achieved for the year ending October 31, 1997. The following financial
data reflects the acquisition and disposition of certain businesses during the
period 1992 through 1997 and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and the Consolidated Financial Statements and the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
----------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Services................................ $40,526 $ 59,792 $ 98,592 $132,260 $137,794 $ 64,974 $ 66,389
Sales................................... 7,838 25,070 50,458 20,924 38,441 24,073 11,047
------- ------- -------- -------- -------- -------- --------
48,364 84,862 149,050 153,184 176,235 89,047 77,436
------- ------- -------- -------- -------- -------- --------
Operating expenses (exclusive of
depreciation and amortization):
Cost of services........................ 20,713 36,513 61,158 78,569 85,742 41,071 39,329
Cost adjustments and strike expenses.... -- -- 6,781(1) -- -- -- --
Cost of sales........................... 4,606 11,679 35,753 15,661 25,864 16,140 7,433
------- ------- -------- -------- -------- -------- --------
25,319 48,192 103,692 94,230 111,606 57,211 46,762
------- ------- -------- -------- -------- -------- --------
Gross profit.............................. 23,045 36,670 45,358 58,954 64,629 31,836 30,674
Selling, general and administrative
expenses................................ 6,419 10,956 25,298 36,540 32,853 16,548 15,205
Restructuring and write-off of assets..... -- -- 8,576(2) 18,241(3) (649)(4) -- --
Depreciation and amortization............. 7,840 11,809 25,418 35,463 40,853 18,994 19,852
------- ------- -------- -------- -------- -------- --------
Operating income (loss)................... 8,786 13,905 (13,934) (31,290) (8,428) (3,706) (4,383)
Other deductions (income):
Interest expense........................ 5,903 3,473 6,408 16,362 14,837 7,332 7,314
Other (income) expense.................. (968) (298) (952) (436) 560 143 132
Proceeds of insurance claim............. (3,000) -- -- -- -- -- --
Litigation settlement................... -- -- -- -- 6,800 6,800 --
(Gain) loss on sale of business......... -- -- -- -- 1,127 -- (257)
------- ------- -------- -------- -------- -------- --------
1,935 3,175 5,456 15,926 23,324 14,275 7,189
------- ------- -------- -------- -------- -------- --------
Earnings (loss) before income tax expense
(benefit) and extraordinary item........ 6,851 10,730 (19,390) (47,216) (31,752) (17,981) (11,572)
Income tax expense (benefit).............. 1,124 1,292 (1,462) 2,673 2,443 1,714 542
------- ------- -------- -------- -------- -------- --------
Earnings (loss) before extraordinary
item.................................... 5,727 9,438 (17,928) (49,889) (34,195) (19,695) (12,114)
Write-off of financing fees & expenses.... -- -- 4,222(5) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net earnings (loss)....................... $ 5,727 $ 9,438 $(22,150) $(49,889) $(34,195) $(19,695) $(12,114)
======= ======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(6)................................. $16,626 $ 25,714 $ 11,484 $ 4,173 $ 32,425 $ 15,288 $ 15,469
Adjusted EBITDA(7)........................ 16,626 25,714 26,841(7) 25,114(7) 32,345(7) 15,288 15,469
Cash interest expense(8).................. 5,598 3,817 6,987 13,309 13,504 6,715 6,607
Capital expenditures...................... 628 3,277 19,533 9,990 2,103 1,075 701
Wagering systems expenditures(8).......... -- 46,500 39,932 8,150 7,138 4,051 2,721
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................. $ 1,206 $ 10,524 $ 6,110 $ 4,991 $ 5,988 $ 4,138 $ 3,599
Total assets.............................. 62,950 187,105 241,597 241,021 196,793 222,520 147,797
Total debt................................ 57,231 76,987 143,955 177,264 169,024 176,888 141,659
Stockholders' equity (deficit)............ (20,972) 76,079 55,721 11,857 (20,196) (6,026) (29,433)
</TABLE>
34
<PAGE> 44
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma consolidated financial data have
been prepared by the Company's management from the historical financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus. The unaudited pro forma consolidated income statement and other data
set forth below reflect adjustments (a) to exclude historical data relating to
CBS (which was sold in October 1996 for approximately $3.0 million) and Tele
Control (which was acquired by the Company in September 1993 and sold in April
1997 for approximately $26.6 million), and to give effect to the application of
the proceeds from the sales of CBS and Tele Control, and (b) to give effect to
the issuance of the Old Notes and the application of the net proceeds therefrom
as reflected under "Capitalization," as if all such transactions had been
consummated or were effective at the beginning of all periods presented (in the
case of CBS and Tele Control for the periods in which such companies were owned
by the Company). The unaudited pro forma consolidated balance sheet data as of
April 30, 1997 is presented on a historical basis and as adjusted to give effect
to the issuance of the Old Notes and the application of the proceeds therefrom
as if such transaction had occurred on such date.
The financial effects of such transactions as presented in the pro forma
financial data are not necessarily indicative of either the Company's financial
position or the results of its operations which would have been obtained had
such transactions actually occurred on the dates described above, nor are they
necessarily indicative of the results of future operations. The pro forma
financial data should be read in conjunction with the notes thereto, which are
an integral part thereof, and with the consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
---------------------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Services............................ $39,204 $58,414 $ 88,886 $118,487 $124,813 $58,443 $61,191
Sales............................... 6,929 20,884 38,024 14,822 20,133 9,011 10,126
------- ------- -------- -------- -------- ------- -------
46,133 79,298 126,910 133,309 144,946 67,454 71,317
------- ------- -------- -------- -------- ------- -------
Operating expenses (exclusive of
depreciation and amortization):
Cost of services.................... 20,021 35,637 56,872 73,422 77,002 36,028 36,832
Cost adjustments and strike
expenses.......................... -- -- 6,781(1) -- -- -- --
Cost of sales....................... 4,152 10,056 25,526 12,263 14,416 6,792 7,111
------- ------- -------- -------- -------- ------- -------
24,173 45,693 89,179 85,685 91,418 42,820 43,943
------- ------- -------- -------- -------- ------- -------
Gross profit.......................... 21,960 33,605 37,731 47,624 53,528 24,634 27,374
Selling, general and administrative
expenses............................ 6,146 10,583 23,655 33,656 28,722 14,936 14,745
Restructuring and write-off of
assets.............................. -- -- 8,576(2) 17,567(3) (649)(4) -- --
Depreciation and amortization......... 7,617 11,470 21,852 30,589 35,024 16,422 16,950
------- ------- -------- -------- -------- ------- -------
Operating income (loss)............... 8,197 11,552 (16,352) (34,188) (9,569) (6,724) (4,321)
OTHER DATA:
EBITDA(5)............................. $15,814 $23,022 $ 5,500 $ (3,599) $ 25,455 $ 9,698 $12,629
Adjusted EBITDA(6).................... 15,814 23,022 20,857(6) 16,668(6) 25,375 9,698 12,629
Cash interest expense(8).............. 14,065 7,101 6,816
Ratio of Adjusted EBITDA to cash
interest expense.................... 1.80x 1.37x 1.85x
Capital expenditures.................. $ 628 $ 3,156 $ 16,222 $ 6,182 $ 1,720 $ 865 $ 649
Wagering systems expenditures(7)...... -- 46,500 39,132 8,150 7,138 4,051 2,721
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1997
---------------------------
ACTUAL AS ADJUSTED(9)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents..................................................................... $ 3,599 $ 7,196
Total assets.................................................................................. 147,797 154,556
Total debt.................................................................................... 141,659 149,269
Stockholders' equity (deficit)................................................................ (29,433) (30,259)
</TABLE>
35
<PAGE> 45
- ---------------
(1) Reflects $6,781 of unusual charges in the fiscal year ended October 31,
1994. These charges primarily consist of inventory, equipment and contract
adjustments principally relating to acquisitions totaling $3,939. In
addition, as a result of a strike by the Company's field service employees,
$2,842 of unusual charges were incurred for the same period. See Notes 2
and 3 of the Company's Consolidated Financial Statements.
(2) Reflects $8,576 in unusual charges in the fiscal year ended October 31,
1994. These charges are principally attributable to the write-off of
certain assets related to certain of the Company's domestic and overseas
projects totaling $4,737, and $3,839 in unusual charges for the same period
as a result of closing of the Company's Newark, Delaware manufacturing
facility and the discontinuation of certain product lines. See Note 2 of
the Company's Consolidated Financial Statements.
(3) Reflects $18,241 of unusual charges in the fiscal year ended October 31,
1995 (Pro Forma $17,567). These charges are principally the result of the
write-off of certain investments and non-current assets, including $2,750
attributable to the Company's Mexican VGM contracts, $2,576 attributable to
European wagering terminals, $1,314 (Pro Forma $640) attributable to other
assets, $11,601 principally related to the closure of the Company's Owings
Mills, Maryland lottery support facility and the manufacturing facility in
Ballymahon, Ireland. See Note 2 of the Company's Consolidated Financial
Statements.
(4) Reflects an unusual credit of $649 in the fiscal year ended October 31,
1996 which is a partial reversal of fiscal year 1995 restructuring cost
accruals because of the Company's decision to continue limited
manufacturing of wagering terminals at its Ireland manufacturing facility.
(5) "EBITDA" represents earnings (loss) before income tax expense (benefit) and
extraordinary item, interest income and expense, other income and expense,
and depreciation and amortization. Management has included information
concerning EBITDA as it provides useful information regarding the Company's
ability to service its debt. However, EBITDA should not be considered in
isolation or as a substitute for net earnings (loss), cash flow from
continuing operations or other data prepared in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity.
(6) "Adjusted EBITDA" represents EBITDA (see footnote 5 above) before the
unusual Charges referred to in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Unusual Charges." Adjusted
EBITDA for the fiscal year ended October 31, 1994 is before $15,357 of
unusual charges. See footnotes 1 and 2 above. Adjusted EBITDA for the
fiscal year ended October 31, 1995 is before $20,941 (Pro Forma $20,267) of
unusual charges including $2,700 of miscellaneous charges. See footnote 3
above. Adjusted EBITDA for the fiscal year ended October 31, 1996 is before
($80) net unusual credit of $649 (see footnote 4 above) partially offset by
$569 in expense incurred for contractual payments related to the departure
of the former President of the Company.
(7) Prior to the fiscal year ended October 31, 1993, the Company did not
separately identify expenditures for equipment under long-term wagering
systems agreements.
(8) For the purpose of Other Data, cash interest expense excludes the
amortization of deferred financing costs, other amortization costs and bank
waiver fees and includes capitalized interest costs of $819, $1,113 and $81
in fiscal years ended 1993, 1994 and 1995, respectively. Cash interest
expense includes the issuance of common stock in lieu of cash for interest
payments of $1,100 due in each of August 1995 and February 1996 on the
Subordinated Debentures. (See Note 13 of the Company's Consolidated
Financial Statements.)
(9) The As Adjusted balance sheet data at April 30, 1997 gives effect to the
issuance of the Old Notes and the application of the proceeds therefrom to
repay the Company's then existing credit agreement in full, including
accrued interest and fees, to repurchase $5.0 million aggregate principal
amount of Subordinated Debentures at a discount and to pay approximately
$4.2 million of fees and expenses related to the issuance of the Old Notes,
and gives effect to a $0.9 million gain on the repurchase of Subordinated
Debentures at a discount and the write-off of $1.7 million of previously
deferred financing fees.
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<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
The Company operates in two business segments, Pari-mutuel Operations and
Lottery Operations. Pari-mutuel Operations include the North American and
international pari-mutuel operations, simulcasting services, Connecticut OTB
operations, video gaming and CBS (the Company's casino/race and sports wagering
service business which was sold in October 1996). Lottery Operations include
both domestic and international lottery operations (including Tele Control, the
Company's European lottery business which was sold in April 1997), as well as
systems and equipment sales. See "Business."
The Company is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is also a leading provider of
such systems worldwide. The Company also owns and operates the Connecticut OTB
and is the leading provider of Racing Industry simulcasting services in the
United States. Additionally, the Company provides technologically advanced VGMs
to the North American Racing Industry for use at racetracks. The Company also
provides lottery systems and equipment in the United States and internationally.
Historically, the Company's revenues have been derived from two principal
sources: service revenues pursuant to multi-year contracts to provide wagering
systems and other services, which are typically based on a percentage of the
Handle and/or daily or monthly fees, and sales contracts for wagering equipment
and software. The first quarter of the fiscal year and a portion of the second
fiscal quarter traditionally comprise the weakest season for wagering service
revenue. Wagering equipment sales revenues usually reflect a limited number of
large transactions which do not recur on an annual basis, but which historically
have given rise to additional terminal and systems software sales to existing
customers. Consequently, revenues and operating results could vary substantially
from period to period as a result of the timing of revenue recognition for major
equipment sales.
The Company's business strategy over the past several years has been to
refocus its activities on its core businesses, which generate recurring revenues
rather than one-time equipment sales, and to reduce its operating expenses.
Consistent with this strategy, the Company (i) in October 1996, sold CBS for
approximately $3.0 million and (ii) in April 1997, sold Tele Control for
approximately $26.6 million. The proceeds from the sale of these businesses were
used to reduce the Company's outstanding indebtedness.
The acquisition of the Company's simulcasting operations and the French
pari-mutuel business, which occurred in fiscal 1994 and 1995, are described in
Note 3 of the Company's Consolidated Financial Statements. Since all but one of
these acquisitions were accounted for as purchases, the timing of each
acquisition affects the comparability of operations from period to period.
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<PAGE> 47
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
OCTOBER 31, APRIL 30,
---------------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pari-mutuel Operations
OPERATING REVENUES:
Service.......................... $ 81,080 $111,797 $118,267 $55,088 $56,917
Sales............................ 11,808 15,539 10,172 6,895 3,195
------- ------- ------- ------- -------
Total Revenues......... $ 92,888 $127,336 $128,439 $61,983 $60,112
======= ======= ======= ======= =======
GROSS PROFIT (excluding depreciation
and amortization)................... $ 26,579 $ 45,302 $ 49,620 $23,236 $23,577
======= ======= ======= ======= =======
Lottery Operations
OPERATING REVENUES:
Service.......................... $ 17,512 $ 20,463 $ 19,527 $ 9,886 $ 9,472
Sales............................ 38,650 5,385 28,269 17,178 7,852
------- ------- ------- ------- -------
Total Revenues......... $ 56,162 $ 25,848 $ 47,796 $27,064 $17,324
======= ======= ======= ======= =======
GROSS PROFIT (excluding depreciation
and amortization)................... $ 18,779 $ 13,652 $ 15,009 $ 8,600 $ 7,097
======= ======= ======= ======= =======
Company Total
OPERATING REVENUES:
Service.......................... $ 98,592 $132,260 $137,794 $64,974 $66,389
Sales............................ 50,458 20,924 38,441 24,073 11,047
-------- -------- -------- ------- -------
Total Revenues......... $149,050 $153,184 $176,235 $89,047 $77,436
======== ======== ======== ======= =======
GROSS PROFIT (excluding depreciation
and amortization)................... $ 45,358 $ 58,954 $ 64,629 $31,836 $30,674
======== ======== ======== ======= =======
</TABLE>
38
<PAGE> 48
SIX MONTHS ENDED APRIL 30, 1997 COMPARED TO SIX MONTHS ENDED APRIL 30, 1996
Revenue Analysis
Revenues decreased 13% or $11.6 million to $77.4 million in the first six
months of the fiscal year ending October 31, 1997 from $89.0 million in the
first six months of the fiscal year ended October 31, 1996.
Pari-mutuel Operations service revenues of $56.9 million for the first six
months of fiscal 1997 improved $1.8 million or 3% during the period as compared
to the prior year. This improvement reflects revenue increases of $3.5 million
as a result of growth in Handle in the Company's North American pari-mutuel and
Connecticut OTB operations, and the addition of new customers in the
simulcasting business. These increases were partially offset by the absence of
$1.2 million in revenues provided in the prior year period by CBS, which was
sold in October 1996. The growth in Handle during the first half of fiscal 1997
compared to the first half of fiscal 1996 is attributable to the addition of six
new North American racetrack and OTB sites, full card simulcasting at two North
American racetrack customers, the addition of 320 VGMs to the lease base and the
expansion of OTB operations in Connecticut to seven days a week, as well as to a
much milder winter in fiscal 1997 than in the prior year. Sales revenues in the
first six months of fiscal 1997 decreased $3.7 million to $3.2 million as
compared to the first six months of fiscal 1996 principally due to a decline in
equipment sales to the international market.
Lottery Operations service revenues decreased $0.4 million during the first
six months of fiscal 1997 from $9.9 million to $9.5 million primarily because of
the sale of Tele Control in April 1997. Sales revenues decreased significantly
in the first six months of fiscal 1997 to $7.9 million from $17.2 million in the
same period in fiscal 1996. This decrease is primarily attributable to the
fiscal 1996 delivery of systems by Tele Control to several German lottery
contract sites coupled with deliveries by the Company of terminals and parts for
sale to Italy's TOTIP pari-mutuel lottery pool, partially offset by the delivery
of approximately 450 terminals to the Israel lottery in the second quarter of
fiscal 1997.
Gross Profit Analysis
The total gross profits earned by the Company, exclusive of depreciation
and amortization, of $30.7 million for the first six months of fiscal 1997
decreased by $1.2 million, or 4% compared to the first six months of fiscal
1996, principally reflecting delivery by Tele Control of the German lottery
systems during the fiscal 1996 period, partially offset by the second quarter
1997 terminal sale to the Israel lottery, coupled with profit improvements in
the Company's North American pari-mutuel business in fiscal 1997. Gross margins
on equipment sales were 33% in the first six months of 1997 and were comparable
to margins earned in the first six months of fiscal 1996. Gross margins on
service revenues improved to 41% during the first six months of fiscal 1997
compared to 37% for the first six months of 1996 due to higher volumes and
improved margins at Tele Control, which was sold in April 1997.
Expense Analysis
Selling, general and administrative expenses decreased $1.3 million or 8%
to $15.2 million in the first six months of fiscal 1997 from $16.5 million in
the first six months of fiscal 1996 as a result of the sale of CBS in the fourth
quarter of fiscal 1996, the sale of Tele Control in April 1997, and the
continuing effects of the Company's cost containment and reduction programs.
Depreciation and amortization expenses increased 5% to $19.9 million in the
first six months of 1997 compared to $19.0 million in the first six months of
fiscal 1996. The increase is primarily due to Tele Control's investment in its
European lottery software and the Company's other software development programs
in fiscal 1996.
Interest expense decreased slightly in the first six months of 1997
primarily due to higher interest costs under the existing credit agreement
partially offset by reduced borrowings as the result of the asset sales
discussed above and pursuant to scheduled amortization payments.
39
<PAGE> 49
Income Taxes
Income tax expense was $0.5 million in the 1997 period as compared to $1.7
million in the 1996 period. Income tax expense principally reflects foreign tax
expense, since no tax benefit has been recognized on domestic operating losses.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenue Analysis
Revenues increased 15% or $23.0 million to $176.2 million in the fiscal
year ended October 31, 1996 from $153.2 million in fiscal 1995.
Pari-mutuel Operations service revenues of $118.3 million for the fiscal
year ended October 31, 1996 improved $6.5 million or 6% compared to the prior
year principally because of the growth in Handle at Connecticut OTB attributable
to operation of the Sports Haven(R) simulcast/multi-entertainment facility for
the full fiscal year, coupled with higher revenues from the sale of excess
transponder time due to increased signal capacity, as well as increased Handle
at certain North American racetracks. Sales revenues declined $5.4 million to
$10.2 million for the fiscal year ended October 31, 1996 reflecting the decrease
in international equipment sales during the year.
Lottery Operations service revenues were down slightly for the fiscal year
ended October 31, 1996 because of the change in the revenue mix at Tele Control
from primarily service to sales during 1996 coupled with reduced wagering on the
Connecticut State Lottery. Equipment sales improved significantly in fiscal 1996
to $28.3 million from $5.4 million in fiscal 1995. This improvement was
attributable to the delivery of computer equipment by Tele Control to six German
lottery contract sites, as well as the delivery of terminals and parts to
Italy's TOTIP pari-mutuel lottery.
Gross Profit Analysis
Total gross profits earned by the Company, exclusive of depreciation and
amortization, increased $5.7 million, or 10%, to $64.6 million in fiscal 1996 as
compared to $58.9 million in fiscal 1995.
Gross profits earned by the Pari-mutuel Operations of $49.6 million in
fiscal 1996 increased $4.3 million from $45.3 million in fiscal 1995,
principally due to the growth in Handle at Connecticut OTB. Other gross profit
increases resulting from increased North American pari-mutuel and OTB revenues
and higher simulcasting revenues were largely offset by higher expenses at Tele
Control.
Gross profits earned by the Lottery Operations totaled $15.0 million for
fiscal 1996, an increase of $1.4 million compared to fiscal 1995 reflecting the
delivery of equipment by Tele Control and an increase in the number of terminals
delivered to Italy's TOTIP pari-mutuel lottery.
Gross profits on equipment sales were 33% for the year, a significant
improvement over fiscal 1995. Gross margins on services were approximately 38%
for 1996, down 3% from margins earned in fiscal 1995 reflecting the change in
revenue mix at Tele Control.
Expense Analysis
Selling, general and administrative expenses decreased $3.6 million or 10%
to $32.9 million in fiscal 1996 from $36.5 million in fiscal 1995. Expense
reductions resulting from fiscal 1995 restructuring activities and other cost
reduction programs were partially offset by increased expenses for legal
compliance, litigation and compensation costs, and contractual costs incurred
upon the departure of the former President of the Company.
Depreciation and amortization expenses increased 15% to $40.9 million in
fiscal 1996 compared to $35.5 million in fiscal 1995. The increase was primarily
due to capital additions for North America's pari-mutuel video gaming
operations, new terminals and software installed at the Connecticut State
Lottery, investment in
40
<PAGE> 50
Tele Control's lottery software, the January 1995 acquisition by the Company of
simulcasting assets, and the increased investment in the Sports Haven(R)
facility.
Interest expense decreased 9% from $16.4 million in fiscal 1995 to $14.8
million in fiscal 1996 reflecting a $0.3 million increase due to additional
borrowings, and a $0.5 million increase in amortization of deferred financing
costs. These increases were offset by a $0.1 million decrease due to lower
interest rates, and a decrease of $2.3 million due to bank waiver and amendment
fees incurred in fiscal 1995.
Unusual Charges
Unusual charges were recorded in the amount of $1.2 million in fiscal 1996,
partially offset by the reversal of $0.6 million of 1995 restructuring cost
accruals because of the Company's plan to continue limited manufacturing of
wagering terminals at its Ireland manufacturing facility. These charges consist
of (i) $0.6 million recorded as "Other Expenses" for costs incurred in
connection with the Company's proposed but uncompleted third quarter 1996 debt
offering, and (ii) $0.6 million in selling, general and administrative expenses
for contractual payments related to the departure of the former President of the
Company.
Income Taxes
Income tax expense was $2.4 million in the 1996 period compared to an
expense of $2.7 million in the 1995 period. Income tax expense principally
reflects foreign tax expense, since no tax benefit has been recognized on
domestic operating losses.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenue Analysis
Total revenues generated by the Company increased 3% or $4.1 million to
$153.2 million in fiscal 1995 from $149.1 million in fiscal 1994.
Pari-mutuel Operations service revenues increased 38% or $30.7 million to
$111.8 million in fiscal 1995, compared to $81.1 million in fiscal 1994. The
increase in service revenues reflected continued improvement in the Company's
OTB and pari-mutuel wagering businesses, significant growth in the Company's
simulcasting operations, largely reflecting its 1995 simulcasting asset
acquisition, and the acquisition of the French pari-mutuel wagering operations
in November 1994 which contributed $8.7 million to the fiscal 1995 increase.
Pari-mutuel Operations sales revenues increased 32% or $3.7 million to $15.5
million in fiscal 1995 compared to $11.8 million in fiscal 1994 primarily due to
$4.5 million in equipment sales by the Company's French pari-mutuel wagering
operations.
Lottery Operations service revenues increased 17% or $3.0 million to $20.5
million in fiscal 1995 compared to $17.5 million in fiscal 1994 reflecting
improved performance at Tele Control. Offsetting this revenue improvement was a
decrease in sales revenues of $33.3 million from $38.7 million in fiscal 1994 to
$5.4 million in fiscal 1995, largely due to the inclusion in fiscal 1994 of
$25.8 million in revenues attributable to the sale of terminals to Italy's TOTIP
pari-mutuel lottery and $6.3 million in revenues associated with the
commencement of certain international lottery contracts received by Tele
Control.
Gross Profit Analysis
Total gross profits earned on the Company's revenues, exclusive of
depreciation and amortization, increased $13.6 million, or 30%, to $59.0 million
in fiscal 1995 as compared to $45.4 million in fiscal 1994. Excluding 1994
inventory, equipment and contract adjustments of $3.9 million and strike
expenses of $2.8 million, total gross profits increased $6.8 million during the
year.
Gross profits earned by the Pari-mutuel Operations of $45.3 million in
fiscal 1995 increased by $11.9 million from $33.4 million in fiscal 1994,
excluding the effect of the $6.8 million fiscal 1994 inventory, equipment and
contract adjustments and strike expenses, principally due to the first quarter
acquisition of its French pari-mutuel wagering operations which contributed $4.6
million in gross profits. Other increases were
41
<PAGE> 51
realized in simulcasting service revenues, primarily attributable to the
acquisition of the simulcasting assets and improvements for North American
pari-mutuel and OTB businesses.
Gross profits earned by the Lottery Operations totaled $13.7 million for
fiscal 1995, a decrease of $12.6 million compared to fiscal 1994, excluding the
effect of the $7.5 million fiscal 1994 contingent payment made in connection
with the Company's acquisition of Tele Control. Although improvements at Tele
Control resulted in increased gross profits, such profits were only able to
partially offset the decline in profits as a result of the significant reduction
in the number of terminals delivered to Italy's TOTIP pari-mutuel lottery in
1995 as compared to 1994.
Expense Analysis
Selling, general and administrative expenses include marketing, sales,
administrative, engineering and software development, finance, legal and other
expenses. These expenses increased to $36.5 million for fiscal 1995 from $25.3
million in fiscal 1994, an increase of $11.2 million or 44%. Approximately $4.2
million of the increase is due to the acquisition by the Company of its French
pari-mutuel wagering operations. Additional increases in fiscal 1995 selling,
general and administrative expenses primarily reflect increased expenses for
market development, legal and other professional fees, and increased expenses
attributable to expanded simulcasting and Tele Control. Software systems and
product development expenses totaled $2.4 million in fiscal 1995 compared to
$1.4 million in fiscal 1994.
Depreciation and amortization expenses increased 40% to $35.5 million in
fiscal 1995 from $25.4 million in fiscal 1994. The increased depreciation and
amortization was primarily due to the acquisition by the Company of its French
pari-mutuel wagering operations and the acquisition of the simulcasting assets,
capital additions for North American pari-mutuel operations, and increased
amortization attributable to capitalized software systems development costs for
Tele Control's lottery division.
Interest expense increased $10.0 million to $16.4 million in fiscal 1995
compared to $6.4 million in fiscal 1994. The increase primarily reflects
increased borrowings to finance capital additions for North American pari-mutuel
operations, the acquisition by the Company of its French pari-mutuel wagering
operations and the acquisition of simulcasting assets, $2.4 million in 1995
credit agreement fees and other financing costs primarily related to a waiver of
certain financial covenant violations under the existing credit agreement, and
the 1994 capitalization of interest costs on certain capital projects.
Unusual Charges
Unusual charges were recorded in the amount of $20.9 million in fiscal
1995. These charges resulted substantially from the Company's restructuring and
from certain asset valuation adjustments which costs have been allocated to the
Pari-mutuel Operations ($7.5 million) and Lottery Operations ($13.4 million).
The restructuring charges totaled $11.6 million and were attributable to
the closure of the Owings Mills Lottery support facility and the scaling back of
certain international activities, including the planned closing of the Company's
manufacturing facility in Ballymahon, Ireland. The decision to close the
aforementioned facilities resulted in the elimination of approximately 105 full
time positions. The restructuring charge of $11.6 million included $2.0 million
in employee termination benefits; $1.1 million attributable to the cancellation
of certain leasehold contracts; $3.2 million in connection with the write-down
of inventory and equipment previously used in the lottery terminal manufacturing
process including the repayment of certain foreign capital equipment economic
development grants; $4.3 million in capitalized software systems development
costs written-off in connection with the Company's decision to terminate support
for certain of its domestic lottery products and $1.0 million in other
miscellaneous asset valuation adjustments and expenses. The Company estimates
that the restructuring plans will result in annual savings of approximately $5.0
million.
The Company wrote-off $6.6 million relating to certain investments and
other non-current assets principally associated with its Pari-mutuel Operations
which included $2.7 million attributable to the Company's Mexican VGM contracts.
The decision to write-off the Company's investment in Mexican VGM contracts was
based on the continued economic and political turmoil in Mexico which repeatedly
interfered with the Company's ability to complete implementation of the
contracts. Also included in the write-off of investments and other non-current
assets was $2.6 million primarily attributable to lottery terminals, and $1.3
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<PAGE> 52
million attributable to other assets. Technical limitations led to the Company's
re-evaluation of the continued viability of the lottery terminals. The remaining
$2.7 million of unusual charges included miscellaneous asset valuation
adjustments, principally consisting of receivable write-offs of $1.6 million and
severance costs of $0.4 million. In addition, the Company recorded $1.7 million
of unusual charges for bank credit agreement costs primarily relating to a
waiver of certain financial covenants under the Company's existing credit
agreement.
As a result of these charges, the Company anticipates total cash
obligations of approximately $5.9 million, of which $4.3 million was paid
through October 31, 1996 and $0.6 million was reversed because of the Company's
decision to continue limited manufacturing in Ireland. The restructurings were
completed in fiscal 1996 and the Company has satisfied all cash obligations with
respect to the 1995 restructuring charges.
Unusual charges were recorded in the amount of $15.4 million for the
Company's Pari-mutuel Operations in fiscal 1994.
Income Taxes
Income tax expense was $2.7 million in fiscal 1995 as compared to a benefit
of $1.5 million in fiscal 1994. Income tax expense for fiscal 1995 principally
reflects foreign tax expense. Because of the Company's recent history of losses,
no tax benefit has been recognized on fiscal 1995 domestic operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company's available cash and borrowing capacity
totalled $6.8 million as compared to $6.0 million at October 31, 1996. Net cash
provided by operating activities was $9.7 million for the six months ended April
30, 1997. Utilizing $5.0 million of cash provided by operating activities, the
Company invested principally in wagering systems expenditures and software
systems development. The balance of the cash provided by operating activities of
$4.7 million (less the effect of exchange rate changes on cash of $0.3 million)
together with approximately $19.5 million of cash proceeds from the sale of Tele
Control net of contingent payments and the cash balance on hand at Tele Control
at the closing of the sale, $1.0 million of proceeds from the sale of common
stock and $2.4 million of available cash, were used to reduce borrowings by
$26.5 million under the Company's existing credit facility and to repay $0.7
million of other long term debt.
In connection with the issuance of the Old Notes, the Company entered into
the New Credit Agreement, the terms of which are more fully described elsewhere
in this Prospectus. The New Credit Agreement provides, subject to certain terms
and conditions, a $25.0 million, 3.5 year revolving credit facility to the
Company. The New Credit Agreement has no scheduled interim reductions, but
requires, under certain circumstances, mandatory prepayments or commitment
reductions. As of August 22, 1997, the Company had approximately $5.0 million of
outstanding letters of credit, and had approximately $20.0 million available,
under the New Credit Agreement. Borrowings under the New Credit Agreement, as
well as the incurrence of other Indebtedness of the Company, are subject to
compliance with certain conditions, including the maintenance of certain
financial ratios. See "Description of New Credit Agreement."
The Company believes that, although it will incur net losses in fiscal 1997
and 1998, its present cash resources, after completion of the issuance of the
Old Notes and the application of the proceeds therefrom, anticipated cash flows
from operations and available borrowings under the New Credit Agreement will
provide sufficient liquidity to meet scheduled interest payments and anticipated
capital expenditures during the next twelve months. The Company believes,
however, that additional financing will be required for capital requirements
thereafter and to enable it to meet its debt service obligations, including
principal payments under the Notes, the New Credit Agreement and the
Subordinated Debentures.
During fiscal 1996, the Company generated net cash of $21.3 million which
were reduced by unusual payments of $2.5 million under the terms of the
litigation settlement discussed in Note 16 to the Consolidated Financial
Statements and $3.9 million in connection with the Company's fiscal 1995
restructuring, resulting in net cash provided by operating activities of $14.9
million. At October 31, 1996, the Company had cash and cash equivalents of $6.0
million as compared to $5.0 million at October 31, 1995.
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<PAGE> 53
Net cash used in investing activities was $7.9 million in fiscal 1996.
Utilizing cash provided by operating activities, the Company invested in
contract expenditures and software systems development costs. Additionally, the
Company received approximately $1.0 million from the sale/leaseback of its
administration and development facility in Newark, Delaware and approximately
$3.0 million from the sale of CBS in October 1996. The net proceeds from these
transactions were used to reduce bank debt.
In fiscal 1996, net cash used by financing activities consisted primarily
of borrowings of $2.6 million under the Company's existing credit agreement and
repayments of $10.8 million. Additionally, under an agreement with the holders
of its Subordinated Debentures, the Company issued 936,369 unregistered shares
of Class A Common Stock in lieu of making cash interest payments in August 1995
and February 1996. The Company also borrowed funds under terms of the litigation
settlement.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This pronouncement permits the Company to choose
either a new fair value based method or the current Accounting Principles Board
opinion 25 intrinsic value based method of accounting for its stock based
compensation arrangements. The Company intends to retain the intrinsic value
based method of accounting for its stock based compensation arrangements and
provide the footnote disclosures as required by SFAS No. 123 in fiscal 1997.
Consequently, implementation of this pronouncement will not impact the Company's
financial position or results of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). This statement simplifies
the standards for computing earnings per share ("EPS") and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement of all entities with complex capital
structures. SFAS 128 also requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Since the Company has experienced net losses in each quarter of fiscal 1996
and in the first and second quarters of fiscal 1997, stock options and stock
warrants are anti-dilutive. Therefore, they have been and would continue to be
excluded from the denominator of the earnings per common share calculation as
reported in the accompanying financial statements and as contemplated under SFAS
128. Earnings per common share in the second quarter and first six months of
fiscal 1996 and 1997 as computed under SFAS 128 are thus equal to basic earnings
per share as presented in the accompanying financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 establishes standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS 131 requires
that companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance. SFAS 130
and 131 are effective for fiscal 1998. Adoption of these standards is expected
to result in additional disclosures, but will not have an effect on the
Company's financial position or results of operations.
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<PAGE> 54
BUSINESS
RECENT DEVELOPMENTS
On August 25, 1997, the Company announced its results for its third fiscal
quarter and nine months ended July 31, 1997. Revenues were $35.8 million for the
third quarter of fiscal 1997 compared to $41.8 million in the third quarter of
fiscal 1996. The decrease is primarily a result of the sales of the CBS and Tele
Control businesses in October 1996 and April 1997, respectively. The Company
reported a net loss of $2.1 million for the third quarter of fiscal 1997
(including a $1.6 million gain from the sale of Tele Control) compared to a net
loss of $7.8 million for the third quarter of fiscal 1996. For the nine months
ended July 31, 1997, the Company reported revenues of $113.3 million compared to
$130.9 million for the same period of fiscal 1996. The Company reduced its net
loss for the nine months ended July 31, 1997 to $14.3 million (including a $1.8
million gain from the sale of Tele Control) from a net loss of $27.5 million for
the same period of fiscal 1996.
THE COMPANY
The Company is the leading provider of computerized pari-mutuel wagering
systems to the North American Racing Industry and is the exclusive licensed
operator of substantially all OTBs in the State of Connecticut. The Company is
also a leading provider of computerized pari-mutuel systems worldwide, with
systems in racetracks and OTBs in Europe, Central and South America, and
Asia-Pacific. The Company believes its pari-mutuel wagering systems processed
approximately 65% of the estimated $20 billion of North American Racing Industry
Handle in 1996. The Company owns over 22,000 pari-mutuel wagering terminals in
use throughout North America. In addition, the Company is the leading provider
of Racing Industry simulcasting services in the United States through its
broadcasting of live racing events via satellite to other racetracks and OTBs.
The Company also currently provides technologically advanced VGMs to the North
American Racing Industry for use at racetracks. Further, the Company provides
lottery systems and equipment both in the United States and internationally. For
the twelve months ended April 30, 1997, the Company generated Pro Forma
operating revenues and Pro Forma Adjusted EBITDA (as defined herein) of $148.8
million and $28.3 million, respectively.
The Company's proprietary pari-mutuel wagering systems process the sale and
cashing of wagers through ticket-issuing terminals, accumulate wagering data,
calculate pari-mutuel odds, distribute information to display systems and
provide management information and marketing services for its customers. The
wagering systems utilize high-volume, real-time transaction and data processing
networks, managed by central computers, communications equipment, special
purpose microcomputer-based terminals, peripheral and display equipment, and
operations and applications software. Revenues received by the Company for
providing and operating its pari-mutuel wagering systems in North America
generally range up to approximately 0.55% of the Handle on a particular event
with a weighted average of approximately 0.35% of the Handle. In Connecticut,
where the Company owns and operates the Connecticut OTB, it retains from 15% to
25% of the Handle. In addition, the Company receives daily or monthly fees from
its Racing Industry customers for the provision of simulcasting services and the
use of certain Company-owned pari-mutuel equipment.
Favorable changes in pari-mutuel wagering and simulcasting laws in various
states and the expanded use of simulcasting and telecommunications technology in
the North American Racing Industry have contributed significantly to the growth
in OTB, telephone and "intertrack" wagering (wagering on location at one
racetrack on races held at other racetracks). The Company's systems process
wagers at approximately 100 racetracks in North America, including 10 of the 15
largest racetracks, and at over 800 OTBs. The Company believes racing events
held at the largest racetracks in North America, most of which utilize the
Company's pari-mutuel wagering systems, have generated the most significant
growth in OTB and intertrack wagering. The percentage of total Racing Industry
Handle in North America generated by the top 15 racetracks, as measured by
annual aggregate Handle, increased from approximately 32% in 1992 to
approximately 42% in 1995 and total Handle generated by these racetracks grew at
a compound annual growth rate of approximately 9% from $6.2 billion in 1992 to
$8.2 billion in 1995.
The growth in OTB, telephone and intertrack wagering, together with the
Company's extensive penetration of the North American pari-mutuel wagering
market, have enabled the Company to generate increased revenues. The Company has
achieved this because it (i) is the leading provider of pari-mutuel
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<PAGE> 55
wagering systems to the leading racetracks whose live racing events are in the
greatest demand for off-track wagering, (ii) is a leading provider of
computerized pari-mutuel wagering systems and automated telephone betting
equipment to OTBs and racetracks accepting wagers on simulcasted racing events,
(iii) is the leading simulcaster of live horse and greyhound racing and jai alai
events to racing facilities, OTBs and casinos in North America, and (iv) owns
the Connecticut OTB, including the Bradley Teletheater and Sports Haven(R)
entertainment complexes and nine other OTB locations, which accepts wagers on
racing events at more than 30 racetracks throughout North America and which
processed approximately $197 million in Handle in fiscal 1996. The Company
believes that it will realize additional benefits to the extent that states
enact further legislation which facilitates growth in OTB, telephone and
intertrack wagering.
The Company's lottery operations (i) provide wagering equipment and
services to operate the Connecticut State Lottery under an exclusive
full-service facilities management contract, (ii) provide support and
maintenance services for on-line lotteries, including government authorized
lotteries in Israel and Italy and (iii) market new wagering systems and
equipment to other on-line lotteries. The Company's ten year contract to operate
the Connecticut State Lottery is scheduled to expire in May 1998. The Company
plans to participate in the bidding process with respect to the renewal of such
contract. The Company's Connecticut lottery operations represented approximately
5% of the Company's Pro Forma Adjusted EBITDA for the twelve months ended April
30, 1997.
OPERATING STRENGTHS
The Company believes its principal operating strengths are:
- SUBSTANTIAL MARKET PRESENCE. The Company is the leading provider and
operator of computerized pari-mutuel wagering systems, simulcasting
services and related services and equipment to the North American Racing
Industry and is one of the leading providers of computerized pari-mutuel
wagering systems worldwide. The Company believes that its share of the
estimated total North American Racing Industry Handle increased to
approximately 65% in 1996, from less than 30% in 1990. Moreover, the
Company's market presence is concentrated in the larger racetracks and
OTBs which have experienced, and which the Company believes will continue
to experience, the largest growth in Handle. The Company believes it is
well positioned to participate in the continued growth of OTB, telephone
and intertrack wagering and race simulcasting.
- SUBSTANTIAL RECURRING REVENUES. The Company typically provides its
computerized pari-mutuel wagering systems and simulcasting services to its
Racing Industry customers pursuant to long-term contracts. In addition,
the Company owns and operates the Connecticut OTB. Historically, these
businesses have contributed a significant portion to the Company's total
annual operating revenues and cash flow and accounted for approximately
80% of Pro Forma operating revenues and approximately 84% of Pro Forma
Adjusted EBITDA for the twelve months ended April 30, 1997. In such
period, the Company's pari-mutuel wagering systems and simulcasting
services and the Company's Connecticut OTB operations generated
approximately 51% and 29%, respectively, of Pro Forma operating revenues
and approximately 57% and 27%, respectively, of Pro Forma Adjusted EBITDA.
The Pro Forma Adjusted EBITDA contribution of these businesses has grown
significantly from $10.7 million in fiscal 1994 to $24.0 million in the
twelve months ended April 30, 1997. As a result of its contractual
arrangements and the relative historic stability of the North American
Racing Industry Handle, the Company believes that these revenues can be
characterized as recurring.
- FULL-SERVICE SUPPLIER OF SYSTEMS AND SERVICES TO THE RACING
INDUSTRY. The Company's pari-mutuel wagering systems process, account for
and display all of a racetrack customer's wagering activity and
disseminate that information on a real-time basis to other racetracks and
OTBs. The Company's simulcasting services provide the satellite technology
and broadcast transmissions which enable racetracks to distribute their
product to other wagering locations, thereby expanding the racetrack's
access to potential wagers. Further, operating the Connecticut OTB, with
11 locations (including two simulcasting and entertainment complexes),
provides a captive end-use market into which the Company can offer
broadcast transmissions from racetrack customers. The Company believes
that its ability to provide its customers with these integrated services
and its experience in installing and
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operating large scale pari-mutuel wagering systems and networks represent
a significant competitive advantage.
- ESTABLISHED PARI-MUTUEL WAGERING NETWORKS. The Company has invested over
$100 million since 1993 to develop, build and install state-of-the-art,
pari-mutuel wagering networks and simulcasting systems throughout North
America. These networks link multiple racetracks and OTBs to one another
via dedicated, high-speed communications channels, using centralized
processing centers to provide services for the entire network. Further,
the Company's systems enable multiple networks to communicate with each
other and with stand-alone facilities, thereby increasing wagering
opportunities at racetracks and OTBs. The Company believes that these
established networks afford the Company a competitive advantage in
maintaining and expanding its customer base by (i) creating operating
efficiencies for its customers who benefit from the cost-effective
centralized nature of the network systems and (ii) increasing OTB and
intertrack wagering which generates increased Handle for the Company's
racetrack customers. These networks provide an additional competitive
advantage to the Company by enabling the Company to spread the cost of its
terminals and centralized processing centers among many of its customers
thereby creating significant economies of scale. The Company believes a
competitor of the Company seeking to provide substitute services to an
individual customer would need to (i) incur significant expenditures in
providing the necessary terminals to such customer and (ii) have a
significant base of existing customers over which to spread its processing
costs in order to provide such services on a cost-effective basis. The
Company currently operates regional networks in California, Connecticut,
Florida, Illinois, Louisiana, Michigan, New Jersey, New York, Oregon,
Pennsylvania, Washington, West Virginia, Puerto Rico, Alberta, British
Columbia and Ontario, including a network in Southern California linking
approximately 2,700 terminals at 5 racetracks and 13 OTBs and a network
linking all of the casinos in Atlantic City that accept pari-mutuel
wagers. In addition, as a result of the Company's substantial investment,
the Company believes its future capital expenditures in support of these
networks will be significantly lower than they have been in the past.
- SUPERIOR PRODUCT TECHNOLOGY. The Company believes that it is the
technological leader in introducing computerized pari-mutuel wagering
systems and related equipment, including (i) the Probe terminal product
line, which was the first to offer the versatility of teller operation and
self-service capabilities in the same unit, and when combined with the
Company's stand-alone self-service units results in increased percentages
of racetrack Handle being generated by self-service (at some tracks over
50%), thereby resulting in substantial labor savings for the Company's
customers; (ii) phone betting and interactive voice response wagering
products, which provide end-users the ability to wager from remote
locations; (iii) VGMs which combine full gaming functionality, such as
video poker, blackjack, spinning reels and keno, with full race betting
functionality and picture-in-picture capabilities, providing multiple
opportunities for revenue generation at racetracks where VGM wagering is
permitted; (iv) digital compression in Racing Industry simulcasting which
enables more efficient use of transponder capacity and improved picture;
and (v) hand held mobile terminals which allow a racetrack representative
to bring the terminal to the patron, thereby facilitating wagering
throughout a racetrack or fronton. The Company believes that these
technological innovations afford it with a competitive advantage and have
contributed to the increase in the amount of North American Racing
Industry Handle the Company processes.
BUSINESS STRATEGY
The Company's business strategy over the past several years has been to
refocus its activities on its core businesses, which generate recurring revenues
rather than one-time equipment sales, and to reduce its operating expenses.
- FOCUS ON CORE BUSINESSES. The Company's strategy is to focus its efforts
on its core businesses which include its pari-mutuel wagering operations,
the Connecticut OTB operations, its simulcasting services, and its
domestic lottery business. To achieve more stable operating performance,
the Company has, among other things, de-emphasized its reliance on
one-time equipment sales and emphasized long-term international service
contracts generating recurring revenues. To reduce operating costs, the
Company closed its Delaware terminal manufacturing operations and
substantially decreased its
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terminal manufacturing operations in its Irish manufacturing plant.
Consistent with this strategy, the Company also (i) in October 1996, sold
CBS, a company engaged primarily in the sale of equipment for casino/race
and sports wagering in Nevada, for approximately $3.0 million, and (ii)
in April 1997, sold Tele Control, a company principally engaged in the
provision of lottery systems software and equipment in Europe, for
approximately $26.6 million. The proceeds from the sale of these
businesses were used to reduce the Company's outstanding indebtedness.
- REDUCE OPERATING EXPENSES. The Company intends to continue its strategy
of reducing operating costs, enhancing operating efficiency and improving
profitability. Over the last three years, the Company has decreased its
reliance on equipment sales and realigned its cost structure to reflect
its recurring revenues business strategy, including the elimination of 143
employees relating to the reduction of manufacturing operations in
Delaware and Ireland. In addition, the Company substantially reduced its
marketing and development activities for its domestic lottery business,
eliminating an additional 51 employees. Other initiatives taken by the
Company include a program to substantially reduce its consumption of
paper, the second largest expense item in its pari-mutuel wagering
operations. As a result of its refocused business strategy and reductions
in operating expenses, the Company has experienced substantial improvement
in operating cash flow and margins as depicted in the table below:
<TABLE>
<CAPTION>
FISCAL YEARS TWELVE
ENDED MONTHS ENDED
OCTOBER 31, APRIL 30,
----------------- ------------
1995 1996 1997
------ ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Pro Forma Operating Revenues................ $133.3 $144.9 $148.8
Pro Forma Adjusted EBITDA................... 16.7 25.4 28.3
Pro Forma Adjusted EBITDA Margin............ 12.5% 17.6% 19.0%
</TABLE>
- CAPITALIZE ON THE STRENGTH OF PARI-MUTUEL OPERATIONS. The Company seeks
to increase its share of the North American Racing Industry Handle and
enhance its position with the major racetracks and OTBs by continuing to
develop or introduce a complement of innovative and value-added products
and services, such as (i) sophisticated networking, information and
communication systems, (ii) simulcasting services, and (iii) advanced
integrated VGM applications. The Company is the only participant in the
North American Racing Industry which offers all of these services. The
Company also intends to pursue opportunities to manage additional wagering
venues such as OTBs and racetracks.
- PURSUE INTERNATIONAL GROWTH OPPORTUNITIES. The Company believes
significant opportunities exist for it to provide its pari-mutuel systems
in international markets that have substantial volumes of legalized
wagering but lack sophisticated automated wagering technology. The Company
intends to market its systems and services under long-term contracts
designed to increase recurring revenue. In addition, the Company is
engaged in discussions with racetracks in more established international
markets to (i) introduce simulcasting services within those markets and
(ii) broadcast North American racing events internationally. The Company
believes these initiatives should increase the Racing Industry Handle and
strengthen the Company's position as a leading provider of pari-mutuel
wagering systems and simulcasting services to the Racing Industry.
INDUSTRY OVERVIEW
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.
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.
Despite the relative stability of total Racing Industry Handle from 1992 to
1995, OTB, telephone and intertrack wagering have experienced significant
growth. This growth has been driven primarily by the expanded use of
simulcasting and telecommunications technology in the North American Racing
Industry, and by favorable changes in pari-mutuel wagering and simulcasting laws
in various states. The Company has benefitted from this growth trend as it
processes a majority of the OTB and intertrack Handle in North
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America and is the leading provider of simulcasting services in the United
States. Further, the growth in the OTB, telephone and intertrack wagering has
had the greatest impact at the largest racetracks in North America, which offer
the most popular racing product (predominantly thoroughbred racing) and usually
the largest pari-mutuel pools. The percentage of total North American Racing
Industry Handle generated by the top 15 racetracks, as measured by annual
aggregate Handle, increased from approximately 32% in 1992 to approximately 42%
in 1995 and total Handle generated by these racetracks grew at a compound annual
growth rate of approximately 9% from $6.2 billion in 1992 to $8.2 billion in
1995. The thoroughbred segment of the U.S. Racing Industry contributed
significantly to this increase, growing from $9.6 billion of Handle in 1992 to
$11.6 billion of Handle in 1996, a compound annual growth rate of approximately
5%.
TOP 15 RACETRACKS RANKED BY 1995 ANNUAL HANDLE(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL ANNUAL AVERAGE DAILY COMPOUND ANNUAL
HANDLE HANDLE(2) GROWTH RATE IN
------------ ------------------- AVERAGE DAILY
1995 1992 1995 HANDLE (%)
------------ ------ -------- ---------------
<S> <C> <C> <C> <C>
Santa Anita*................................ $1,309,397 $7,296 $10,912 14.4%
Belmont Park*............................... 1,005,948 7,078 9,314 9.6
Hollywood Park*............................. 990,667 6,768 10,213 14.7
Aqueduct*................................... 681,028 6,723 5,239 (8.0)
Gulfstream.................................. 513,949 2,541 8,158 47.5
Del Mar*.................................... 484,348 7,699 11,264 13.5
Calder...................................... 447,384 1,503 2,586 19.8
Saratoga*................................... 384,770 9,809 11,317 4.9
Churchill................................... 371,101 2,279 5,015 30.1
Laurel Park................................. 352,433 1,436 2,245 16.1
Golden Gate*................................ 344,736 2,874 3,024 1.7
Woodbine*................................... 325,664 2,279 1,714 (9.1)
Bay Meadows*................................ 319,640 2,565 2,779 2.7
Turfway Park................................ 318,975 1,577 2,981 23.7
Hawthorne*.................................. 317,594 2,229 3,490 16.1
----------
Top 15 Racetracks................. $8,167,634
==========
</TABLE>
- ---------------
* Company customer
TOTAL HANDLE GROWTH OF TOP 15 RACETRACKS(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
TOTAL ANNUAL HANDLE GROWTH RATE IN
--------------------------- TOTAL ANNUAL
1992 1995 HANDLE (%)
----------- ----------- ---------------
<S> <C> <C> <C>
Top 15 Racetracks................................ $ 6,240,075 $ 8,167,634 9.4%
Racing Industry(2)............................... 19,668,317 19,522,688 --
Percentage of Total Racing Industry Handle
Generated by Top 15 Racetracks................. 31.7% 41.8% N/A
</TABLE>
- ---------------
(1) Includes on-track, intertrack and off-track Handle.
(2) Total Racing Industry Handle, excluding Mexico.
Sources: Daily Racing Form, April 1994 and April 1996. Association of Racing
Commissioners International, Inc. 1992 and 1995 Pari-mutuel Racing
Statistical Summary.
49
<PAGE> 59
The following table sets forth the U.S. thoroughbred pari-mutuel Handle for
each of the years from 1992 through 1996.
U.S. THOROUGHBRED PARI-MUTUEL HANDLE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Thoroughbred
Handle.......... $9,638,864 $9,600,545 $9,897,029 $10,428,822 $11,627,000
</TABLE>
- ---------------
Sources: The Jockey Club's(R) 1997 Fact Book, Equibase, Daily Racing Form,
Association of Racing Commissioners International, Inc.
PARI-MUTUEL OPERATIONS
North American Wagering Systems
The Company's wagering systems and/or related equipment process wagers at
approximately 100 racetracks in North America, including 10 of the top 15
largest racetracks in 1995, and at over 800 OTBs. In North America, the
Company's customers typically enter into five-year service contracts pursuant to
which the Company provides the pari-mutuel wagering system, as well as the
operations, maintenance and supervisory personnel necessary to operate the
pari-mutuel wagering system. The Company maintains ownership of the pari-mutuel
wagering systems which enables it to employ such equipment in more than one
racetrack at different times during the year.
The pari-mutuel wagering systems provided by the Company in North America
typically include the terminals that issue the wagering tickets, the central
processing unit which calculates the betting odds of a particular event and
tabulates and accounts for the Handle, the display board which indicates the
betting odds of a particular event and the communication equipment necessary for
additional wagering from sources outside the wagering facility. The systems
utilize high volume, real-time transaction and data processing networks managed
by central computers, communications equipment, special purpose
microcomputer-based terminals, peripheral and display equipment and operations
and applications software. The type of central processing unit and the number of
ticket issuing terminals used in a system are generally determined by the amount
of wagering at, and physical layout of, the facility. 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 generally range up to
approximately 0.55% of the Handle on a particular event (with a weighted average
of approximately 0.35% of the Handle), subject in many instances to minimum fees
which are usually exceeded under normal operating conditions. Minimum fees under
the Company's service contracts are generally based on the number of days the
facility operates, as well as other factors, including the type of system and
number of teller operated terminals installed at the facility.
In addition to payments received for wagering which takes place at a
location where the Company operates a wagering system, the Company also
typically receives an "Interface Fee" of 0.125% for wagers that are made from
remote sites on a race that is occurring at a racetrack where the Company
operates the wagering system. This Interface Fee is charged and typically
collected from the remote site where the wager is placed whether or not such
site is a customer of the Company. As intertrack and off-track wagering has
increased, the percentage of total North American Racing Industry Handle on
which Interface Fees are charged has grown.
In recent years, the Company has focused on the creation of regional
networks of large and medium sized racetracks, 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
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<PAGE> 60
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% of the estimated total North American Racing
Industry Handle 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 in regions where such networks
exist because of the Company's ability to offer customers greater services more
efficiently than its competitors. The Company currently operates its regional
pari-mutuel wagering networks in California, Connecticut, Florida, Illinois,
Louisiana, Michigan, New Jersey, New York, Oregon, Pennsylvania, Washington,
West Virginia, Puerto Rico, Alberta, British Columbia and Ontario.
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 all of the casinos in Atlantic City that offer their patrons the opportunity
to make wagers on racing events. Services provided to these casinos are similar
to those provided directly to OTBs.
In its service contracts, the Company makes certain warranties regarding
the operation, performance, implementation and reliability of its wagering
systems relating to, among other things, data accuracy, repairs and validation
procedures. The Company's warranties in its wagering systems contracts are
negotiated, and accordingly vary on a case-by-case basis.
Connecticut OTB
In 1993, the Company purchased from the State of Connecticut the exclusive
right to operate substantially all off-track betting within the state. Since the
Company commenced operating the Connecticut OTB, it has implemented several
important product and service enhancements, including expanded simulcasting from
racetracks across the country, common pool wagering, seven day per week
operations at seven locations and expanded telephone betting. These improvements
have helped increase the Connecticut OTB Handle from approximately $133 million
in fiscal 1993, when the State of Connecticut last operated the Connecticut OTB,
to approximately $197 million in fiscal 1996. The Company believes its expertise
developed in operating the Connecticut OTB provides it with a competitive
advantage in obtaining future OTBs through privatization. The Company currently
operates 11 Connecticut OTB locations statewide, including two simulcasting
teletheaters in New Haven and Windsor Locks and a telephone account betting
operation in New Haven. The Company's approximately 39,000 square foot Bradley
Teletheater in Windsor Locks features simulcasts of racing events, dining
facilities and other services. During fiscal 1995, the Company opened the
approximately 55,000 square feet New Haven sports, simulcasting and
entertainment complex called Sports Haven(R) which features pari-mutuel wagering
on thoroughbred, harness, greyhound and jai alai events shown live on large
screens and televisions throughout the facility. Since its opening, wagering in
New Haven has increased from approximately $35.0 million to $52.0 million
annually.
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 3.5% of all monies wagered. The percentage of the total
Handle which the Company may receive as the operating revenues from the
Connecticut OTB is determined by the track where the event is held and ranges
from 15% to 25%, depending on the racetrack and type of wagers.
The Company believes operation of the Connecticut OTB further strengthens
its competitive position in attracting certain new racetrack customers to the
extent that the Connecticut OTB does not already accept wagers for such
racetrack's racing events. The Company can enhance a proposal for its services
by offering the racetrack the opportunity to have its racing events wagered upon
at the Connecticut OTB. In return, racetracks generally receive between 3% and
6% of pari-mutuel wagers as a payment.
In 1996, the Company received legislative approval to expand its operations
to seven days a week subject to local approval. Currently seven Connecticut OTB
locations operate seven days a week. In June 1997, the
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State of Connecticut passed legislation authorizing the Company to simulcast
live racing events in up to six locations. Currently, the Company simulcasts at
its Bradley Teletheater and Sports Haven(R) locations and intends to simulcast
to four additional locations as permitted by such legislation. Such legislation
also authorized racetracks and jai alai frontons within Connecticut to retain a
larger portion of the Handle from pari-mutuel pools. The Connecticut OTB
typically retains the same amount as the racetrack or fronton where the event is
held. As a result, the Company believes that, to the extent that the racetracks
and jai alai frontons increase the amounts that they retain, the Company's gross
profit will be positively affected. During fiscal 1996, the Company estimates
that patrons wagered approximately $45 million at the Connecticut OTB on races
and jai alai events which took place within Connecticut.
Simulcasting Systems
The Company is the leading simulcaster of live horse and greyhound racing
and jai alai events to racing facilities, OTBs and casinos in North America. The
Company simulcasts racing events from over 40 racetracks and jai alai frontons
to over 150 racetracks and over 750 OTBs throughout North America.
Simulcasting is the process of transmitting the audio and/or video signal
of a live racing event from one facility to a satellite for reception by
wagering locations across the country. Simulcasting provides racetracks the
opportunity to increase revenues by sending their signals to as many wagering
locations as possible, such as other racetracks, OTBs and casinos. Sending live
audio and video broadcasts of remote racing events generates increased revenues
for the Company and its customers by (i) increasing the consumer base for the
remote events and (ii) maximizing the number of events available to a patron for
wagering by utilizing idle time between races at racetracks to broadcast remote
events.
In its simulcasting operations, the Company leases satellite transponders
and uses digital compression technology to increase the number of events which
may be simulcasted at one time. The Company also owns vehicles which uplink the
video and audio signals of racetrack and jai alai events to Company controlled
satellite transponders and owns decoders which are used by OTBs and intertrack
wagering facilities to unscramble the transmission signal from other racetracks.
In general, the Company receives fees as follows: (i) a daily fee charged to
racetracks for the broadcast transmission services, including the uplink
vehicle, operator and the use of satellite time controlled by the Company; and
(ii) a fee charged to receiving sites for the use of the Company's decoders to
unscramble the transmission feed of other racetracks. In addition, the Company
often sells excess satellite transponder capacity to other users of satellite
communications outside the Racing Industry. From time to time, the Company sells
such excess capacity under long-term contracts. See "Risk Factors--Reliance on
Suppliers, Contract Manufacturers and Simulcast Systems."
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 $10.4 million in service 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 communication standards and other key
elements. The sale of a pari-mutuel wagering system includes a license for use
of the Company's proprietary system software, as well as technical assistance,
support, accessories and spare parts. The Company's personnel participate in the
installation and then train the customer's personnel. The Company has sold its
systems in approximately 25 countries.
Video Gaming
The Company has developed a proprietary line of VGMs, which combine full
gaming functionality, such as video poker, blackjack, spinning reels and keno,
with full race betting functionality and picture-in-picture
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capabilities, providing multiple opportunities for revenue generation at
racetracks where VGM wagering is permitted. The Company's latest VGM 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 VGMs if video gaming is approved in more racetracks across the country. The
Company has also sold VGMs to the Manitoba Lottery Commission.
Casino/Race and Sports Wagering
In October 1996, the Company sold CBS, its casino/race and sports wagering
service business which provided sports wagering systems to 107 of the 113
casinos in Nevada and to the leading operator of sports wagering facilities in
Mexico. Under the terms of the sale and related agreements, the Company retained
the right to continue, and has continued, serving one customer in Mexico. The
Company has since decided to discontinue the provision of services to such
customer and is seeking to terminate its existing contract. Through a
distributor affiliated with the purchaser of CBS, the Company expects to
continue to provide pari-mutuel wagering terminals and parts to the casinos and
sports wagering facilities that generally use systems manufactured by the
Company. See "Risk Factors--Impact of Government Regulation."
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. Lottery systems are required to
process very large transaction volumes. Such high performance requirements
dictate the need for sophisticated software applications that necessitate
expertise in software engineering and development. In the United States, the
Company's primary focus is operating the Connecticut Lottery. Internationally,
the Company has provided central processing systems and/or terminals to
lotteries in Israel and Italy. The Company has previously provided 14,000
terminals for Italy's TOTIP pari-mutuel lottery, a nationwide lottery based on
horse racing, 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 of
3,100 terminals while retaining title to the equipment. The Company has
installed its latest generation lottery system, utilizing its UNIX-based central
system, which features open system architecture and symmetrical multiprocessors,
at the Connecticut State Lottery. Revenues received by the Company from its
operation of the Connecticut State Lottery are based on a percentage of amounts
wagered in the lottery. The Company's ten year contract to operate the
Connecticut State Lottery expires in May 1998. The Company plans to participate
in the bidding process with respect to the renewal of such contract if such
contract is not extended. The Company also provides technical support services
to the Massachusetts State Lottery and since July 1996 has provided services for
a multi-state lottery game known as the "Big Game." The Company anticipates that
the provision of these services will be terminated by the end of 1997. The
Company believes that the loss of this business will not have a material adverse
effect on its results of operations.
The Company's lottery products consist primarily of central processing
systems, including data communication networks, and on-line and on-line/off-line
computer-based lottery terminals. The lottery management system portion of the
product includes a lottery administration client-server network and relational
database. Lottery terminals are generally on-line to the central system via
telephone lines connected to the system's
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communication front-end processors. The Company's technology includes "open
system" architecture permitting rapid new game development and portability of
software to numerous general-purpose computer platforms.
Sale of Tele Control
On April 15, 1997, the Company completed the sale of Tele Control for cash
consideration of approximately $25 million plus an upward adjustment of
approximately $1.6 million based upon a balance sheet of Tele Control prepared
as of such date. In addition, the Company provided the purchaser with a letter
of credit in the amount of $2.5 million to secure certain obligations of the
Company under the sale agreement. The letter of credit reduces to zero in
accordance with a schedule on specified dates through October 1998.
Under the terms of the sale, the purchaser will have the right to license
and purchase the Company's terminals for use in lottery applications. Currently
neither Tele Control nor the purchaser has on-line lottery wagering terminals.
Also under the agreement, the purchaser will have the right of first refusal to
purchase the Company's remaining lottery business. The Company, however,
currently has no plans to sell this business and remains committed to serving
the North American lottery market and its existing customers.
In connection with the sale of Tele Control, the Company agreed not to
compete for three years in the on-line lottery business outside of the United
States and Canada except with respect to (a) existing customers (including
customers in Israel and Italy) not served by Tele Control and (b) certain
identified proposed customers of the Company. The non-competition covenants do
not apply to the Company's right to sell certain terminals for lottery
applications anywhere, except to existing customers of Tele Control.
CONTRACT PROCUREMENT
Contract awards to horse and greyhound racetracks, OTBs and casino/sports
wagering facilities and from state and foreign governments often involve a
lengthy competitive bid process, spanning from specification development to
contract negotiation and award. Contracts have a high dollar value and are
technically and commercially complex and may require substantial initial cash
outlays. Start up costs associated with contract awards typically involve
expenditures for items such as software development/customization, assembly of
wagering systems, and installation costs including electrical and carpentry
work, transportation and placement of equipment, and system implementation. Such
costs are primarily comprised of labor related expenses due to the relative
magnitude of software development and customization in the start up phase. In
the United States, lottery authorities generally commence the contract award
process by issuing a request for proposals inviting bids and proposals from
various lottery vendors. Internationally, lottery authorities do not typically
utilize such a formal bidding process, but rather negotiate proposals with one
or more potential vendors.
The Company's contracts for the provision of pari-mutuel services are
typically for terms of five years. Contracts representing 1%, 22%, 21%, and 8%
of the Company's annual pari-mutuel service revenues are scheduled to expire in
fiscal years 1997, 1998, 1999 and 2000, respectively. The Company currently has
signed letters of intent with certain of its customers (subject to certain
conditions) with respect to the renewal of their contracts. If these letters of
intent result in definitive agreements, the percentage of revenues represented
by expiring contracts in fiscal year 1998 would decrease from 22% to 14%. In
addition, the Company's ten-year contract to operate the Connecticut State
Lottery expires in May 1998. The Company historically has been successful in
renewing its largest contracts as they have come due for renewal. However, there
can be no assurance that the Company will be able to renew a substantial number
of pari-mutuel systems operating contracts with its largest customers or its
lottery contract with the State of Connecticut, and, if it is unable to do so,
there would be a material adverse effect on the Company.
SERVICE AND SUPPORT
The Company's staff of approximately 485 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.
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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 40 people in connection with software, engineering and product
development.
INTELLECTUAL PROPERTY
The Company maintains patent protection on certain of its pari-mutuel
wagering and lottery products and has a number of registered trademarks and
other common law trademark rights for certain of its products. The software and
control systems for the Company's wagering systems are also protected by
copyright and/or trade secret laws.
PRODUCTION PROCESSES; SOURCES AND AVAILABILITY OF COMPONENTS
Production of the Company's wagering systems and component products
primarily involves the assembly of electronic components into more complex
systems and products. In 1995, the Company sold its Newark, Delaware
manufacturing facility and in 1997 began limited terminal assembly in part of
its Newark, Delaware administration and development facility. In addition,
limited production of certain product lines is performed at the Company's
manufacturing facility in Ballymahon, Ireland. 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
90 days. The Company believes that this is consistent with its competitors' lead
times and is also consistent with the needs of its customers.
COMPETITION
A significant portion of the Company's revenues are generated from
pari-mutuel wagering on racing events at racetracks and OTBs. The market for
pari-mutuel wagering is competitive, and certain of the Company's competitors
may have substantially greater financial and other resources than the Company.
The Company competes primarily on the basis of design, performance, reliability
and pricing of its products as well as customer service. To effectively compete,
the Company expects to make continued investments in product development and/or
acquisitions of technology. As new wagering products are developed, the Racing
Industry may experience increased competition for wagers. Competition in the
simulcasting business in North America currently is fragmented. Other than the
Company, only Roberts Television International, Inc. has achieved a significant
share of the market. Competition for wagers also comes from casino gaming, which
has continued to expand, and other forms of legal and illegal gambling.
The Company's two principal competitors in the North American pari-mutuel
wagering systems business are Video Lottery Technologies, Inc. ("VLTI"), which
operates its pari-mutuel wagering systems business through its subsidiary United
Wagering Systems, Inc., and AmTote International, Inc. VLTI offers video gaming
terminals to the pari-mutuel wagering industry. Other video gaming industry
terminal suppliers include International Game Technology, WMS Industries Inc.,
Alliance Gaming, Inc. and several smaller companies. The Company's competition
outside of North America is more fragmented, with competition being provided by
several international and regional companies. No single company maintains the
leading market position internationally, although certain companies possess
regional strengths.
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The on-line lottery business is also highly competitive. State and foreign
governments normally award contracts based on competitive bidding procedures.
Significant factors which influence the award of lottery contracts include
price, the ability to optimize lottery revenues through marketing capability and
applications knowledge, the quality, dependability and upgrade capability of the
network, the experience, financial condition and reputation of the vendor, and
the satisfaction of other requirements and qualifications which the lottery
authority may impose. There can be no assurance that the Company will achieve
the technological advances necessary, have the financial resources or otherwise
have the ability to effectively compete in this market. The Company's principal
competitors in the on-line lottery business are Gtech Holdings Corp. and VLTI.
The market for the Company's products is affected by changing technology,
new legislation and evolving industry standards. The Company's ability to
anticipate such changes and to develop and introduce new and enhanced products
on a timely basis will be a significant factor in the Company's ability to
expand, remain competitive, attract new customers and retain existing contracts.
There can be no assurance that the Company will have the financial or other
resources to respond to such changes or to develop and introduce new products on
a timely basis.
In connection with the sales of its CBS and Tele Control subsidiaries, the
Company entered into certain agreements not to compete which the Company
believes will not have a material impact on the Company's ability to conduct its
business. See "-- Pari-Mutuel Operations -- Casino/Race and Sports Wagering,"
"-- Lottery Operations -- Sale of Tele Control" and "Risk
Factors -- Competition."
REGULATION
General
Pari-mutuel wagering, sports wagering, video gaming industry 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 substantial compliance with all
regulatory requirements in the jurisdictions where it operates. Any failure to
receive a material license or the loss of a material license that the Company
currently holds could have a material adverse effect on the overall operations
and financial condition of the Company.
In 1996, the United States Congress passed legislation authorizing a
comprehensive study of gaming, including segments of the gaming industry served
by the Company. The Company is unable to predict whether this study will result
in legislation that would impose regulations on gaming industry operators,
including the Company, or whether such legislation, if any, would have a
material adverse effect on the Company.
The Company has developed and implemented an extensive internal compliance
program in an effort to assure the Company's compliance with legal requirements
imposed in connection with its wagering-related activities, as well as legal
requirements generally applicable to all publicly traded corporations. The
compliance program is run on a day-to-day basis by a full-time compliance
officer, and is overseen by the Compliance Committee of the Company's Board of
Directors. While the Company is firmly committed to full compliance with all
applicable laws, there can be no assurance that such steps will prevent the
violation of one or more laws or regulations, or that a violation by the Company
or an employee of the Company will not result in the imposition of a monetary
fine or suspension or revocation of one or more of the Company's licenses.
Pari-Mutuel Wagering
Forty-three states, Puerto Rico, all of the Canadian provinces, Mexico and
many other foreign countries have authorized pari-mutuel wagering on horse races
and 19 states and many foreign countries, including Mexico, have authorized
pari-mutuel wagering on dog races. In addition, Connecticut, Rhode Island,
Nevada, Florida and Mexico also allow pari-mutuel betting on jai alai matches.
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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 the Company's licensing status to come
under review in other jurisdictions as well.
A subsidiary of the Company that provides pari-mutuel wagering equipment
and/or services to certain casinos located in Atlantic City, New Jersey is
licensed by the New Jersey Casino Control Commission ("New Jersey Commission")
as a gaming related casino service industry in accordance with the New Jersey
Casino Control Act ("Casino Control Act") for an initial period of two years and
then for renewable periods of four years thereafter. An applicant for a gaming
related casino service industry license is required to establish, by clear and
convincing evidence, financial stability, integrity and responsibility; good
character, honesty and integrity; and sufficient business ability and experience
to conduct a successful operation. The Company must also qualify under the
standards of the Casino Control Act. The Company and its licensed subsidiary may
also be required to produce such information, documentation and assurances as
required by the regulators to establish the integrity of all financial backers,
who may be required to seek qualification or waiver of qualification. For casino
holding companies, the New Jersey Commission traditionally has granted informal
waivers at the staff level for non institutional investors holding less than 15%
of a debt issue and for institutional investors holding less than 50% of a debt
issue and less than 20% of the issuer's overall debt.
The New Jersey Commission has broad discretion in licensing matters and may
at any time condition a license or suspend or revoke a license or impose fines
upon a finding of disqualification or non-compliance. The New Jersey Commission
may require that persons holding five percent or more of the Class A Common
Stock of the Company qualify under the Casino Control Act. Under the Casino
Control Act, a security holder is rebuttably presumed to control a
publicly-traded corporation if the holder owns at least five percent of such
corporation's equity securities. Failure to qualify could jeopardize the
Company's license. In addition, the New Jersey Racing Commission also licenses
this subsidiary and retains concurrent regulatory oversight over this subsidiary
with the New Jersey Commission.
The Company's rights to operate the Connecticut OTB system shall continue
as long as the Company holds all licenses required for the operation of the
system. In addition, the officers and directors and certain other employees of
the Company must be licensed. Licensees are generally required to submit to
background investigations and provide required disclosures. The Division of
Special Revenue of the State of Connecticut (the "Division") may revoke the
license to operate the system under certain circumstances, including a false
statement in the licensing disclosure materials, a transfer of ownership of the
licensed entity without Division approval and failure to meet financial
obligations. The 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
offtrack betting facility is closed or relocated or any new branch or simulcast
facility is established.
While in the past and at present the Company has been the subject of
enforcement proceedings instituted by one or more regulatory bodies, the Company
has been able to consensually resolve any such proceedings upon its
implementation of remedial measures and/or the payment of settlements or
monetary fines to such bodies. The Company does not believe that any of these
proceedings, past or pending, will have a materially adverse effect on the
Company. However, there can be no assurance that similar proceedings in the
future will be similarly resolved, or that such proceedings will not have a
material adverse impact on the Company's ability to retain and renew existing
licenses or to obtain new licenses in other jurisdictions.
Video Gaming
Coin or voucher operated gambling devices offering electronic, video
versions of slots, poker, black-jack and similar games are known as VGMs, video
lottery terminals ("VLTs") or slot machines, depending on the
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jurisdiction. These devices represent a growing area in the wagering industry.
The Company or its subsidiaries manufacture and supply terminals and wagering
systems designed for use as VGMs, VLTs or slot machines.
Twenty-four states and Puerto Rico authorize wagering on VGMs, VLTs or slot
machines at casinos, riverboats, racetracks and/or other licensed facilities.
Although some states, such as Rhode Island and West Virginia, currently restrict
VGMs or VLTs to already existing wagering facilities, others permit these
devices to be placed at bars and restaurants as well. Several Indian tribes
throughout the United States are also authorized to operate these devices on
reservation lands. In addition, several Canadian provinces and various foreign
countries have authorized their use.
Government officials in other states are considering proposals to legalize
or expand video gaming, 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 (i) to insure the
responsibility, financial stability and character of equipment manufacturers and
their key personnel and stockholders through licensing requirements, (ii) to
insure the integrity and randomness of the machines, and (iii) to prohibit the
use of VGMs, 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 intends to apply for all
necessary 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.
Certain of the Company's 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 the Company's pari-mutuel wagering terminal. The Company has
registered under the Devices Act, and believes that it is substantially in
compliance with all of the Devices Act's record-keeping and equipment
identification requirements.
Lottery Operations
At the present time, 37 states, the District of Columbia, Puerto Rico, all
the Canadian provinces, Mexico and many other foreign countries authorize
lotteries. Once authorized, the award of lottery contracts and ongoing operation
of lotteries in the United States is highly regulated. Although certain of the
features of a
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lottery, such as the percentage of gross revenues which must be paid back to
players in prize money, are usually established by legislation, the lottery
authorities generally exercise significant authority, including the
determination of the types of games played, the price of each wager, the manner
in which the lottery is marketed, and the selection of the vendors of equipment
and services.
To ensure the integrity of the contract award and wagering process, most
jurisdictions require detailed background disclosure on a continuous basis from,
and conduct background investigations of, the vendor, its subsidiaries and
affiliates and its principal shareholders. Background investigations of the
vendor's employees who will be directly responsible for the operation of the
system are also generally conducted, and most states reserve the right to
require the removal of employees whom they deem to be unsuitable or whose
presence they believe may adversely affect the operational security or integrity
of the lottery. Certain jurisdictions also require extensive personal and
financial disclosure and background checks from persons and entities
beneficially owning a specified percentage (typically five percent or more) of
the Company's securities. The failure of such beneficial owners to submit to
such background checks and provide such disclosure could result in the
imposition of penalties upon such beneficial owners and could jeopardize the
award of a lottery contract to the Company or provide grounds for termination of
an existing lottery contract.
The international jurisdictions in which the Company markets its lottery
systems also usually have legislation and regulations governing lottery
operations. The regulation of lotteries in these international jurisdictions
typically varies from the regulation of lotteries in the United States. In
addition, restrictions are often imposed on foreign corporations seeking to do
business in such jurisdictions. United States and international regulations
affecting lotteries are subject to change. The Company cannot predict with
certainty the impact on its business of changes in regulations.
Simulcasting
The Federal Communications Commission (the "FCC") regulates the use and
transfer of earth station licenses used to operate the Company's simulcasting
operations. 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, 43 states, Puerto Rico, all of the Canadian provinces, Mexico
and many other foreign countries authorize inter-state and/or intra-state
pari-mutuel wagering, which may involve the simulcasting of such races.
Licensing and other regulatory requirements associated with such simulcasting
activities are similar to those governing pari-mutuel wagering, and are
generally enforced by pari-mutuel regulators. In addition, contracts with host
tracks whose races are simulcast by the Company or its subsidiaries to other
facilities within or outside the jurisdictions in which such races are held may
be subject to approval by regulatory authorities in the jurisdictions from
and/or to which the races are simulcast. The Company believes that it and/or its
subsidiaries are in substantial compliance with applicable regulations and that
the Company, its subsidiaries, and/or the appropriate third parties have entered
into contracts and obtained the necessary regulatory approvals thereof to
lawfully conduct current simulcast operations.
Casino/Race and 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
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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.
EMPLOYEES
As of April 30, 1997, the Company employed approximately 880 persons. Of
this total, approximately 485 persons were engaged in full-time field
operations, 220 in part-time tellering/cashiering, approximately 40 in
engineering and software product development, approximately 30 in marketing and
approximately 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, one of which expires in
October 1997. The Company considers its employee relations to be satisfactory.
FACILITIES
The Company leases approximately 12,000 square feet for its corporate
headquarters in New York; 40,000 square feet for its administration and
development facility in Newark, Delaware; 16,000 square feet of office and
warehouse space in Rocky Hill, Connecticut in order to operate the Connecticut
State Lottery; 2,000 square feet of office space for its operations center in
Gelsenkirchen, Germany; 2,900 square feet of office space in Owings Mills,
Maryland; 3,000 square feet of warehouse space in Englewood, New Jersey;
approximately 10,000 square feet for its manufacturing facility in Ballymahon,
Ireland; and 16,000 square feet of warehouse space in Bridgeport, New Jersey.
The Company leases approximately 44,000 square feet of space for its
Connecticut OTB locations in Norwalk, Bridgeport, West Haven, East Haven,
Meriden, New Britain, Bristol, Waterbury and Torrington. The Company owns the
Bradley teletheater in Windsor Locks and the Sports Haven(R) complex in New
Haven, encompassing approximately 39,000 square feet and 55,000 square feet,
respectively, both of which are used for OTB operations. The Company's Sports
Haven(R) facility in New Haven also houses its central off-track betting
computer operations and telephone wagering systems for the Connecticut OTB. The
Company leases an additional 2,000 square feet for its OTB administrative
offices and approximately 7,700 square feet for warehousing in New Haven. In
addition, the Company owns approximately 10,000 square feet of office space in
Cedex, France.
The Company's lease in Newark, Delaware resulted from the sale and
leaseback of its facility in January 1996. The sale-leaseback arrangement
established a sale price of $1.0 million and provided the Company with a lease
term of up to ten years.
60
<PAGE> 70
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning directors and officers of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
A. Lorne Weil.............................. 51 Chairman of the Board, President and Chief
Executive Officer(1)
Larry J. Lawrence.......................... 54 Vice Chairman of the Board(1)(2)(3)
Sir Brian Wolfson.......................... 61 Director
Alan J. Zakon.............................. 61 Director(1)(2)(3)
Marshall Bartlett.......................... 72 Director(2)(3)
William Luke............................... 50 Vice President and Chief Financial Officer
Gerald Lawrence............................ 57 Vice President
Martin E. Schloss.......................... 50 Vice President, General Counsel and
Secretary
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation and 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 and was appointed President on August 13, 1997. From 1982 until 1989,
Mr. Weil was a director and consultant to the holding company of one of the
Company's current subsidiaries. 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.
Mr. Larry J. Lawrence has been a director of the Company since December
1989 and was appointed Vice Chairman on August 13, 1997. 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. Mr. Lawrence is currently a director of several private
companies. Mr. Lawrence served as a director of Autotote Systems, Inc. until it
was acquired by the Company in 1989.
Sir Brian Wolfson has been a director of the Company since 1988 and was a
Vice Chairman of the Board from May 1995 to August 1997. He served as Acting
President and Chief Executive Officer of the Company from June 1991 to October
31, 1991. Sir Brian was the Chairman from 1987 until May 1995, and Deputy
Chairman from May 1995 to September 1995, of Wembley plc, a United Kingdom
corporation. 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 was a
Vice Chairman of the Board from May 1995 to August 1997. 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 Corporation, Hechinger Corporation, and Boyle Leasing
Technologies.
Mr. Marshall Bartlett has been a director of the Company since December
1991. From June 1994 until June 1995, Mr. Bartlett acted as a consultant to the
Company. From June 1993 through May 1994,
61
<PAGE> 71
Mr. Bartlett was employed by the Company in various capacities. Mr. Bartlett was
Executive Vice President and Chief Operating Officer of Bourns Inc., an
electronic component manufacturer from 1979 until his retirement in 1991.
Mr. William Luke has been Vice President and Chief Financial Officer of the
Company since February 1996. Mr. Luke served as Vice President--Finance and
Chief Financial Officer of Nashua Corporation from August 1984 through November
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 Industry 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.
62
<PAGE> 72
EXECUTIVE COMPENSATION; CERTAIN ARRANGEMENTS
EXECUTIVE COMPENSATION
The following table shows the compensation awarded or paid by the Company
for services rendered for the years ended October 31, 1994, 1995 and 1996 to the
Chief Executive Officer and the individuals who, in fiscal 1996, were the other
four highest paid Executive Officers of the Company who received in excess of
$100,000 in salary and bonuses in that year (collectively the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
COMPENSATION
-------------------------- ---------------------
(a) (b) (c) (d) (f) (g) (i)
- ------------------------------------- ---- ------- ------- ------- ------- ------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS(1) AWARD OPTIONS COMPENSATION
AT FISCAL YEAR-END YEAR ($) ($) ($)(2) (#) ($)
- ------------------------------------- ---- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
A. Lorne Weil........................ 1996 441,400(3) -- -- 273,000 17,200(4)
Chief Executive 1995 408,800 -- 534,001(5) -- 12,700(6)
Officer 1994 408,800 -- -- -- 13,500(7)
William Luke......................... 1996 168,300 -- -- 150,000 --
Vice President and Chief
Financial Officer
Martin E. Schloss.................... 1996 195,700 -- -- 100,000 7,500(4)
Vice President, General Counsel 1995 175,000 13,000 70,272(8) -- 7,600(6)
and Secretary 1994 135,600 115,000(9) -- 65,000(8) 6,200(7)
Gerald Lawrence...................... 1996 219,300 -- -- 150,000 11,100(4)
Vice President 1995 184,600 50,000 137,000(10) 100,000(10) --
Thomas DeFazio(11)................... 1996 253,100 -- -- 140,000(12) 37,400(4)
1995 148,100 60,000 -- 200,000(12) 113,000(6)
</TABLE>
- ---------------
(1) Bonuses paid in any fiscal year are based on results of the previous year.
(2) The number and value of the aggregate restricted Deferred Shares (as
defined) at October 31, 1996, is as follows:
(i) Number of Deferred Shares: Mr. Weil, 129,298; Mr. Schloss, 17,015;
Mr. G. Lawrence, 33,172.
(ii) Value of Deferred 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 Deferred Shares listed above would also receive the
dividend(s).
(3) Mr. Weil's 1996 annual compensation consisted of $430,300 in base salary
plus a consumer price index adjustment of $11,100 owed during fiscal year
1995.
(4) 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.
(5) On May 25, 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 25, 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 the Class A
Common Stock.
63
<PAGE> 73
(6) 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.
(7) 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.
(8) On May 25, 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 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.
(9) Consists of fiscal 1994 bonus of $60,000 and special bonus of $55,000 to
recognize contributions to the Company's longer-term strategic goals. These
bonuses were initially payable in three equal installments in 1995, 1996
and 1997 as long as Mr. Schloss is employed by the Company. However, the
Compensation Committee of the Board of Directors decided to terminate the
deferred compensation plan and to pay out the second and third installments
in 1996.
(10) On May 25, 1995, Mr. G. Lawrence exchanged all of his Underwater Options,
constituting options to purchase 100,000 shares of Class A Common Stock,
for an award of 33,172 Deferred Shares under the 1992 Plan. The vesting of
such Deferred Shares will require either a lengthy period of future service
or the achievement of certain performance goals for the Company as measured
by the price of the Class A Common Stock.
(11) Mr. DeFazio ceased as an officer and employee of the Company on August 5,
and October 18, 1996, respectively.
(12) Unexercisable options of 273,333 were cancelled on October 18, 1996 and
exercisable options of 66,667 were cancelled on January 17, 1997.
64
<PAGE> 74
STOCK OPTIONS
The following table sets forth information regarding stock options granted
to the Named Executive Officers during the fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
AT ASSUMED
ANNUAL RATES
OF STOCK
PRICE
APPRECIATION
OPTIONS GRANTED IN FISCAL YEAR 1996 FOR
INDIVIDUAL GRANTS OPTION TERM(1)
-------------------------------------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g)
- ----------------------------- ---------- ------------ ------- ---------- -------- ----------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE
GRANTED IN PRICE EXPIRATION 5% 10%
NAME #(2) FISCAL YEAR ($/SH) DATE ($) ($)
- ----------------------------- ---------- ------------ ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
A. Lorne Weil................ 273,000 12.26% $ 3.00 12-14-05 $515,065 $1,305,275
William Luke................. 150,000 6.73% $3.0625 2-26-06 $288,898 $ 732,125
Martin E. Schloss............ 50,000 2.24% $2.8750 11-01-05 $ 90,404 $ 229,100
Martin E. Schloss............ 50,000 2.24% $ 3.00 12-14-05 $ 94,334 $ 239,061
Gerald Lawrence.............. 75,000 3.37% $2.8750 11-01-05 $135,605 $ 343,651
Gerald Lawrence.............. 50,000 2.24% $ 3.00 12-14-05 $ 94,334 $ 239,061
Gerald Lawrence.............. 25,000 1.12% $3.3750 3-22-06 $ 53,063 $ 134,472
Thomas DeFazio(3)............ 140,000 6.29% $ 3.00 12-14-05 $264,136 $ 669,372
---------- ------------ ------- ---------- -------- ----------
</TABLE>
- ---------------
(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 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 option terminates
immediately.
(3) These options were cancelled on October 18, 1996.
65
<PAGE> 75
The following table sets forth information for the Named Executive Officers
with respect to fiscal 1996 year-end option values.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996, AND 1996 FISCAL YEAR-END OPTION VALUE
- ----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- --------------------------------- ------------ ----------- ----------------- ----------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES OCT. 31, 1996(#) OCT. 31, 1996($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
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-
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors for 1996 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. If the Company terminates Mr. Weil's employment under the Weil
Employment Agreement other than for cause, Mr. Weil will be 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 to purchase
600,000 shares of Class A Common Stock of the Company at an exercise price of
$3.50 per share. The option originally was exercisable in equal annual
installments on November 1, 1993, November 1, 1994 and November 1, 1995. In
August 1993, the Compensation Committee of the Board of Directors accelerated
the vesting period of the option such that the option became exercisable in
full. On May 25, 1995, Mr. Weil exchanged such stock options to purchase 600,000
Shares of Class A Common Stock for 129,298 Deferred Shares under the 1992 Plan.
The vesting of such Deferred Shares will require either a lengthy period of
future service or the achievement of certain performance goals of the Company as
measured by the price of the Class A Common Stock.
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's 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. Luke entered into an
employment agreement (the "Luke Employment Agreement") pursuant to which Mr.
Luke assumed the position of Vice President and Chief Financial Officer of the
Company. The Luke Employment Agreement provides for an annual base salary of
$250,000, an annual bonus of up to 45% of 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 at
66
<PAGE> 76
the average price of the Class A Common Stock on the date of employment
($3.0625), 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, Mr. Luke is entitled to receive one year's 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 that is held on the
same day as a Board meeting or that is held by telephone conference call.
Members of the Executive Committee of the Board of Directors do not receive fees
for attending meetings thereof.
CERTAIN 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.
67
<PAGE> 77
SECURITY OWNERSHIP
The following table sets forth certain information as of June 15, 1997 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 in the table have
sole voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
NAME NUMBER(1) PERCENT(1)
- ---------------------------------------------------------------- ------------- ----------
<S> <C> <C>
A. Lorne Weil................................................... 2,746,392(2) 7.40%
750 Lexington Avenue
25th Floor
New York, New York 10022
Thomas H. Lee................................................... 4,037,070(3) 11.25%
c/o Thomas H. Lee Company
75 State Street
Boston, MA 02109
Larry J. Lawrence............................................... 2,684,540(4) 7.38%
c/o Lawrence, Smith & Horey
29th Floor
515 Madison Avenue
New York, New York 10022
Marshall Bartlett............................................... 39,999(5) *
Gerald Lawrence................................................. 48,500(6) *
William Luke.................................................... 37,500(7) *
Martin E. Schloss............................................... 80,000(8) *
Sir Brian Wolfson............................................... 106,667(9) *
Alan J. Zakon................................................... 333,667(10) *
All current directors and officers as a group (consisting of 9
persons)(2)(3)(4)(5)(6)(7)(8)(9)(10).......................... 10,114,335(11) 25.96%
State of Wisconsin Investment Board............................. 2,810,500(12) 7.95%
P.O. Box 7842
Madison, WI 54707
Oaktree Capital Management, LLC................................. 2,000,000(13) 5.36%
550 South Hope Street
Los Angeles, CA 90071
Lawrence, Tyrrell, Ortale & Smith............................... 1,886,245(14) 5.19%
515 Madison Avenue
New York, New York 10022
</TABLE>
- ---------------
* Represent 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 or for which such securities are exercisable. The
percentage ownership of the outstanding Class A Common Stock reported
herein is based on the assumption (expressly required by the applicable
rules of the SEC) that only the person whose ownership is being reported
has exercised his warrants or options for Class A Common Stock.
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<PAGE> 78
(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 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 to October 1999, and (c) 1,193,250 shares subject to currently
exercisable stock options, 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 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 terminates on the earlier of March
1999 or the death of Mr. Weil or if certain other events occur during such
period.
(3) Includes (a) 552,381 shares issuable upon exercise of warrants that were to
expire in October 1996 and were extended by the Board to October 1999 and
1,538,433 shares 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. From December 1991 to August 1997, Mr. Lee was
a Director of the Company.
(4) Includes 42,533 shares issuable upon exercise of warrants that were to
expire in October 1996 and were extended by the Board to October 1999. Also
includes (a) 902,483 shares, and (b) 983,762 shares issuable upon exercise
of warrants 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) Includes 30,000 shares subject to currently exercisable stock options,
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.
(6) Includes 37,500 shares subject to currently exercisable stock options.
(7) Consists of 37,500 shares subject to currently exercisable stock options.
(8) Includes 65,000 shares subject to currently exercisable stock options,
40,000 of which were to expire in October 1997 and were extended by the
Stock Option Committee to October 2002.
(9) Includes (a) 45,000 shares subject to currently exercisable stock options
that were to expire in June 1998 and were extended by the Stock Option
Committee to June 2003, and (b) 25,000 shares held by Millco Limited as
nominee.
(10) Includes 45,000 shares subject to currently exercisable stock options that
were to expire in July 1998 and were extended by the Stock Option Committee
to July 2003.
(11) Includes (a) 2,167,546 shares issuable upon exercise of warrants and (b)
1,453,250 shares subject to currently exercisable stock options.
(12) Based on a Schedule 13G filed with the SEC on February 3, 1997.
(13) Consists of 2,000,000 shares currently issuable upon conversion of the
Subordinated Debentures at a conversion price of $20.00 per share. See "Use
of Proceeds."
(14) Includes 983,762 shares issuable upon exercise of warrants that were to
expire in October 1996 and were extended by the Board to October 1999.
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<PAGE> 79
DESCRIPTION OF CERTAIN INDEBTEDNESS
As of the date of this Prospectus the Company has outstanding $35,000,000
aggregate principal amount of 5.5% Convertible Subordinated Debentures due
August 2001 which were issued in a private placement. The Subordinated
Debentures are convertible into 1,750,000 shares of the Company's Class A Common
Stock at a conversion price of $20.00 per share. Upon the consummation of the
issuance of the Old Notes, the Company repurchased $5,000,000 aggregate
principal amount of the Subordinated Debentures at a discount to face value plus
accrued interest.
The Company is required to make cash interest payments on the outstanding
Subordinated Debentures in February and August of each year until maturity.
Under a November 1995 agreement with the holders of the Subordinated Debentures,
the Company issued 936,369 unregistered shares of Class A Common Stock in lieu
of making the August 1995 and February 1996 cash interest payments. The
agreement with the holders provides for demand and piggy-back registration
rights with respect to the unregistered shares. The Notes will rank senior in
right and priority of payment to the Subordinated Debentures. The Subordinated
Debentures are scheduled to mature prior to the maturity of the Notes. See Note
7 to the Company's Consolidated Financial Statements.
DESCRIPTION OF NEW CREDIT AGREEMENT
In connection with the consummation of the issuance of the Old Notes, the
Company entered into the New Credit Agreement with certain lenders, one of which
is an affiliate of the Initial Purchaser. Set forth below is a summary
description of the terms of the New Credit Agreement which does not purport to
be complete.
The New Credit Agreement provides, subject to certain terms and conditions,
for borrowings of up to $25.0 million, with a $15.0 million sublimit for letters
of credit, under a 3.5 year revolving credit facility. The New Credit Agreement
requires mandatory commitment reductions upon the occurrence of certain events,
including asset sales and the incurrence of certain indebtedness, in each case,
in excess of specified thresholds. In addition, the Company may make optional
prepayments and commitment reductions. Any proceeds from the New Credit
Agreement will be used for general corporate and working capital purposes of the
Company and its subsidiaries. Borrowings under the New Credit Agreement will
bear interest at a floating rate plus an applicable margin depending upon the
Company's performance. Obligations under the New Credit Agreement are jointly
and severally guaranteed by substantially all of the Company's U.S.
Subsidiaries. In addition, the New Credit Agreement is secured by (i) first
priority security interests in substantially all tangible and intangible assets
of the Company and its U.S. Subsidiaries and (ii) a first priority lien on all
of the capital stock of the Company's U.S. Subsidiaries and on 65% of the
capital stock of the Company's subsidiaries other than U.S. Subsidiaries (the
"Foreign Subsidiaries"). The New Credit Agreement matures in February 2001.
The New Credit Agreement contains customary covenants, including
limitations on (i) the incurrence of additional indebtedness, (ii) the creation
of liens, (iii) making restricted payments, including the payment of dividends,
(iv) making investments, (v) engaging in mergers, consolidations and sales of
assets, (vi) making capital expenditures and (vii) engaging in transactions with
certain subsidiaries and affiliated parties. In addition, the New Credit
Agreement requires compliance with certain financial covenants, including
requirements that the Company (on a consolidated basis) (a) maintain minimum
EBITDA and interest coverage levels and (b) not exceed a maximum total debt to
EBITDA ratio, in each case as specified in the New Credit Agreement. The New
Credit Agreement also contains certain events of default customary for credit
facilities of this type.
DESCRIPTION OF NOTES
The Old Notes were, and the New Notes will be, issued under an indenture
(the "Indenture"), dated as of July 28, 1997 by and among the Company, the
Guarantors and IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee").
The terms of the New Notes are identical in all material respects to the Old
Notes, except that the New Notes have been registered under the Securities Act
and, therefore, will not bear legends
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restricting their transfer and will not contain certain provisions providing for
an increase in the interest rate thereon under certain circumstances described
in the Registration Rights Agreement, the provisions of which will terminate
upon the consummation of the Exchange Offer. The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the TIA as in effect on the date of the
Indenture. A copy of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The definitions of
certain capitalized terms used in the following summary are set forth below
under "-- Certain Definitions." For purposes of this section, references to the
"Company" include only Autotote Corporation and not its subsidiaries. Unless the
context otherwise requires, references to Notes shall include the New Notes.
The Old Notes were and the New Notes will be issued in fully registered
form only, without coupons, in denominations of $1,000 and integral multiples
thereof. Initially, the Trustee will act as Paying Agent and Registrar for the
Notes. The Notes may be presented for registration or transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Notes at the Trustee's corporate trust office in
New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
Holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $110,000,000 and
will mature on August 1, 2004. Interest on the Notes will accrue at the rate of
10 7/8% per annum and will be payable semiannually in cash on each February 1
and August 1, commencing on February 1, 1998, to the Persons who are registered
Holders at the close of business on January 15 and July 15 immediately preceding
the applicable interest payment date. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of issuance.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after August
1, 2001, upon not less than 30 nor more than 60 days notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on August 1 of the year set
forth below, plus, in each case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001...................................................... 105.438%
2002...................................................... 102.719%
2003 and thereafter....................................... 100.000%
</TABLE>
Optional Redemption Upon Public Equity Offering. At any time, or from time
to time, on or prior to August 1, 2000, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings to redeem in the
aggregate up to 35% of the original principal amount of the Notes at a
redemption price equal to 110.875% of the principal amount thereof plus accrued
interest to the date of redemption; provided, however, that at least 65% of the
initially outstanding aggregate principal amount of Notes remains outstanding
immediately after any such redemption.
SELECTION AND NOTICE
In case of a partial redemption, selection of the Notes or portions thereof
for redemption shall be made by the Trustee by lot, pro rata or in such manner
as it shall deem appropriate and fair and in such manner as complies with any
applicable requirements of the principal national securities exchange, if any,
on which the
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Notes are listed; provided, however, that if a partial redemption is made with
the proceeds of a Public Equity Offering on or prior to August 1, 2000,
selection of the Notes or portion thereof for redemption shall be made by the
Trustee only on a pro rata basis, unless such method is otherwise prohibited.
Notes may be redeemed in part in multiples of $1,000 principal amount only.
Notice of redemption will be sent, by first class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to each Holder whose Notes are to be redeemed at the last address for such
Holder then shown on the registry books. In order to effect a redemption with
the proceeds of a Public Equity Offering, the Company shall make such redemption
not more than 120 days after the consummation of any such Public Equity
Offering. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after any redemption date, interest
will cease to accrue on the Notes or parts thereof called for redemption as long
as the Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Indenture.
RANKING
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to the Subordinated Debentures and to all future subordinated
indebtedness of the Company and pari passu in right of payment with all other
existing or future unsubordinated indebtedness of the Company, including
indebtedness under the New Credit Agreement. The Notes, however, will be
effectively subordinated to secured Indebtedness of the Company and the
Guarantors (including Indebtedness under the New Credit Agreement) with respect
to the assets securing such Indebtedness.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior basis, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections from or payments made by or on behalf of any other Guarantor
in respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount pro rata, based on the net
assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor without limitation, or with other Persons upon the
terms and conditions set forth in the Indenture. See "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets." In the event all of the
Capital Stock of a Guarantor is sold or otherwise disposed of (by merger or
otherwise) by the Company or any of its Subsidiaries and the sale or disposition
is otherwise in compliance with the provisions set forth in "-- Certain
Covenants -- Limitation on Asset Sales," the Guarantor's Guarantee will be
released and such Guarantor shall be relieved of all of its obligations and
duties under the Indenture and the Notes.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, the
Company is required to offer to repurchase all outstanding Notes pursuant to the
offer described below (the "Change of Control
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Offer"), at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the repurchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note repurchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
repurchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its repurchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on their respective properties, to make Restricted Payments and to
make Asset Sales may also make more difficult or discourage a takeover of the
Company, whether favored or opposed by the management of the Company.
Consummation of any such transaction in certain circumstances may require
repurchase of the Notes, and there can be no assurance that the Company or the
acquiring party will have sufficient financial resources to effect such
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements which
have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
With respect to the sale of assets, the phrase "all or substantially all"
as used in the Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under relevant law and
is subject to judicial interpretation. Accordingly, in certain circumstances,
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
assets of a Person and, therefore, it may be unclear whether a Change of Control
has occurred and whether Notes are subject to a Change of Control Offer.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company or in
warrants, rights or options (other than debt securities or Disqualified Capital
Stock) to acquire Qualified Capital Stock of the Company) on or in respect of
shares of the Company's Capital Stock to holders of such Capital Stock,
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(b) purchase, redeem or otherwise acquire or retire for value any Capital Stock
of the Company or any warrants, rights or options (other than debt securities or
Disqualified Capital Stock) to purchase or acquire shares of any class of such
Capital Stock, other than the exchange of such Capital Stock, warrants, rights
or options for Qualified Capital Stock and/or for warrants, rights or options
(other than debt securities or Disqualified Capital Stock) to acquire Qualified
Capital Stock, (c) make any voluntary purchase, defeasance, redemption,
prepayment, or other acquisition or retirement for value, more than 3 months
prior to any scheduled final maturity, scheduled repayment or scheduled sinking
fund payment, any Indebtedness of the Company that is subordinate (pursuant to
its terms) or junior in right of payment (pursuant to its terms) to the Notes,
or (d) make any Restricted Investment (other than Permitted Investments) (each
of the foregoing actions set forth in clauses (a), (b), (c) and (d) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto, (i) a Default or an Event of
Default shall have occurred and be continuing, (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant, or (iii) the aggregate amount of Restricted Payments
made subsequent to the Issue Date shall exceed the sum of: (x) 50% of the
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned subsequent to
July 31, 1997 and on or prior to the date the Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting period); plus (y)
100% of the aggregate net cash proceeds received by the Company from any Person
(other than a Subsidiary of the Company) from the issuance and sale subsequent
to the Issue Date and on or prior to the Reference Date of Qualified Capital
Stock or for warrants, rights or options (other than debt securities or
Disqualified Capital Stock) to acquire Qualified Capital Stock of the Company,
including Qualified Capital Stock issued upon the conversion of convertible
Indebtedness, plus (z) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (a) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (b) the
initial amount of such Restricted Investment (in each case to the extent not
included in the Company's Consolidated Net Income).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not be violated by reason of: (1) the payment of any
dividend or distribution or the redemption of any securities within 60 days
after the date of declaration of such dividend or distribution or the giving of
formal notice by the Company of such redemption, if the dividend or distribution
would have been permitted on the date of declaration or the redemption would
have been permitted on the date of the giving of the formal notice thereof; (2)
so long as no Default or Event of Default shall have occurred and be continuing,
the acquisition of any shares of Capital Stock of the Company or the making of a
Restricted Investment, either (i) in exchange for shares of Qualified Capital
Stock and/or warrants, rights or options (other than debt securities or
Disqualified Capital Stock) to acquire Qualified Capital Stock, or (ii) through
the application of the net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital Stock
and/or warrants, rights or options (other than debt securities or Disqualified
Capital Stock) to acquire Qualified Capital Stock; (3) so long as no Default or
Event of Default shall have occurred and be continuing, the acquisition of
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes, either (i) in exchange for shares of Qualified Capital Stock and/or
warrants, rights or options (other than debt securities) to acquire Qualified
Capital Stock or for Indebtedness of the Company which is subordinate or junior
in right of payment to the Notes (pursuant to its terms), at least to the extent
that the Indebtedness being acquired is subordinated to the Notes, and has a
Weighted Average Life to Maturity no less than that of the Indebtedness being
acquired or (ii) through the application of the net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of shares
of Qualified Capital Stock and/or warrants, rights or options (other than debt
securities) to acquire Qualified Capital Stock or Indebtedness of the Company
which is subordinate or junior in right of payment to the Notes (pursuant to its
terms), at least to the extent that the Indebtedness being acquired is
subordinated to the Notes, and has a Weighted Average Life to Maturity no less
than that of the Indebtedness being refinanced; (4) so long as no Default or
Event of Default shall have occurred and be continuing, a Restricted Investment
in a person principally engaged in a Related Business with the net proceeds of a
substantially concurrent sale
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for cash (other than to a Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company; (5) so long as no Default or Event of Default
shall have occurred and be continuing, any other Restricted Payment by the
Company; provided, however, that the aggregate amount of cash expended by the
Company pursuant to this clause (5) does not exceed $3 million (plus, to the
extent that any Restricted Payment pursuant to this clause (5) is in the form of
a Restricted Investment, the lesser of (a) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if any) and
(b) the initial amount of such Restricted Investment (in each case to the extent
not included in the Company's Consolidated Net Income)); and (6) the voluntary
purchase, defeasance, redemption, prepayment or other acquisition or retirement
for value or repurchase of Subordinated Debentures in an amount expended not to
exceed $5.0 million in the aggregate within 30 days of the Issue Date. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, (x) amounts expended (to the extent such expenditure is in the form
of cash) pursuant to clauses (1), (2), (3) (but only to the extent such
expenditure is the application of the net proceeds of the substantially
concurrent sale of Capital Stock and/or warrants, rights or options (other than
debt securities) to acquire Qualified Capital Stock), (4) or (5) shall be
included in such calculation, and (y) the amount expended pursuant to clause (6)
shall be excluded from such calculation.
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of any such Indebtedness, the Company or any Guarantor may incur
Indebtedness if on the date of the incurrence of such Indebtedness, after giving
effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio
of the Company is equal to or greater than 2.0 to 1.0 prior to August 1, 1999
and 2.25 to 1.0 thereafter.
Neither the Company nor any Guarantor will, directly or indirectly, in any
event incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated to any other Indebtedness
of the Company or such Guarantor, as the case may be, unless such Indebtedness
is also by its terms (or by the terms of any agreement governing such
Indebtedness) made expressly subordinate to the Notes or the Guarantees, as the
case may be, to the same extent and in the same manner as such Indebtedness is
subordinated.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
with any of its Affiliates (an "Affiliate Transaction"), other than (x)
Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate
Transactions on terms that are no less favorable to the Company or such
Restricted Subsidiary than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate; provided, however, that for a transaction or series of
related transactions with an aggregate value of $1 million or more (i) such
determination shall be made in good faith by a majority of the disinterested
members of the Board of the Directors of the Company or (ii) the Board of
Directors of the Company shall have received an opinion from an independent
nationally recognized investment banking firm selected by the Company, that such
transaction or series of related transactions is on terms which are fair, from a
financial point of view, to the Company or such Restricted Subsidiary; and
provided, further, that for a transaction or series of related transactions with
an aggregate value of $5 million or more, (i) such determination shall be made
in good faith by a majority of the disinterested members of the Board of
Directors of the Company and (ii) the Board of Directors of the Company shall
have received an opinion from an independent nationally recognized investment
banking firm selected by the Company, that such transaction or series of related
transactions is on terms which are fair, from a financial point of view, to the
Company or such Restricted Subsidiary.
(b) The foregoing restrictions shall not apply to (i) reasonable fees and
compensation paid to and indemnity provided on behalf of, officers, directors,
employees or consultants of the Company or any Subsidiary as determined in good
faith by the Company's Board of Directors or senior management;
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(ii) transactions between or among the Company and any of its Restricted
Subsidiaries at least 51% of the outstanding voting securities of which is owned
by the Company or one or more of its Wholly Owned Subsidiaries so long as no
portion of the minority interest in such Restricted Subsidiary is owned by an
Affiliate of the Company (other than a Wholly Owned Subsidiary of the Company or
directors or officers of such Subsidiary that hold stock of such Subsidiary to
the extent that local law requires a resident of such jurisdiction to own stock
of such company) or between or among such Restricted Subsidiaries; provided such
transactions are not otherwise prohibited by the Indenture; (iii) any agreement
as in effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) or in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; and (iv) Permitted
Investments and Restricted Payments permitted by the Indenture.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist or remain in effect any Liens upon any properties or assets of
the Company or of any of its Restricted Subsidiaries whether owned on the Issue
Date or acquired after the Issue Date, or on any income or profits therefrom,
unless (a) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes or any Guarantee, the
Notes or such Guarantee as the case may be, are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (b) in
all other cases, the Notes and the Guarantees are equally and ratably secured,
except for (A) Liens existing on the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date; (B) Liens securing the Notes and the
Guarantees; (C) Liens of the Company or a Guarantor on assets of any Restricted
Subsidiary; and (D) Permitted Liens.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary of the Company; or (c) transfer any of its property or
assets to the Company or any other Restricted Subsidiary of the Company, except
for such encumbrances or restrictions existing under or by reason of: (1)
applicable law and agreements with governmental authorities with respect to
assets located in their jurisdiction, (2) the Indenture, (3) (A) customary
provisions restricting (i) the subletting or assignment of any lease or (ii) the
transfer of copyrighted or patented materials, (B) provisions in agreements that
restrict the assignment of such agreements or rights thereunder or (C)
provisions of a customary nature contained in the terms of Capital Stock
restricting the payment of dividends and the making of distributions on Capital
Stock, (4) any agreement or instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person or the properties or assets of the
Person so acquired (including the Capital Stock of such Persons), (5) any
agreement existing on the Issue Date (including, without limitation, the New
Credit Agreement), (6) restrictions on the transfer of assets subject to any
Lien permitted under the Indenture, (7) restrictions imposed by any agreement to
sell assets permitted under the Indenture to any person pending the closing of
such sale, (8) customary rights of first refusal with respect to the Company's
and its Restricted Subsidiaries' interests in their respective Restricted
Subsidiaries and joint ventures, (9) Indebtedness of a Person that was a
Restricted Subsidiary at the time of Incurrence and the Incurrence of which
Indebtedness is permitted by the provisions described under "--Limitation on
Incurrence of Additional Indebtedness"; provided that such encumbrances and
restrictions apply only to such Restricted Subsidiary and its assets; and
provided, further, that the Board of Directors of the Company has determined in
good faith, at the time of creation of each such encumbrance or restriction,
that such encumbrances and restrictions would not singly or in the aggregate
have a materially adverse effect on the holders of the Notes, (10) the
subordination of any Indebtedness owed by the Company or any of its Restricted
Subsidiaries to the Company or any other Restricted Subsidiary to any other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided (A)
such other Indebtedness is permitted under the Indenture and (B) the Board of
Directors of the Company has determined in good faith, at the time of creation
of each such encumbrance or restriction, that such encumbrances and restrictions
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would not singly or in the aggregate have a materially adverse effect on the
holders of the Notes or (11) an agreement effecting a refinancing, replacement
or substitution of Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above or any other agreement
evidencing Indebtedness permitted under the Indenture; provided, however, that
the provisions relating to such encumbrance or restriction contained in any such
refinancing, replacement or substitution agreement or any such other agreement
are not less favorable to the Company in any material respect as determined by
the Board of Directors of the Company than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and its Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company or a Restricted
Subsidiary of the Company shall be the surviving or continuing corporation or
(2) the Person (if other than the Company or a Restricted Subsidiary of the
Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of the Company's assets determined on a
consolidated basis for the Company and its Restricted Subsidiaries (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form
satisfactory to the Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, and premium, if any, and interest on all
of the Notes and the performance of every covenant of the Notes, the Indenture
and the Registration Rights Agreement on the part of the Company to be performed
or observed; (ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the "--Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
and be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to the execution of such supplemental indenture have been
satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company (other than to a Wholly Owned Subsidiary that is a
Guarantor), the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is
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merged or to which such conveyance, lease or transfer is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under the Indenture and the Notes with the same effect as if such surviving
entity had been named as such and the Company shall be relieved of all of its
obligations and duties under the Indenture and the Notes.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture) will not, and
the Company will not cause or permit any Guarantor to, consolidate with or merge
with or into any Person other than the Company or any other Guarantor unless:
(i) the entity formed by or surviving any such consolidation or merger (if other
than the Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and existing under
the laws of the United States or any State thereof or the District of Columbia;
(ii) such entity assumes by supplemental indenture all of the obligations of the
Guarantor on the Guarantee; (iii) immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; and (iv) immediately after giving effect to such transaction and the
use of any net proceeds therefrom on a pro forma basis, the Company could
satisfy the provisions of clause (ii) of the first paragraph of this covenant.
Any merger or consolidation of a Guarantor with and into the Company (with the
Company being the surviving entity) or another Guarantor that is a Wholly Owned
Restricted Subsidiary of the Company need not comply with this covenant.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or such Restricted Subsidiary (exclusive of
indemnities), as the case may be, from such Asset Sale shall be cash or Cash
Equivalents and is received at the time of such disposition; provided that the
amount of (a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or any such Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Notes) that are assumed by the transferee of any such assets, (b) any notes or
other obligations received by the Company or any such Restricted Subsidiary from
such transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash
Equivalents received) and (c) any Designated Non-cash Consideration received by
the Company or any of its Restricted Subsidiaries in such Asset Sale having an
aggregate fair market value, taken together with all other Designated Non-cash
Consideration received pursuant to this clause (c), not to exceed $5 million
(with the fair market value of each item of Designated Non-cash Consideration
being measured at the time received and without giving effect to subsequent
changes in value), shall be deemed to be cash for the purposes of this clause
(ii); and provided, further, that the TEK Transaction shall not be subject to
this clause (ii), and (iii) upon the consummation of an Asset Sale, the Company
shall apply directly or through a Restricted Subsidiary, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 270 days of receipt thereof either (A) to repay any Indebtedness
ranking at least pari passu with the Notes and the Guarantees (and in the case
of any Indebtedness outstanding under a revolving credit facility, to
permanently reduce the amounts that may be reborrowed thereunder by an
equivalent amount), with the Net Cash Proceeds received in respect thereof, (B)
to reinvest in Productive Assets, or (C) a combination of prepayment, reduction
and investment permitted by the foregoing clauses (iii)(A) and (iii)(B);
provided that the 75% limitation referred to above shall not apply to any sale,
transfer or other disposition of assets in which the cash portion of the
consideration received therefor is equal to or greater than what the after-tax
net proceeds would have been had such transaction complied with the
aforementioned 75% limitation. On the 271st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the
next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company to make an offer to repurchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than
30 nor more than 45 days following the
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applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis
that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to
100% of the principal amount of the Notes to be repurchased, plus accrued
interest to the date of repurchase.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$10 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time as
such Net Proceeds Offer Amount plus the aggregate amount of all Net Proceeds
Offer Amounts arising subsequent to the Net Proceeds Offer Trigger Date relating
to such initial Net Proceeds Offer Amount from all Asset Sales by the Company
and its Restricted Subsidiaries aggregates at least $10 million, at which time
the Company shall apply all Net Cash Proceeds constituting all Net Proceeds
Offer Amounts that have been so deferred to make a Net Proceeds Offer (the first
date the aggregate of all such deferred Net Proceeds Offer Amounts is equal to
$10 million or more shall be deemed to be a Net Proceeds Offer Trigger Date). To
the extent that the aggregate purchase price of Notes tendered pursuant to any
Net Proceeds Offer is less than the Net Proceeds Offer Amount, the Company or
any Guarantor may use such amount for general corporate purposes. Upon
completion of any Net Proceeds Offer, the Net Proceeds Offer Amount shall be
reset to zero.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Productive Assets and (ii) such
Asset Sale is for fair market value (as determined in good faith by the
Company's Board of Directors); provided that any consideration not constituting
Productive Assets received by the Company or any of its Restricted Subsidiaries
in connection with any Asset Sale permitted to be consummated under this
paragraph shall constitute Net Cash Proceeds subject to the provisions of the
two preceding paragraphs.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under the "-- Merger,
Consolidation and Sale of Assets" covenant, the successor corporation shall be
deemed to have sold the properties and assets of the Company and its Restricted
Subsidiaries not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale. In addition, the fair market value of such properties and
assets of the Company or its Restricted Subsidiaries deemed to be sold shall be
deemed to be Net Cash Proceeds for purposes of this covenant.
Notice of a Net Proceeds Offer will be mailed to the Holders as shown on
the register of Holders not less than 30 days nor more than 60 days before the
payment date for the Net Proceeds Offer, with a copy to the Trustee, and shall
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in
part in integral multiples of $1,000 principal amount at maturity in exchange
for cash. To the extent Holders properly tender Notes in an amount exceeding the
Net Proceeds Offer Amount, Notes of tendering Holders will be repurchased on a
pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain
open for a period of 20 Business Days or such longer period as may be required
by law.
If an offer is made to repurchase the Notes pursuant to a Net Proceeds
Offer, the Company will and will cause its Restricted Subsidiaries to comply
with all tender offer rules under state and federal securities laws, including,
but not limited to, Section 14(e) under the Exchange Act and Rule 14e-1
thereunder, to the extent applicable to such offer.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any Restricted Subsidiary that is not a Guarantor, directly or
indirectly, by way of the pledge of any intercompany note or otherwise, to
assume, guarantee or in any other manner become liable with respect to any
Indebtedness of the Company (other than (A) Indebtedness and other obligations
under the New Credit Agreement, (B) Indebtedness incurred in reliance on clauses
(xi) (to the extent the Indebtedness being refinanced, modified, replaced,
renewed, restated, refunded, deferred, extended, substituted, supplemented,
reissued or resold was permitted to be guaranteed by Restricted Subsidiaries)
and (xii) of the definition of Permitted Indebtedness or under Currency
Agreements in reliance on clause (v) of the definition of Permitted
Indebtedness, or (C) Interest Swap Obligations incurred in reliance on clause
(iv) of the definition of Permitted Indebtedness)
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unless, in any such case (a) such Restricted Subsidiary has executed and
delivered or executes and delivers a supplemental indenture to the Indenture,
providing a guarantee of payment of the Notes by such Restricted Subsidiary in
the form required by the Indenture (the "Guarantee") and (b) if such assumption,
guarantee or other liability of such Restricted Subsidiary is provided in
respect of Indebtedness that is expressly subordinated to the Notes, the
guarantee or other instrument provided by such Restricted Subsidiary in respect
of such subordinate Indebtedness shall be similarly subordinated to the
Guarantee.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company, of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided,
however, that (a) such sale or disposition of such Capital Stock or assets is
otherwise in compliance with the terms of the Indenture and (b) such assumption,
guarantee or other liability of such Restricted Subsidiary has been released by
the holders of the other Indebtedness so guaranteed.
SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Leaseback Transaction; provided that the Company and any
Guarantor may enter into a Sale and Leaseback Transaction if (i) the Company or
such Guarantor could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such Sale and Leaseback Transaction pursuant to
the "Limitation on Incurrence of Additional Indebtedness" covenant and (b)
incurred a Lien to secure such Indebtedness pursuant to the "-- Limitation on
Liens" covenant, (ii) the gross cash proceeds of such Sale and Leaseback
Transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such Sale and
Leaseback Transaction and (iii) the transfer of assets in such Sale and
Leaseback Transaction is permitted by, and the Company or the applicable
Guarantor applies the proceeds of such transaction with, the "-- Limitation on
Asset Sales" covenant.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due and
payable and the default continues for a period of 30 days; (ii) the failure to
pay the principal on any Notes, when such principal becomes due and payable, at
maturity, upon redemption or otherwise (including the failure to make a payment
to repurchase Notes tendered pursuant to a Change of Control Offer or a Net
Proceeds Offer); (iii) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default continues for a
period of 45 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes; (iv)
the failure to pay at final maturity (giving effect to any extensions thereof)
the principal amount of any Indebtedness of the Company or any Restricted
Subsidiary of the Company that is a Significant Subsidiary (other than
intercompany Indebtedness) and such failure continues for a period of 20 days or
more, or the acceleration of the final stated maturity of any such Indebtedness
(which acceleration is not rescinded, annulled or otherwise cured within 20 days
of receipt by the Company or such Restricted Subsidiary of notice of any such
acceleration) if, in either case, the aggregate principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
in default for failure to pay principal at final maturity or which has been
accelerated, in each case with respect to which the 20-day period described
above has passed, aggregates $10 million or more at any time; (v) one or more
judgments in an aggregate amount in excess of $10 million shall have been
rendered against the Company or any of its Restricted Subsidiaries that is a
Significant Subsidiary and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become final
and non-appealable; (vi) certain events of bankruptcy
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affecting the Company or any of its Restricted Subsidiaries that is a
Significant Subsidiary; (vii) any of the Guarantees ceases to be in full force
and effect or any of the Guarantees is declared to be null and void and
unenforceable or any of the Guarantees is found to be invalid by a final
judgment or order that is not appealable or any of the Guarantors denies its
liability under its Guarantee (other than by reason of release of a Guarantor in
accordance with the terms of the Indenture); and (viii) the termination of any
Guarantee for any reason not permitted by the Indenture or the denial of any
Person acting on behalf of any Guarantor of its obligations under any such
Guarantee.
During the continuance of any Event of Default specified in the Indenture,
the Trustee or the Holders of at least 25% in principal amount of outstanding
Notes may declare the principal of and accrued interest on all the Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default with respect to bankruptcy proceedings of the Company
occurs and is continuing, then such amount shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an Officers' Certificate
and an Opinion of Counsel that such Event of Default has been cured or waived.
The holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
DEFEASANCE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer, substitution and
exchange of Notes, (ii) rights of Holders to receive payments of principal of,
premium, if any, and interest on the Notes and any other rights of the Holders
with respect to such amounts, (iii) the rights, obligations and immunities of
the Trustee under the Indenture and (iv) certain other specified provisions in
the Indenture (the foregoing exceptions (i) through (iv) are collectively
referred to as the "Reserved Rights")) if: (a) the Company irrevocably deposits,
or causes to be deposited, with the Trustee, in trust for the benefit of the
Holders pursuant to an irrevocable trust and security agreement in form and
substance reasonably satisfactory to the Trustee (i) U.S. Legal Tender, (ii)
U.S. Government Obligations or (iii) a combination thereof, in an amount
sufficient after payment of all Federal, state and local taxes or other charges
or assessments in respect thereof payable by the Trustee, which through the
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of the Notes, U.S. Legal Tender in an amount
which, in the opinion of a nationally recognized firm of independent certified
public accountants expressed in a written certification thereof (in form and
substance reasonably satisfactory to the Trustee) delivered to the Trustee, is
sufficient to pay the principal of, premium, if any, and interest on the Notes
then outstanding on the dates on which any such payments are due and payable in
accordance with the terms of the Indenture and of the Notes; provided, however,
that (i) the trustee of the irrevocable trust shall have been irrevocably
instructed to pay such money or the proceeds of such U.S. Government Obligations
to the Trustee; and (ii) the Trustee shall have been irrevocably instructed to
apply such money or the proceeds of such U.S. Government Obligations to the
payment of said principal and interest with respect to the Notes; (b) the
Company shall have delivered to the Trustee an Opinion of Counsel from
independent counsel reasonably satisfactory to the Trustee or a tax ruling from
the Internal Revenue Service to the effect that the holders will not recognize
income, gain or loss for Federal income tax purposes as a result of such
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deposit and defeasance and will be subject to Federal income tax in the same
amounts and in the same manner and at the same times as would have been the case
if such deposit and defeasance had not occurred; (c) the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that after the 91st
day following the deposit, such money or the proceeds of such U.S. Government
Obligations will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and (d) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each in form and substance reasonably
satisfactory to the Trustee, each stating that all conditions precedent relating
to the satisfaction and discharge of the Indenture have been complied with. In
addition, the Company may terminate all of its obligations under the Indenture
(except as to certain of the Reserved Rights) when (i) all outstanding Notes
theretofore authenticated have been delivered to the Trustee for cancellation
and the Company has paid or caused to be paid all sums payable under the
Indenture by the Company or (ii) the Company has called for redemption pursuant
to the Indenture all of the Notes under arrangements satisfactory to the
Trustee, the amounts described in clause (a) above have been deposited as
described therein, the conditions in clauses (i) and (ii) of the proviso to such
clause (a) have been satisfied and the certificate and opinion described in
clause (e) above have been delivered. Notwithstanding the foregoing, the Opinion
of Counsel required by clause (c) above need not be delivered if all Notes not
theretofore delivered to the Trustee for cancellation (i) have become due and
payable, (ii) will become due and payable on the maturity date within one year
or (iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company. In addition, the
Company may at its option and at any time elect to terminate its obligations
with respect to certain covenants that are set forth in the Indenture, some of
which are described under "-- Certain Covenants" above.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders of the Notes, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an Opinion of Counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each holder of
the Notes affected thereby, no amendment may: (i) reduce the amount of Notes
whose holders must consent to an amendment; (ii) reduce the rate of or change or
have the effect of changing the time for payment of interest, including
defaulted interest, on any Notes; (iii) reduce the principal of or change or
have the effect of changing the fixed maturity of any Notes, or change the date
on which any Notes may be subject to redemption or repurchase, or reduce the
redemption or repurchase price therefor; (iv) make any Notes payable in money
other than that stated in the Notes; (v) make any change in provisions of the
Indenture protecting the right of each holder of a Note to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting holders of a majority in
principal amount of a class of Notes to waive Defaults or Events of Default
(other than Defaults or Events of Default with respect to the payment of
principal of or interest on the Notes); or (vi) adversely affect the ranking of
the Notes or the Guarantees. In addition, without the consent of Holders of at
least 75% of the outstanding aggregate principal amount of Notes, an amendment
or waiver may not make any change to the Company's obligations to make and
consummate a Change of Control Offer in the event of a Change of Control or make
and consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto.
ADDITIONAL INFORMATION
The Indenture provides that the Company will deliver to the Trustee within
15 days after the filing of the same with the SEC, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the SEC pursuant to Section 13 or
15(d) of the Exchange Act. The Indenture further provides that, notwithstanding
that the Company may not be subject to
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the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company will file with the SEC, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided, however,
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Restricted Subsidiaries existing at the time such Person becomes a Restricted
Subsidiary of the Company or at the time it merges or consolidates with the
Company or any of its Subsidiaries or is assumed in connection with the
acquisition of assets from such Person and not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company; provided, however, that the term Affiliate shall not include the
Company or any Subsidiary of the Company so long as no Affiliate of the Company
has any direct or indirect interest therein, except through the Company or its
Subsidiaries. The term "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person which
constitute all or substantially all of the assets of such Person, any division
or line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(other than operating leases entered into in the ordinary course of business),
assignment or other transfer for value by the Company or any of its Restricted
Subsidiaries (including any Sale and Leaseback Transaction that does not give
rise to a Capitalized Lease Obligation) to any Person other than the Company or
a Restricted Subsidiary of the Company of (a) any Capital Stock of any
Restricted Subsidiary of the Company; or (b) any other property or
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assets (other than cash or Cash Equivalents) of the Company or any Restricted
Subsidiary of the Company other than in the ordinary course of business;
provided, however, that Asset Sales shall not include (i) a transaction or
series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration (exclusive of indemnities) of less
than $500,000, (ii) the sale of accounts receivable, (iii) the sale, lease,
conveyance, disposition or other transfer of inventory, wagering systems or
related equipment or intangible assets in the ordinary course of business, (iv)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
or any Guarantor as permitted under "-- Merger, Consolidation and Sale of
Assets", (v) sales, transfers or other dispositions of assets resulting from the
creation, incurrence or assumption of (but not any foreclosure with respect to)
any Lien not prohibited by the provisions described under "-- Limitation on
Liens", and (vi) sales, transfers or other dispositions of assets which are
Restricted Investments or Restricted Payments permitted by the provisions
described under "-- Limitation on Restricted Payments".
"Attributable Debt" in respect of a sale and leaseback transaction
consummated subsequent to the Issue Date means, at the time of determination,
the present value (discounted at the rate of interest implicit in such
transaction, determined in accordance with GAAP) of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction (including any period for which such lease has
been extended or may, at the option of the lessor, be extended).
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of corporate stock, including each class of common stock and
preferred stock of such Person and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of the Company or
such other Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (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 maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Rating Services or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptances
(or, with respect to foreign banks, similar instruments) maturing within one
year from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250 million; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; and (vi) investments
in money market funds which invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group") (whether or not otherwise in compliance with the
provisions of the Indenture), other than a Permitted Holder or Holders; (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
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compliance with the provisions of the Indenture); (iii) any Person or Group,
other than a Permitted Holder or Holders, shall become the owner, directly or
indirectly, beneficially, of shares representing more than 50% of the aggregate
voting power represented by the issued and outstanding Capital Stock of the
Company entitled under ordinary circumstances to elect as majority of the
directors of the Company; or (iv) the replacement of a majority of the Board of
Directors of the Company over a two-year period from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors then still in office who either were members of the Board of
Directors at the beginning of such period or whose election as a member of the
Board of Directors was previously so approved.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary or
nonrecurring gains or losses), (iii) Consolidated Interest Expense and (iv)
Consolidated Non-cash Charges.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment or retirement of
other Indebtedness (and the application of the proceeds thereof) at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date (other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities), as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any pro forma
expense and cost reductions calculated on a basis consistent with Regulation S-X
under the Securities Act) attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such Asset
Sale or Asset Acquisition (including the incurrence, assumption or liability for
any such Indebtedness or Acquired Indebtedness) occurred on the first day of the
Four Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such Person or any Restricted Subsidiary of such Person had directly incurred
or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
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"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in common stock) paid,
accrued or scheduled to be paid or accrued during such period times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated Federal, state and local tax rate
of such Person expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (i) the aggregate of all cash and
non-cash interest expense with respect to all outstanding Indebtedness of such
Person and its Restricted Subsidiaries, including the net costs associated with
Interest Swap Obligations, capitalized interest, and imputed interest with
respect to Attributable Debt (but excluding (i) the write-off of deferred
financing costs associated with the Indebtedness being refinanced with the
proceeds of the sale of the Notes and (ii) the amortization of deferred
financing charges associated with the issuance of the Notes and the New Credit
Agreement), for such period determined on a consolidated basis in conformity
with GAAP; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a) after
tax gains but not losses from Asset Sales (without regard to the $500,000
threshold in clause (i) of the definition of Asset Sales) or abandonments or
reserves relating thereto, (b) items classified as extraordinary or nonrecurring
gains but not losses, and the related tax effects according to GAAP, (c) the net
income (or loss) of any Person acquired in a pooling of interests transaction
accrued prior to the date it becomes a Subsidiary of such first Person or is
merged or consolidated with it or any Subsidiary, (d) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income is restricted by contract,
operation of law or otherwise, (e) the net loss of any Person, other than a
Restricted Subsidiary of the Company, (f) the net income of any Person, other
than a Restricted Subsidiary, in which such Person has an interest, except to
the extent of cash dividends or distributions paid to such Person or a
Restricted Subsidiary of such Person, and (g) gains from retirement of debt.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP less (to the extent otherwise included in accordance with GAAP) amounts
attributable to Disqualified Capital Stock.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Non-cash Consideration" means the fair market value of non-cash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Non-cash
Consideration pursuant to an officers' certificate executed by the principal
executive officer and the principal financial officer of the Company or such
Restricted Subsidiary.
"Disqualified Capital Stock" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event
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(other than an event which would constitute a Change of Control), matures
(excluding any maturity as the result of an optional redemption by the issuer
thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the sole option of the holder thereof (except, in
each case, upon the occurrence of a Change of Control), in whole or in part, on
or prior to the final maturity date of the Notes.
"Fair market value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under pressure or compulsion to complete the transaction. Fair market
value shall be determined by the board of directors of the Company acting
reasonably and in good faith and shall be evidenced by a board resolution
delivered to the Trustee.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture,
including, without limitation, those set forth in the 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
approved by a significant segment of the accounting profession.
"Guarantor" means (i) each of Autotote Lottery Corporation, Autotote
Enterprises, Inc., Autotote Communication Services, Inc., Marvin H. Sugarman
Productions, Inc., Racing Technology, Inc., Autotote Keno Corporation, Autotote
Systems, Inc., Autotote International, Inc., Autotote Management Corporation,
Autotote Mexico, Ltd. and Newark Holdings, Inc. and (ii) each of the Company's
Restricted Subsidiaries organized in the United States that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees to
be bound by the terms of the Indenture as a Guarantor; provided that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture.
"Indebtedness" means with respect to any Person, without duplication, (i)
the principal amount of all obligations of such Person for borrowed money, (ii)
all obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all Capitalized Lease Obligations of such Person,
(iv) all obligations of such Person to pay the deferred purchase price of
property, all conditional sale obligations and all obligations under any title
retention agreement (but excluding accounts payable and other current
liabilities arising in the ordinary course of business), (v) all obligations of
such person for the reimbursement of any obligor on any letter of credit or
banker's acceptance, (vi) guarantees and other contingent obligations of such
Person in respect of Indebtedness referred to in clauses (i) through (v) above
and clause (viii) below, (vii) all Indebtedness of any other Person of the type
referred to in clauses (i) through (vi) above which are secured by any Lien on
any property or asset of such Person, the amount of such obligation being deemed
to be the lesser of the fair market value at such date of any asset subject to
any Lien securing the Indebtedness of others and the amount of the Indebtedness
secured, (viii) all obligations under currency agreements relating to currency
swap agreements and interest swap agreements of such Person, and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock. The amount of
Indebtedness of any Person at any date shall be the amount of all unconditional
obligations described above, as such amount would be reflected on a balance
sheet prepared in accordance with GAAP, and the maximum liability at such date
of such Person for any contingent obligations described above.
"Interest Swap Obligations" means the obligations of any Person, pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic
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payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Subsidiaries on commercially reasonable terms. For the purposes
of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall
include and be valued at the fair market value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any
Investment shall be the original cost of such Investment plus the cost of all
additional Investments by the Company or any of its Restricted Subsidiaries,
without any adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment, reduced by the
payment of dividends or distributions (including tax sharing payments) in
connection with such Investment or any other amounts received in respect of such
Investment. If the Company or any Restricted Subsidiary sells or otherwise
disposes of any Capital Stock of any Restricted Subsidiary such that, after
giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary, the Company shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Capital Stock of such Subsidiary not sold or disposed.
"Issue Date" means the date of original issuance of the Old Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, 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).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) all out-of-pocket expenses and fees relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees and sales
commissions), (b) taxes paid or payable after taking into account any reduction
in consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) the amounts of (x) any repayments of debt secured,
directly or indirectly, by Liens on the assets which are the subject of such
Asset Sale or (y) any repayments of debt associated with such assets which is
due by reason of such Asset Sale (i.e., such disposition is permitted by the
terms of the instruments evidencing or applicable to such debt, or by the terms
of a consent granted thereunder, on the condition the proceeds (or portion
thereof) of such disposition be applied to such debt), and other fees, expenses
and other expenditures, in each case, reasonably incurred as a consequence of
such repayment of debt (whether or not such fees, expenses or expenditures are
then due and payable or made, as the case may be); (d) any portion of cash
proceeds which the Company determines in good faith should be reserved for
post-closing adjustments, it being understood and agreed that on the day that
all such post-closing adjustments have been determined, the amount (if any) by
which the reserved amount in respect of such Asset Sale exceeds the actual
post-closing adjustments payable by the Company or any of its Restricted
Subsidiaries shall constitute Net Cash Proceeds on such date and (e) all amounts
deemed appropriate by the Company (as evidenced by a signed certificate of the
Chief Financial Officer of the Company delivered to the Trustee) to be provided
as a reserve, in accordance with GAAP ("GAAP Reserves"), against any liabilities
associated with such assets which are the subject of such Asset Sale; (f) all
foreign, federal, state and local taxes payable (including taxes reasonably
estimated to the payable) in connection with or as a result of such Asset Sale;
and (g) with respect to Asset Sales by Restricted Subsidiaries of the Company,
the portion of such cash payments attributable to Persons holding a minority
interest in such Restricted Subsidiary. Notwithstanding the foregoing, Net Cash
Proceeds shall not
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include proceeds received in a foreign jurisdiction from an Asset Sale of an
asset located outside the United States to the extent (i) such proceeds cannot
under applicable law be transferred to the United States or (ii) such transfer
would result (in the good faith determination of the Board of Directors of the
Company set forth in a Board Resolution) in a foreign tax liability that would
be materially greater than if such Asset Sale occurred in the United States;
provided that if, as, and to the extent that any of such proceeds may lawfully
be in the case of clause (i) or are (in the case of clause (ii) transferred to
the United States, such proceeds shall be deemed to be cash payments that are
subject to the terms of this definition of Net Cash Proceeds.
"New Credit Agreement" means the New Credit Agreement dated as of July 28,
1997 between the Company and the lenders thereto including all related notes,
collateral documents and guarantees in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, increasing the total commitment under, refinancing, replacing or
otherwise restructuring (including adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Permitted Holders" means Thomas H. Lee Company (or any Person wholly-owned
or controlled by Thomas H. Lee Company (a "TH Lee Company") or any fund or trust
for which the Thomas H. Lee Company or a TH Lee Company acts as investment
advisor or over which Thomas H. Lee Company or a TH Lee Company has voting
control), Larry J. Lawrence (or Lawrence, Tyrrell Ortale & Smith, a New York
limited partnership of which Larry J. Lawrence is the general partner) and A.
Lorne Weil (or the 1989 Lorne Weil Trust).
"Permitted Indebtedness" means, without duplication, (i) the Notes, (ii)
Indebtedness incurred pursuant to the New Credit Agreement in an aggregate
principal amount at any time outstanding not to exceed the sum of the aggregate
commitments pursuant to the New Credit Agreement as in effect on the Issue Date
reduced by any required permanent repayments (which are accompanied by a
corresponding permanent commitment reduction) thereunder (excluding any such
required permanent repayment and corresponding permanent commitment reduction to
the extent refinanced at the time of payment under a replaced New Credit
Agreement) and less the amount of any prepayment made with the proceeds of an
Asset Sale in accordance with the "Limitation on Asset Sales" covenant, (iii)
other Indebtedness of the Company and its Subsidiaries outstanding on the Issue
Date, (iv) Interest Swap Obligations of the Company or any of its Subsidiaries
covering Indebtedness of the Company or any of its Subsidiaries; provided,
however, that any Indebtedness to which any such Interest Swap Obligations
correspond is otherwise permitted to be incurred under the Indenture; provided,
further, that such Interest Swap Obligations are entered into, in the judgment
of the Company, to protect the Company or any of its Subsidiaries from
fluctuation in interest rates on their respective outstanding Indebtedness, (v)
Indebtedness under Currency Agreements, (vi) intercompany Indebtedness owed by
the Company to any Wholly Owned Restricted Subsidiary of the Company or by any
Restricted Subsidiary of the Company to the Company or any Wholly Owned
Restricted Subsidiary of the Company for so long as such Indebtedness is held by
the Company or a Wholly Owned Restricted Subsidiary of the Company in each case
subject to no Lien held by a Person other than the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided, however, that if as of any date
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness under
this clause (vi), (vii) Acquired Indebtedness to the extent the Company could
have incurred such Indebtedness in accordance with the "Limitation on Incurrence
of Additional Indebtedness" covenant on the date such Indebtedness became
Acquired Indebtedness, (viii) (A) guarantees by Restricted Subsidiaries pursuant
to the "Limitation of Guarantees by Restricted Subsidiaries" covenant or
guarantees by Restricted Subsidiaries of Indebtedness of other Restricted
Subsidiaries to the extent that such Indebtedness is otherwise permitted under
the Indenture and (B) guarantees by the Company of its Wholly Owned Restricted
Subsidiaries' Indebtedness; provided that such Indebtedness is permitted to be
incurred under the Indenture, (ix) Indebtedness incurred by the Company or any
Restricted Subsidiary in connection with the purchase or improvement of property
(real or
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personal) or equipment or other capital expenditures in the ordinary course of
business, in aggregate not to exceed $10 million in any fiscal year of the
Company; provided, however, that any unused amounts under this clause (ix) may
be carried over to the next (but not any subsequent) fiscal year); and provided,
further, that any such unused amounts which are carried forward to the next
fiscal year are to be used only after the $10 million with respect to such
fiscal year has been used in full, (x) Indebtedness of the Company or any
Restricted Subsidiary evidenced by Capitalized Lease Obligations not to exceed
$10 million principal amount at any one time outstanding, (xi) guarantees,
letters of credit and indemnity agreements relating to performance and surety
bonds incurred in the ordinary course of business, (xii) any refinancing,
modification, replacement, renewal, restatement, refunding, deferral, extension,
substitution, supplement, reissuance or resale of existing or future
Indebtedness in accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant (other than pursuant to clause (ii), (vi), (ix), (x) or
(xiii) of this definition), including any additional Indebtedness incurred to
pay premiums required by the instruments governing such existing or future
Indebtedness as in effect at the time of issuance thereof ("Required Premiums")
and fees in connection therewith; provided, however, that any such event shall
not (1) result in an increase in the aggregate principal amount of Permitted
Indebtedness (except to the extent such increase is a result of a simultaneous
incurrence of additional Indebtedness (A) to pay Required Premiums and related
fees or (B) otherwise permitted to be incurred under the Indenture) of the
Company and its Subsidiaries and (2) create Indebtedness with a Weighted Average
Life to Maturity at the time such Indebtedness is incurred that is less than the
Weighted Average Life to Maturity at such time of the Indebtedness being
refinanced, modified, replaced, renewed, restated, refunded, deferred, extended,
substituted, supplemented, reissued or resold, and (xiii) additional
Indebtedness of the Company and its Restricted Subsidiaries in an aggregate
principal amount not to exceed $20 million at any one time outstanding (which
amount may, but need not, be incurred in whole or in part under the New Credit
Agreement).
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in, or for the benefit of, any Restricted
Subsidiary of the Company (whether existing on the Issue Date or created
thereafter and including Investments in any Person, if after giving effect to
such Investment, such Person would be a Restricted Subsidiary of the Company)
and Investments in, or for the benefit of, the Company by any Restricted
Subsidiary of the Company; (ii) cash and Cash Equivalents; (iii) Investments
existing on the Issue Date (including the Company's Investment on the Issue Date
in SJC Video Corporation which shall be designated as an Unrestricted Subsidiary
on the Issue Date); (iv) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers or in
settlement of or other resolution of claims or disputes, and in each case,
extensions, modifications and remands thereof; (v) so long as no Default or
Event of Default has occurred loans and advances in the ordinary course of
business by the Company and its Restricted Subsidiaries to their respective
employees not to exceed $1 million at any one time outstanding; (vi) so long as
no Default or Event of Default has occurred, additional Investments in a Person
or Persons principally engaged in a Related Business not to exceed $20 million
at any one time outstanding; (vii) Investments received by the Company or its
Restricted Subsidiaries as consideration for asset sales, including Asset Sales;
provided, however, in the case of an Asset Sale, such Asset Sale is effected in
compliance with the "Limitation on Asset Sales" covenant; (viii) Currency
Agreements and Interest Swap Obligations entered into in the ordinary course of
the Company's or its Restricted Subsidiaries' business and otherwise in
compliance with the Indenture; (ix) the amount of the Company's Investment in
TEK as of the Issue Date at such time as TEK ceases to be a Restricted
Subsidiary pursuant to the TEK Transaction; and (x) guarantees by the Company or
any of its Restricted Subsidiaries of Indebtedness or other obligations
otherwise permitted to be incurred by the Company or any of its Restricted
Subsidiaries under the Indenture.
"Permitted Liens" means (i) Liens for taxes, assessments or governmental
charges or claims either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may be required
pursuant to GAAP; (ii) Statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business; (iii) Liens incurred
or deposits made in the ordinary course of business, including in connection
with workers' compensation, unemployment insurance and other types of social
security, including any Lien securing letters
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of credit issued in the ordinary course of business in connection therewith, or
to secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return-of-money bonds
and other similar obligations (exclusive of obligations for the payment of
borrowed money); (iv) Judgment Liens not giving rise to an Event of Default; (v)
Easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real property not interfering in any material respect
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries; (vi) Any interest or title of a lessor under any
Capitalized Lease Obligation; (vii) (A) Purchase money Liens to finance property
or assets of the Company or any Restricted Subsidiary of the Company acquired in
the ordinary course of business; provided, however, that (1) the related
purchase money Indebtedness shall not exceed the cost of such property or assets
and shall not be secured by any property or assets of the Company or any
Restricted Subsidiary of the Company other than the property and assets so
acquired and (2) the Lien securing such Indebtedness shall be created within 90
days of such acquisition; and (B) Liens securing Indebtedness incurred in
reliance on clause (ix) of the definition of Permitted Indebtedness to the
extent the assets subject to such Lien are acquired or improved with the
proceeds of such Indebtedness; (viii) Liens upon specific items of inventory or
other goods and proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the account of such Person
to facilitate the purchase, shipment, or storage of such inventory or other
goods; (ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof; (x) Liens encumbering
deposits made to secure obligations arising from statutory, regulatory,
contractual, or warranty requirements of the Company or any of its Restricted
Subsidiaries, including rights of offset and set-off; (xi) Liens securing
Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness
that is otherwise permitted under the Indenture; (xii) Liens securing
Indebtedness under Currency Agreements which Currency Agreements relate to
Indebtedness that is otherwise permitted under the Indenture; (xiii) Liens
existing on the Issue Date, together with any Liens securing Indebtedness
incurred in reliance on clause (xi) of the definition of Permitted Indebtedness
in order to refinance the Indebtedness secured by Liens existing on the Issue
Date; provided, however, that in the case of such clause (xi), the Liens
securing the refinancing Indebtedness shall not extend to property other than
that pledged under the Liens securing the Indebtedness being refinanced; (xiv)
Liens securing Acquired Indebtedness incurred in accordance with the "Limitation
on Incurrence of Additional Indebtedness" covenant; provided that (A) such Liens
secured such Acquired Indebtedness at the time of and prior to the incurrence of
such Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company and were not granted in connection with, or in anticipation of, the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company and (B) such Liens do not extend to or cover any
property or assets of the Company or of any of its Restricted Subsidiaries other
than the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary of the Company and are no more favorable to the
lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company; (xv) Liens securing any Indebtedness and other
obligations under the New Credit Agreement to the extent constituting Permitted
Indebtedness; (xvi) Liens securing Indebtedness incurred in reliance on clause
(xiii) of the definition of Permitted Indebtedness; (xvii) Leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries; (xviii) Liens on
contract revenues to secure Indebtedness incurred in reliance on clause (ix),
(x) or (xi) of the definition of Permitted Indebtedness; provided that the
proceeds of such Indebtedness were used by the Company or a Restricted
Subsidiary to acquire property or equipment which was utilized by the Company or
a Restricted Subsidiary to generate, in whole or in part, such contract
revenues; and (xix) Liens at any time outstanding with respect to assets of the
Company and its Restricted Subsidiaries the fair market value of which at the
time the Lien was imposed does not exceed $500,000.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
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"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act.
"Productive Assets" means assets (including Capital Stock and licenses or
other similar rights to operate) of a kind used or usable in the businesses of
the Company and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale; provided, however, that accounts receivable acquired as
part of an acquisition of assets of a kind used or usable in such businesses
shall be deemed to be Productive Assets.
"Public Equity Offering" means an underwritten public offering of Qualified
Capital Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act.
"Qualified Capital Stock" means any stock that is not Disqualified Capital
Stock.
"Related Business" means the businesses of the Company and its Restricted
Subsidiaries as conducted on the Issue Date and similar or related businesses or
reasonable extensions, developments or expansions thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property; provided,
however, that a Sale and Leaseback Transaction shall not include a transaction
or series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration (exclusive of indemnities) of less
than $250,000.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.
"Subordinated Debentures" means the Company's 5 1/2% Convertible
Subordinated Debentures due 2001.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"TEK Transaction" means the proposed disposition by the Company or its
Restricted Subsidiaries of up to a 50% equity interest in TEK Turfelektronik
GmbH ("TEK") to customers of TEK for future consideration to consist of long
term service contracts and capital expenditure commitments.
"Unrestricted Subsidiary" of any Person means (i) SJC Video Corporation,
(ii) any Subsidiary of such Person that at the time of determination shall be or
continue to be designated an Unrestricted Subsidiary by the Board of Directors
of such Person in the manner provided below; and (iii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any other Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated; provided,
however, that (x) the Company certifies to the Trustee that such designation
complies with the "Limitation on Restricted Payments" covenant and (y) each
Subsidiary to be so designated and each of its Subsidiaries has not at the time
of designation, and does not thereafter, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of its Restricted Subsidiaries. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x)
immediately after giving effect to such designation, the
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Company is able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant and (y) immediately before and immediately
after giving effect to such designation, no Default or Event of Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than directors' qualifying shares) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Old Notes in the aggregate principal amount of $110.0 million were issued
originally in global form (the "Global Old Note"). Except as described in the
next paragraph, the New Notes initially will be represented by a single,
permanent global certificate in definitive, fully registered form (the "Global
New Note", and together with the Global Old Note, the "Global Notes"). Upon
issuance, the Global New Note, will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the name
of a nominee of DTC.
Holders tendering Old Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global New Note (and
which are thus ineligible to trade through DTC) (collectively referred to herein
as the "Non-Global Purchasers") will be issued New Notes in registered form
(a "Certificated Security"). Certificated Securities shall initially be
registered in the name of a nominee of DTC and be deposited with, or on behalf
of, DTC. Beneficial owners of Certificated Securities, however, may request
registration of such Certificated Securities in their names or the names of
their nominees.
The Global New Note. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global New Note, DTC or its
custodian will credit, on its internal system, the principal amount of New Notes
of the individual beneficial interests represented by such global securities to
the respective accounts of persons who have accounts with such depositary
("participants") and (ii) ownership of beneficial interests in the Global New
Note will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
New Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the New Notes represented by such Global New Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
New Note will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any) and interest on, a Global
New Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in a Global New
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of a Global New Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global New Note
as shown
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on the records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in a Global New Note held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell New Notes to persons in states which require physical delivery of the
New Notes, or to pledge such securities, such holder must transfer its interest
in the Global New Note, in accordance with the normal procedures of DTC and with
the procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Old Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global New Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global New Note and a successor depositary is
not appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Note.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material anticipated federal income
tax consequences expected to result to Holders from the acquisition, ownership
and disposition of the New Notes. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative
pronouncements, all of which are subject to change, possibly with retroactive
effect. No ruling has been or will be requested by the Company from the Internal
Revenue Service (the "Service") on any matters relating to the New Notes, and
there can be no assurance that the Service will have a similar view with respect
to the tax consequences described below.
The following discussion is for general information only. The tax treatment
of a Holder of the New Notes may vary depending upon such Holder's particular
situation. The discussion only addresses the tax consequences to Holders who
acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes
as capital assets, and does not deal with special classes of Holders that may be
subject to special rules not discussed below, such as insurance companies,
tax-exempt organizations, financial institutions, dealers in securities, foreign
corporations and persons who are not citizens or residents of the United States.
EACH
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HOLDER OF OLD NOTES SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
THE EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a Holder thereof for federal income tax purposes.
An exchanging Holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The Old Notes were issued and the New Notes will be issued without original
issue discount. Stated interest on the Old and New Notes will be taxable to a
Holder as ordinary interest income at the time it is accrued or paid in
accordance with such Holder's method of accounting for tax purposes.
BOND PREMIUM ON THE NEW NOTES
If a Holder of a New Note purchased the Old Notes for an amount in excess
of the amount payable at the maturity date (or a call date, if appropriate) of
the Old Notes, the Holder may deduct such excess as amortizable bond premium
over the aggregate terms of the Old Notes and the New Notes (taking into account
earlier call dates, as appropriate), under a yield-to-maturity formula. The
deduction is available only if an election is made by the Holder or is in
effect. This election is revocable only with the consent of the Service. The
election applies to all obligations owned or subsequently acquired by the
Holder. The Holder's adjusted tax basis in the Old Notes and the New Notes will
be reduced to the extent of the deduction of amortizable bond premium. Except as
may otherwise be provided in future regulations, under the Code the amortizable
bond premium is treated as an offset to interest income on the Old Notes and the
New Notes rather than as a separate deduction item.
MARKET DISCOUNT ON THE NEW NOTES
Tax consequences of a disposition of the New Notes may be affected by the
market discount provisions of the Code. These rules generally provide that if a
Holder acquired the Old Notes (other than in an original issue) at a market
discount which equals or exceeds 1/4 of 1% of the stated redemption price of the
Old Notes at maturity multiplied by the number of remaining complete years to
maturity and thereafter recognizes gain upon a disposition (or makes a gift) of
the New Notes, the lesser of (i) such gain (or appreciation, in the case of a
gift) or (ii) the portion of the market discount which accrued while the Old or
New Notes were held by such Holder will be treated as ordinary income at the
time of the disposition (or gift). For these purposes, market discount means the
excess (if any) of the stated redemption price at maturity over the basis of
such Old Notes immediately after their acquisition by the Holder. A Holder of
the New Notes may elect to include any market discount (whether accrued under
the Old Notes or the New Notes) in income currently rather than upon disposition
of the New Notes. This election once made applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies, and may not be revoked without the consent of the Service.
A Holder of any New Note who acquired the Old Note at a market discount
generally will be required to defer the deduction of a portion of the interest
on any indebtedness incurred or maintained to purchase or carry such Old or New
Note until the market discount is recognized upon a subsequent disposition of
such New Note. Such a deferral is not required, however, if the Holder elects to
include accrued market discount in income currently.
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REDEMPTION OR SALE OF THE NEW NOTES
Generally, any redemption or sale of the New Notes by a Holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the extent that
such cash or property received is attributable to accrued, but previously
untaxed, interest) and the Holder's tax basis in the New Notes. The tax basis of
a Holder of the New Notes should generally be equal to the price paid for the
Old Notes exchanged therefor, plus any accrued market discount on the New Notes
(and the Old Notes exchanged therefor) included in the Holder's income prior to
sale or redemption of the New Notes, or reduced by any amortizable bond premium
applied against the Holder's income prior to sale or redemption of the New
Notes. Except to the extent it constitutes accrued market discount, such gain or
loss generally would be long-term capital gain or loss if the holding period
exceeded one year which, for individual Holders, would be taxed at the lowest
rates currently applicable to capital gains if the holding period exceeded
eighteen months.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A 31% "backup" withholding tax and information reporting requirements apply
to certain payments of interest and original issue discount on an obligation,
and to proceeds of the sale of an obligation before maturity, to certain
non-corporate holders. The Company, and/or any paying and/or collection agent,
including a broker, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
unless the holder furnishes its taxpayer identification number (i.e., social
security number in the case of an individual) in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies (with respect to payments of interest) as to no loss of exemption from
backup withholding and meets certain other conditions. Backup withholding,
however, in any event, generally does not apply to payments to certain "exempt
recipients" such as corporations.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC enunciated in Morgan
Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings
Corporation (available May 13, 1988), and interpreted in the SEC's letters to
Shearman & Sterling (available July 2, 1993) and K-III Communications
Corporation (available May 14, 1993), and similar no-action or interpretive
letters issued to third parties, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any Holder thereof (other than any
such Holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holder's business and such
Holder is not participating, does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Accordingly, any Holder using the Exchange Offer to
participate in a distribution of the New Notes will not be able to rely on such
no-action letters. Notwithstanding the foregoing, each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with any resale of New
Notes received in exchange for Old Notes if such Old Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of 180 days following the consummation of the Exchange
Offer, it will make this Prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. See "The Exchange
Offer."
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus as required, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. By acceptance of the
Exchange Offer, each broker-dealer that receives New Notes pursuant to the
Exchange Offer hereby agrees to notify the Company prior to using this
Prospectus in connection with the sale or transfer of New Notes and acknowledges
and agrees that, upon receipt of notice from the Company of the happening of any
event which makes any statement in this Prospectus untrue in any material
respect or which requires the making of any changes in this Prospectus in order
to make the statements herein not misleading (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend use of
this Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such broker-dealer.
For a period of 180 days from the consummation of the Exchange Offer, the
Company will send a reasonable number of additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal. The Company will pay all
the expenses incident to the Exchange Offer (which shall not include the
expenses of any Holder in connection with resales of the New Notes). The Company
has agreed to indemnify the Holders of Old Notes, including any broker-dealers
participating in the Exchange Offer, against certain liabilities, including
liabilities under the Securities Act.
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There is no existing market for the New Notes and there can be no assurance
as to the liquidity of any market that may develop for the New Notes, the
ability of the Holders of the New Notes to sell their New Notes or the price at
which Holders would be able to sell their New Notes. Future trading prices of
the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. The Company has been advised by the Initial Purchaser that
the Initial Purchaser intends to make a market in the Notes, subject to the
limits imposed by the Securities Act and the Exchange Act and subject to any
limits imposed during the pendency of any registration statement or shelf
registration statement; however, it is not obligated to do so, and may
discontinue such market-making at any time without notice. The Company does not
currently intend to list the New Notes on any securities exchange. Therefore, no
assurance can be given as to the liquidity of the trading market for the New
Notes. In addition, such market-making activities may be limited during the
Exchange Offer and the pendency of any shelf registration statement relating to
the Notes. See "Risk Factors -- Absence of Public Market for the New Notes."
LEGAL MATTERS
The legality and binding nature of the securities offered hereby will be
passed upon on behalf of the Company by Kramer, Levin, Naftalis & Frankel, New
York, New York.
ACCOUNTANTS
The consolidated balance sheets of the Company as of October 31, 1996 and
1995, and the related consolidated statements of operations, stockholders equity
(deficit) and cash flows for each of the years in the three-year period ended
October 31, 1996, together with the related notes, financial statement schedule
and the report of KPMG Peat Marwick LLP, independent certified public
accountants, all contained in the Company's 1996 Annual Report on Form 10-K, are
included herein.
98
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Audited Financial Statements:
Consolidated Balance Sheets as of October 31, 1995 and 1996........................... F-3
Consolidated Statements of Operations for the years ended October 31, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended October
31, 1994, 1995 and 1996............................................................. F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1994, 1995 and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-8
Schedule II.:
Valuation and Qualifying Accounts..................................................... F-35
Unaudited Financial Statements:
Consolidated Balance Sheets as of October 31, 1996 and April 30, 1997................. F-36
Consolidated Statements of Operations for the six months ended April 30, 1996 and
1997................................................................................ F-37
Consolidated Statements of Cash Flows for the six months ended April 30, 1996 and
1997................................................................................ F-38
Notes to Consolidated Financial Statements............................................ F-39
</TABLE>
F-1
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Autotote Corporation:
We have audited the consolidated financial statements of Autotote
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Autotote
Corporation and subsidiaries as of October 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
New York, New York
December 5, 1996, except for Notes 7 and 21
which are as of January 29, 1997 and note 22
which is as of July 1, 1997
F-2
<PAGE> 110
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 4,991 5,988
Restricted cash.................................................... 1,282 611
Accounts receivable, net of allowance for doubtful accounts of
$1,679 and $2,053 in 1995 and 1996, respectively................ 21,700 18,257
Inventories........................................................ 12,497 5,780
Unbilled receivables............................................... 4,166 6,901
Prepaid expenses, deposits and other current assets................ 3,121 3,131
-------- --------
Total current assets....................................... 47,757 40,668
-------- --------
Property and equipment, at cost...................................... 186,005 186,249
Less accumulated depreciation...................................... 67,745 90,369
-------- --------
Net property and equipment................................. 118,260 95,880
-------- --------
Goodwill, net of amortization........................................ 26,986 21,024
Operating right, net of amortization................................. 17,848 16,848
Other assets and investments......................................... 30,170 22,373
-------- --------
$ 241,021 196,793
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt............................. $ 10,772 9,234
Accounts payable................................................... 16,448 14,242
Accrued liabilities................................................ 23,783 20,057
Income taxes payable............................................... 1,878 379
-------- --------
Total current liabilities.................................. 52,881 43,912
-------- --------
Deferred income taxes................................................ 5,807 7,675
Other long-term liabilities.......................................... 3,984 5,612
Long-term debt, excluding current installments....................... 126,492 119,790
Long-term debt, convertible subordinated debentures.................. 40,000 40,000
-------- --------
Total liabilities.......................................... 229,164 216,989
-------- --------
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, 2,000 shares
authorized, none outstanding.................................... -- --
Class A common stock, par value $0.01 per share, 99,300 shares
authorized, 30,528 and 31,474 shares outstanding at October 31,
1995 and 1996, respectively..................................... 306 315
Class B non-voting common stock, par value $0.01 per share, 700
shares authorized, none outstanding............................. -- --
Additional paid-in capital......................................... 140,050 143,369
Accumulated deficit................................................ (129,469) (163,664)
Treasury stock, at cost............................................ (295) (102)
Currency translation adjustment.................................... 1,265 (114)
-------- --------
Total stockholders' equity (deficit)....................... 11,857 (20,196)
-------- --------
Commitments and contingencies (Notes 7, 8, 12 and 14)................ $ 241,021 196,793
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 111
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Services.................................................... $ 98,592 132,260 137,794
Sales....................................................... 50,458 20,924 38,441
-------- ------- -------
149,050 153,184 176,235
-------- ------- -------
Operating expenses (exclusive of depreciation and amortization
shown below):
Services.................................................... 61,158 78,569 85,742
Inventory, equipment and contract adjustments and strike
expenses................................................. 6,781 -- --
Sales....................................................... 35,753 15,661 25,864
-------- ------- -------
103,692 94,230 111,606
-------- ------- -------
Total gross profit.................................. 45,358 58,954 64,629
Selling, general and administrative expenses.................. 25,298 36,540 32,853
Restructuring and write-off of assets......................... 8,576 18,241 (649)
Depreciation and amortization................................. 25,418 35,463 40,853
-------- ------- -------
Operating loss...................................... (13,934) (31,290) (8,428)
-------- ------- -------
Other deductions (income):
Interest expense............................................ 6,408 16,362 14,837
Litigation settlement....................................... -- -- 6,800
Other (income) expense...................................... (952) (436) 1,687
-------- ------- -------
5,456 15,926 23,324
-------- ------- -------
Loss before income tax expense (benefit) and extraordinary
item..................................................... (19,390) (47,216) (31,752)
Income tax expense (benefit).................................. (1,462) 2,673 2,443
-------- ------- -------
Loss before extraordinary item.............................. (17,928) (49,889) (34,195)
Extraordinary item -- write-off of financing fees........... 4,222 -- --
-------- ------- -------
Net loss.................................................... $(22,150) (49,889) (34,195)
======== ======= =======
Loss per common share:
Loss per common share before extraordinary item............. $ (0.64) (1.72) (1.09)
Extraordinary item -- write-off of financing fees........... (0.15) -- --
-------- ------- -------
Loss per common share....................................... $ (0.79) (1.72) (1.09)
======== ======= =======
Weighted average number of common shares outstanding.......... 28,174 28,965 31,305
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 112
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED TREASURY TRANSLATION STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK ADJUSTMENT EQUITY (DEFICIT)
------ ---------- ----------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1993....... $279 133,390 (57,430) -- (160) 76,079
Exercise of stock options........ 4 1,398 -- -- -- 1,402
Exercise of warrants............. 5 76 -- -- -- 81
Currency translation
adjustment..................... -- -- -- -- 309 309
Net loss......................... -- -- (22,150) -- -- (22,150)
---- ------- -------- ---- ---- -------
Balances, October 31, 1994....... 288 134,864 (79,580) -- 149 55,721
Exercise of stock options........ 2 439 -- (235) -- 206
Issuance of Class A common stock,
net of issuance expense........ 16 4,521 -- -- -- 4,537
Exercise of warrants............. -- 60 -- (60) -- --
Deferred compensation............ -- 166 -- -- -- 166
Currency translation
adjustment..................... -- -- -- -- 1,116 1,116
Net loss......................... -- -- (49,889) -- -- (49,889)
---- ------- -------- ---- ---- -------
Balance, October 31, 1995........ 306 140,050 (129,469) (295) 1,265 11,857
Issuance of Class A common stock,
net of issuance expenses....... 9 1,961 -- 193 -- 2,163
Issuance of warrants in lieu of
cash........................... -- 1,012 -- -- -- 1,012
Deferred compensation............ -- 346 -- -- -- 346
Currency translation
adjustment..................... -- -- -- -- (1,379) (1,379)
Net loss......................... -- -- (34,195) -- -- (34,195)
---- ------- -------- ---- ---- -------
Balance, October 31, 1996........ $315 143,369 (163,664) (102) (114) (20,196)
==== ======= ======== ==== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 113
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(22,150) (49,889) (34,195)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization........................... 25,418 35,463 40,853
Write-off of non-cash financing fees.................... 4,222 -- --
Restructuring charges and asset write-offs, net of cash
payments.............................................. 8,576 17,359 (649)
Change in deferred income taxes......................... (989) 854 1,868
Litigation settlement, net of cash payments............. -- -- 4,250
Loss on asset sales..................................... -- 314 1,401
Non-cash interest charges............................... -- 1,564 636
Changes in operating assets and liabilities, net of
effects of purchase/disposition of subsidiaries:
Restricted cash....................................... (633) (649) 671
Accounts receivable................................... (10,579) 6,576 1,977
Inventories........................................... 3,467 (4,276) 5,920
Unbilled receivables.................................. (6,015) 2,264 (3,182)
Accounts payable...................................... 2,812 (616) (1,834)
Accrued liabilities................................... 6,114 (2,578) (3,110)
Other................................................... (2,801) 1,604 262
-------- -------- --------
Total adjustments.................................. 29,592 57,879 49,063
-------- -------- --------
Net cash provided by operating activities.................... 7,442 7,990 14,868
-------- -------- --------
Cash flows from investing activities:
Capital expenditures....................................... (19,533) (9,990) (2,103)
Expenditures for equipment under wagering systems
contracts............................................... (39,932) (8,150) (7,138)
Increase in other assets and investments................... (20,629) (13,262) (3,007)
Purchase of companies, net of cash acquired................ -- (14,400) --
Proceeds from asset sales.................................. -- 1,000 4,684
Other...................................................... (350) 988 (325)
-------- -------- --------
Net cash used in investing activities........................ (80,444) (43,814) (7,889)
-------- -------- --------
Cash flows from financing activities:
Net repayments under lines of credit....................... (474) (250) --
Net borrowings under senior bank credit facility........... 101,448 27,832 2,610
Proceeds from issuance of long-term debt................... 17,556 4,198 2,550
Payments on long-term debt................................. (51,562) (2,367) (10,829)
Net proceeds from issuance of common stock................. 1,483 4,495 --
-------- -------- --------
Net cash provided (used) by financing activities............. 68,451 33,908 (5,669)
-------- -------- --------
Effect of exchange rate changes on cash...................... 137 797 (313)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............. (4,414) (1,119) 997
Cash and cash equivalents, beginning of year................. 10,524 6,110 4,991
-------- -------- --------
Cash and cash equivalents, end of year....................... $ 6,110 4,991 5,988
======== ======== ========
</TABLE>
F-6
<PAGE> 114
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING ACTIVITIES
1994
Net transfers from goodwill to property and equipment were $6,751 in
accordance with finalization of purchase price allocations for the 1993
acquisitions. See notes 3 and 8 for a description of acquisitions and capital
lease transactions.
1995 and 1996
See notes 7, 13 and 14 for a description of the issuance of warrants,
assumption of mortgage by the buyer of the sports wagering business, capital
lease transactions, the exchange of services for common stock and, in 1995, the
exchange of stock options for Performance Accelerated Restricted Stock.
Supplemental cash flow information
Cash paid during the year for:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Interest (net of interest capitalized of $1,113
and $81 in 1994 and 1995, respectively)...... $4,979 12,504 14,318
Income taxes................................... $2,386 3,260 2,291
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 115
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1996
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the Business
Autotote Corporation (the Company) and its subsidiaries are primarily
engaged in the design, sale and operation of computerized wagering systems for
pari-mutuel wagering, sports/race wagering, simulcasting services and lottery
applications in the United States, Europe and Asia, as well as the operation of
certain off-track betting concerns in the United States and Europe.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and subsidiaries in which the Company's ownership is greater than
50%. Investments in other entities where the Company has the ability to exercise
significant influence over the investee are accounted for principally on the
equity basis. Under the equity method, investments are stated at cost plus the
Company's equity in undistributed earnings after acquisition.
All significant inter-company balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity at the date of purchase of three months or less to be cash equivalents.
(d) Restricted Cash
Restricted cash represents amounts on deposit by customers for TeleBet
wagering. State regulations require the Company to maintain such balances until
deposited amounts are wagered or returned to the customer.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
as follows:
<TABLE>
<CAPTION>
ITEM COST METHOD
------------------------------------ -----------------------------------------------
<S> <C>
Parts............................... First-in, first-out or weighted moving average.
Work-in-process & Finished goods.... Specific identification or weighted moving
average for direct material and labor; other
fixed and variable production costs are
allocated as a percentage of direct labor cost.
Ticket paper........................ First-in, first-out
</TABLE>
The Company adjusts inventory accounts on a periodic basis to reflect the
impact of potential obsolescence.
(f) Unbilled Receivables
Unbilled receivables represent costs and related earnings in excess of
payments made by customers.
F-8
<PAGE> 116
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED LIFE
ITEM IN YEARS
----------------------------------------------------- --------------
<S> <C>
Machinery and equipment.............................. 3-7
Buildings............................................ 15-40
Transportation....................................... 3-7
Furniture and fixtures............................... 5-10
Building and leasehold improvements.................. 5-30
</TABLE>
Depreciation expense includes the amortization of capital leased assets.
(h) 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 $9,482,000 and $7,034,000
at October 31, 1995 and 1996, respectively.
(i) Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies. The excess of costs over net assets
acquired arising from the Company's acquisition of Autotote Lottery, SEPMO and
IDB is being amortized on a straight-line basis over five years. The excess of
costs over net assets acquired for Tele Control, and ETAG is being amortized on
a straight-line basis over 7 and 10 years, respectively. Total goodwill amounted
to $26,986,000 and $21,024,000 net of accumulated amortization of $8,673,000 and
$13,822,000 as of October 31, 1995 and 1996, respectively.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future cash flows of the acquired
operation and other considerations. The amount of impairment of goodwill, if
any, is measured based on projected discounted future cash flows.
(j) Operating Right
On July 1, 1993, the Company acquired the exclusive right to operate the
Connecticut off-track betting system. This operating asset is being amortized on
a straight-line basis over twenty years and amounted to $17,848,000 and
$16,848,000 net of accumulated amortization of $2,357,000 and $3,357,000 at
October 31, 1995 and 1996, respectively.
(k) 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 employ-
F-9
<PAGE> 117
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
ment agreements arising primarily from business acquisitions. These capitalized
costs are amortized on the straight-line basis over their useful lives.
(l) Revenue Recognition
Revenues from wagering system, simulcast and lottery service contracts are
recognized over the contract period pursuant to the terms of the contracts.
Costs of providing operating services under contracts are charged to earnings in
the period incurred. Revenue from the operation of off-track betting concerns is
recognized based on a percentage of amounts wagered.
Revenues from major contracts for the sale of wagering systems and revenues
for contracted software development are recognized on the percentage of
completion method of accounting based on the ratio of costs incurred to the
total estimated costs. Any anticipated losses on fixed price contracts are
charged to earnings when such losses can be estimated. The Company recognizes
revenue from software licenses upon shipment if post-delivery obligations are
insignificant and if the terms of the agreement are such that the payment
obligation is non-cancelable and non-refundable. Revenue arising from the sale
of component equipment and supplies is recognized when shipped.
(m) 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 tax bases 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.
(n) Loss Per Common Share
Loss per common share is based on the weighted average number of shares of
common stock outstanding during the period. Common stock equivalents are not
included in the calculation of loss per share since their inclusion would be
anti-dilutive.
(o) Foreign Currency Translation
Assets and liabilities of foreign operations are translated at year-end
rates of exchange and operations are translated at the average rates of exchange
for the year. Gains or losses resulting from translating the foreign currency
financial statements are accumulated as a separate component of stockholders
equity (deficit). Gains or losses resulting from foreign currency transactions
are included in other income (deductions) in the consolidated statements of
operations.
(p) Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the more significant estimates being made involve
percentage of completion for contracted software development projects,
capitalization of software development costs, evaluation of the recoverability
of assets and assessment of litigation and contingencies, including income and
other taxes. Actual results could differ from those estimates.
F-10
<PAGE> 118
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
(q) Reclassification
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current presentation.
(2) UNUSUAL ITEMS
In fiscal 1994, the Company recorded $15.4 million of unusual charges.
These charges included $3.9 million primarily consisting of inventory, equipment
and contract adjustments in connection with an acquisition; restructuring
charges of $3.8 million resulting from closing the Company's Newark, Delaware
manufacturing facility and the discontinuing of certain product lines; a $4.7
million write-off of certain assets principally relating to domestic and
overseas projects and costs of $2.8 million incurred as a result of a strike by
the field service employees of the Company's pari-mutuel operations in North
America. In addition, the Company recorded an extraordinary item consisting of a
non-cash write-off of financing fees and expenses of $4.2 million associated
with the Company's repayment of its prior senior bank credit facility. The
Company has satisfied all cash obligations with respect to the 1994 unusual
charges.
In fiscal 1995, the Company recognized unusual charges of $20.9 million,
substantially resulting from the Company's restructuring, and certain valuation
adjustments.
Restructuring charges of $11.6 million were attributable to the closure of
the Owings Mills Lottery support facility and the scaling back of certain
international activities, including the planned closing of the Company's
manufacturing facility in Ballymahon, Ireland. The decision to close the
aforementioned facilities resulted in the elimination of approximately 105
full-time positions. The restructuring charge of $11.6 million included $2.0
million in employee termination benefits; $1.1 million attributable to the
cancellation of certain leasehold contracts; $3.2 million in connection with the
write-down of inventory and equipment previously used in the lottery terminal
manufacturing process including the repayment of certain foreign capital
equipment economic development grants; $4.3 million in capitalized software
systems development costs written-off in connection with the Company's decision
to terminate support for certain of its domestic lottery products and $1.0
million in other miscellaneous asset valuation adjustments and expenses.
The Company wrote-off $6.6 million relating to certain investments and
other non-current assets which included $2.7 million attributable to the
Company's Mexican VGM contracts. The decision to write-off the Company's
investment in Mexican VGM contracts was based on the continued economic and
political turmoil in Mexico which repeatedly interfered with the Company's
ability to complete implementation of the contracts. Also included in the
write-off of investments and other non-current assets was $2.6 million primarily
attributable to lottery terminals, and $1.3 million attributable to other
assets. Technical limitations led to the Company's re-evaluation of the
continued viability of the lottery terminals. The remaining $2.7 million of
unusual charges included miscellaneous asset valuation adjustments, principally
consisting of receivable write-offs of $1.6 million and severance costs of $0.4
million.
In addition, the Company recorded $1.7 million of unusual charges for bank
credit agreement costs primarily relating to a waiver of certain financial
covenants under the Company's Senior Facility.
As a result of these charges, the Company anticipated total cash
obligations of approximately $5.9 million, of which $4.3 million was paid
through October 31, 1996 and $0.6 million was reversed because of the Company's
decision to continue limited manufacturing in Ireland. The restructurings were
completed in fiscal 1996 and the Company has satisfied all cash obligations with
respect to the 1995 restructuring charges.
In the third quarter of fiscal 1996, the Company recorded charges in other
deductions of $.6 million for costs incurred in connection with the Company's
unsuccessful third quarter 1996 debt offering, and charges in selling, general
and administrative expense of $.6 million for contractual payments related to
the departure of the President of the Company. Partially offsetting these costs
was the reversal of $.6 million of 1995
F-11
<PAGE> 119
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) UNUSUAL ITEMS -- (CONTINUED)
restructuring cost accruals because of the Company's current plan to continue
limited manufacturing of wagering terminals at its Ireland plant.
(3) ACQUISITIONS
1994
On July 20, 1994, Marvin H. Sugarman Productions, Inc. ("MHSP") and Racing
Technology, Inc. ("RTI") were acquired in an exchange of 500,000 shares of the
Company's Class A Common Stock for all of the outstanding shares of MHSP and
RTI. The transaction was accounted for as a pooling of interests.
1995
On November 1, 1994, the Company acquired 80% of the outstanding capital
stock of the holding company of SEPMO S.A., ("SEPMO"), a French supplier of
wagering systems and services to the French off-track betting network and other
customers, for cash of approximately $281,000, plus acquisition related costs.
In addition to the purchase consideration, the Company concurrently advanced the
SEPMO holding company approximately $2 million for purposes of repaying certain
convertible debt and purchasing the minority holdings in certain subsidiary
companies. The remaining 20% of the capital stock of the holding company of
SEPMO was scheduled to be purchased over a four year period at a price to be
determined by formula based on the results of operations of SEPMO on a
consolidated basis during the period, provided that the aggregate purchase price
for such additional shares will be at least the equivalent of 3 million French
francs and not in excess of the equivalent of 9 million French francs
(approximately $600,000 and $1,800,000, respectively, based on exchange rates in
effect at October 31, 1995). In July 1995, the Company purchased an additional
5% of the holding company of SEPMO's stock for $61,000. In 1996, the Company
acquired the remaining 15% of the capital stock of the SEPMO holding company for
approximately $540,000, payable over three years. The acquisition has been
accounted for by the purchase method of accounting, and accordingly, the
purchase price has been allocated to the assets acquired based on estimates of
fair values at the date of acquisition. The excess of the purchase price plus
acquisition related costs over the estimated fair values of the net assets
acquired was $3.2 million, and has been recorded as goodwill which is being
amortized over 5 years.
In January 1995, the Company acquired substantially all of the assets of
the Simulcast Division of LDDS Corporation (formerly IDB Communications Group,
Inc.) ("IDB") and the rights and obligations under leases relating to eight
C-band satellite transponders for a purchase price of $13.7 million in cash. The
acquisition has been accounted for by the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired based
on estimates of fair values at the date of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired was
$5.3 million, and has been recorded as goodwill which is being amortized over 5
years.
The operating results of these acquisitions are included in the Company's
consolidated results of operations from the respective dates of the
acquisitions.
F-12
<PAGE> 120
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1995 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Parts............................................................... $ 4,667 3,295
Work-in-process..................................................... 4,724 909
Finished goods...................................................... 2,541 1,028
Ticket paper........................................................ 565 548
------- ------
$12,497 5,780
======= ======
</TABLE>
Work-in-process includes costs for equipment expected to be sold. Costs
incurred for equipment associated with specific wagering system contracts not
yet placed in service are classified as construction in progress in property and
equipment (see Note 5).
(5) PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital leases, consist of
the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Machinery, equipment and deferred installation costs............. $144,628 156,816
Land and buildings............................................... 20,169 14,967
Transportation equipment......................................... 656 414
Furniture and fixtures........................................... 4,488 4,739
Leasehold improvements........................................... 4,972 4,621
Construction in progress......................................... 11,092 4,692
-------- --------
$186,005 186,249
======== ========
</TABLE>
Depreciation expense for the years ended October 31, 1994, 1995, and 1996,
amounted to $14,256,000, $19,208,000 and $23,632,000, respectively.
For financial reporting purposes, at October 31, 1995 and 1996, 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.
Under wagering systems contracts, the Company retains ownership of all
equipment located at wagering facilities.
F-13
<PAGE> 121
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) OTHER ASSETS AND INVESTMENTS
Other assets and investments (net) consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Software systems development costs................................. $15,872 12,132
Deferred financing costs........................................... 1,943 2,056
Deferred transponder costs......................................... 3,656 2,531
Other intangible assets............................................ 2,143 921
Other assets....................................................... 6,556 4,733
------- -------
$30,170 22,373
======= =======
</TABLE>
In 1994, the Company capitalized $6,012,000 of costs primarily related to
lottery and video lottery systems. In 1995, the Company wrote-off $6,378,000 of
capitalized costs relating primarily to lottery software and wagering terminal
applications development. This write-off is included in the Company's third
quarter 1995 restructuring costs. In 1995 and 1996, the Company capitalized
$7,355,000 and $1,741,000, respectively, of costs associated with development of
its lottery software, principally its UNIBET software developed for the
international market, as well as $2,380,000 and $460,000 respectively, of costs
related primarily to video gaming and pari-mutuel terminal applications.
Capitalized costs are amortized on a straight-line basis over a period of five
years. Amortization of capitalized software systems development costs was
$2,245,000, $4,274,000 and $5,417,000, for the years ended October 31, 1994,
1995 and 1996, respectively.
Deferred financing costs relate to those costs associated with the
procurement of long term financing by the Company. Such costs are amortized over
the life of the financing agreements. In 1994, the Company wrote off $4.2
million of deferred financing fees and expenses associated with the Company's
repayment of its prior senior credit facility with Heller Financial Group, Inc.
In 1995, the Company capitalized $405,000 incurred in connection with its 1995
financing programs and expensed $321,000 of fees incurred during the year which
had no future benefit. In 1996, the Company expensed $650,000 of costs incurred
in connection with its unsuccessful bond financing. Amortization expense was,
$534,000, $785,000 and $1,654,000 for the years ended October 31, 1994, 1995 and
1996, respectively.
Deferred transponder costs arose in connection with the acquisition of IDB
and are being amortized over a four year period. Amortization expense in 1995
and 1996 amounted to $844,000 and $1,125,000, respectively.
F-14
<PAGE> 122
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolver, due February 13, 1998, interest payable as defined,
(8.28% at October 31, 1996), secured by the assets of the
Company........................................................ $129,280 71,890
A and B Term Loans, due in quarterly installments through
February 13, 1998, interest payable as defined, (8.28% at
October 31, 1996), secured by the assets of the Company........ -- 52,000
5.5% subordinated debentures due August, 2001, convertible into
Class A Common Stock at $20.00 per share, interest due
semi-annually.................................................. 40,000 40,000
Capital lease obligations, due in monthly installments through
January 2000, interest rates ranging from 7.93% to 11.0%....... 1,985 1,516
Term Loan due in April 2003, interest payable at 8%.............. -- 1,250
Mortgage loan due in monthly installments through April 2003,
interest payable at 8%......................................... 1,033 890
European bank credit facility, reducing at $100,000 per year,
interest at 5.0%, secured by assets of the Company............. 359 317
European bank credit facility, reducing $63,000 in fiscal 1997
and $100,000 per year thereafter, interest at 8%, secured by
assets of the Company.......................................... -- 283
Term loan due in monthly installments of $39,000, interest
payable at approximately 8% secured by the equipment........... 731 787
Irish Development Authority grant, due upon shut-down of plant... 531 30
Various term loans due in installments through March 1999 at
interest rates ranging from 7.33% to 13.75%.................... 1,056 --
Mortgage loan transferred to buyer upon sale of sports wagering
business unit.................................................. 2,093 --
Commercial Development Revenue Bond, interest payable at
approximately 8.75%, secured by buildings and improvements..... 126 --
Note payable -- Video equipment vendor, payable in monthly
installments through September 1999, interest payable at 11%... 70 61
-------- --------
Total long-term debt........................................... 177,264 169,024
Less current installments...................................... 10,772 9,234
-------- --------
Long-term debt, excluding current installments................. $166,492 159,790
======== ========
</TABLE>
F-15
<PAGE> 123
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT -- (CONTINUED)
The Company's senior bank credit facility is governed by the Amended and
Restated Credit Agreement dated January 26, 1996 ("the Senior Facility") for
which Bankers Trust is agent. The Senior Facility provides for: 1) a $55 million
term loan (the "A Term Loan"), 2) a $5 million term loan (the "B Term Loan"),
and 3) a $75 million revolving credit facility (the "Revolver"), which includes
a $25 million sublimit for letters of credit. In connection with the January
1996 amendment of the Senior Facility, the Company issued to the Banks warrants
to purchase 525,000 shares of Class A Common Stock, subject to adjustments, at
an exercise price of $1.25 per share (the "1996 Lender Warrants") having an
estimated fair value of approximately $1.0 million (see Note 13). On January 29,
1997, the Company amended the Senior Facility (the "Amendment") to revise the
maturity and amortization of the A and B Term Loans, the maturity of the
Revolver, the borrowing rate, certain financial covenants and to revise how
proceeds from asset sales reduce scheduled principal payments. The maturity of
the Revolver and A Term Loan was changed to February 13, 1998 and scheduled
quarterly principal payments on the A Term Loan were reduced to $7.0 million in
fiscal 1997, with the balance of $44.0 million due in fiscal 1998. The maturity
of the B Term Loan was extended to April 30, 1997 with the remaining balance of
$1.0 million due in equal installments of $0.5 million in January 1997 and April
1997. In connection with the Amendment, the Company paid a fee of $250,000,
agreed to pay fees of up to $3.1 million at maturity if certain additional
principal repayments are not made prior to maturity of the Revolver, and to
reduce the exercise price of the 1995 and 1996 Lender Warrants from $2.98 and
$1.25, respectively, to $.01 per share if the Senior Facility is not repaid in
full by December 1, 1997.
Effective with the Amendment, borrowings under the Senior Facility bear
interest at the Prime lending rate plus a margin ranging from 0.75% to 2.00%
depending on the timing and amount of additional principal repayments made in
fiscal 1997 in excess of scheduled principal repayments. The Senior Facility
permits voluntary prepayments, and requires mandatory repayments upon the
occurrence of certain events and in certain amounts, including certain proceeds
from asset sales, equity sales and debt raised; and 75% of annual "Excess
Cashflow," as defined. A commitment fee of 0.5% per year is payable on the
unused amount under the Revolver. A letter of credit fee equal to 2.75% plus a
facing fee of 1/8 of 1% per year is payable on each letter of credit issued.
The Senior Facility contains various financial and other covenants,
including restrictions on the Company's acquisitions, indebtedness, investments
and capital expenditures, and covenants that prohibit the payment of cash
dividends on the Company's stock and distributions to stockholders. In addition
to customary events of default, a change of control of the Company (as defined)
constitutes an event of default under the Senior Facility. The Senior Facility
is guaranteed by the Company and its subsidiaries and is secured by
substantially all of the assets of the Company and its subsidiaries.
During 1996, the Company also amended the Senior Facility to permit the
settlement of the shareholder litigation and payment of the Company's $1.0
million obligation in connection therewith, adjusted certain financial
covenants, deferred an aggregate of $1.0 million of A Term Loan and B Term Loan
payments from April 1996 until July 1996, and the sale of the Company's sports
wagering business in October 1996 and application of the net sales proceeds
against the A and B Term Loans.
Amounts outstanding in 1995 were governed by a credit facility with the
same banks which provided the Company with a five year revolving credit facility
in the amount of $125 million to $135 million. The Company was in violation of
certain covenants under this Senior Facility at various times throughout fiscal
1994 and 1995. The Company obtained a number of amendments, waivers and consents
during this period to remedy these covenant violations in exchange for specified
fees paid in cash of $1.4 million, through the issuance of warrants in September
1995 to purchase 385,000 shares of Class A Common Stock at an exercise price of
$3.00 per share (the "1995 Lender Warrants"), and by deferring cash payments due
Debenture holders from August 1995 until February 1996 (the "1995 Letter
Agreement"). The Company was also required to raise cash in fiscal 1995 through
the sale of assets ($1.2 million) and the issuance of additional
F-16
<PAGE> 124
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT -- (CONTINUED)
equity ($4.42 million, net, from the sale of 1.56 million shares of Class A
Common Stock in accordance with the provisions of a Regulation S offering of
securities).
The Company has outstanding $40,000,000 principal amount of 5.5%
convertible subordinated debentures due 2001 (the Debentures) in a private
placement. The Debentures are convertible into 2,000,000 shares of Class A
Common Stock at a conversion price of $20.00 per share. $17,500,000 of the
proceeds were used to complete the Tele Control Group acquisition, $10,000,000
of the proceeds were applied to borrowings under the Senior Facility and the
remainder was used for capital expenditures and other corporate purposes.
On November 6, 1995, the Company entered into a Letter Agreement (the "1995
Letter Agreement") with holders of its 5.5% Convertible Subordinated Debentures
whereby the holders agreed to accept unregistered shares of the Company's Class
A Common Stock in lieu of cash for the August 1995 and February 1996 interest
payments in the amount of $1,100,000 each. The 1995 Letter Agreement provides
demand and piggy-back registration rights to the Debenture holders with respect
to the unregistered shares. In November 1995 and March 1996, the Company issued
422,500 and 513,869 shares of Class A Common Stock in payment of the interest
due August 1995 and February 1996, respectively.
As of October 31, 1996, the Company had approximately $19,000 available for
borrowing under its Revolver, with $3,091,000 in outstanding letters of credit
and $123,890,000 in outstanding borrowings.
The aggregate maturities of long-term debt for the next five fiscal years
and thereafter are as follows: 1997, $9,234,000; 1998, $118,303,000; 1999,
$804,000; 2000, $288,000; 2001, $40,148,000; and thereafter, $247,000.
(8) LEASES
At October 31, 1996, the Company was obligated under operating leases
covering office equipment, office space, transponders and transportation
equipment expiring at various dates through 2006. Future minimum lease payments
required under these leasing arrangements at October 31, 1996 are as follows:
1997, $9,957,000; 1998, $9,941,000; 1999, $5,474,000; 2000, $2,011,000; 2001,
$1,013,000; and thereafter $3,527,000. The Company also leases equipment as
needed under various month-to-month lease agreements. Total rental expense under
these operating leases was $3,211,000, $7,715,000 and $10,183,000, in the years
ended October 31, 1994, 1995 and 1996, respectively.
The Company entered into capital lease obligations of $587,000 and
$1,023,000, during the years ended October 31, 1994 and 1995, respectively.
There were no new capital leases in fiscal 1996.
(9) INCOME TAX EXPENSE (BENEFIT)
The consolidated loss before income tax expense (benefit) and extraordinary
item, by domestic and foreign source, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1994 1995 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic............................................. $(26,090) (45,966) (28,714)
Foreign.............................................. 6,700 (1,250) (3,038)
-------- ------- -------
Consolidated loss before income tax expense (benefit)
and extraordinary item............................. $(19,390) (47,216) (31,752)
======== ======= =======
</TABLE>
F-17
<PAGE> 125
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAX EXPENSE (BENEFIT) -- (CONTINUED)
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1994 -- Federal.......................................... $ (579) (5,670) (6,249)
1994 -- Foreign.......................................... 106 4,681 4,787
------ ------ ------
$ (473) (989) (1,462)
====== ====== ======
1995 -- Foreign.......................................... $ 1,819 854 2,673
====== ====== ======
1996 -- Foreign.......................................... $ 575 1,868 2,443
====== ====== ======
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to significant portions of
the deferred tax liability (asset) relate to the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
CURRENT DEFERRED TAX LIABILITY (ASSET)
Accrued restructuring costs.................................... $(1,948) --
Accrued litigation costs....................................... -- (2,690)
Accrued vacation............................................... (685) (666)
Inventory reserve.............................................. (571) (670)
Other accrued liabilities...................................... (1,347) (1,240)
Reserve for doubtful accounts.................................. (417) (420)
------- ------
Current deferred tax asset............................. (4,968) (5,686)
Accrued foreign contract reserve............................... 5,116 2,833
------- ------
Current deferred tax liability (asset), net............ 148 (2,853)
------- ------
NONCURRENT DEFERRED TAX LIABILITY (ASSET)
Intangible assets difference in amortization periods........... 776 881
Property and equipment due to differences in financial
reporting and tax depreciation methods...................... 8,330 7,705
Other, net..................................................... 226 1,351
Interest charge, Domestic International Sales Corp............. 4,495 4,716
------- ------
Noncurrent deferred tax liability, net................. 13,827 14,653
------- ------
Net operating loss carryforward................................ (31,448) (41,498)
Foreign tax credit carryforward................................ (759) (474)
Alternative minimum tax credits................................ (184) (184)
Research and experimentation credits........................... (150) (150)
------- ------
Noncurrent deferred tax asset.......................... (32,541) (42,306)
Valuation allowance............................................ 24,373 38,181
------- ------
Noncurrent deferred tax asset, net..................... (8,168) (4,125)
------- ------
Noncurrent deferred tax liability...................... 5,659 10,528
------- ------
Net deferred tax liability on balance sheet............ $ 5,807 7,675
======= ======
</TABLE>
F-18
<PAGE> 126
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAX EXPENSE (BENEFIT) -- (CONTINUED)
The aggregate deferred tax assets before valuation allowance at October 31,
1995 and 1996, were $37,509,000 and $47,992,000, respectively. The aggregate
deferred tax liabilities at October 31, 1995 and 1996 were $18,943,000 and
$17,486,000, respectively.
The actual tax expense (benefit) differs from the "expected" tax benefit
(computed by applying the U.S. Federal corporate rate of 34% to loss before
income taxes (benefit) and extraordinary item) as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax benefit....................... $(6,593) (16,053) (10,796)
Increase (reduction) in income taxes resulting from:
Additional provision for foreign source income...... 1,754 -- --
Unused net operating loss........................... -- 15,450 9,661
Valuation allowance for deferred tax assets......... 384 -- --
Foreign tax differential............................ 2,654 3,098 3,276
Other, net.......................................... 339 178 302
------- ------- -------
$(1,462) 2,673 2,443
======= ======= =======
</TABLE>
As a result of the 1994 loss and the allocation of income tax benefit to
continuing operations, no deferred tax benefit remained to be allocated to the
extraordinary loss or additional capital.
The Company has regular tax net operating loss carryforwards of
approximately $1,794,000 that expire in 2005, $1,222,000 that expire in 2006,
$954,000 that expire in 2008, $29,910,000 that expire in 2009, $45,440,000 that
expire in 2010 and $23,885,000 that expire in 2011.
The Company has minimum tax credit carryforwards (which can be carried
forward indefinitely) of approximately $184,000, regular foreign tax credits of
approximately $474,000 and research and experimentation credit carryforwards of
approximately $150,000. Regular foreign tax credits of $195,000 expire in 1997,
and the balance of $279,000 expire in 1998. The research and experimentation
credits expire from 1997 to 2003.
The valuation allowance for deferred tax assets in the amount of $5,894,000
was established in 1994. The net changes in the valuation allowance for the
years ended October 31, 1995 and 1996 were an increase of $18,479,000 and
$13,808,000, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Because of tax losses in
recent years, no deferred tax assets have been recorded.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of October 31, 1996 will be allocated as follows (in
thousands):
<TABLE>
<S> <C>
Income tax benefit that would be reported in the consolidated statements of
operations............................................................... $35,331
Additional capital (benefit from exercise of stock options)................ 2,850
-------
$38,181
=======
</TABLE>
F-19
<PAGE> 127
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) PENSION PLANS
The Company has a defined benefit plan for union employees. Retirement
benefits under the plan are based upon the number of years of credited service
up to a maximum of thirty years for the majority of the employees. The Company's
policy is to fund the minimum contribution permissible by the Internal Revenue
Service.
The following are the components of pension expense related to the defined
benefit plan:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................... $ 78 63 62
Interest cost on projected benefit obligation.................. 81 82 89
Actual return on plan assets................................... (32) (87) (19)
Net amortization and deferral.................................. (38) 16 (66)
---- --- ---
$ 89 74 66
==== === ===
</TABLE>
The assets and obligations of the defined benefit plan at October 31, 1995
and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------ -----
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$1,112,000 and $1,170,000 at October 31, 1995 and 1996,
respectively...................................................... $1,255 1,349
------ -----
Projected benefit obligation for services rendered to date.......... 1,272 1,349
Plan assets at fair value (invested in insurance company general
accounts guaranteed as to principal).............................. 1,043 1,230
------ -----
Projected benefit obligation in excess of plan assets............... 229 119
------ -----
Funded status....................................................... (229) (119)
Unrecognized net obligation......................................... 57 52
Unrecognized prior service cost..................................... 88 80
Unrecognized net loss............................................... 209 273
------ -----
Prepaid pension cost................................................ $ 125 286
====== =====
</TABLE>
The accumulated benefit obligation represents the actuarial present value
of benefits based upon the benefit multiplied by the participants' historical
years of service.
The accumulated and projected benefit obligation for 1995 and 1996 were
calculated using the unit credit method and reflect the following assumptions:
discount rate of 7.25% in 1995 and 1996, with a 9% long-term rate of return on
assets.
In connection with its collective bargaining agreements, the Company
participates with other companies in a defined benefit pension plan covering
union employees. Payments made to the multi-employer plan were approximately
$313,000, $187,000, and $204,000 during the years ended October 31, 1994, 1995
and 1996, respectively.
The Company has a 401(K) plan covering all employees who are not covered by
a collective bargaining agreement. Company contributions to the plan are at the
discretion of the Board of Directors. Pension expense for the years ended
October 31, 1994, 1995 and 1996 amounted to approximately $756,000, $839,000,
and $814,000, respectively. The Company has a 401(K) plan for all union
employees which does not provide for Company contributions.
F-20
<PAGE> 128
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) MANAGEMENT INCENTIVE COMPENSATION
The Company has an inactive management incentive compensation plan which is
included in the accompanying financial statements net of future tax benefits.
The obligations of the plan will be satisfied, upon favorable termination of
employment, through the issuance of 53,250 shares of Class A Common Stock at a
stated value of $3.33 per share.
The Company also makes cash awards to key management personnel based on
contractual commitments, overall profitability of the Company, as well as
individual performance. Management incentive compensation expense amounted to
$884,000, $1,157,000, and $439,000 in 1994, 1995 and 1996, respectively.
(12) SERVICE CONTRACT ARRANGEMENTS
Service contracts for wagering systems in North America generally cover a
five-year period and provide for substantial related services such as software,
maintenance personnel, computer operators, and certain operating supplies. They
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 a specified
minimum. The Company also has service contracts based on a percentage of total
amounts wagered with no specified minimum.
Minimum annual payments expected to be received under service contracts in
effect as of October 31, 1996 with specified minimums are as follows: 1997,
$14,593,000; 1998, $12,528,000; 1999, $9,933,000; 2000, $7,694,000; 2001,
$4,558,000; and thereafter $3,675,000.
(13) CAPITAL STOCK
The Company has two classes of common stock consisting of Class A Common
Stock and Class B Non-voting Common Stock (Class B Common Stock). All shares of
Class A Common Stock and Class B Common Stock entitle holders to the same rights
and privileges except that the Class B Common Stock is non-voting. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock.
In October 1995, the Company completed a private placement of its Class A
Common Stock which raised net proceeds of $4,420,089 through the sale of
1,562,849 shares in accordance with the provisions of Regulation S. These shares
have not been registered under the Securities Act of 1933 and may not be offered
for sale or sold in the United States absent registration or an applicable
exemption from registration requirements. The Company used the net proceeds,
after deducting expenses of the offering, to repay a portion of the revolving
loans outstanding under its Bank Credit Facility.
In November 1995, the Company entered into an Agreement with holders of its
5.5% Convertible Subordinated Debentures whereby the holders would receive
unregistered shares of Class A Common Stock in lieu of cash for interest
payments due in August 1995 and February 1996 in the amount of $1,100,000 each.
Accordingly, the Company issued 422,500 shares in November 1995 and 513,869
shares in March 1996 (see Note 7).
During 1996, the Company issued 17,460 shares of Class A Common Stock in
settlement of a PARS obligation (see Note 14). During 1995, the Company issued
12,000 and 15,000 shares of unregistered Class A Common Stock in exchange for
early termination of a services contract and in payment for services provided to
the Company related to MHSPI, respectively.
F-21
<PAGE> 129
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) CAPITAL STOCK -- (CONTINUED)
Warrants
At October 31, 1996, the Company had the following warrants outstanding,
including adjustments made in accordance with certain anti-dilution provisions:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE EXPIRATION
--------- -------- -----------------
<S> <C> <C> <C>
Warrants to purchase Class A Common Stock:
1991 Warrants................................ 2,307,400 $ 1.64 October 31,1999
1995 Warrants................................ 387,317 $ 2.98 April 30, 2000
1996 Warrants................................ 525,000 $ 1.25 April 20, 1998
---------
Total Class A Common Stock
Warrants........................... 3,219,717
=========
Warrants to purchase Class B Common Stock...... 146,793 $ 3.83 October 30, 2003
=========
</TABLE>
In connection with the January 29, 1997 amendment of the Senior Facility,
the Company agreed to reduce the exercise price of the 1995 and 1996 Lender
Warrants from $2.98 and $1.25 per share, respectively, to $.01 per share if the
Senior Facility is not repaid in full by December 1, 1997 (see Note 7).
(14) STOCK OPTIONS
The Company has three stock option plans under which shares of Class A
Common Stock have been authorized and are reserved for issuance to employees,
officers and directors: the 1984 Stock Option Plan (the "1984
Plan") -- 1,350,000 shares; the 1992 Equity Incentive Plan (the "1992
Plan") -- 3,000,000 shares; and the 1995 Equity Incentive Plan (the "1995
Plan") -- 2,000,000 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, or, in
certain circumstances, on an accelerated basis based on the Company's stock
being traded at certain per share prices, or at the discretion of the Board of
Directors. Options to purchase 1,976,500 shares were exchanged for 503,610 PARS.
Additionally, a total of 110,000 and 50,000 deferred shares with a three year
vesting schedule were issued to certain non-employee directors under the 1992
Plan ("Deferred Stock") in fiscal 1995 and 1996, respectively. In accordance
with the award of PARS and Deferred Stock, the Company has recorded compensation
expense of $166,000 and $346,000 in 1995 and 1996, respectively. Additional
compensation expense totaling $1,851,000 will be charged to expense through
2005.
Options granted under the Company's equity incentive plans are exercisable
at the fair market value of the stock at the date of grant. From time to time,
the Company grants additional stock options to individuals outside of the 1992
and 1995 Plans in recognition of contributions made to the Company.
F-22
<PAGE> 130
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) STOCK OPTIONS -- (CONTINUED)
Information with respect to the Company's stock options are as follows:
<TABLE>
<CAPTION>
NUMBER OF
STOCK OPTIONS SHARES PRICE RANGE
-------------------------------------------------- --------- --------------
<S> <C> <C>
Outstanding at October 31, 1993................... 3,750,205
Granted......................................... 891,400 $15.75-$22.00
Canceled........................................ 3,800 $15.75
Exercised....................................... 428,503 $ 1.59-$13.50
---------
Outstanding at October 31, 1994................... 4,209,302
Granted......................................... 634,000 $ 3.19-$15.00
Canceled........................................ 156,100 $ 4.84-$26.25
Exchanged....................................... 1,887,200 $ 4.84-$26.25
Exercised....................................... 168,999 $ 1.59-$ 4.84
---------
Outstanding at October 31, 1995................... 2,631,003
Granted......................................... 2,319,500 $ 1.19-$ 3.50
Canceled........................................ 1,143,365 $ 2.88-$21.00
Exchanged....................................... 89,300 $ 6.00-$17.25
---------
Outstanding at October 31, 1996................... 3,717,838
=========
</TABLE>
At October 31, 1996, 1,949,903 options to acquire shares of Class A Common
Stock were exercisable. Outstanding options expire prior to October 21, 2006,
and are exercisable at prices ranging from $1.19 to $17.00 per share.
(15) 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 accounts receivable,
accounts payable, and accrued liabilities, except for its long-term debt, and
subordinated debentures, approximates their recorded values.
With respect to the Company's senior bank credit facility, the Company is
unable to determine the fair value of this instrument. Similarly, the Company is
unable to obtain an independent appraisal of the fair market value of its
subordinated debentures.
(16) LITIGATION
In addition to routine legal proceedings incidental to the conduct of its
business, the Company and certain of its officers and directors were named as
defendants in a number of lawsuits commenced in February 1995 as class actions
in the United States District Court for the District of Delaware. These lawsuits
were consolidated into one class action in June 1995. The parties entered into a
definitive Stipulation and Agreement of Settlement dated July 19, 1996 (the
"Settlement Agreement") related to these claims.
The Settlement Agreement was finalized on December 24, 1996, at which time
the Company paid $7.5 million in cash plus 2,963,590 shares of Class A Common
Stock which had an aggregate value of $3.5 million based on the average price of
the Company's Class A Common Stock for 10 trading days preceding the final
hearing in the District Court. Insurance companies providing directors and
officers insurance contributed approximately $6.5 million of the cash portion of
the settlement (with $1.25 million of that amount in the form of a loan to the
Company, with the payment terms subject to negotiation).
F-23
<PAGE> 131
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) LITIGATION -- (CONTINUED)
The Company accrued a charge of $6.8 million against earnings in fiscal
1996 to reflect the expected settlement and anticipated legal fees. There will
be no further charges against earnings as a result of the Settlement Agreement.
(17) EXPORT SALES AND MAJOR CUSTOMERS
Sales to foreign customers amounted to $6,073,000, $9,860,000, and
$11,119,000, in 1994, 1995 and 1996, respectively. A single customer represented
$27,290,000 of fiscal 1994 revenues.
(18) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------
1995 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Compensation and benefits......................................... $ 7,944 6,600
Taxes, other than income.......................................... 1,295 1,367
Customer advances on sales contracts.............................. 743 306
Warranty reserves................................................. 1,320 454
Interest.......................................................... 2,069 647
Restructuring costs............................................... 2,510 --
Other............................................................. 7,902 10,683
------- ------
$23,783 20,057
======= ======
</TABLE>
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended October 31, 1995 and
1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1995
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------ ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total operating revenues..................... $ 31,117 37,132 38,722 46,213
Gross profit................................. 12,874 14,960 13,770 17,350
Net loss..................................... (5,931) (8,958) (29,246) (5,754)
Loss per common share........................ $ (0.21) (0.31) (1.01) (0.20)
------- ------ ------- ------
Weighted average shares outstanding.......... 28,810 28,913 28,928 29,201
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------ ------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total operating revenues..................... $ 43,306 45,741 41,828 45,360
Gross profit................................. 15,761 16,075 15,941 16,852
Net loss..................................... (13,801) (5,894) (7,804) (6,696)
Loss per common share........................ $ (0.45) (0.19) (0.25) (0.20)
------- ------ ------- ------
Weighted average shares outstanding.......... 30,905 31,373 31,459 31,474
======= ====== ======= ======
</TABLE>
F-24
<PAGE> 132
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS
The following tables represent revenues, profits, depreciation and assets
by business and geographic segments for the years ended October 31, 1994, 1995
and 1996. Corporate expenses are allocated among industry and geographic
segments.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1994 1995 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BUSINESS SEGMENTS
Service revenue and product sales
Pari-mutuel/sports betting................................. $ 92,888 127,336 128,439
Lottery operations......................................... 56,162 25,848 47,796
-------- -------- --------
$149,050 153,184 176,235
======== ======== ========
Operating income (loss)
Pari-mutuel/sports betting................................. $(18,887) (19,412) (10,293)
Lottery operations......................................... 4,953 (11,878) 1,865
-------- -------- --------
$(13,934) (31,290) (8,428)
======== ======== ========
Depreciation and amortization
Pari-mutuel/sports betting................................. $ 18,351 26,861 31,068
Lottery operations......................................... 7,067 8,602 9,785
-------- -------- --------
$ 25,418 35,463 40,853
======== ======== ========
Assets
Pari-mutuel/sports betting................................. $195,559 188,220 152,868
Lottery operations......................................... 46,038 52,801 43,925
-------- -------- --------
$241,597 241,021 196,793
======== ======== ========
Capital expenditures and expenditures for equipment under
wagering systems contracts
Pari-mutuel/sports betting................................. $ 57,954 14,723 8,135
Lottery operations......................................... 1,511 3,417 1,106
-------- -------- --------
$ 59,465 18,140 9,241
======== ======== ========
</TABLE>
F-25
<PAGE> 133
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
(20) BUSINESS AND GEOGRAPHIC SEGMENTS -- (CONTINUED)
<S> <C> <C> <C>
GEOGRAPHIC SEGMENTS
Service revenue and product sales
North America.............................................. $ 91,915 114,943 120,589
Europe..................................................... 50,350 34,227 49,656
Asia....................................................... 6,785 4,014 5,990
-------- -------- --------
$149,050 153,184 176,235
======== ======== ========
Operating income (loss)
North America.............................................. $(20,515) (25,960) (6,373)
Europe..................................................... 4,389 (4,500) (1,573)
Asia....................................................... 2,192 (830) (482)
-------- -------- --------
$(13,934) (31,290) (8,428)
======== ======== ========
Depreciation and amortization
North America.............................................. $ 19,653 27,296 32,195
Europe..................................................... 5,715 8,167 8,658
Asia....................................................... 50 -- --
-------- -------- --------
$ 25,418 35,463 40,853
======== ======== ========
Assets
North America.............................................. $196,232 180,637 146,929
Europe..................................................... 45,365 60,384 49,864
Asia....................................................... -- -- --
-------- -------- --------
$241,597 241,021 196,793
======== ======== ========
Capital expenditures and expenditures for equipment under
wagering systems contracts
North America.............................................. $ 57,460 15,798 8,518
Europe..................................................... 2,005 2,342 723
Asia....................................................... -- -- --
-------- -------- --------
$ 59,465 18,140 9,241
======== ======== ========
</TABLE>
(21) EUROPEAN LOTTERY BUSINESS
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. If consummated as presently contemplated, the Company
expects to recover the carrying value of the business.
F-26
<PAGE> 134
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(22) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. In July 1997, the Company expects to issue $110
million aggregate principal amount of Senior Notes due 2004 bearing interest at
10 7/8% per annum (the "Senior Notes"). The proceeds from the issuance of the
Senior Notes will be used to repay all amounts outstanding under the Senior
Facility (see Note 7). The Senior Notes will be jointly and severally guaranteed
by substantially all of the Company's wholly-owned domestic subsidiaries (the
"Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company"), the Guarantor Subsidiaries and the
wholly-owned foreign subsidiaries and the non wholly-owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of October 31, 1995 and 1996
and for each of the three years in the period ended October 31, 1996. The
condensed consolidating financial information has been presented to show the
nature of assets held, results of operations and cash flows of the Parent
Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries assuming the
expected guarantee structure of the Senior Notes was in effect at the beginning
of the periods presented. Separate financial statements for the 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 expense and
administrative expenses, as well as the fiscal 1994 extraordinary write-off of
financing fees, have not been allocated to the subsidiaries.
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues.................... $ -- 96,080 55,103 (2,133) 149,050
Operating expenses.................... -- 70,389 36,970 (3,667) 103,692
-------- -------- -------- ------- - --------
Gross profit........................ -- 25,691 18,133 1,534 45,358
Selling, general and administrative
expenses............................ 7,902 14,640 2,756 -- 25,298
Restructuring and write-off of
assets.............................. 651 6,807 851 267 8,576
Depreciation and amortization......... 60 17,107 8,251 -- 25,418
-------- -------- -------- ------- - --------
Operating income (loss)............. (8,613) (12,863) 6,275 1,267 (13,934)
Interest expense...................... 5,891 184 153 180 6,408
Other (income) expense................ -- (94) (2,243) 1,385 (952)
-------- -------- -------- ------- - --------
Income (loss) before equity of
subsidiaries, taxes and
extraordinary item............... (14,504) (12,953) 8,365 (298) (19,390)
Equity in income (loss) of
subsidiaries........................ (6,435) -- -- 6,435 --
Income tax expense (benefit).......... (3,011) (3,414) 4,963 -- (1,462)
-------- -------- -------- ------- - --------
Income (loss) before extraordinary
item............................. (17,928) (9,539) 3,402 6,137 (17,928)
Extraordinary item-write-off of
financing fees...................... 4,222 -- -- -- 4,222
-------- -------- -------- ------- - --------
Net income (loss)..................... $(22,150) (9,539) 3,402 6,137 (22,150)
======== ======== ======== ======== ========
</TABLE>
F-27
<PAGE> 135
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)....................... $(22,150) (9,539) 3,402 6,137 (22,150)
Depreciation and amortization......... 60 17,107 8,251 -- 25,418
Equity in (income) loss of
subsidiaries....................... 6,435 -- -- (6,435) --
Other non-cash adjustments............ 4,873 265 5,734 (1,864) 9,008
Changes in working capital............ (1,813) 12,548 (17,352) 1,783 (4,834)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities............................ (12,595) 20,381 35 (379) 7,442
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital and wagering systems
expenditures....................... (23) (53,969) (6,745) 1,272 (59,465)
Other assets and investments.......... (5,248) (14,574) (1,213) 56 (20,979)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities............................ (5,271) (68,543) (7,958) 1,328 (80,444)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net borrowings under lines of
credit............................. -- (474) -- -- (474)
Proceeds from issuance of long-term
debt............................... -- 118,300 704 -- 119,004
Payments on long-term debt............ -- (51,256) (306) -- (51,562)
Other, principally intercompany
balances........................... 17,845 (26,929) 11,516 (949) 1,483
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................ 17,845 39,641 11,914 (949) 68,451
-------- -------- -------- -------- --------
Effect of exchange rate changes on
cash.................................. -- -- 137 -- 137
Increase (decrease) in cash and cash
equivalents........................... (21) (8,521) 4,128 -- (4,414)
Cash and cash equivalents, beginning of
year.................................. 36 6,763 3,725 -- 10,524
-------- -------- -------- -------- --------
Cash and cash equivalents, end of
year.................................. $ 15 (1,758) 7,853 -- 6,110
======== ======== ======== ======== ========
</TABLE>
F-28
<PAGE> 136
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1995
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Accounts receivable, net............. $ -- 11,930 9,770 -- 21,700
Other current assets................. 3,919 7,171 15,136 (169) 26,057
Property and equipment, net.......... 71 102,671 16,286 (768) 118,260
Investment in subsidiaries........... 72,714 -- -- (72,714) --
Other assets......................... 3,239 42,623 30,722 (1,580) 75,004
------- ------- ------ ------- -------
Total assets................. $79,943 164,395 71,914 (75,231) 241,021
======= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.................. $ 8,810 22,011 11,262 26 42,109
Current installments of long-term
debt.............................. -- 8,472 2,323 (23) 10,772
Long-term debt, excluding current
installments...................... 40,000 124,727 1,819 (54) 166,492
Other non-current liabilities........ 1,865 912 6,790 224 9,791
Intercompany balances................ 17,411 (27,383) 9,922 50 --
Stockholders' equity (deficit)....... 11,857 35,656 39,798 (75,454) 11,857
------- ------- ------ ------- -------
Total liabilities and
stockholders' equity
(deficit).................. $79,943 164,395 71,914 (75,231) 241,021
======= ======= ====== ======= =======
</TABLE>
F-29
<PAGE> 137
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues.................... $ -- 117,885 42,984 (7,685) 153,184
Operating expenses.................... -- 78,701 22,184 (6,655) 94,230
--------- ------- ------ ------- -------
Gross profit........................ -- 39,184 20,800 (1,030) 58,954
Selling, general and administrative
expenses............................ 12,481 16,242 7,817 -- 36,540
Restructuring and write-off of
assets.............................. 4,039 11,997 2,205 -- 18,241
Depreciation and amortization......... 22 24,627 10,938 (124) 35,463
--------- ------- ------ ------- -------
Operating loss................... (16,542) (13,682) (160) (906) (31,290)
Interest expense...................... 15,770 226 532 (166) 16,362
Other (income) expense................ -- (227) (391) 182 (436)
--------- ------- ------ ------- -------
Income (loss) before equity of
subsidiaries and taxes........... (32,312) (13,681) (301) (922) (47,216)
Equity in income (loss) of
subsidiaries........................ (17,577) -- -- 17,577 --
Income tax expense.................... -- -- 2,673 -- 2,673
--------- ------- ------ ------- -------
Net income (loss)..................... $(49,889) (13,681) (2,974) 16,655 (49,889)
========= ======= ====== ======= =======
</TABLE>
F-30
<PAGE> 138
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)....................... $(49,889) (13,681) (2,974) 16,655 (49,889)
Depreciation and amortization......... 22 24,627 10,938 (124) 35,463
Equity in (income) loss of
subsidiaries....................... 17,577 -- -- (17,577) --
Other non-cash adjustments............ 5,240 12,007 4,234 214 21,695
Changes in working capital............ 8,567 (5,868) (1,850) (128) 721
--------- ------- ------ ------- -------
Net cash provided by (used in) operating
activities............................ (18,483) 17,085 10,348 (960) 7,990
--------- ------- ------ ------- -------
Cash flows from investing activities:
Capital and wagering systems
expenditures....................... (61) (17,134) (3,073) 2,128 (18,140)
Other assets and investments.......... (1,727) (3,619) (4,724) (1,204) (11,274)
--------- ------- ------ ------- -------
Net cash provided by (used in) investing
activities............................ (1,788) (20,753) (7,797) 924 (29,414)
--------- ------- ------ ------- -------
Cash flows from financing activities:
Net borrowing under lines of credit... -- -- (250) -- (250)
Proceeds from issuance of long-term
debt............................... -- 30,227 1,803 -- 32,030
Payments on long-term debt............ -- (805) (1,562) -- (2,367)
Other, principally intercompany
balances........................... 23,776 (23,646) (10,071) 36 (9,905)
--------- ------- ------ ------- -------
Net cash provided by (used in) financing
activities............................ 23,776 5,776 (10,080) 36 19,508
--------- ------- ------ ------- -------
Effect of exchange rate changes on
cash.................................. (135) -- 932 -- 797
Increase (decrease) in cash and cash
equivalents........................... 3,370 2,108 (6,597) -- (1,119)
Cash and cash equivalents, beginning of
year.................................. 15 (1,758) 7,853 -- 6,110
--------- ------- ------ ------- -------
Cash and cash equivalents, end of
year.................................. $ 3,385 350 1,256 -- 4,991
========= ======= ====== ======= =======
</TABLE>
F-31
<PAGE> 139
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Accounts receivable, net............. $ -- 9,557 8,700 -- 18,257
Other current assets................. 4,080 5,396 13,146 (211) 22,411
Property and equipment, net.......... 158 83,522 12,649 (449) 95,880
Investment in subsidiaries........... 65,402 -- -- (65,402) --
Other assets......................... 3,401 33,163 25,323 (1,642) 60,245
-------- -------- ------- -------- --------
Total assets................. $73,041 131,638 59,818 (67,704) 196,793
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.................. $ 9,856 16,788 7,988 47 34,679
Current installments of long-term
debt.............................. -- 8,478 781 (25) 9,234
Long-term debt, excluding current
installments...................... 40,000 117,983 1,832 (25) 159,790
Other non-current liabilities........ 3,644 778 8,557 308 13,287
Intercompany balances................ 39,738 (46,908) 7,234 (64) --
Stockholders' equity (deficit)....... (20,197) 34,519 33,426 (67,945) (20,197)
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit).................. $73,041 131,638 59,818 (67,704) 196,793
======== ======== ======= ======== ========
</TABLE>
F-32
<PAGE> 140
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues.................... $ -- 121,294 57,197 (2,256) 176,235
Operating expenses.................... -- 78,466 35,227 (2,087) 111,606
-------- -------- ------- -------- --------
Gross profit........................ -- 42,828 21,970 (169) 64,629
Selling, general and administrative
expenses............................ 9,771 13,443 9,766 (127) 32,853
Restructuring and write-off of
assets.............................. 233 -- (882) -- (649)
Depreciation and amortization......... 40 29,674 11,456 (317) 40,853
-------- -------- ------- -------- --------
Operating income (loss)............. (10,044) (289) 1,630 275 (8,428)
Interest expense...................... 14,499 288 391 (341) 14,837
Other (income) expense................ 8,581 (184) (335) 425 8,487
-------- -------- ------- -------- --------
Income (loss) before equity of
subsidiaries and taxes........... (33,124) (393) 1,574 191 (31,752)
Equity in income (loss) of
subsidiaries........................ (671) -- -- 671 --
Income tax expense.................... 400 200 1,843 -- 2,443
-------- -------- ------- -------- --------
Net income (loss)..................... $(34,195) (593) (269) 862 (34,195)
======== ======== ======= ======== ========
</TABLE>
F-33
<PAGE> 141
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)...................... $(34,195) (593) (269) 862 (34,195)
Depreciation and amortization........ 40 29,674 11,456 (317) 40,853
Equity in (income) loss of
subsidiaries...................... 671 -- -- (671) --
Other non-cash adjustments........... 7,188 441 (13) 152 7,768
Changes in working capital........... 373 (2,274) 2,431 (88) 442
-------- -------- ------- -------- --------
Net cash provided by (used in)
operating activities................. (25,923) 27,248 13,605 (62) 14,868
-------- -------- ------- -------- --------
Cash flows from investing activities:
Capital and wagering systems
expenditures...................... (114) (7,863) (1,262) (2) (9,241)
Other assets and investments......... 1,530 1,168 (2,013) 669 1,354
-------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities................. 1,416 (6,695) (3,275) 667 (7,887)
-------- -------- ------- -------- --------
Cash flows from financing activities:
Net borrowings under lines of
credit............................ -- -- -- -- --
Proceeds from issuance of long-term
debt.............................. -- 4,236 924 -- 5,160
Payments on long-term debt........... -- (8,930) (1,926) 27 (10,829)
Other, principally intercompany
balances.......................... 24,112 (15,947) (7,391) (774) --
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities................. 24,112 (20,641) (8,393) (747) (5,669)
-------- -------- ------- -------- --------
Effect of exchange rate changes on
cash................................. 386 (1) (842) 142 (315)
Increase (decrease) in cash and cash
equivalents.......................... (9) (89) 1,095 -- 997
Cash and cash equivalents, beginning of
year................................. 3,385 350 1,256 -- 4,991
-------- -------- ------- -------- --------
Cash and cash equivalents, end of
year................................. $ 3,376 261 2,351 -- 5,988
======== ======== ======= ======== ========
</TABLE>
F-34
<PAGE> 142
SCHEDULE II
AUTOTOTE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1994
Allowance for doubtful accounts........ $ 974 625 -- 1,101 498
Year ended October 31, 1995
Allowance for doubtful accounts........ $ 498 1,372 169 360 1,679
Year ended October 31, 1996
Allowance for doubtful accounts........ $ 1,679 1,392 -- 1,018 2,053
</TABLE>
- ---------------
(1) Amounts related to acquired companies
(2) Amounts written off
F-35
<PAGE> 143
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 5,988 3,599
Restricted cash................................................... 611 524
Accounts receivable, net.......................................... 18,257 13,564
Inventories....................................................... 5,780 5,129
Unbilled receivables.............................................. 6,901 --
Prepaid expenses, deposits and other current assets............... 3,131 3,766
-------- --------
Total current assets...................................... 40,668 26,582
-------- --------
Property and equipment, at cost..................................... 186,249 179,178
Less accumulated depreciation..................................... 90,369 94,522
-------- --------
Net property and equipment................................ 95,880 84,656
-------- --------
Goodwill, net of amortization....................................... 21,024 7,341
Operating right, net of amortization................................ 16,848 16,348
Other assets and investments........................................ 22,373 12,870
-------- --------
$ 196,793 147,797
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Current installments of long-term debt............................ $ 9,234 31,060
Accounts payable.................................................. 14,242 8,917
Accrued liabilities............................................... 20,436 22,424
-------- --------
Total current liabilities................................. 43,912 62,401
-------- --------
Deferred income taxes............................................... 7,675 2,797
Other long-term liabilities......................................... 5,612 1,433
Long-term debt, excluding current installments...................... 119,790 70,599
Long-term debt, convertible subordinated debentures................. 40,000 40,000
-------- --------
Total liabilities......................................... 216,989 177,230
-------- --------
Stockholders' deficit:
Preferred stock, par value $1.00 per share, 2,000 shares
authorized, none outstanding................................... -- --
Class A common stock, par value $0.01 per share, 99,300 shares
authorized, 31,474 and 35,282 shares outstanding at October 31,
1996 and April 30, 1997, respectively.......................... 315 353
Class B non-voting common stock, par value $0.01 per share, 700
shares authorized, none outstanding............................ -- --
Additional paid-in capital........................................ 143,369 148,011
Accumulated deficit............................................... (163,664) (175,778)
Treasury stock, at cost........................................... (102) (102)
Translation adjustment............................................ (114) (1,917)
-------- --------
Total stockholders' deficit............................... (20,196) (29,433)
-------- --------
$ 196,793 147,797
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 144
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1997
---------- ----------
<S> <C> <C>
Operating revenues:
Services............................................................. $ 64,974 66,389
Sales................................................................ 24,073 11,047
-------- --------
89,047 77,436
-------- --------
Operating expenses (exclusive of depreciation and amortization shown
below):
Services............................................................. 41,071 39,329
Sales................................................................ 16,140 7,433
-------- --------
57,211 46,762
-------- --------
Total gross profit........................................... 31,836 30,674
-------- --------
Selling, general and administrative expenses........................... 16,548 15,205
Depreciation and amortization.......................................... 18,994 19,852
-------- --------
Operating loss............................................... (3,706) (4,383)
-------- --------
Other deductions (income):
Interest expense..................................................... 7,332 7,314
Litigation settlement................................................ 6,800 --
Other (income) expenses.............................................. 143 (125)
-------- --------
14,275 7,189
-------- --------
Loss before income tax expense....................................... (17,981) (11,572)
Income tax expense..................................................... 1,714 542
-------- --------
Net loss............................................................... $(19,695) (12,114)
======== ========
Net loss per common share.............................................. $ (0.63) (0.36)
======== ========
Weighted average number of common shares outstanding................... 31,139 33,616
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 145
AUTOTOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1996 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(19,695) (12,114)
-------- -------
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization................................... 18,994 19,852
Litigation settlement, net of cash payments..................... 5,800 --
Changes in operating assets and liabilities..................... (2,256) 1,837
Other........................................................... 2,813 134
-------- -------
Total adjustments.......................................... 25,351 21,823
-------- -------
Net cash provided by operating activities............................ 5,656 9,709
-------- -------
Cash flows from investing activities:
Capital expenditures............................................... (1,075) (701)
Expenditures for equipment under wagering systems contracts........ (4,051) (2,721)
Proceeds from sale of business and asset disposals, net of cash
transferred..................................................... 997 19,451
Increase in other assets and other liabilities..................... (2,134) (1,606)
-------- -------
Net cash used in investing activities................................ (6,263) 14,423
-------- -------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facilities...... 2,195 (4,487)
Payments on long-term debt......................................... (2,571) (22,701)
Net proceeds from issuance of common stock......................... -- 956
-------- -------
Net cash used by financing activities................................ (376) (26,232)
-------- -------
Effect of exchange rate changes on cash.............................. 130 (289)
-------- -------
Increase/(Decrease) in cash and cash equivalents..................... (853) (2,389)
Cash and cash equivalents, beginning of period....................... 4,991 5,988
-------- -------
Cash and cash equivalents, end of period............................. $ 4,138 3,599
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................................... $ 5,579 6,785
======== =======
Income taxes....................................................... $ 636 825
======== =======
The Company issued 2,964 shares of Class A Common Stock during the
1997 period in connection with the settlement of its stockholder
litigation.
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 146
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of April 30, 1997 and the consolidated
statements of operations for the three months and six months ended April 30,
1996 and 1997, and the consolidated statements of cash flows for the six months
then ended have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at April 30, 1997, and the results of its operations for the
three and six months ended April 30, 1996 and 1997, and its cash flows for the
six months ended April 30, 1996 and 1997 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's 1996 Annual Report on Form 10-K. The results of operations for
the periods ended April 30, 1997 are not necessarily indicative of the operating
results for the full year.
Certain items in the prior year's financial statements have been
reclassified to conform with the current year presentation.
(2) SALE OF THE EUROPEAN LOTTERY BUSINESS
On April 15, 1997, the Company completed the sale of its European lottery
business through the sale of its stock ownership of Tele Control Kommunikations
und Computersysteme Aktien Gesellschaft ("Tele Control") for cash consideration
of approximately $25.0 million. The sales price is subject to an upward
adjustment of up to approximately $1.6 million based upon, among other items,
the closing balance sheet. Concurrently at closing, the Company provided the
purchaser with a letter of credit in the amount of $2.5 million to secure
certain obligations under the sales agreement. The letter of credit reduces to
zero in specified amounts and on specified dates through October 1998. The
Company recorded a gain of $0.3 million on the sale in the second quarter of
fiscal 1997.
Under the terms of the sale, the purchaser will have the right to license
and purchase the Company's terminals for use in lottery applications. Currently
neither Tele Control nor the purchaser has on-line lottery wagering terminals.
Also under the agreement, the purchaser will have the right of first refusal to
purchase the Company's remaining lottery business. The Company, however, has no
plans to sell this business at the present time and remains committed to serving
the North American lottery market and its existing customers.
The following unaudited information shows the revenues and expenses of the
European lottery business for the three months and six months ended April 30,
1996 and 1997. Interest and income tax expenses have not been included in the
table below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------- ----------------
1996 1997 1996 1997
------ ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenue........................................ $9,344 2,463 19,518 6,119
Operating expenses, including selling, general and
administrative expenses, and depreciation and
amortization expenses.................................. 9,171 2,772 16,723 6,181
------ ----- ------ -----
Operating income......................................... $ 173 (309) 2,795 (62)
====== ===== ====== =====
</TABLE>
F-39
<PAGE> 147
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Parts........................................................... $ 3,295 3,580
Work-in-process................................................. 909 519
Finished goods.................................................. 1,028 440
Ticket paper.................................................... 548 590
------ -----
Total........................................................... $ 5,780 5,129
====== =====
</TABLE>
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.
(4) DEBT
The Company's senior bank credit facility is governed by the Amended and
Restated Credit Agreement dated January 26, 1996 ("the Senior Facility") for
which Bankers Trust is agent. The Senior Facility provides for: 1) a $55 million
term loan (the "A Term Loan"), 2) a $5 million term loan (the "B Term Loan"),
and 3) a $75 million revolving credit facility (the "Revolver"), which includes
a $25 million sublimit for letters of credit. On January 29, 1997, the Company
amended the Senior Facility (the "Amendment") to revise the maturity and
amortization of the A and B Term Loans, the maturity of the Revolver, the
borrowing rate, certain financial covenants and to revise how proceeds from
asset sales reduce scheduled principal payments. The maturity of the Revolver
and A Term Loan were changed to February 13, 1998 and scheduled quarterly
principal payments on the A Term Loan were reduced to $7.0 million in fiscal
1997 with the balance of $44.0 million due in fiscal 1998. The maturity of the B
Term Loan was extended to April 30, 1997 with the remaining balance of $1.0
million due in equal installments of $.5 million in January 1997 and April 1997.
Effective with the Amendment, borrowings under the Senior Facility bear
interest at the Prime lending rate plus a margin ranging from 0.75% to 2.00%
depending on the timing and amount of additional principal repayments made in
fiscal 1997 in excess of scheduled principal repayments. The Senior Facility
permits voluntary prepayments, and requires mandatory repayments upon the
occurrence of certain events and in certain amounts, including certain proceeds
from asset sales, equity sales and debt raised, and 75% of annual "Excess
Cashflow," as defined. A commitment fee of 0.5% per year is payable on the
unused amount under the Revolver. A letter of credit fee equal to 2.75% plus a
facing fee of 1/8 of 1% per year is payable on each letter of credit issued. See
Note 7 to the Consolidated Financial Statements for the year ended October 31,
1996 included in the Company's 1996 Annual Report on Form 10-K.
Through April 30, 1997, the Company made scheduled payments of $1.5 million
on the A Term Loan and $0.5 million on the B Term Loan. Additionally, on April
15, 1997, as a result of the sale of the European lottery business, the Company
made payments mandated under the Senior Facility of $0.5 million on the B Term
Loan and $19.5 million on the A Term Loan, as well as discretionary payments of
$5.0 million on the Revolver. Because the Company made the mandated payments on
schedule, the maturity of the Revolver was extended to July 31, 1998; the
interest rate margin applicable to borrowings under the Senior Facility was
fixed at 0.75%; scheduled repayments were reduced by $2.0 million in fiscal 1997
and $18.0 million in fiscal 1998; certain contingent fees were waived; and
certain financial covenants were revised.
F-40
<PAGE> 148
AUTOTOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT -- (CONTINUED)
As of April 30, 1997, the Company had approximately $3.2 million available
for borrowing under its Revolver, with $4.4 million in outstanding letters of
credit including $2.5 million issued in connection with the sale of the European
lottery business, and $97.4 million in outstanding borrowings.
(5) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
This statement simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement of all
entities with complex capital structures. SFAS 128 also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Since the Company has experienced net losses in each quarter of fiscal 1996
and in the first and second quarters of fiscal 1997, stock options and stock
warrants are anti-dilutive. Therefore, they have been and would continue to be
excluded from the denominator of the earnings per common share calculation as
reported in the accompanying financial statements and as contemplated under SFAS
128. Earnings per common share in the second quarter and first six months of
fiscal 1996 and 1997 as computed under SFAS 128 are thus equal to basic earnings
per share as presented in the accompanying financial statements.
(6) FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. In July, 1997, the Company expects to issue $110
million aggregate principal amount of Senior Notes due 2004 bearing interest at
10 7/8% per annum (the "Senior Notes"). The proceeds from the issuance of the
Senior Notes will be used to repay all amounts outstanding under the Senior
Facility (see Note 4). The Senior Notes will be jointly and severally guaranteed
by substantially all of the Company's wholly-owned domestic subsidiaries (the
"Guarantor Subsidiaries").
Presented below is condensed consolidating financial information for
Autotote Corporation (the "Parent Company"), the Guarantor Subsidiaries and the
wholly-owned foreign subsidiaries and the non wholly-owned domestic and foreign
subsidiaries (the "Non-Guarantor Subsidiaries") as of April 30, 1995 and 1996
and for the six month periods then ended (unaudited). 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 expected
guarantee structure of the Senior Notes was in effect at the beginning of the
periods presented. Separate financial statements for the 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 expense and
administrative expenses have not been allocated to the subsidiaries.
F-41
<PAGE> 149
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Accounts receivable, net............. $ 236 10,517 8,558 -- 19,311
Other current assets................. 1,984 6,534 16,475 (171) 24,822
Property and equipment, net.......... 112 95,080 14,312 (615) 108,889
Investment in subsidiaries........... 71,893 -- -- (71,893) --
Other assets......................... 4,164 38,180 28,734 (1,580) 69,498
------- ------- ------ ------- -------
Total assets................. $78,389 150,311 68,079 (74,259) 222,520
======= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities.................. $ 8,555 15,351 13,263 22 37,191
Current installments of long-term
debt.............................. -- 23,978 1,611 (25) 25,564
Long-term debt, excluding current
installments...................... 40,000 109,073 2,303 (52) 151,324
Other non-current liabilities........ 5,779 966 7,480 242 14,467
Intercompany balances................ 30,081 (35,355) 5,218 56 --
Stockholders' equity (deficit)....... (6,026) 36,298 38,204 (74,502) (6,026)
------- ------- ------ ------- -------
Total liabilities and
stockholders' equity
(deficit).................. $78,389 150,311 68,079 (74,259) 222,520
======= ======= ====== ======= =======
</TABLE>
F-42
<PAGE> 150
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues.................... $ -- 57,042 33,178 (1,173) 89,047
Operating expenses.................... -- 36,810 21,445 (1,044) 57,211
-------- ------ ------ ------ -------
Gross profit........................ -- 20,232 11,733 (129) 31,836
Selling, general and administrative
expenses............................ 5,784 6,796 4,095 (127) 16,548
Depreciation and amortization......... 13 13,690 5,442 (151) 18,994
-------- ------ ------ ------ -------
Operating income (loss)............. (5,797) (254) 2,196 149 (3,706)
Interest expense...................... 6,936 187 209 -- 7,332
Other (income) expense................ 6,800 210 (85) 18 6,943
-------- ------ ------ ------ -------
Income (loss) before equity in
subsidiaries and taxes.............. (19,533) (651) 2,072 131 (17,981)
Equity in income (loss) of
subsidiaries........................ (162) -- -- 162 --
Income tax expense.................... -- -- 1,714 -- 1,714
-------- ------ ------ ------ -------
Net income (loss)..................... $(19,695) (651) 358 293 (19,695)
======== ====== ====== ====== =======
</TABLE>
F-43
<PAGE> 151
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)....................... $(19,695) (651) 358 293 (19,695)
Depreciation and amortization......... 13 13,690 5,442 (151) 18,994
Equity in (income) loss of
subsidiaries....................... 162 -- -- (162) --
Other non-cash adjustments............ 7,257 450 906 -- 8,613
Changes in working capital............ (604) (4,434) 2,785 (3) (2,256)
-------- ------- ------ ------- -------
Net cash provided by (used in) operating
activities............................ (12,867) 9,055 9,491 (23) 5,656
-------- ------- ------ ------- -------
Cash flows from investing activities:
Capital and wagering systems
expenditures....................... (56) (4,395) (673) (2) (5,126)
Other assets and investments.......... (1,140) 2,343 (2,642) 302 (1,137)
-------- ------- ------ ------- -------
Net cash provided by (used in) investing
activities............................ (1,196) (2,052) (3,315) 300 (6,263)
-------- ------- ------ ------- -------
Cash flows from financing activities:
Net borrowings under lines of
credit............................. -- -- -- -- --
Proceeds from issuance of long-term
debt............................... -- 1,660 535 -- 2,195
Payments on long-term debt............ -- (1,808) (763) -- (2,571)
Other, principally intercompany
balances........................... 11,863 (6,678) (4,796) (389) --
-------- ------- ------ ------- -------
Net cash provided by (used in) financing
activities............................ 11,863 (6,826) (5,024) (389) (376)
-------- ------- ------ ------- -------
Effect of exchange rate changes on
cash.................................. 401 (1) (382) 112 130
Increase (decrease) in cash and
equivalents........................... (1,799) 176 770 -- (853)
Cash and cash equivalents, beginning of
year.................................. 3,385 350 1,256 -- 4,991
-------- ------- ------ ------- -------
Cash and cash equivalents, end of
year.................................. $ 1,586 526 2,026 -- 4,138
======== ======= ====== ======= =======
</TABLE>
F-44
<PAGE> 152
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Accounts receivable, net............ $ -- 10,980 2,584 -- 13,564
Other current assets................ 4,135 5,007 4,110 (234) 13,018
Property and equipment, net......... 167 75,448 9,317 (276) 84,656
Investment in subsidiaries.......... 50,454 -- -- (50,454) --
Other assets........................ 3,078 29,930 4,923 (1,372) 36,559
--------- ------- ------ ------- -------
Total assets................ $ 57,834 121,365 20,934 (52,336) 147,797
========= ======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities................. $ 12,715 14,526 4,006 94 31,341
Current installments of long-term
debt............................. -- 30,499 588 (27) 31,060
Long-term debt, excluding current
installments..................... 40,000 69,205 1,407 (13) 110,599
Other non-current liabilities....... 1,242 583 2,405 -- 4,230
Intercompany balances............... 33,310 (30,827) (2,371) (112) --
Stockholders' equity (deficit)...... (29,433) 37,379 14,899 (52,278) (29,433)
--------- ------- ------ ------- -------
Total liabilities and
stockholders' equity
(deficit)................. $ 57,834 121,365 20,934 (52,336) 147,797
========= ======= ====== ======= =======
</TABLE>
F-45
<PAGE> 153
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenues.................... $ -- 60,176 18,479 (1,219) 77,436
Operating expenses.................... -- 37,338 10,609 (1,185) 46,762
--------- ------- ------ ------- -------
Gross profit........................ -- 22,838 7,870 (34) 30,674
Selling, general and administrative
expenses............................ 5,677 6,327 3,085 116 15,205
Depreciation and amortization......... 25 14,039 5,972 (184) 19,852
--------- ------- ------ ------- -------
Operating income (loss)............. (5,702) 2,472 (1,187) 34 (4,383)
Interest expense...................... 7,402 15 111 (214) 7,314
Other (income) expense................ (592) (406) 659 214 (125)
--------- ------- ------ ------- -------
Income (loss) before equity in
subsidiaries and taxes........... (12,512) 2,863 (1,957) 34 (11,572)
Equity in income (loss) of
subsidiaries........................ 398 -- -- (398) --
Income tax expense.................... -- 7 535 -- 542
--------- ------- ------ ------- -------
Net income (loss)..................... $(12,114) 2,856 (2,492) (364) (12,114)
========= ======= ====== ======= =======
</TABLE>
F-46
<PAGE> 154
AUTOTOTE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATING
COMPANY SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)...................... $(12,114) 2,856 (2,492) (364) (12,114)
Depreciation and amortization........ 25 14,039 5,972 (184) 19,852
Equity in (income) loss of
subsidiaries...................... (398) -- -- 398 --
Other non-cash adjustments........... 674 37 (577) -- 134
Changes in working capital........... 1,440 (3,351) 3,679 69 1,837
--------- ------- ------ ------- -------
Net cash provided by (used in)
operating activities................. (10,373) 13,581 6,582 (81) 9,709
--------- ------- ------ ------- -------
Cash flows from investing activities:
Capital and wagering systems
expenditures...................... (31) (2,831) (570) 10 (3,422)
Net proceeds from sale of business... 19,201 -- -- -- 19,201
Other assets and investments......... (183) (133) (941) (99) (1,356)
--------- ------- ------ ------- -------
Net cash provided by (used in)
investing activities................. 18,987 (2,964) (1,511) (89) 14,423
--------- ------- ------ ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt... -- -- 13 -- 13
Payments on long-term debt........... -- (26,756) (455) 10 (27,201)
Other, principally intercompany balances... (10,003) 16,081 (5,286) 164 956
--------- ------- ------ ------- -------
Net cash provided by (used in)
financing activities................. (10,003) (10,675) (5,728) 174 (26,232)
--------- ------- ------ ------- -------
Effect of exchange rate changes on
cash................................. 25 -- (310) (4) (289)
Increase (decrease) in cash and cash
equivalents.......................... (1,364) (58) (967) -- (2,389)
Cash and cash equivalents, beginning of
year................................. 3,376 261 2,351 -- 5,988
--------- ------- ------ ------- -------
Cash and cash equivalents, end of
year................................. $ 2,012 203 1,384 -- 3,599
========= ======= ====== ======= =======
</TABLE>
F-47
<PAGE> 155
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY GUARANTOR, THE INITIAL PURCHASER OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION WITH
RESPECT TO ANY SECURITY OTHER THAN AN OFFER TO OR SOLICITATION OF THE SECURITIES
OFFERED HEREBY OR ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. iii
Prospectus Summary.................... 1
Risk Factors.......................... 15
The Exchange Offer.................... 23
Use of Proceeds....................... 33
Capitalization........................ 33
Selected Historical Consolidated
Financial Data...................... 34
Selected Unaudited Pro Forma
Consolidated Financial Data......... 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 45
Management............................ 61
Executive Compensation; Certain
Agreements.......................... 63
Security Ownership.................... 68
Description of Certain Indebtedness... 70
Description of New Credit Agreement... 70
Description of Notes.................. 70
Certain Federal Income Tax
Consequences........................ 94
Plan of Distribution.................. 97
Legal Matters......................... 98
Accountants........................... 98
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$110,000,000
AUTOTOTE LOGO
AUTOTOTE CORPORATION
10 7/8% SERIES B SENIOR NOTES
DUE 2004
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 156
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware (the "DGCL") at
Section 102(b)(7) enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of the director's fiduciary duty, except (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
The DGCL, at Section 145, provides, in pertinent part, that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the corporation or is or was serving
another corporation, partnership, joint venture, trust or other enterprise, at
the request of the corporation, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Lack of
good faith, or lack of a reasonable belief that one's actions are in or not
opposed to the best interest of the corporation, or with respect to any criminal
action or proceeding, lack of reasonable cause to believe one's conduct was
unlawful is not presumed from the termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or nolo contendere plea or its
equivalent. In addition, the indemnification of expenses (including attorneys'
fees) is allowed in derivative actions, except no indemnification is allowed in
respect of any claim, issue or matter as to which any such person has been
adjudged to be liable to the corporation, unless and only to the extent the
Court of Chancery or the court in which such action or suit was brought decides
that indemnification is proper. To the extent that any such person succeeds on
the merits or otherwise in defense of any of the above described actions or
proceedings, he shall be indemnified against expenses (including attorneys'
fees). The determination that the person to be indemnified met the applicable
standard of conduct, if not made by a court, is made by the Board of Directors
of the corporation by a majority vote of a quorum consisting of directors not
party to such an action, suit or proceeding or, if a quorum is not obtainable or
a disinterested quorum so directs, by independent legal counsel in a written
opinion or by the stockholders. Expenses may be paid in advance upon the receipt
of undertakings to repay. A corporation may purchase indemnity insurance.
The Certificate of Incorporation of Autotote Corporation, a Delaware
corporation (the "Company"), provides at Article ELEVENTH that no director of
the Company shall be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the fullest extent allowed by Delaware
law. The Company's By-laws at Article VII provide that the Company shall
indemnify all allowed persons for liabilities and expenses to the fullest extent
allowed by Delaware law. The same provisions are made for (i) Autotote Lottery
Corporation, a Delaware corporation, by Article SIXTH of its Certificate of
Incorporation and Article VIII of its By-laws, (ii) Autotote Mexico, Ltd., a
Delaware corporation, by Article SEVENTH of its Certificate of Incorporation and
Article VII of its By-laws, and (iii) Newark Holdings, Inc., a Delaware
corporation, by Article 7 of its Certificate of Incorporation and Section 17 of
its By-laws.
Article SIXTH of Autotote Communication Services, Inc., a Delaware
corporation ("Autotote Communication Services"), provides that Autotote
Communication Services shall indemnify all allowed persons to the greatest
extent allowed by Delaware law. Article VIII of the By-laws provides for the
same extent of indemnification as Article SIXTH of the Certificate of
Incorporation and limits the liability of directors to the fullest extent
allowed by Delaware law.
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<PAGE> 157
Section 17 of the By-laws of Autotote Systems, Inc., a Delaware corporation
("Autotote Systems"), provides that Autotote Systems shall indemnify all allowed
persons to the greatest extent allowed by Delaware law.
Article SEVENTH of the Certificate of Incorporation of Autotote Management
Corporation, a Delaware corporation, provides for the limitation of the
liability of directors to the fullest extent allowable under Delaware law.
The New York Business Corporation Law (the "NYBCL") at Sections 719 and 717
provides that a director shall not be liable to the corporation or its
shareholders for actions taken as a director, if (1) he acted in good faith, and
(2) he acted with the care an ordinarily prudent person in a like position would
exercise under similar circumstances.
The NYBCL, at Sections 722 through Section 726, provides, in pertinent
part, that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any action, or proceeding, whether civil,
criminal, (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director or officer of the corporation or
is or was serving another corporation, partnership, joint venture, trust or
other enterprise, at the request of the corporation, against reasonable expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such action or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Lack of good faith, or lack of a reasonable belief that
one's actions are in or not opposed to the best interest of the corporation, or
with respect to any criminal action or proceeding, lack of reasonable cause to
believe one's conduct was unlawful is not presumed from the termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or nolo
contendere plea or its equivalent. In addition, indemnification is allowed in
derivative actions, except no indemnification is allowed in respect of any
claim, issue or matter as to which any such person has been adjudged to be
liable to the corporation, unless and only to the extent the court in which such
action was brought, or, if no action was brought, any court of competent
jurisdiction, decides that indemnification is proper. To the extent that any
such person succeeds on the merits or otherwise in defense of any of the above
described actions or proceedings, he shall be entitled to indemnification. The
determination that the person to be indemnified met the applicable standard of
conduct, if not made by a court, is made by the Board of Directors of the
corporation by a majority vote of a quorum consisting of directors not party to
such an action, suit or proceeding or, if a quorum is not obtainable or a
disinterested quorum so directs, by independent legal counsel in a written
opinion or by the stockholders. Expenses may be paid in advance upon the receipt
of undertakings to repay. A corporation may purchase indemnity insurance.
The Certificate of Incorporation of Marvin H. Sugarman Productions, Inc., a
New York corporation ("MHS"), at Article SEVENTH provides for the limitation of
liability of the directors of MHS to the fullest extent allowable by New York
law and that MHS shall indemnify all allowed persons to the fullest extent
allowed by New York law.
The Certificate of Incorporation of Racing Technology, Inc., a New York
corporation ("Racing Technology"), at Article SIXTH provides that no director
shall be personally liable to the Racing Technology or its shareholders for
damages for any breach of duty as a director except where a judgment or other
final adjudication adverse to said director establishes: that the director's
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that said director personally gained a financial
profit or other advantage to which he was not entitled, or the director's acts
violated Section 719 of the NYBCL.
The Business Corporation Act of the State of Connecticut (the "CBCA") at
Section 33-756, provides, in pertinent part, that a director is not liable for
action taken as a director, or any failure to take any action, if (1) he acted
in good faith, (2) he acted with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and (3) in a manner he
reasonably believes to be in the best interests of the corporation.
The CBCA at Sections 33-770 through 778, provides, in pertinent part, that
unless its certificate of incorporation otherwise provides, a corporation
incorporated prior to January 1, 1997 shall indemnify any
II-2
<PAGE> 158
person who is made a party to any proceeding, other than an action by or in the
right of the corporation in which the person was adjudged liable to the
corporation or any proceeding charging improper benefit, by reason of the fact
that he is or was a director or officer. In the case of a proceeding by or in
the right of the Corporation, indemnification is limited to reasonable expenses
incurred by him in connection with the proceeding against the corporation to
which the individual was named a party. The corporation shall indemnify such
person only if (1) he conducted himself in good faith, and (2) he reasonably
believed (A) in the case of conduct in his official capacity with the
corporation, that his conduct was in its best interests, and (B) in all other
cases, that his conduct was at least not opposed to its best interests, and (3)
in the case of any criminal proceeding, he had no reasonable cause to believe
his conduct was unlawful. Termination of a proceeding by judgment, order,
settlement or conviction or a plea of nolo contendere or its equivalent is not,
of itself, determinative that the director or officer did not meet the standard
of conduct required by the statute. Unless limited by its certificate of
incorporation, a corporation shall indemnify a director or an officer who was
wholly successful, on the merits or otherwise, in the defense of any proceeding
to which he was a party because he is or was a director or an officer of that
corporation against reasonable expenses incurred by him in connection with the
proceeding to which he was a party. Expenses may be paid in advance upon receipt
of a written affirmation from the party claiming indemnification that his
conduct in question met the standards of conduct required by the statute and a
written undertaking to repay such advanced expenses and upon determination by
the members of the Board of Directors by a majority vote of a quorum consisting
of directors not at the time parties to the proceeding that no known facts would
preclude indemnification. A director may also apply to a court of appropriate
jurisdiction for indemnification. A corporation may purchase indemnity
insurance.
The Certificate of Incorporation of Autotote Enterprises, Inc., a
Connecticut corporation ("Autotote Enterprises"), at Section 4(b) provides that
the personal liability of a director to Autotote Enterprises or its shareholders
for monetary damages for breach of duty as a director shall be limited to an
amount that is equal to the compensation received by the director for serving
Autotote Enterprises during the year of the violation if such breach did not (i)
involve a knowing and culpable breach of law, (ii) involve improper personal
economic gain, (iii) show a lack of good faith and a conscious disregard for the
duty of the director to Autotote Enterprises, (iv) constitute a sustained and
unexcused pattern of inattention that amounted to an abdication of the
director's duty to Autotote Enterprises, or (v) create liability under Section
33-321 of the Connecticut General Statutes. The Certificate of Incorporation and
the By-laws of Autotote Enterprises make no provision for indemnification of any
person beyond what is required by Connecticut law.
The Business Corporation Act of the State of Nebraska (the "NBCA") at
Section 21-2095, provides, in pertinent part, that a director is not liable for
action taken as a director, or any failure to take any action, if he or she (1)
acted in good faith, (2) acted with the care an ordinarily prudent person in a
like position would exercise under similar circumstances, and (3) acted in a
manner he or she reasonably believed to be in the best interests of the
corporation.
The NBCA at Sections 21-20,103 through 20,111, provides, in pertinent part,
that a corporation may indemnify any person who is made a party to any
proceeding, other than an action by or in the right of the corporation or any
proceeding charging improper benefit, by reason of the fact that he or she is or
was a director or officer. In the case of a proceeding by or in the right of the
corporation, indemnification is limited to reasonable expenses incurred by him
in connection with the proceeding against the corporation to which the
individual was named a party. The corporation shall indemnify such person only
if (1) he or she conducted himself in good faith, and (2) he or she reasonably
believed (A) in the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in its best interests, and (B) in all
other cases, that his or her conduct was at least not opposed to its best
interest, and (3) in the case of any criminal proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful. Termination of a
proceeding by judgment, order, settlement or conviction or a plea of nolo
contendere or its equivalent is not, of itself, determinative that the director
did not meet the standard of conduct required by the statute. Unless limited by
its certificate of incorporation, a corporation shall indemnify a director who
was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he or she was a party because he or she is or was a director
of that corporation against reasonable expenses incurred by him in connection
with the proceeding to which he was a party. Expenses may be paid in advance
upon receipt of a written affirmation from the party claiming indemnification
that his or her conduct in question met the standards of conduct required by the
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<PAGE> 159
statute and a written undertaking to repay such advanced expenses and upon
determination by the members of the Board of Directors by a majority vote of a
quorum consisting of directors not at the time parties to the proceeding that no
known facts would preclude indemnification. A director may also apply to a court
of appropriate jurisdiction for indemnification. The NBCA at Section 21-20,108
provides that an officer of a corporation may be indemnified to the same extent
as a director. An officer who is not a director may be indemnified further
through provisions of a contract, the Certificate of Incorporation, By-laws, or
by action of the Board of Directors except for actions by or in the right of the
corporation, receipt by such officer of improper financial benefit, intentional
infliction of harm on the corporation, or intentional violation of law. A
corporation may, by provision in its Certificate of Incorporation, limit or
extend indemnification rights and the right to prepayment of expenses. A
corporation may purchase indemnity insurance.
The Certificate of Incorporation and the By-laws of Autotote Keno
Corporation, a Nebraska corporation, make no provision for limitation of
liability of directors or indemnification of any person beyond the provisions of
Nebraska law.
The foregoing discussion is qualified in its entirety by reference to the
DGCL, NYBCL, CBCA and NBCA and the referenced certificates of incorporation and
by-laws.
Autotote Corporation maintains officers' and directors' liability
insurance, as permitted by Article VII of the Company's By-Laws, which insures
against liabilities that officers and directors of the Company and its
subsidiaries may incur in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Company, as amended through June 29, 1995.(1)
3.2 Bylaws of the Company.(2)
4.1 Indenture, dated as of July 28, 1997, among the Company, the Guarantors and IBJ
Schroder Bank & Trust Company, as Trustee.(3)
4.2 Form of 10 7/8% Series A and Series B Senior Notes Dues 2004, dated as of July 28,
1997 (incorporated by reference to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of July 28, 1997, among the Company, the
Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation.(4)
5.1 Opinion of Kramer, Levin, Naftalis & Frankel(+)
10.1 Credit Agreement, dated as of July 28, 1997, between the Company, the financial
institutions party thereto and DLJ Capital Funding, Inc. as agent.(5)
10.2 1984 Stock Option Plan, as amended.(6)*
10.3 Form of Option dated March 3, 1992 issued to A. Lorne Weil.(7)*
10.4 Form of Option dated December 13, 1991 issued to Marshall Bartlett.(8)*
10.5 Employment Agreement dated November 1, 1992, of A. Lorne Weil and Autotote
Corporation.(9)*
10.6 Employment Agreement dated July 18, 1994 between the Company and Marvin H.
Sugarman.(10)*
10.7 Employment Agreement between Gerald Lawrence and the Company dated November 14,
1994.(11)*
10.8 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin H. Sugarman,
Robert Melican, Racing Technology, Inc. and Marvin H. Sugarman Productions, Inc.(12)
10.9 Asset Purchase Agreement dated January 12, 1995 between Autotote Communication
Services, Inc. and IDB Communications Group Inc.(13)
10.10 Purchase Agreement dated October 14, 1994 between Autotote Corporation, Yves
Alexandre, Marie A. Alexandre and Frederic Alexandre. (English summary attached to
French original.)(14)
</TABLE>
II-4
<PAGE> 160
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.11 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the State of
Connecticut, Division of Special Revenue, dated June 30, 1993.(15)
10.12 Stock Purchase Agreement between the Company and General Instrument Corporation
dated May 18, 1993.(16)
10.13 Purchase and Sale Agreement between the Company and Sven Eriksson dated May 27,
1993.(17)
10.14 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik, Peter
Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27, 1993.(18)
10.15 Purchase Agreement among certain purchasers and Autotote Corporation dated August
13, 1993 with respect to the 5 1/2% Convertible Subordinated Debentures due
2001.(19)
10.16 1995 Equity Incentive Plan.(20)
10.17 1992 Equity Incentive Plan, as amended and restated.(21)
10.18 Registration Rights Agreement, dated as of November 6, 1995, between the Company and
Hartford Stock Fund and Hartford Advisers Fund, dated as of November 6, 1995.(22)
10.19 Interest Agreement, dated as of November 6, 1995, between the Company and the
Funds.(23)
10.20 Letter Agreement, dated January 3, 1995, between the Company and Martin E.
Schloss.(24)*
10.21 Agreement of Purchase and Sale, dated January 19, 1996, between Autotote Systems,
Inc. and Fusco Properties, L.P. ("Fusco").(25)
10.22 Lease Agreement, dated as of January 19, 1996, between Fusco and Autotote Systems,
Inc.(26)
10.23 Employment Agreement, dated February 22, 1996, between the Company and William
Luke.(27)*
10.24 Promissory Note dated May 13, 1996 between the Company and A. Lorne Weil.(28)
10.25 Stock Transfer Agreement among the Company and American Wagering, Inc., dated
October 25, 1996, with respect to all outstanding stock of Autotote CBS, Inc.(+)
10.26 Stock Purchase Agreement among the Company and Scientific Games Holding Corp., dated
April 15, 1997, with respect to all outstanding stock of Tele Control Kommunikations
Und Computersysteme Aktien Gesellschaft.(29)
12.1 Statement re: computation of ratio of earnings to fixed charges(++)
21.1 List of Subsidiaries.(++)
23.1 Consent of KPMG Peat Marwick LLP.(++)
23.2 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the opinion filed
as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder Bank & Trust
Company as Trustee.(++)
99.1 Form of Letter of Transmittal.(+)
99.2 Form of Notice of Guaranteed Delivery.(+)
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees.(+)
99.4 Form of Letter to Clients.(+)
99.5 Guidelines for Certification of Taxpayer Identification Number on Form W-9.(+)
99.6 Common Stock Purchase Warrant dated October 31, 1991 issued to Heller Financial
Inc.(30)
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.(31)
99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant Agreement"), as
amended as of January 29, 1997.(+)
99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant Agreement"), as
amended as of January 29, 1997.(+)
99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant Agreement and the
1996 Warrant Agreement.(+)
99.11 Order and Final Judgment of the United States District Court for the District of
Delaware dated October 22, 1996, Amendment to Amended Stipulation and Agreement of
Settlement, dated November 7, 1996, and Amended Stipulation and Agreement of
Settlement dated July 19, 1996.(32)
</TABLE>
II-5
<PAGE> 161
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1995.
(2) Incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration No. 33-46594) which became effective
March 20, 1992 (the "1992 S-8").
(3) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated August 11, 1997 (the "1997 8-K").
(4) Incorporated by reference to Exhibit 2 to the 1997 8-K.
(5) Incorporated by reference to Exhibit 3 to the 1997 8-K.
(6) Incorporated by reference to Exhibit 4.1 to the 1992 S-8.
(7) Incorporated by reference to Exhibit 10.45 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1992 (the "1992 10-K").
(8) Incorporated by reference to Exhibit 10.46 to the Company's 1992 10-K.
(9) Incorporated by reference to Exhibit 10.39 to the Company's 1992 10-K.
(10) Incorporated by reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 10-K").
(11) Incorporated by reference to Exhibit 10.18 to the Company's 1994 10-K.
(12) Incorporated by reference to Exhibit 10.19 to the Company's 1994 10-K.
(13) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K.
(14) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K.
(15) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 1, 1993.
(16) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated June 22, 1993.
(17) Incorporated by reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K dated June 22, 1993.
(18) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(19) Incorporated by reference to Exhibit 10 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(20) Incorporated by reference to Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995 (the "1995 10-K").
(21) Incorporated by reference to Exhibit A to the Company's Proxy Statement
filed April 19, 1996.
(22) Incorporated by reference to Exhibit 10.36 to the 1995 10-K.
(23) Incorporated by reference to Exhibit 10.37 to the 1995 10-K.
(24) Incorporated by reference to Exhibit 10.40 to the 1995 10-K.
(25) Incorporated by reference to Exhibit 10.42 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 1995, dated February
22, 1996 (the "1995 10-K/A").
(26) Incorporated by reference to Exhibit 10.43 to the 1995 10-K/A.
(27) Incorporated by reference to Exhibit 10.45 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.
(28) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1996.
II-6
<PAGE> 162
(29) Incorporated by reference to Exhibit 10.27 to the Company's Current Report
on Form 8-K dated April 15, 1997.
(30) Incorporated by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated November 14, 1991.
(31) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.
(32) Incorporated by reference to Exhibit 28.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996, dated January 30,
1997.
* Includes management contracts and compensation plans and arrangements.
+ To be filed by amendment.
++ Filed herewith.
- ---------------
(b) The Financial Statement Schedule filed as part of this Registration
Statement is as follows:
Schedule II -- Valuation and Qualifying Accounts (See page F-35).
Information required by other schedules is not applicable or the required
information is included in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrants undertake that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of the
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of any
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of any registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the SEC under Section 305(b)(2) of the Act.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt
II-7
<PAGE> 163
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE CORPORATION
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, Chairman of the
Board,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL Chairman of the Board and August 25, 1997
- ------------------------------------------ President (Chief Executive
A. Lorne Weil Officer), Director
/s/ WILLIAM LUKE Vice President and Chief August 25, 1997
- ------------------------------------------ Financial Officer (Principal
William Luke Financial Officer)
/s/ DEWAYNE E. LAIRD Corporate Controller (Principal August 25, 1997
- ------------------------------------------ Accounting Officer)
DeWayne E. Laird
/s/ LARRY J. LAWRENCE Director August 25, 1997
- ------------------------------------------
Larry J. Lawrence
/s/ SIR BRIAN WOLFSON Director August 25, 1997
- ------------------------------------------
Brian Wolfson
/s/ ALAN J. ZAKON Director August 25, 1997
- ------------------------------------------
Alan J. Zakon
/s/ MARSHALL BARTLETT Director August 25, 1997
- ------------------------------------------
Marshall Bartlett
</TABLE>
II-9
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE LOTTERY CORPORATION
By: /s/ WILLIAM J. HUNTLEY
------------------------------------
William J. Huntley, Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ WILLIAM J. HUNTLEY Chief Executive Officer August 25, 1997
- ------------------------------------------
William J. Huntley
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ A. LORNE WEIL Director August 25, 1997
- ------------------------------------------
A. Lorne Weil
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-10
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE ENTERPRISES, INC.
By: /s/ ERIC G. COWAN
------------------------------------
Eric G. Cowan, President, Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ ERIC G. COWAN President, (Chief Executive August 25, 1997
- ------------------------------------------ Officer), Director
Eric G. Cowan
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ LARRY J. LAWRENCE Director August 25, 1997
- ------------------------------------------
Larry J. Lawrence
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-11
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE COMMUNICATION
SERVICES, INC.
By: /s/ MARK SILLCOX
------------------------------------
Mark Sillcox, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ MARK SILLCOX President (Chief Executive August 25, 1997
- ------------------------------------------ Officer)
Mark Sillcox
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ A. LORNE WEIL Director August 25, 1997
- ------------------------------------------
A. Lorne Weil
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-12
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
MARVIN H. SUGARMAN PRODUCTIONS, INC.
By: /s/ GERALD LAWRENCE
------------------------------------
Gerald Lawrence, Chairman of the
Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ GERALD LAWRENCE Chairman of the Board (Chief August 25, 1997
- ------------------------------------------ Executive Officer), Director
Gerald Lawrence
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ A. LORNE WEIL Director August 25, 1997
- ------------------------------------------
A. Lorne Weil
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-13
<PAGE> 169
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
RACING TECHNOLOGY, INC.
By: /s/ GERALD LAWRENCE
------------------------------------
Gerald Lawrence, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ GERALD LAWRENCE President (Chief Executive August 25, 1997
- ------------------------------------------ Officer)
Gerald Lawrence
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ A. LORNE WEIL Director August 25, 1997
- ------------------------------------------
A. Lorne Weil
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-14
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE KENO CORPORATION
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, Chairman of the Board
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL Chairman of the Board and August 25, 1997
- ------------------------------------------ President (Chief Executive
A. Lorne Weil Officer), Director
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer)
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-15
<PAGE> 171
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE SYSTEMS, INC.
By: /s/ GERALD LAWRENCE
------------------------------------
Gerald Lawrence, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ GERALD LAWRENCE President (Chief Executive August 25, 1997
- ------------------------------------------ Officer)
Gerald Lawrence
/s/ WILLIAM LUKE Vice President of Finance and August 25, 1997
- ------------------------------------------ Treasurer (Principal Financial
William Luke Officer)
/s/ GERARD D. SCHEINBACH Controller (Principal Accounting August 25, 1997
- ------------------------------------------ Officer)
Gerard D. Scheinbach
/s/ A. LORNE WEIL Director August 25, 1997
- ------------------------------------------
A. Lorne Weil
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-16
<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE INTERNATIONAL, INC.
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL President (Chief Executive August 25, 1997
- ------------------------------------------ Officer), Director
A. Lorne Weil
/s/ WILLIAM LUKE Treasurer (Principal Financial August 25, 1997
- ------------------------------------------ and Accounting Officer)
William Luke
/s/ GERALD LAWRENCE Director August 25, 1997
- ------------------------------------------
Gerald Lawrence
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-17
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE MANAGEMENT CORPORATION
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL President (Chief Executive August 25, 1997
- ------------------------------------------ Officer), Director
A. Lorne Weil
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer), Director
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-18
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
AUTOTOTE MEXICO, LTD.
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, Chairman of the Board
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL Chairman of the Board and August 25, 1997
- ------------------------------------------ President
A. Lorne Weil (Chief Executive Officer),
Director
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer), Director
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-19
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement or amendment thereto to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York, New
York, on August 25, 1997.
NEWARK HOLDINGS, INC.
By: /s/ A. LORNE WEIL
------------------------------------
A. Lorne Weil, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Martin E. Schloss and William Luke his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and any registration statement
for the same offering covered by this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, and hereby ratifies and confirms all that said
attorney-in-fact and agents, each acting alone, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ A. LORNE WEIL President, (Chief Executive August 25, 1997
- ------------------------------------------ Officer), Director
A. Lorne Weil
/s/ WILLIAM LUKE Vice President and Treasurer August 25, 1997
- ------------------------------------------ (Principal Financial and
William Luke Accounting Officer), Director
/s/ MARTIN E. SCHLOSS Director August 25, 1997
- ------------------------------------------
Martin E. Schloss
</TABLE>
II-20
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ --------------------------------------------------------------------------- --------
<C> <S> <C>
3.1 Certificate of Incorporation of the Company, as amended through June 29,
1995.(1)
3.2 Bylaws of the Company.(2)
4.1 Indenture, dated as of July 28, 1997, among the Company, the Guarantors and
IBJ Schroder Bank & Trust Company, as Trustee.(3)
4.2 Form of 10 7/8% Series A and Series B Senior Notes Dues 2004, dated as of
July 28, 1997 (incorporated by reference to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of July 28, 1997, among the
Company, the Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation.(4)
5.1 Opinion of Kramer, Levin, Naftalis & Frankel+
10.1 Credit Agreement, dated as of July 28, 1997, between the Company, the
financial institutions party thereto and DLJ Capital Funding, Inc. as
agent.(5)
10.2 1984 Stock Option Plan, as amended.(6)*
10.3 Form of Option dated March 3, 1992 issued to A. Lorne Weil.(7)*
10.4 Form of Option dated December 13, 1991 issued to Marshall Bartlett.(8)*
10.5 Employment Agreement dated November 1, 1992, of A. Lorne Weil and Autotote
Corporation.(9)*
10.6 Employment Agreement dated July 18, 1994 between the Company and Marvin H.
Sugarman.(10)*
10.7 Employment Agreement between Gerald Lawrence and the Company dated November
14, 1994.(11)*
10.8 Stock Purchase Agreement dated July 15, 1994 among the Company, Marvin H.
Sugarman, Robert Melican, Racing Technology, Inc. and Marvin H. Sugarman
Productions, Inc.(12)
10.9 Asset Purchase Agreement dated January 12, 1995 between Autotote
Communication Services, Inc. and IDB Communications Group Inc.(13)
10.10 Purchase Agreement dated October 14, 1994 between Autotote Corporation,
Yves Alexandre, Marie A. Alexandre and Frederic Alexandre. (English summary
attached to French original.)(14)
10.11 Purchase Agreement among the Company, Autotote Enterprises, Inc., and the
State of Connecticut, Division of Special Revenue, dated June 30, 1993.(15)
10.12 Stock Purchase Agreement between the Company and General Instrument
Corporation dated May 18, 1993.(16)
10.13 Purchase and Sale Agreement between the Company and Sven Eriksson dated May
27, 1993.(17)
10.14 Agreement among ETAG Electronic Totalisator AG, Gerhard Harwalik, Peter
Freudenschuss, Peter Tinkl and Manfred Harwalik dated July 27, 1993.(18)
10.15 Purchase Agreement among certain purchasers and Autotote Corporation dated
August 13, 1993 with respect to the 5 1/2% Convertible Subordinated
Debentures due 2001.(19)
10.16 1995 Equity Incentive Plan.(20)
10.17 1992 Equity Incentive Plan, as amended and restated.(21)
10.18 Registration Rights Agreement, dated as of November 6, 1995, between the
Company and Hartford Stock Fund and Hartford Advisers Fund, dated as of
November 6, 1995.(22)
10.19 Interest Agreement, dated as of November 6, 1995, between the Company and
the Funds.(23)
10.20 Letter Agreement, dated January 3, 1995, between the Company and Martin E.
Schloss.(24)*
10.21 Agreement of Purchase and Sale, dated January 19, 1996, between Autotote
Systems, Inc. and Fusco Properties, L.P. ("Fusco").(25)
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ --------------------------------------------------------------------------- --------
<C> <S> <C>
10.22 Lease Agreement, dated as of January 19, 1996, between Fusco and Autotote
Systems, Inc.(26)
10.23 Employment Agreement, dated February 22, 1996, between the Company and
William Luke.(27)*
10.24 Promissory Note dated May 13, 1996 between the Company and A. Lorne
Weil.(28)
10.25 Stock Transfer Agreement among the Company and American Wagering, Inc.,
dated October 25, 1996, with respect to all outstanding stock of Autotote
CBS, Inc.(+)
10.26 Stock Purchase Agreement among the Company and Scientific Games Holding
Corp., dated April 15, 1997, with respect to all outstanding stock of Tele
Control Kommunikations und Computersysteme Aktien Gesellschaft.(29)
12.1 Statement re: computation of ratio of earnings to fixed charges(++)
21.1 List of Subsidiaries.(++)
23.1 Consent of KPMG Peat Marwick LLP.(++)
23.2 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion filed as Exhibit 5.1).
25.1 Form T-1 Statement of Eligibility and Qualification of IBJ Schroder Bank &
Trust Company as Trustee.(++)
99.1 Form of Letter of Transmittal.(+)
99.2 Form of Notice of Guaranteed Delivery.(+)
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees.(+)
99.4 Form of Letter to Clients.(+)
99.5 Guidelines for Certification of Taxpayer Identification Number on Form
W-9.(+)
99.6 Common Stock Purchase Warrant dated October 31, 1991 issued to Heller
Financial Inc.(30)
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.(31)
99.8 Warrant Agreement dated as of September 14, 1995 (the "1995 Warrant
Agreement"), as amended as of January 29, 1997.(+)
99.9 Warrant Agreement dated as of January 26, 1996 (the "1996 Warrant
Agreement"), as amended as of January 29, 1997.(+)
99.10 Amendment dated January 29, 1997 amending both the 1995 Warrant Agreement
and the 1996 Warrant Agreement.(+)
99.11 Order and Final Judgment of the United States District Court for the
District of Delaware dated October 22, 1996, Amendment to Amended
Stipulation and Agreement of Settlement, dated November 7, 1996, and
Amended Stipulation and Agreement of Settlement dated July 19, 1996.(32)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1995.
(2) Incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration No. 33-46594) which became effective
March 20, 1992 (the "1992 S-8").
(3) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated August 11, 1997 (the "1997 8-K").
(4) Incorporated by reference to Exhibit 2 to the 1997 8-K.
(5) Incorporated by reference to Exhibit 3 to the 1997 8-K.
(6) Incorporated by reference to Exhibit 4.1 to the 1992 S-8.
(7) Incorporated by reference to Exhibit 10.45 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1992 (the "1992 10-K").
(8) Incorporated by reference to Exhibit 10.46 to the Company's 1992 10-K.
<PAGE> 178
(9) Incorporated by reference to Exhibit 10.39 to the Company's 1992 10-K.
(10) Incorporated by reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 10-K").
(11) Incorporated by reference to Exhibit 10.18 to the Company's 1994 10-K.
(12) Incorporated by reference to Exhibit 10.19 to the Company's 1994 10-K.
(13) Incorporated by reference to Exhibit 10.20 to the Company's 1994 10-K.
(14) Incorporated by reference to Exhibit 10.21 to the Company's 1994 10-K.
(15) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 1, 1993.
(16) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated June 22, 1993.
(17) Incorporated by reference to Exhibit 2.2 to the Company's Current Report on
Form 8-K dated June 22, 1993.
(18) Incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(19) Incorporated by reference to Exhibit 10 to the Company's Current Report on
Form 8-K dated September 8, 1993.
(20) Incorporated by reference to Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 31, 1995 (the "1995 10-K").
(21) Incorporated by reference to Exhibit A to the Company's Proxy Statement
filed April 19, 1996.
(22) Incorporated by reference to Exhibit 10.36 to the 1995 10-K.
(23) Incorporated by reference to Exhibit 10.37 to the 1995 10-K.
(24) Incorporated by reference to Exhibit 10.40 to the 1995 10-K.
(25) Incorporated by reference to Exhibit 10.42 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 1995, dated February
22, 1996 (the "1995 10-K/A").
(26) Incorporated by reference to Exhibit 10.43 to the 1995 10-K/A.
(27) Incorporated by reference to Exhibit 10.45 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996.
(28) Incorporated by reference to Exhibit 10.47 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1996.
(29) Incorporated by reference to Exhibit 10.27 to the Company's Current Report
on Form 8-K dated April 15, 1997.
(30) Incorporated by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated November 14, 1991.
(31) Incorporated by reference to Exhibit 10.34 to the Company's 1992 10-K.
(32) Incorporated by reference to Exhibit 28.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996, dated January 30,
1997.
- ---------------
* Includes management contracts and compensation plans and arrangements.
+ To be filed by amendment.
++ Filed herewith.
<PAGE> 1
EXHIBIT 12.1
AUTOTOTE CORPORATION AND SUBSIDIARIES
EXHIBIT
RATIO OF PRO FORMA EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
TWELVE
SIX MONTHS MONTHS
ENDED ENDED
YEARS ENDED OCTOBER 31, APRIL 30, APRIL 30,
--------------------------------------------------- ------------------ ---------
1992 1993 1994 1995 1996 1996 1997 1997
------- ------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro forma earnings before income
taxes and extraordinary item..... $ 5,689 8,664 (21,478) (48,192) (31,674) (13,931) (10,966) (28,709)
Fixed Charges:
Pro forma interest and 1/3 of rent
expense.......................... 6,527 3,566 6,926 16,558 17,464 8,609 8,110 16,966
------- ------- ------- ------- ------- ------- ------- ---------
Pro forma earnings before income
taxes, extraordinary item & Fixed
Charges.......................... 12,216 12,230 (14,552) (31,634) (14,210) (5,322) (2,856) (11,743)
Pro forma earnings before income
taxes, extraordinary item and
Fixed Charges to Fixed Charges... 1.87 3.43 -- -- -- -- -- --
Fixed Charges in excess of pro
forma earnings before income
taxes, extraordinary item and
fixed charges.................... 21,478 48,192 31,674 13,931 10,966 28,709
</TABLE>
For the purpose of determining the pro forma ratio of earnings to fixed charges,
"earnings" consist of pro forma earnings (loss) before income tax expense
(benefit) and extraordinary item, plus fixed charges. "Fixed charges" consist of
pro forma interest expense, including amortization of deferred financing costs,
plus one-third of rental expense (this portion is considered to be
representative of the interest factor). Pro forma interest expense reflects an
adjustment, in applicable years, to give effect to the application of the net
proceeds from the sales of CBS and Tele Control and to give effect to the net
proceeds from the issuance of the Old Notes. No funds were deemed borrowed under
the New Credit Agreement. Earnings were insufficient to cover fixed charges on a
pro forma basis for the fiscal years ended October 31, 1994, 1995 and 1996 and
for the six months ended April 30, 1996 and 1997 and for the twelve months ended
April 30, 1997 in the amounts of $21,478, $48,192, $31,674, $13,931, $10,966 and
$28,709, respectively.
<PAGE> 1
EXHIBIT 21.1
AUTOTOTE CORPORATION SUBSIDIARIES
Autotote Management Corporation (Delaware) (100%)
Newark Holdings, Inc. (Delaware) (100%)
Autotote Systems, Inc. (Delaware) (100%)
Autotote International, Inc. (Delaware) (100%)
Autotote Canada Inc. (Ontario) (100%)
Autotote Worldwide Limited (Non-Resident Ireland (Bermuda)) (99%, 1% NHI)
Autotote Worldwide Services, Limited (Ireland) (100%)
Autotote 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 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. (Quebec) (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%)
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%)
SASO (France) (100%)
Autotote Mexico, Ltd. (Delaware) (100%)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Autotote Corporation:
We consent to the use of our report dated December 5, 1996, except for
Notes 7 and 21 which are as of January 29, 1997, and Note 22 which is as of July
1, 1997, with respect to the consolidated balance sheets of Autotote Corporation
and subsidiaries as of October 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity (deficit), cash flows, and
financial statement schedule for each of the years in the three-year period
ended October 31, 1996, and to the references of our firm under the headings
"Summary Historical Consolidated Financial Data," "Selected Historical
Consolidated Financial Data," and "Accountants" included in the registration
statement on Form S-4 of Autotote Corporation.
KPMG Peat Marwick LLP
Short Hills, New Jersey
August 26, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939,
AS AMENDED, OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)
------------------------
IBJ SCHRODER BANK & TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEW YORK 13-5375195
(STATE OF INCORPORATION (I.R.S. EMPLOYER
IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
ONE STATE STREET, NEW YORK, NEW YORK 10004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
LUIS PEREZ, ASSISTANT VICE PRESIDENT
IBJ SCHRODER BANK & TRUST COMPANY
ONE STATE STREET
NEW YORK, NEW YORK 10004
(212) 858-2000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
AUTOTOTE CORPORATION
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 81-0422894
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
750 LEXINGTON AVENUE, 25TH FLOOR 10022
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
------------------------
AUTOTOTE LOTTERY CORPORATION
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1808020
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
AUTOTOTE ENTERPRISES, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CONNECTICUT 06-1370549
(STATE OR JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
(Exhibit 25.1 continued on next page)
================================================================================
